The increasing securitization of rare earth elements has transformed its production chain from industrial inputs into strategic assets central to economic competitiveness, technological innovation, and national security. Rare earths are indispensable to the production of semiconductors, electric vehicles, renewable energy technologies, and advanced defense systems. Yet bottlenecks in global rare earth supply chains still exist in many sectors, particularly in downstream processing and separation, creating vulnerabilities that have prompted governments to pursue policies such as supplier diversification, friend-shoring, stockpiling, and domestic production. While these approaches primarily seek to diversify “where” production occurs, they pay comparatively little attention to “how” production is organized and the financial trade-offs that comes along.

One potential yet underexplored approach is the application of modular production systems. In Design Rules, Volume 1: The Power of Modularity, Carliss Y. Baldwin and Kim B. Clark define modularity as the decomposition of a complex production system into relatively independent modules connected through standardized interfaces.[1] By decomposing complex production processes into interchangeable subsystems, modular architectures allow individual production units to be modified, upgraded, or replicated without redesigning the entire system. This architectural flexibility has been widely recognized as a driver of industrial innovation, enabling greater adaptability, scalability, and responsiveness in complex manufacturing systems.

The literature on modularity has traditionally focused on product architecture, manufacturing flexibility, and organizational design. As Mari Sako argues, modularity can be understood through three complementary dimensions: modularity-in-design (MID), modularity-in-production (MIP), and modularity-in-use (MIU).[2] These concepts explain how modularity reshapes production processes, organizational relationships, and supply-chain coordination. However, their application to rare earth elements supply chains remains limited. Existing policy discussions largely emphasize geographic diversification and strategic stockpiling while overlooking whether the architectural organization of production itself can enhance supply-chain resilience. Furthermore, not every stage of the rare earth value chain is equally amenable to modularization. While activities such as logistics, investment, and certain manufacturing processes may be modularized relatively easily, chemically intensive stages such as separation and refining remain constrained by technological complexity, process integration, and environmental requirements.

Source: Doris D. Sasu, “Rare Earths: Production Share by Country 2025,” Statista, April 2026, https://www.statista.com/statistics/270277/mining-of-rare-earths-by-country/?srsltid=AfmBOorYsGViKYlM4SrR3l4Qrw-z4UT8jCVWmitQPH4yCf0p8xpIgq4x.

This paper argues that modular production should not be viewed as a universal solution to supply-chain security but as a strategic production architecture whose effectiveness varies across different stages of the rare earth value chain. Rather than asking whether modularization should be adopted universally, this paper examines where modular production can meaningfully reduce strategic vulnerabilities and where integrated production remains necessary. It therefore addresses the following research question: “To what extent can modular production systems reduce strategic vulnerabilities in rare earth processing while maintaining economic and operational efficiency?”

Organizational modularity refers to a production architecture in which ownership and strategic coordination remain vertically integrated, while production processes are decomposed into relatively independent functional modules.[3] Rather than treating the production line as a single integrated system, modular manufacturing separates individual stages into standardized units connected through defined interfaces. Such an approach enables individual production modules to be modified, upgraded, or replaced without requiring extensive redesign of the entire production process. Within the rare earth value chain, this architecture offers the potential to reduce operational disruptions by limiting the propagation of failures across interconnected production stages while preserving centralized strategic oversight.

Source: Author adapted from “Rare Earth Elements: Pathways to Secure and Diversified Supply Chains,” International Energy Agency, April 8, 2026, https://www.iea.org/events/rare-earth-elements-pathways-to-secure-and-diversified-supply-chains.

Unlike conventional approaches to economic security, which primarily emphasize supplier diversification, geographic dispersion, and strategic stockpiling, modular production addresses resilience through the architecture of manufacturing itself. The graph above illustrates current bottlenecks within the rare earth elements production chain. As illustrated above, many of the bottlenecks are linked to technological stratification and disparity in manufacturing equipment accessibility. Additionally, many bottlenecks are also related to legal, geographical, and political restrictions that are difficult to illustrate in the graph hence oversimplifying the complex dynamics in between sectors which might share heterogenous risks across the industry. Existing policy discussions generally assume that supply-chain security is achieved by relocating production away from strategically vulnerable regions. However, the argument here is that resilience should also be understood as a function of production design. By decomposing rare earth processing into standardized and semi-independent production modules, governments and firms may improve flexibility, facilitate technological upgrading, and reduce the strategic consequences of disruptions affecting individual production stages. Nevertheless, the feasibility of modularization is not uniform across the rare earth value chain. While certain stages can be modularized with relatively limited efficiency losses, others remain highly integrated due to technological complexity, continuous chemical processes, and economies of scale.

