- An important U.S. high-tech manufacturer is shutting
down its American operations, laying off hundreds of workers and moving
sophisticated equipment now being used to make critical parts for smart
bombs to the People's Republic of China [PRC], Insight has learned.
- Indianapolis-based Magnequench Inc. has not yet publically
announced the closing of its Valparaiso, Ind., factory, but Insight has
confirmed that the company will shut down this year and relocate at least
some of its high-tech machine tools to Tianjin, China. Word of the shutdown
comes as the company is producing critical parts for the U.S. Joint Direct
Attack Munition [JDAM] project, more widely known as smart bombs, raising
heavy security issues related to the transfer of military technology to
the PRC. The factory uses rare earths to produce sintered neodymium-iron-boron
permanent magnets that have many industrial applications but are essential
to the servos critical to precision-guided munitions. According to documents
obtained by Insight, Magnequench UG currently is producing thousands of
the rare-earth magnets for "SL Montevideo Tech," a Minnesota-based
manufacturer of servos. That company confirmed to Insight that it holds
a Department of Defense [DoD] contract to produce the high-tech motors
for the precision-guided JDAM.
- The Valparaiso-based manufacturer, originally known as
UGIMAG, became Magnequench UG when it was acquired by Magnequench Inc.
in August 2000. Magnequench Inc. had been purchased in 1995 by a consortium
that included the China-based San Huan New Materials and Hi-Tech Co., created
and at least partially owned by the Chinese Academy of Sciences in Beijing.
Magnequench was a spin-off company of General Motors Corp. [GM], and at
the time of the buyout was headquartered in Anderson, Ind.
- Clyde South was a negotiator for the United Auto Workers
Local 662 representing the workers at Magnequench when the consortium began
negotiating to buy the company in 1995. In an interview with Insight, South
says that worker concern about PRC influence over the consortium led to
an "agreement with GM" that the plant would remain in Anderson
for at least 10 years According to South, the buyers made the same agreement
with the union, but since he had doubts about their intentions he took
his concerns to Washington. Warnings fell on deaf ears. In August 2001,
the sixth year of the 10-year agreement, South's distrust was validated
when the consortium's managers "told us they intend to close the plant"
and eliminate roughly 400 jobs.
- The Magnequench plant in Anderson transforms neodymium,
iron and boron into powder using a unique patented process that produces
the exotic rare-earth magnets. Following the buyout in 1995, the production
line at Anderson was "duplicated in China" at a facility built
by the PRC company. According to South, after the company "made sure
that it worked, they shut down" the Anderson facility. South says
he suspects the buyout was about getting the technology, adding, "I
believe the Chinese entity wanted to shut the plant down from the beginning.
They are rapidly pursuing this technology."
- Meanwhile, says the union negotiator, "They told
us, 'We are going bankrupt,'" and therefore had to close the Anderson
facility. This was not long after the consortium purchased UGIMAG in Valparaiso,
according to critics, telling the workers there that they planned to keep
the factory running. But, according to some sources, Magnequench Inc. had
"refused to buy the buildings or the property" on which the factory
was located, "suggesting a temporary arrangement." South said
of his experience, "You just couldn't believe anything they told you."
- The plant workers at Magnequench UG are organized by
the United Steelworkers of America. Insight contacted union official Michael
O'Brien, who confirmed negotiations with Magnequench UG regarding the company's
future, but declined to comment further.
- The transfer to Communist China of technologies that
make rare-earth permanent magnets also is a matter of concern for defense
and national-security experts, says Peter Leitner, a senior strategic-trade
adviser to the DoD. Leitner says rare-earth magnets "lie at the heart
of many of our most advanced weapons systems, particularly rockets, missiles
and precision-guided weapons such as smart bombs and cruise missiles."
He tells Insight why the PRC's need for this type of technology is urgent,
noting that "China has an ongoing high-priority effort to produce
a long-range cruise missile. They are trying to replicate the capabilities
the U.S. has, such as with the Tomahawk [cruise missile], as part of their
power projection, and expanding their ability to strike targets at long
- Since the 1995 buyout of Magnequench by the consortium
of two Chinese companies and a cooperating U.S. firm, it has in turn bought
at least two more high-tech companies that deal in rare-earth magnets.
In addition to UGIMAG in 2000, which became Magnequench UG, it has bought
- GA Powders, which was a spin-off company of the Idaho
National Engineering and Environmental Laboratory, a U.S. national lab.
An insider tells Insight that "Magnequench UG is the last American
company making these rare-earth magnets. When it moves to China, there
are none left." Leitner sees a pattern. He says the Chinese "have
targeted the manufacturing process through a variety of suspicious business
activities and have been furiously transferring the manufacturing technology
to China, thereby becoming the only source. They are purchasing U.S. companies,
shutting them down and transferring them to China."
