January 1, 2008


The United States has lost critical domestic capabilities to equip itself for future wars—much to the Pentagon's disinterest.

One of the most critical national defense issues facing the United States has nothing to do with Islamic extremism, Iran or our depleted and battered volunteer Army.

The issue is this: Because the Pentagon doesn’t track the source of weapons components beyond the top three tiers of contractors and subcontractors, we don’t really know who makes the parts and pieces of our often complicated armaments.

Put another way, it appears that a number of vitally important weapons components and militarily important supplies are no longer made in the United States—in one or two cases, they now may be made only in China—and the Pentagon not only doesn’t know it, it doesn’t regard the problem as important. Defense planners have turned a blind eye to growing U.S. dependence on foreign sources of defense-critical parts and components.

“If the Chinese wanted to play hard ball, there would be some severe consequences,” says Archibald Cox, Jr., son of the former Watergate prosecutor and one-time CEO of a militarily significant company working in rare-earth technologies before it was moved through a series of transactions to China. Says retired Army Major General John Batiste, now president of Klein Steel Service of Rochester, New York: “The risk is enormous.”

The issue is not a new one, but observers and politicians who have been tracking the problem say it has worsened as more of the U.S. manufacturing base has shifted to low-cost locations such as China and as weapons systems have grown more complex, requiring legions of companies—some specialists in narrow but important fields—to produce.

“As the U.S. manufacturing base diminishes, the U.S. military risks losing its ability to easily, quickly and reliably procure much-needed weapons systems, components and spare parts,” says the U.S.-China Economic and Security Review Commission (USCC), an entity created by Congress in 2000 to serve as a watchdog for the worrisome Chinese military growth trend. “With a smaller industrial base to draw from, military leaders are increasingly concerned about maintaining warfare capabilities, especially in the event of actions not supported by the People’s Republic of China.” In its most recent annual report, the commission identified the Pentagon’s failure to gather data on the sources of defense components as the most significant issue blocking a detailed evaluation of the threat.

“The conclusions of the U.S.-China Commission are alarming,” says U.S. Sen. Evan Bayh (D-Indiana).

Risky Business

Rep. Donald Manzullo, the Illinois Republican who chaired the House Small Business Committee from 2001 to 2007, has been a Capitol Hill champion of a thorough review of military sourcing, as has Rep. Duncan Hunter (R-California), the former chairman of the House Armed Services Committee, now its ranking Republican and a presidential candidate. Manzullo cites 16 defense-critical industrial capabilities—from printed circuit boards and foundries, to machine tools and ammunition—that are so thinly manufactured in the United States, or not manufactured at all, that supplies are at severe risk.

While the country has yet to cross a threshold that marks the loss of overall domestic capability to supply the needs of its military, “trends suggest we will,” Manzullo says. “We are close—and closer than we ever want to be.” Adds Hunter, “We have a modicum of risk right now, but it could become severe if we don’t take steps to turn it around.”

Lost defense manufacturing competencies sometimes involve relatively simple baseline armaments, such as ammunition. The U.S. Army Joint Munitions Command (USAJMC) reports the United States no longer has any domestic suppliers of lead azide, an explosive crystalline compound found in detonators in 85% of the ammunition the military uses. A government production facility was shut down in the 1980s, and the last commercial facility left the business in the early 1990s. As a result, Manzullo says, lead azide will have to be eliminated as an ammunition component, or the Pentagon will become dependent on foreign sources, only two of which remain in the world—in Mexico and Germany.

The U.S. Army Armament Research Development and Engineering Center (ARDEC) is currently looking at the feasibility of domestically manufacturing lead azide or a substitute. “There is a very, very limited supply of lead azide in our stockpiles, and its shelf-life is questionable,” says Peter Rowland, public affairs officer for ARDEC. Ultimately, Rowland, says, the goal of ARDEC is a lead-free azide that can be produced domestically, but there is no indication when that may happen.


