Citing national-security concerns, two Democratic lawmakers are engaged in a last-ditch effort to halt plans for the transfer of an Indiana factory that produces critical technology used in the guidance systems of U.S. “smart bombs” to the People’s Republic of China.

The Department of Defense denies any impropriety, but some observers are asking: Is it a case of politics as usual, or a cover-up?

The Magnequench factory (originally known as UGIMAG) was sold in August 2000 to a consortium that included Chinese interests. In 2001, it was announced the plant would be shut down.

The factory is responsible for producing 80 percent of the rare-earth permanent magnets used in the guidance systems of U.S. “smart bombs,” according to lawmakers.

Sen. Evan Bayh, D-Ind.

On Aug. 1, the office of Rep. Pete Visclosky, D-Ind., issued a statement indicating he and Sen. Evan Bayh, D-Ind., were mounting a “last-ditch” effort to halt the factory move to China. Citing the loss of 225 northwest Indiana jobs, Visclosky also expressed concern over the “transfer of sensitive defense technology to the People’s Republic of China.”

“We deserve answers not only about the economic impact of this move, but also about the potential threat to national security that it creates,” Bayh said.

Both Bayh and Visclosky previously lobbied President Bush and administration officials to look into the Magnequench matter, but received no response.

“We’re still trying to get a response,” Visclosky press secretary Clifton Brown told WND.

“The congressman is very concerned about the transfer of this kind of technology to a foreign power,” Brown said, stating that a supply chokepoint could result “in the event the U.S. becomes involved in a conflict that the Peoples Republic of China doesn’t approve of.”

“The congressman is very unhappy the administration has taken no interest in this issue at all,” he added.

Inquiries go unanswered

The two lawmakers reportedly received no response from letters sent to President Bush on March 6 and May 1.

Two letters sent to Treasury Secretary John Snow (on May 20 and June 5) received a response turning down a request from the congressman for a meeting. Several phone calls also have received no response.

Rep. Pete Visclosky, D-Ind.

Visclosky sent a letter July 31 to the U.S. House of Representatives Armed Services Committee, requesting the committee review the contracts Magnequench currently holds with the U.S. Department of Defense.

“These contracts must be reviewed in order to verify the legality of the pending move to China,” he said.

Bayh, who is a member of the Senate Armed Services Committee, backs the request for a review.

WorldNetDaily contacted the office of Sen. John Warner, R-Va., head of the Senate Armed Services Committee, and asked whether the committee was moving on this issue. At the time of the publication of this report, WND had not received a response.

On Aug. 1, Bayh and Visclosky also sent a letter to the U.S. Department of the Treasury demanding all the facts of its investigation into its review of Magnequench’s 1995 sale to a consortium that included Chinese interests and Magnequench’s 2000 acquisition of the Valparaiso facility.

To date, they have not received a response. WorldNetDaily contacted Snow’s office and had not received a response by press time.

A controversial sale

In 1995, Beijing San Huan New Material High-Tech Inc. and China National Non-Ferrous Metals Import & Export Corporation partnered with investment firm the Sextant Group Inc. to acquire Magnequench and established the new entity as Magnequench International Inc.

Magnequench, a high-tech company created in 1986 by General Motors, pioneered the development and production of quenched neodymium-iron-boron (NdFeB) – magnets used in the guidance system of “smart bombs.”

Beijing San Huan New Materials High-Tech Inc. is a holding of the Chinese Academy of Science Business Group and was established in 1985. China National Non-Ferrous Metals – previously described by the Wall Street Journal as a “high-flying state company” – operates under the control of the State Council, one of the major organs of the Chinese government.

The 1995 sale required approval from the Committee on Foreign Investments in the U.S., or CFIUS. The CFIUS is an inter-agency committee chaired by the secretary of treasury, tasked with conducting reviews of foreign acquisitions that might threaten national security.

“Concerns raised by American officials about what they considered a clear case of the PRC attempting to obtain control of vital U.S. weapons technology were shot down, and CFIUS permitted the buyout,” reported Insight magazine and WND.

WorldNetDaily has learned that in the same year the CFIUS approved the sale, the U.S. International Trade Commission had initiated an investigation into San Huan New Materials and found they were associated with the Chinese government and were engaged in illegal practices that harmed domestic industry.

