Missile technology sent to China; the move to China of a U.S. manufacturer of military parts is causing fears that Beijing is out to corner the market in rare-earth magnets—critical components of smart bombs

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."