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Outsourcing US Missile Technology to China

The Saga of Magnequench

by JEFFREY ST. CLAIR

Magnequench is an Indianapolis-based company. It specializes in the obscure field of sintered magnetics. Essentially, it makes tiny, high-tech magnets from rare-earth minerals ground down into a fine powder. The magnets are highly prized by electronics and aviation companies. But Magnequench’s biggest client has been the Pentagon.

The neodymium-iron-boron magnets made by Magnequench are a crucial component in the guidance system of cruise missiles and the Joint Direct Attack Munition or JDAM bomb, which is made by Boeing and had a starring role in the spring bombing of Baghdad. Indeed, Magnequench enjoys a near monopoly on this market niche, supplying 85 percent of the rare-earth magnets that are used in the servo motors of these guided missiles and bombs.

But the Pentagon may soon be sending its orders for these parts to China, instead of Indiana. On September 15, 2004 Magnequench shuttered its last plant in Indiana, fired its 450 workers and began shipping its machine tools to a new plant in China. "We’re handing over to the Chinese both our defense technology and our jobs in the midst of a deep recession," says Rep. Peter Visclosky, a Democrat from northern Indiana.

It gets stranger. Magnequench is not only moving its defense plants to China, it’s actually owned by Chinese companies with close ties to the Chinese government.

Magnequench began its corporate life back in 1986 as a subsidiary of General Motors. Using Pentagon grants, GM had developed a new kind of permanent magnet material in the early 1980s. It began manufacturing the magnets in 1987 at the Magnequench factory in Anderson, Indiana.

In 1995, Magnequench was purchased from GM by Sextant Group, an investment company headed by Archibald Cox, Jr-the son of the Watergate prosecutor. After the takeover, Cox was named CEO. What few knew at the time was that Sextant was largely a front for two Chinese companies, San Huan New Material and the China National Non-Ferrous Metals Import and Export Corporation. Both of these companies have close ties to the Chinese government. Indeed, the ties were so intimate that the heads of both companies were in-laws of the late Chinese premier Deng Xiaopeng.

At the time of the takeover, Cox pledged to the workers that Magnequench was in it for the long haul, intending to invest money in the plants and committed to keeping the production line going for at least a decade.

Three years later Cox shut down the Anderson plant and shipped its assembly line to China. Now Cox is presiding over the closure of Magnequench’s last factory in the US, the Valparaiso, Indiana plant that manufactures the magnets for the JDAM bomb. Most of the workers have already been fired.

"Archie Cox and his company are committing a criminal act," says Mike O’Brien, an organizer with the UAW in Indiana. "He’s a traitor to his country."

It’s clear that Cox and Sextant were acting as a front for some unsavory interests. For example, only months prior to the takeover of Magnequench San Huan New Materials was cited by US International Trade Commission for patent infringement and business espionage. The company was fined $1.5 million. Foreign investment in American high-tech and defense companies is regulated by the Committee on Foreign Investments in the United States (CFIUS). It is unlikely that CFIUS would have approved San Huan’s purchase of Magnequench had it not been for the cover provided by Cox and his Sextant Group.

One of Magnequench’s subsidiaries is a company called GA Powders, which manufactures the fine granules used in making the mini-magnets. GA Powders was originally a Department of Energy project created by scientists at the Idaho National Engineering and Environmental Lab. It was spun off to Magnequench in 1998, after Lockheed Martin took over the operations at INEEL.

In June 2000, Magnequench uprooted the production facilities for GA Powders from Idaho Falls to a newly constructed plant in Tianjin, China. This move followed the transfer to China of high-tech computer equipment from Magnequench’s shuttered Anderson plant. According to a report in Insight magazine, these computers could be used to facilitate the enrichment of uranium for nuclear warheads.

GA Powders isn’t the only business venture between a Department of Energy operation and Magnequench. According to a news letter produced by the Sandia Labs in Albuquerque, New Mexico, Sandia is working on a joint project with Magnequench involving "the development of advanced electronic controls and new magnet technology".

Dr. Peter Leitner is an advisor to the Pentagon on matters involving trade in strategic materials. He says that the Chinese targeted Magnequench in order to advance their development of long-range Cruise missiles. China now holds a monopoly on the rare-earth minerals used in the manufacturing of the missile magnets. The only operating rare-earth mine is located in Batou, China.

"By controlling access to the magnets and the raw materials they are composed of, US industry can be held hostage to Chinese blackmail and extortion," Leitner told Insight magazine last year. "This highly concentrated control-one country, one government-will be the sole source of something critical to the US military and industrial base."

Visclosky and Senator Evan Bayh asked the Bush administration to intervene using the Exon-Florio Amendment to the 1988 Defense Appropriation Act to pry the Chinese money out of the company and force Magnequench to keep its factories in Indiana.

There was precedent for just such a presidential move. In 1990, George H.W. Bush ordered the state-owned China National Aerospace and Export Company to divest its interest in Mamco Manufacturing of Seattle, reportedly because of concern that the Chinese firm could have use Mamco to acquire jet fighter engine technology. The directive came from Bush three months after CATIC had seized control of Mamco. When after six months the Chinese company refused to relinquish its interest in Mamco, Bush ordered the Treasury Department to place the company in receivership and barred the Chinese officials from having any access to its facilities.

Unlike his father, Bush 2 declined to respond to the pleas from Visclosky and Bayh. The Treasury Department, which could have intervened to stop the move, also refused to act. Visclosky says that he also contacted the Pentagon. Its procurement officials admitted to him that Magnequench was the only domestic supplier of the smart bomb magnets (Hitachi holds the other contract), but that it had no idea that company was owned by the Chinese or that it was packing up for Tianjin.

As the doors closed on its Valparaiso plant, a memo came from Magnequench executives advising that its HQ will be soon be relocated from Indianapolis to Singapore. No word on yet whether Cox is moving too.

And yes, when the Republicans made a mountain out of what turned out in the end to be a pretty small molehill concerning transfers of satellite technology to China in Clinton time, they said it might be grounds for impeachment. William Safire wrote lots of columns on the matter. Not a bleat from Safire now.

This article is excerpted from JEFFREY ST. CLAIR’s new book, Grand Theft Pentagon.