Investigation into San Huan

That finding was part of an investigation into San Huan New Materials High Tech Inc., Ningbo Konit Industries Inc. and Tridus International Inc. regarding the importation of certain NdFeB magnets that infringed upon U.S. patents held by YBM Magnex Inc. (successor in interest to Crucible Materials Corporation).

The investigation was launched in response to a February 1995 complaint lodged by YBM.

San Huan, Tridus and Ningbo are related companies. Tridus is San Huan’s exclusive representative for the sale of NdFeB magnets in the United States; Tridus obtained the imported magnets from San Huan and Ningbo; and San Huan and Tridus own a controlling interest in Ningbo.

The companies were referred to collectively as the “San Huan Respondents” in a later enforcement proceeding.

Following the announcement of the investigation, San Huan voluntarily entered into a consent order that forbade the company from continuing to import the infringing magnets unless under consent or license from Crucible. The consent order became effective Oct. 10, 1995.

It was soon found that San Huan continued illegal importation and sales unabated.

Citing “bad faith” and “harm to domestic industry,” the commission argued San Huan’s actions deserved a “significant penalty,” and a $1.55 million fine was levied against the company.

Magnequench sale goes through

In 1995, the Magnequench sale was completed, and San Huan told investors it chose to acquire the General Motors company because “it possessed the best technology, biggest production capability and sole patent for rapidly quenched NdFeB powder.”

The powders are used in the manufacturing of state-of-the-art sintered neodymium-iron-boron magnets.

The move was said to “set San Huan firmly on the road toward international expansion.”

In 1998, Magnequench moved on to acquire GA Powders to capitalize on its breakthrough gas atomization process for making NdFeB powder. The technology was designed to create superior materials at lower costs. At the time it was created, the Ames National Laboratory estimated the $250 million market for these bonded magnets was expected to grow by more than 20 percent annually into the next century.

GA Powders was in fact a spin-off innovation company created by the Idaho National Engineering and Environmental Laboratory, which was managed by Lockheed Martin Idaho Technologies Company.

At the time, Ames said, “The new venture will strengthen the economy, create jobs and provide a return on taxpayer investment in government-sponsored research and development.”

Ironically, as a sign of the times the Rare-earth Information Center at the Ames National Laboratory was later forced to shut down, after more than 36 years of providing scientific and technical information to industry, government, universities and individuals. The center cited consolidation in the rare-earth and magnet industries as a factor in the shutdown. Private corporations had previously provided significant sponsorship to the RIC, supplementing government funding. The RIC closed on July 1, 2002.

After acquiring GA Powders, Magnequench opened a new powder plant in Tianjin, China, in June 2000, moving production closer to the source of raw materials and driving down the overall cost of the NdFeB magnets. San Huan’s close association with the rare-earth ore mining provinces of Inner Mongolia and Jiangsi gives it a guaranteed stable source of raw materials.

As previously reported by WND and Insight, a second effort to halt technology transfer to China from Magnequench failed in 1999. Company officials sought U.S.-government approval to export equipment from the Magnequench plant in Anderson, Ind., that could enhance China’s ability to enrich uranium for a nuclear weapon.

“Stronger opposition to the transfer within government ranks again was stymied, and the high-tech computerized machine tools were moved to the company’s new plant in mainland China.” Insight writer Scott Wheeler reported.

The “new” Magnequench then went on to purchase the Valparaiso, Ind., factory (then known as UGIMAG) in October 2000, which then became known as Magnequench UG.

The people behind Magnequench

The successful 1995 Magnequench sale was followed by an interesting series of management changes that primed the company for successful expansion.

The chairman of San Huan New Materials, Mr. Hong (Harry) Zhang, then also became chairman of Magnequench.

Archibald Cox Jr., president and CEO of Magnequench

Archibald Cox Jr., founder of the Sextant Group, was appointed president and chief executive officer.

And Shannon Song, the former finance director of state-run China National Non-Ferrous Metals Import & Export Corporation, was appointed as a member of the board of directors. Song is now senior vice president strategic planning and is also responsible for China operations.

Zhang is the husband of Deng Nan, second daughter of China’s former premier, Deng Xiaoping.