The first security implication of modular production is greater operational flexibility and shorter deployment timelines. Because modular systems rely on standardized production units manufactured under controlled factory conditions, installation and commissioning can proceed more rapidly than conventional site-built facilities. Studies of modular manufacturing have shown that factory-based fabrication allows parallel construction and assembly activities, reducing overall project schedules in many industrial applications.[4] Although these findings originate primarily from the construction and manufacturing sectors, similar principles may be applied to rare earth processing equipment, where standardized production modules could reduce the lengthy engineering and customization requirements currently associated with establishing new processing facilities.

This advantage is particularly significant given the substantial equipment bottlenecks that currently constrain the expansion of rare earth processing capacity outside China. The greatest shortages exist in alloy production, metallization, and permanent magnet manufacturing, where specialized equipment remains both scarce and expensive. Compared with Chinese suppliers, equivalent machinery produced in North America, Europe, or Japan is significantly more costly and typically requires considerably longer procurement periods. Industry assessments suggest that capital equipment may cost between five and twelve times more, while delivery times may be two to three times longer than those offered by Chinese manufacturers.[5] These disparities largely reflect the limited number of specialized equipment manufacturers outside China, many of whom originally developed machinery for adjacent chemical industries rather than rare earth processing. As a result, equipment frequently requires redesign, resizing, and technical customization before deployment. Combined with low production volumes, limited customer bases, and the absence of economies of scale, these factors significantly constrain the ability of non-Chinese producers to expand processing capacity rapidly. In the initial processing stages, only a single equipment supplier exists outside China, further limiting competition and creating new industrial bottlenecks.[6]

A second security implication concerns resilience against supply-chain disruption. Conventional rare earth processing facilities are characterized by tightly integrated production systems in which disruptions at one stage frequently propagate throughout the entire production chain. By contrast, modular production isolates critical functions into independent units, reducing the likelihood that localized failures will interrupt the operation of an entire refinery. Such architecture also facilitates incremental capacity expansion and enables damaged or obsolete modules to be replaced individually rather than requiring comprehensive reconstruction of the facility. Consequently, modularization enhances operational resilience not by eliminating strategic dependence altogether, but by limiting the systemic consequences of localized disruptions.[7]

Finally, modular production enhances regulatory and technological adaptability. Environmental regulations governing rare earth processing continue to evolve, particularly regarding chemical waste management, acid consumption, and emissions associated with solvent extraction. Under conventional integrated production systems, compliance with new environmental standards often requires extensive modifications to the entire facility. Modular architecture instead allows individual processing units to be upgraded or replaced independently, reducing compliance costs and accelerating technological adoption. This characteristic is especially relevant as governments and firms seek alternative extraction technologies for ionic adsorption clays, including processes that employ weaker acids or acid-free extraction methods[8]. Because rare earth refining remains one of the most environmentally intensive stages of the rare earth elements value chain, modular production may facilitate the gradual integration of cleaner technologies while minimizing disruptions to ongoing operations.

Industrial clusters have long been regarded as the most efficient organizational structure for advanced manufacturing. As Yossi Sheffi argues, firms naturally cluster because geographic concentration generates supplier ecosystems, skilled labor pools, knowledge spillovers, lower transaction costs, and economies of scale. Consequently, industrial resilience should not be understood simply as the elimination of concentration, but rather as the ability of supply networks to continue functioning when disruptions occur. Sheffi therefore distinguishes efficiency from resilience, arguing that resilient supply chains require flexibility, redundancy, and adaptive capacity rather than complete decentralization.[9]

