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In Indiana, Clinton plays the China card

Hillary Clinton has seized on a symbol of what she sees as the erosion of America’s defense industrial base: a company called Magnequench which once made the high-performance magnets needed in precision-guided weapons.
Image: Senator Hillary Clinton
Democratic presidential contender Hillary Clinton greets her supporters in South Bend, Ind. on Saturday.Frank Polich / Reuters file

Rep. Duncan Hunter, the conservative ex-chairman of the Armed Services Committee, never caught fire as a GOP presidential contender.

But Hunter’s message — that industries vital to the nation’s defense are withering away or being exported — has found its voice in the person of Democratic presidential contender Sen. Hillary Clinton.

Clinton has seized on a symbol of what she sees as the erosion of America’s defense industrial base: a company called Magnequench which once had two factories in Indiana. The company used to make high-performance magnets used in precision-guided weapons.

With Democrats set to vote in Indiana’s presidential primary next Tuesday, Clinton’s campaign has run a TV ad spotlighting Magnequench.

“A Chinese company bought Magnequench,” she said in a speech in Pittsburgh on April 14. “The people of Indiana, the company and the elected officials begged the Bush administration to block the Chinese company from moving the jobs to China…. Not only did the jobs go to China, but so did the intellectual property and the technological know-how to make those magnets…. I'm not comfortable with the fact that we now have to buy magnets for our bombs from China.”

U.S. dependence on Chinese investment
Clinton’s portrayal of China as a threat is not a new theme for her. Last year, she said that the United States was becoming dangerously dependent on Chinese purchases of U.S. Treasury securities.

And a few days before her victory in last week’s Pennsylvania primary she told voters in West Chester, Pa., “the Chinese are convinced that the 21st century is their century…. they are very focused on what they need to do. They are building a blue-water navy to contest us in the Pacific.”

The magnets at issue, call “neo magnets,” are used in products ranging from disk drives to mobile phones.

The ingredients in those magnets are the minerals neodymium, iron, and boron.

Neodymium is one of the rare earth elements, which you may recall from the bottom of the periodic table of the elements in your high school chemistry class.

Now the neo magnets are made in China and Thailand, but the tale of how that came to be is more complicated than Clinton’s version of events.

According to a report issued in March by the Congressional Research Service, General Motors sold Magnequench in 1995 to a group of investors including Archibald Cox, Jr., the Sextant Group, Soros Fund Management, and two Chinese firms, one of which was owned by the Chinese Academy of Sciences.

In 1998, Magnequench began building a plant in Tianjin, China, which began operating two years later.

In 2000, Magnequench bought a neo magnet plant in Valparaiso, Ind. that had been owned by a French firm. But in 2003 it decided to close down the Valparaiso plant.

Money-losing plant
“The plant closed because it was losing $5 million a year,” said Cox, the former chief executive officer of Magnequench. “The rare earths were Chinese, the technology was Japanese. There were no secrets to give away and we gave none away.”

While the Chinese partners were 60 percent owners after the 1995 purchase from GM, subsequent refinancing reduced the Chinese stake to below 20 percent. To characterize the company as a Chinese company at the time the Valparaiso plant was shut down in 2003 is wrong, said a person then involved in the company.

In 2005, Magnequench merged with a Toronto-based firm AMR Technologies, with the new firm called Neo Material Technologies.

“Magnequench divested itself of its business units that make magnets in favor of concentrating on producing the Neo powders that the firm supplies to other firms that, in turn, make the Neo magnets,” said the Congressional Research Service report.

Nevertheless Magnequench, now part of Neo Material Technologies, “holds important patents that make it the only legal supplier of Neo powder for bonded Neo magnets manufactured or sold in the United States and it has approximately an 80% share of the world supply of Neo powders,” said the Congressional Research Service.

The report added, “The Magnequench patent significantly restricts competition within the United States.”

Clinton or Bush could have stopped the deal
Under the 1988 Exon-Florio law, either President Bill Clinton in 1995 or President Bush in 2003 could have blocked the sale of Magnequench or its merger with AMR Technologies.

The Committee on Foreign Investment in the United States (CFIUS), which includes representatives from the Defense Department, the State Department and other agencies, reviewed the transactions and apparently did not object to them proceeding.

Hillary Clinton is not the first Democratic presidential contender to use Magnequench as an example of deindustrialization as a potential security threat. In 2003, Democratic contender Dick Gephardt highlighted the Magnequench case, discussing it at a press conference in Chicago with United Auto Workers members who’d worked at the plant.

Today in the United States no companies manufacture neo magnets on a large scale, according to executives in the magnet industry.

Since the U.S. weapons industry cannot currently get the magnets it needs for precision-guided weapons from a company in the United States, how much risk is there in it relying on foreign suppliers of the components?

Clinton’s chief Indiana ally, Sen. Evan Bayh, who tried to stop the Magnequench plant closure in 2003, said, “The key question is: Are these components vitally important to a weapons system that is significant to our nation’s security? If the answer to that is yes, it seems to me we should retain a significant production capacity in our country and not be solely dependent or largely dependent on another power.”

National security concern
“The real value is in the production process and the real risk to national security is the ability to turn rare earth materials into high performance magnets,” said former House Armed Services Committee staff member Jeff Green, who now represents firms that make up the U.S. Magnet Materials Association.

But a former Magnequench executive played down the significance of the supply issue: "Our product was an 85-cent part that you could make in your kitchen if your oven ran hot enough."

Neo magnet production capability could be re-launched in the United States, if a U.S. firm were willing and able to obtain a license from Hitachi, which owns patents connected to the manufacturing process, and able to hire the Americans with the expertise to do the work.

Another geostrategic angle: most of the rare earth elements now used in manufacturing come from China.

"The Chinese government controls the volume of rare earths that are mined (perhaps much like OPEC controls oil)," said one American magnet industry executive.

"Prices have increased greatly in the last year and the underlying feeling by Westerners is that this is due to the control by the Chinese and the fact that they ran the other producers in the U.S. out of business so they can do what they want."

But there may be some reassuring news for those worried about potential risks to national security. There is a U.S. source for neodymium, an open-pit mine in Mountain Pass, Calif. owned by a subsidiary of Chevron. The Mountain Pass facility was shut in 2000 when rare earth prices were falling.

Chevron re-started operations last fall and is now selling some neodymium from the mine. The demand for the rare earth material has picked up partly due to its use in batteries for hybrid cars.