Deng Nan, wife of Hong Zhang and daughter of Deng Xiaoping

Deng Nan serves on the PRC State Council as vice minister of state for the Ministry of Science and Technology. Broad technology policy directives originating in the upper levels of the Communist Party hierarchy are fine-tuned and implemented by the State Council and its institutions.

The ministry oversees the “863 Program,” an aggressive science and technology acquisition program first launched by Deng Xiaoping and funded and controlled by the Chinese government. It is formally known as the National High Technology Research and Development Program of China. Its name comes from the month (March) and year (1986) it was implemented.

Hong (Harry) Zhang, chairman of Magnequench

U.S. government reports indicate the “Super 863 Program” (as it was called after 1996) calls for continued acquisition and development of technology in a number of areas of military concern, including machine tools, electronics, petrochemicals, electronic information, bioengineering, and nuclear research, aviation and space.

The 863 Program continues to be focused on technology research and acquisition in eight specific fields.

The 863 Program

Rare-earth metals and products, including NdFeB magnets, are one of the chief target areas of focus of the 863 Program. They fall under the category of “exotic materials.” In addition to rare-earths, materials sought in this category include optical-electronic information materials, new energy compound materials and high-capacity engineering plastics.

Despite the wide range of consumer-market uses for NdFeB magnets, the possible military applications of “dual-use” sintered NdFeB magnets concern critics.

About the 863 Program, the 1999 congressional Cox Report noted, “These projects could advance the PRC’s development of materials, such as composites, for military aircraft and other weapons.”

Potential dual-use of exotic materials acquisitions were said to be a key area of military concern.”

San Huan has undertaken various research projects in national government programs such as the Torch Program (another sci/tech development program), the Assault Program, and the 863 Program, which the company says “has greatly enhanced and upgraded San Huan’s technology and products.”

San Huan Materials is mentioned repeatedly in 863 annual reports, which also applaud significant advancements in neodymium-iron-boron magnet engineering.

For the English-speaking public, 863 states it’s goals are to aid military and civilian industry with an emphasis on civilian uses and subsequent economic growth.

According to Russia/China expert Dr. Alexandr V. Nemets, Chinese language explanations of 863 emphasize military goals above civilian goals.

As an example, Nemets quotes a translated sentence from Chinese media stating the 863 Program was necessary for “the development of new advanced technologies for defensive and offensive warfare.”

It is Nemets’ opinion that since 1986, through its 863 Program, China has been developing post-nuclear superweapons using knowledge gained from the “dragnet” of the eight fields of research.

Nemets, who refers to the West as “geo-strategically lobotomized,” has been highly critical of the Bush administration’s war on Iraq, faulting it for not focusing on what he considers to be the far greater threat of strategic developments in China.

“Project 863 has at its disposal not only everything necessary for its development of non-machine post-nuclear superweapons, but also the scientific manpower of the entire world,” said Nemets.

Nemets is a consultant to the American Foreign Policy Council and co-author of “Chinese-Russian Military Relations, Fate of Taiwan and New Geopolitics.” A former student of the Moscow Institute of Steel and Alloys, Nemets worked at the Presidium of Academy of Sciences USSR as an expert on the economic and technological development of China and Japan, and published several dozen articles and booklets in the Soviet scientific media.

Power and the ‘princelings’

Deng Nan was not the only high-placed figure in Chinese politics that was connected to the new Magnequench. At the time of the sale, the president of China Nonferrous Metals Industrial was Wu Jianchang, who is married to Deng Lin, the eldest daughter of the late Deng Xiaoping. Jianchang headed what was China’s key state monopoly in metals trading and was also a director of listed companies in Hong Kong such as Silver Grant.

The two daughters are part of the “Crown Prince Party” – descendants, usually second-generation, of prominent and influential senior Communists of the People’s Republic of China. By virtue of their lineage, the descendants wield significant political and business influence. Members of the Crown Prince Party are commonly referred to in the West by the colloquial terms “princelings” and “princesses.”

In January 1998, Zhang Wule, a senior Communist Party official who had served as governor of Gansu province and more recently headed the State Economic and Trade Commission, was named president of China Nonferrous Metals.

By 1999, San Huan Materials had become the top publicly traded Chinese manufacturer of sintered magnetics, the biggest company for producing NdFeB magnets in China and the world’s third-largest volume producer.

