Vietnam’s Catch-22 in courting China as a rare earth partner

In many ways, Beijing is the perfect partner for Hanoi’s rare earth processing industry ambitions
But standing in the way is Vietnam’s wariness of corporate exploitation and taking sides in the US-China rivalry, as well as its political turmoil

Mengshi Ren

Published: 4:30pm, 15 May 2024

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Two weeks before Vuong Dinh Hue was forced to resign as head of Vietnam’s parliament, he visited Beijing and met executives from Chinese state-owned enterprises, including China Rare Earth Group.

As assembly head, one of the four “pillars” of leadership in Vietnam, Hue was angling for Chinese investment and potentially technology transfers by dangling the possibility of tax deductions, rent cuts and other incentives. He is the second high-ranking official to be removed in two months, after president Vo Van Thuong in March – just when Vietnam is attempting to expand its rare earth industry.

Rare earths, essential in powering the global energy transition, are growing in value. They are required to produce the permanent magnets in clean-energy products from electric vehicles to wind turbines.

Vietnam wants China, with its advanced technology and know-how, to help it develop its rare earth industry chain, but only up to a point – Hanoi also wants to maintain control over its domestic industry and innovation.

China may be willing to help establish the infrastructure a Vietnamese rare earth industrial complex requires, although export restrictions prohibit it from directly granting any country access to Chinese processing technologies.

On a more strategic level, working with Vietnam on rare earth processing could help Beijing “de-risk” from America’s “de-risking” policy. Establishing processing plants in Vietnam would help Chinese companies keep customers in developed countries by circumventing the “Made in China” label.

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Beijing appears to be seizing the opportunity. China’s Baotou INST Magnetic, an Apple supplier, has reportedly leased a factory in northern Vietnam for a magnet plant. Other companies have joined Vietnam’s rare earth industry, including South Korea’s Star Group Industrial, which plans to produce 5,000 tonnes per year of high-end neodymium magnets by 2025.

Vietnam has long sought partnerships with countries that have advanced technology in the sector, such as Japan, South Korea and Australia. But previous collaboration attempts, which include investments in Vietnam’s mining, supply chain and research, have not yielded sufficient progress to kick-start its rare earth industry.

Japan was one of the earliest investors. Back in 2011, under pressure after China started to squeeze its rare earth exports, Japan decided to invest in Vietnam’s Dong Pao mine. But the mine ceased operations around 2015 after cheap Chinese rare earths flooded the market and Japan’s investment in Lynas, an Australian rare earth miner, became more successful.

Today, Vietnam’s rare earth processing technology remains weak. Purities of up to 99.9 per cent are required in the rare earths used to make high-quality permanent magnets. But Vietnam can only refine rare earths up to 70 per cent in laboratory settings – far below the industry standard and its export requirement of 95 per cent.

China looks like Vietnam’s best bet in its search for a rare earth partner. Over the four decades it took Beijing to develop its now dominant rare earth processing industry, it relied on cheap labour, electricity, chemical feedstock and transport, as well as loose environmental regulations and a coordinated export control policy regime.

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Today, it has addressed both the financial and environmental problems of the sector and developed cutting-edge technologies. It is highly qualified to give Vietnam advice on how to jump-start its rare earth industry.

China continues to make great strides in rare earth processing, recovering metals from ore through electrical fields rather than traditional chemical leaching – the new method boosts efficiency, reduces impurities and is more environmentally friendly – and discovering new ores.

In a partnership, Vietnam stands to benefit from China’s experience and advanced technologies. Beijing, meanwhile, wants to source raw materials from Vietnam, which has the world’s second-largest rare earth deposits after China.

Vietnam’s other great advantage in developing a rare earth industry is, for now, theoretical: its labour force.

The country lacks the targeted education and corporate training required to produce the talent needed for the industry. This can be overcome in the short term through corporate training contracts. Importantly, over time, the country can cultivate its own highly skilled workforce by expanding and adding mining engineering programmes at its universities.

Given that the average Vietnamese mining worker salary is only around 30 per cent of what their Chinese peers get, Vietnam’s competitively priced low-skilled labour also gives it an advantage over China.

However, Vietnam does not want to be indebted to Beijing nor does it want to be geopolitically isolated over its rare earth processing vision to the point that it can’t work with China’s strategic competitors. To become a global player in rare earths, it cannot afford to pick a side in the US-China rivalry, or even appear to snub one over the other.

Vietnam faces a Catch-22: it needs Chinese expertise to develop domestic capacity but doesn’t want to invite exploitation. It wants lessons in rare earth innovation and is willing to pay with raw materials and other incentives to attract Chinese industrial players. It’s just not willing to make sacrifices that stifle or suppress its potential at home-grown innovation.

On top of this strategic dilemma, Vietnam’s political turmoil threatens its rare earth dialogue with Chinese enterprises. Negotiations over such a highly-valued industry require time and investment that a revolving leadership door could undermine. More high-profile departures could delay or derail Hanoi’s ambitious plans.

Mengshi Ren is a Georgetown master of foreign service student, concentrating on science, technology and international affairs. He is currently interning at Trivium China as a climate and energy policy analyst