The 1999 Jiji earthquake provides an illustrative example of this distinction. The disruption of semiconductor production exposed the vulnerability of globally concentrated supply chains. While many electronics manufacturers experienced severe component shortages, Dell Technologies was comparatively resilient because of its postponement strategy, whereby products remained in semi-finished form until customer orders were confirmed. By delaying final assembly, Dell retained the flexibility to reallocate components according to changing supply conditions while minimizing inventory risks. Rather than eliminating industrial concentration, resilience was achieved through modularizing the final stages of production.[10]

This lesson is directly applicable to the rare earth industry. China's competitive advantage is not derived solely from its mineral resources but from a mature industrial ecosystem that integrates mining, chemical processing, equipment manufacturing, logistics, state-owned enterprises, and downstream magnet production within highly coordinated industrial clusters.[11] Such concentration maximizes production efficiency but simultaneously creates systemic vulnerabilities for countries dependent on Chinese processing capacity. Rather than attempting to replicate China's entire vertically integrated ecosystem, allied economies may instead pursue distributed manufacturing through multiple regional processing clusters connected by modular production systems.[12] In this context, modularization should be complemented rather than completely replace industrial clustering. This could be achieved by creating geographically diversified yet technically interoperable production networks.

A second trend concerns the changing balance between capital efficiency and geopolitical risk. Traditional integrated processing facilities maximize economies of scale by concentrating production within large, capital-intensive refineries. Such facilities generally achieve lower unit production costs and higher operational efficiency, but they require substantial upfront investment and expose firms to significant risks should market conditions or geopolitical circumstances change.

Modular manufacturing offers a different investment model. Instead of constructing a single large refinery, developers can expand production incrementally by deploying standardized processing modules as demand increases. As demonstrated by Shao and colleagues, modular technologies provide greater investment flexibility because smaller production units allow firms to phase capital expenditure while reducing the risk of overinvestment under uncertain market conditions.[13] Their analysis shows that modular deployment strategies outperform conventional large-scale investments under many uncertain demand scenarios by allowing capacity to expand sequentially rather than all at once.

However, these financial advantages are accompanied by important economic trade-offs. Excessive modularization may sacrifice economies of scale, increase coordination costs, and duplicate production infrastructure. Consequently, modular manufacturing should not be viewed as a universally more efficient production model but rather as one that exchanges some productive efficiency for greater strategic flexibility.

From an economic security perspective, this trade-off becomes increasingly attractive. Becker and colleagues demonstrate that modular chemical production systems perform particularly well when combined with parallel production lines, autonomous processing units, and localized sourcing networks.[14] Applied to the rare earth industry, standardized processing modules could be deployed across trusted partner countries, gradually expanding refining capacity while reducing dependence on geographically concentrated processing hubs. Although such an approach cannot eliminate strategic dependence entirely, it reduces exposure to single points of failure and increases the resilience of allied supply networks.

Current industrial developments suggest that modular manufacturing is becoming increasingly feasible as automation, digital manufacturing, standardized equipment, and process engineering continue to reduce the technical barriers associated with distributed production. Nevertheless, these technological advances do not eliminate the economic advantages of vertically integrated industrial clusters. China’s rare earth ecosystem continues to benefit from decades of accumulated process knowledge, supplier specialization, and economies of scale that cannot easily be replicated through geographically dispersed production alone.

Hence, to answer the question of to what extent can modular production systems reduce strategic vulnerabilities in rare earth processing while maintaining economic and operational efficiency. The answer lies in how different countries prioritize economic efficiency and supply chain securitization. While the two elements are not mutually exclusive, there is still some element of compromise given the current geopolitical situation.

The emerging trend therefore points not toward complete modularization nor complete vertical integration, but toward hybrid production architectures that combine the strengths of both approaches. Large-scale integrated facilities will likely remain necessary for technologically complex processing stages such as separation and refining, while modular production is likely to be most effective in alloy production, magnet manufacturing, and other stages where standardized production units can be replicated across allied economies. Rather than replacing existing industrial clusters, modularization should therefore be understood as a strategic complement that increases production flexibility, improves recoverability following disruptions, and reduces geopolitical concentration risks while preserving the efficiency advantages of integrated manufacturing where they remain indispensable.

Source: Created by the author.