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1 February 2003. Thanks to Peter Leitner.

Also by Scott Wheeler, "China Makes Spying A Company Policy," October 30, 2002:

> http://www.stevequayle.com/News.alert/Espionage/021030.China.spying.policy.html

Story Source: Insight on the News

## Missile Technology Sent to China

By: Scott L. Wheeler

01/31/03

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 distances."

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 that 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 industrial base."

Intelligence analysts emphasize that the PRC routinely combines espionage operations with business deals. Internal PRC documents refer to this as advancing "economy and ... 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 China."

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 ... 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 L. Wheeler is an investigative reporter for Insight magazine.

http://www.magnequench.com/mag_news/releases/letter%20to%20president0429.pdf

### Magnequench

Leading Magnet Innovation ™

MAGNEQUENCH, INC.
6435 SCATTERFIELD ROAD
ANDERSON, INDIANA 46013-9606
(1) 765-648-5012 FAX: (1) 765-648-5015
e-mail: acox@mqii.com
web site: www.magnequench.com

April 29, 2002

Dear Magnequench Customers and Suppliers:

With the first quarter of the year behind us it appears that 2002 will be a better year for the industry than 2002 with the worldwide economy slowly emerging from the recession and the technology sector showing some recovery, but without significant growth in volumes and with continuing pricing pressures in most sectors. Our first quarter showed significant improvement over the first and last quarters of 2001. We sincerely hope that the same was true for our customers and suppliers.

We are now in full production of all powders in our Tianjin, China, powder facility and of magnets in our new facility in Juarez, Mexico, and the Anderson plant has been permanently closed. We continue to expand our magnet-making capabilities and to add to our range of magnetic powders. We are presently sampling two newly developed powders, which we expect to meet specific product requirements of some of our customers, and further developing our product offerings in magnets and subassemblies.

Closer scrutiny of our website has led us to conclude that it needs to be significantly retooled. For this reason we will be disabling some of its functionality and will be making a number of changes to it. In addition we will be adding more specific product data about both our magnets and powders. We apologize for any inconvenience this may temporarily cause, but hope you will find the revised website more useful in the future. Thank you for your past support, and we look forward to working more closely with you in the future.

Sincerely,

Archie Cox

Archibald Cox, Jr.
President and CEO
Magnequench, Inc.