China's rare earth producers say they have increased their efforts at upgrading product ranges and shifting toward downstream businesses due to a glut in supplies of the raw materials, including those produced by illegal mining.

"We have been putting more effort into innovation and technology in downstream products," said Gan Mei, director of public affairs for Tianhe (Baotou) Advanced Tech Magnet Co.

"But many rare earth miners have been forced to shutdown production in the past three to five years because of ongoing price wars and excessive production."

The Baotou-based firm is a unit of Tianhe Magnets, a producer of magnets made of rare-earth alloys, such as neodymium iron boron.

Gan said the company, which used to be just a rare earth smelter, has continued spending around 4 percent to 5 percent of revenue on research and development even as the market hit leaner times.

Its rare earth-produced magnets are widely used in the wind-power, electric vehicle and military sectors.

She said 30 percent to 40 percent of its products are exported to countries including Germany, Italy, Russia and South Korea.

There is huge potential for rare earth product application, especially in the electric car industry, as many cities across the country suffer from heavy air pollution, she said.

The Ministry of Industry and Information Technology has taken a series of measures to promote the transformation and upgrade of the rare earth sector, with financial support to promote integration, for instance, between industrialization and research.

The policies have been frequently targeting key rare earth-producing areas such as Baotou, and encourage the upgrade of relevant production standards.

Chen Chuandong, an expert at Baotou Research Institute of Rare Earths, said one of the challenges companies have faced is the huge cost often involved in R&D.

"When market prospects are good, Chinese companies that are busy making money can be unwilling to invest in innovation or product upgrade," he said. "But of course, also when the market is struggling, there is a reluctance too because they are suffering falling profits or even losses."