Pentagon weighs in

WorldNetDaily spoke to several spokespersons and weapons experts with the Pentagon, the Department of Defense and the Air Force regarding the concerns raised by Bayh and Visclosky. Upon initial contact, none of those contacted knew anything about the Magnequench situation.

Although not familiar with the details, Pentagon spokesman Glenn Flood told WND: “Would we go to China for this? No. If you recall we didn’t buy them [sic] berets.”

Gloria Cales, a spokeswoman for the Air Force and a weapons expert, and Maj. Paul Swiergosz offered to have the issue researched.

A statement was later given to WND by Pentagon spokesperson Cheryl Irwin.

The same statement is slated to be given to members of Congress who inquire about the issue. It said in part, “The Department of Defense does not keep records on the percentage of rare-earth magnets which we have procured from the Indiana facility. However, that plant at one time did make rare-earth magnets used in motors for tail fins on certain U.S. precision-guided munitions.”

Boeing image of a JDAM from it’s Asian Aerospace 2002 conference site.

In a January 2003 interview with Wheeler, Magnequench President Cox initially denied but later confirmed having a contract for the production of rare-earth magnets for the JDAM – the U.S. Joint Direct Attack Munitions project commonly referred to as “smart bombs.”

When asked how DoD could not know the percentage, since the magnets were obtained under contract, Irwin declined further comment, refusing to answer any of WorldNetDaily’s specific questions.

DoD: ‘Department of Dodging?’

Visclosky’s office labeled the DoD’s response to WND an “artful dodge.” “A very large amount of these products are still made there. … It’s a mistake to allow such a large production to go overseas,” said Brown.

Regarding the vagueness of the DoD’s response and their failure to answer critical and specific questions, Jake Swinson, a weapons expert earlier recommended to WND by the Pentagon, said, “[Irwin’s] up there with Rumsfeld’s people,” adding, “They probably don’t know what to do about it. They’re probably in shock. That’s a pretty serious thing.”

Swinson added that complex situations arise “when these mergers take place and sales get up to a pretty high level.”

“They’re probably having trouble deciding what to say and what to do to investigate it,” he added.

Said Brown from Visclosky’s office: “It’s clear that they are trying to avoid answering these questions. The public wants to know. There’s something that they don’t want to tell people about what’s going on.”

2 down – 1 to go

The DoD statement also said, “Nor has China cornered the manufacturing market for such magnets, as numerous alternate suppliers exist (40 percent of world production in Japan, 5.8 percent in the U.S., and 4.8 percent in Europe). Additionally, there are substitute materials for these components available from other sources. ”

The response failed to answer questions regarding contracts already in place and whether those would be honored, resulting in the U.S. purchasing 80 percent of the magnets used in JDAMs from China.

According to Walter Benecki, a consultant to the worldwide magnetics industry, there are only three firms in the U.S. licensed to sell sintered NdFeB magnets. The second firm – a Kentucky plant belonging to Germany’s Vacuumschmelze GmbH, Hanau – has now announced it is closing as well.

“Today we’re down to one – and that one is owned by Japan,” he said.

That firm is the Hitachi Magnetics Corporation in Edmore, Mich., part of Hitachi Metals America.

In terms of the raw materials used to make the permanent magnets, the country’s foremost supplier (80 percent) of rare-earth materials (Molycorp) experienced a shut down in 1998, according to Insight magazine, after spending millions to remake its mining facilities following Bureau of Land Management complaints that it was endangering the desert-tortoise environment. Dr. Stanley Trout, a former consultant to Molycorp, told WND the deteriorating prices on rare earths, mainly due to Chinese competition were also a key factor in the severe operational cutbacks. Some separation facilities at the mine, used to process and purify rare-earth ores remain closed, subject to resolution of the environmental issues. The Mountain Pass rare-earth deposit is the highest quality deposit in the world.

A spokesperson for the Pentagon told WND, “Seventy-five percent of the raw material used to make rare-earth magnets is currently supplied by China. Although other sources and mines exist around the world – including the United States – China remains the most cost effective source at this time.”

Until 1998, there were essentially two active mines in the world producing rare earths for the exotic magnets – the Molycorp mine in Mountain Pass, Calif., and China’s Baotou mine.