- According to Leitner, "The Chinese are clearly trying
to monopolize the world supply of rare-earth materials such as neodymium
that are essential to the production of the militarily critical magnets
- enable precise guidance and control of our most advanced
weapons and aircraft." He warns that risks are involved in allowing
this kind of technology transfer, adding: "By controlling the access
to the magnets and the raw materials they are composed of, U.S. industry
in general and the auto industry in particular can be held hostage to PRC
blackmail and extortion in an effort to manipulate our foreign and military
policy. This highly concentrated control - one country, one government
- will be the sole source of something critical to the U.S. military and
- Intelligence analysts emphasize that the PRC routinely
combines espionage operations with business deals. Internal PRC documents
refer to this as advancing "economy and i national-defense construction."
A 1999 congressional report on PRC espionage states that the Beijing
- government sees "providing civilian cover for military-industrial
companies to acquire dual-use technology through purchase or joint-venture
business dealings" as a responsibility of the government. The report
lists "rare-earth metals ... for military aircraft and other weapons"
as one of the primary targets of the PRC.
- So how could this be happening? Because of the PRC's
involvement in the 1995 buyout of Magnequench, the deal required the approval
of the Committee on Foreign Investments in the United States [CFIUS], which
is chaired by the secretary of the Treasury. CFIUS approval of the buyout
predated a series of reports by the FBI and congressional committees warning
of massive PRC espionage efforts against U.S. businesses and military technology.
In one case, which involved the then-struggling McDonnell Douglas Corp.,
the China National Aero-Technology Import and
- Export Corp. [CATIC] targeted the U.S. aircraft giant's
plant at Columbus, Ohio, according to government sources. Plant 85, as
it was known, is where the bodies of the U.S. Air Force C-17 strategic
transport plane and the MX intercontinental ballistic missile were made.
- In 1994, CATIC made an offer to buy Plant 85 and relocate
it to what was to be a civilian aircraft-production facility, according
to government documents. The request for an export license for the plant's
machine tools touched off a bitter feud among export-control officials
at the DoD that still lingers nine years later. Those opposed to the sale
argued that once the Plant 85 machine tools were exported to the PRC, they
would be used to produce missiles for China's People's Liberation Army
[PLA]. Those who favored the sale pointed to the ancillary deal the PRC
dangled in front of McDonnell Douglas to purchase more than $1 billion
worth of aircraft.
- In the end, those in favor of the sale of Plant 85 won
out and those opposed almost immediately were vindicated. According to
government documents, within months of exporting the plant to China, U.S.
officials learned that the sensitive machine tools had been diverted for
use in a Chinese factory that makes the Silkworm missile that Beijing has
provided to rogue nations. United Auto Workers union official South tells
Insight he sees similarities between the cases of McDonnell Douglas and
Magnequench, noting that immediately after the consortium's first Magnequench
acquisition, "They transferred the patented jet-casting process to
- In an interview with Insight, Magnequench Inc. President
Archibald Cox Jr. initially denied but later confirmed having a contract
for the production of rare-earth magnets for the JDAM. When asked about
the shutdown of the Anderson plant last year, he acknowledged having a
10-year agreement with GM and the steelworkers, but insists that despite
the early termination of that agreement the workers "got a fair deal"
when the company bought out their contract. Cox tells Insight the closing
of the Valparaiso plant was a matter of economics, and denies that the
company is moving equipment to China.
- "We are going to sell everything in the plant i
unless we can use it somewhere else," says Cox. Insight has obtained
evidence that "somewhere else" may mean China. A copy of an internal
memo from the Valparaiso plant seems to contradict the "sell or auction"
option. A brief memo, dated Jan. 23, states in part, "In the near
future you will be seeing people in the plant performing measurements and
a variety of estimating and planning activities in preparation for equipment
sale and/or removal ... to give the company an idea of cost and logistics."
According to eyewitness accounts, all such "people have been from
China." Cox also acknowledges that Magnequench Inc. did not purchase
the buildings or land where the Valparaiso plant is located, but refuses
to characterize reluctance on the company's part: "It just wasn't
part of the deal," Cox says.
- And, Cox insists, "China is already selling the
same products for less money."
- A source with detailed and specific information about
the internal operations of the company tells Insight that "the company
set up their own competitors by transferring the machines and technology
to China. Once the Chinese companies bought into Magnequench, they created
their own competition."
- According to company officials, Mangnequench asked for
and received clearance to export equipment it has shipped to the PRC.
- Meanwhile, employees of Magnequench UG have placed their
hope in an unlikely labor-union ally. The one surefire deterrent to Magnequench
UG's move to China would be for President George W. Bush to exercise his
authority under the 1988 Exon-Florio amendment to the Defense Production
Act and order San Huan New Materials to divest its holdings in this strategic
U.S. company. In his State of the Union Address, the president offered
a glimmer of hope for Magnequench employees by declaring his administration's
intent to "strengthen global treaties banning the production and shipment
of missile technologies." If so, say the workers, this may be a very
good place to begin the process.
- Scott Wheeler is a reporter for InSight Magazine.