The year after the U.S. mine shutdown, China met 88 percent of the world demand for rare earths.

No risk – no monopoly?

The DoD statement went on to deny the lawmakers’ assertion there was risk involved in the situation: “Thus, implication of a risk to DoD due to a Chinese monopoly on these magnets is incorrect,” adding, “The Department has no plans to alter our current purchasing practices of these magnets.”

Dr. Peter Leitner, a senior strategic-trade adviser to the DoD, had previously told Wheeler, “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,” adding that “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.”

“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,” Leitner said. “This highly concentrated control – one country, one government – will be the sole source of something critical to the U.S. military and industrial base.”

Benecki believes within the next five years China will dominate the world market for sintered NdFeB magnets, but doesn’t see it as problematic or “conspiratorial.”

“It’s just the natural evolution of technology and manufacturing driven by raw materials,” he told WND, referring to China’s low labor costs and abundance of rare-earth materials.

“I honestly don’t know how big a national-security issue this is,” Bencki said, “but I hate to see the point where there are no producers of these products in the U.S.”

Benecki is sought after for his expertise in creating strategic alliances with China.

In May, Benecki addressed the Transformer Association on “How to Efficiently Establish an Operation in China.” In October, he will be presenting a seminar in Detroit on Survival Strategies for Western NdFeB Producers.

His advice? Companies must establish some sort of China capability to remain profitable.

“The whole magnet industry is seeing these types of pressures,” he said. “It’s a very difficult equation.”

On July 17, minerals expert Hugh Hanes testified before the Subcommitee on Energy and Mineral Resources and warned that the U.S. was in need of a “well-conceived minerals and metals policy.” Calling them “hidden commodities,” he emphasized how integral they were to the aerospace/defense and critical civilian infrastructure. Among those areas listed were JDAMs, F-22 stealth systems, reconnaissance satellites, battlefield surveillance, missile and ground-based laser systems, telecommunications, electronic transmission and medical applications.

After faulting “a series of unwise political decisions largely over the last 10 years, which discounted the importance of a U.S. minerals base,” Hanes warned, “We have lost or are losing these capabilities as we speak.”

‘Going nuts’ over intel

The diminishing U.S. base for strategic minerals, sensitive technology-transfer issues and espionage can all combine to form a particularly complex concern for the intelligence sector.

The bipartisan “Cox Committee Report” found that two of the methods used by the PRC to acquire advanced U.S. military technology included:

  • Relying on “princelings” who exploit their military, commercial and political connections with high-ranking Chinese Communist Party and Peoples Liberation Army leaders to buy military technology from abroad . Two of the currently most notable princelings, Wang Jun and Liu Chaoying, have been directly involved in illegal activities in the United States, according to the report.

  • Acquiring interests in U.S. technology companies.

The scores of legitimate Chinese mergers, combined with what U.S. officials say are opaque Chinese intelligence operations buried deep within other legitimate-appearing mergers, make such technology-transfer questions murky at best.

According to James Lilley, former U.S. ambassador to the PRC, U.S. agencies are “going nuts” trying to discern where Chinese intelligence links to the PRC’s military science and technology collection are. Such links either are typically buried beneath layers of bureaucracy or later turn out to not exist at all.

Sun sets on Indiana workers

Meanwhile, in Indiana, a crowd of 150 angry Magnequench workers recently vented their frustrations at a Valparaiso protest, jeering the mention of Magnequench President Archibald Cox Jr.’s name.

Wearing t-shirts that read “No More Lousy Trade Deals,” they cheered when union organizer Mike O’Brien called Cox “a traitor to this country,” according to Northwest Indiana News.

Magnequench workers protest.

“I would say Archibald Cox and company are committing a criminal act,” by moving to China the manufacturing of internal workings of U.S. defense system self-guided bombs, O’Brien said.

Visclosky, standing on a pickup truck bed at the end of the march, called for the ouster of elected officials who’ve “made it easier to move U.S. jobs out of the country, ” the newspaper reported.

“We’re giving our enemies our defense technology and your 225 jobs,” Visclosky said.

Magnequench has already begun dismantling some equipment in the plant and moving it to China, according to Indiana media.

The plant is set to close by Sept. 30, with most workers to be gone by Aug. 15.

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