DOD photo by Tech. Sgt. Beth Holliker, U.S. Air Force

USAJMC, the joint munitions command, reports the U.S. industrial base has also lost the ability to produce nitroguanidine, a chemical compound essential to the modular artillery charge system; vinyl alcohol acetate resin, a binder used in pyrotechnic applications; and M234 self-destruct fuses, used in artillery, Navy guns and missile systems. In addition, there is only one remaining U.S. producer of black powder, used in 94 munitions. The domestic fuse base has been reduced to just seven suppliers from a high of 31, and they are all “at risk,” USAJMC says. “The Joint Munitions and Lethality Lifecycle Management Command (JM&L) continues to be concerned about erosion of the defense industrial base, both in the public and private sectors,” says JM&L spokesman Stephen Abney. “Many JM&L facilities have World War II-era machinery and processes that are unsuited to today’s realities.”

Even more critical, says Michael Wessel, president of Washington, D.C.-based consulting firm The Wessel Group and a member of the USCC, is the loss of a domestic capability to make butanetriol trinitrate, used in propellants for rockets and missiles, including the Hellfire missile, used by attack helicopters to combat tanks. Deputy Under Secretary of Defense for Industrial Policy William Greenwalt acknowledged in testimony before the USCC last July that a Chinese source might be the only one available. “God forbid that tensions rise and our stockpile is limited, and we find our capabilities dependent on the Chinese,” Wessel says, adding that an independent inquiry by USCC in late October confirmed less than an 18-month supply exists.

Power Shift

While a loss of domestic capability to manufacture lead azide, butanetriol and others might lead to a future dependence on China, it is rare-earth elements (REE) that symbolize an even more serious threat. The Chinese have worked for a decade to dominate the world market for REE, which include 15 metals known more technically as lanthanides. They have diverse and exceptional nuclear, metallurgical, chemical, catalytic, electrical, optical and magnetic properties that have led to an ever-increasing variety of applications, both commercial and military.

Although REE are not, in fact, rare—even the least abundant of them are nearly 200 times more common than gold—they are rarely found in concentrated, exploitable deposits. Consequently, the world’s supply has historically come from only a few sources.

In 1949, an extraordinary deposit of REE was discovered at Mountain Pass, in the upper Mojave Desert of California. By 1966, this deposit—a reserve of 20 million metric tons—had become the world’s paramount source from a mine operated by Molycorp (now Chevron Mining).

Because of Mountain Pass, the United States was largely self-sufficient in REE until the mid-1980s. China began to increase its production of REE beginning in 1985 at two major mines. In addition, the government had invested heavily in state-of-the-art processing facilities. In the 1990s, when the Chinese Ministry of Science and Technology announced new national R&D priorities, REE were among the first 15 projects named.

By 1999, more than 90% of REE required by U.S. industry came from China, according to the U.S. Geological Survey (USGS). “The United States was once largely self-sufficient in REE, but in the past decade has become dependent upon imports from China,” USGS said in a 2002 report. As major reasons for the rapid transition from self-sufficiency to dependence on China, USGS noted “much lower labor and regulatory costs in China; continued expansion of electronics and other manufacturing in Asia; the favorable number, size and REE content of Chinese deposits; and the ongoing environmental and regulatory problems at Mountain Pass.”

China began to exert increasing dominance over the $1 billion world REE market, estimated at 95,000 metric tons. In contrast, the Mountain Pass mine operated below capacity and only intermittently, and in 2002, it was put on standby after years of regulatory and environmental problems. “[U.S.] dependence on imports from China comes at a time when REE have become increasingly important in defense applications, including jet fighter engines and other aircraft components, missile guidance systems, electronic countermeasures, underwater mine detection, antimissile defense, range finding and space-based satellite power and communications systems,” USGS said in 2002 (see “Magnetic Storm”).

Last November, Chevron Mining announced plans to reopen the Mountain Pass mine, but a company representative said in December there is no timetable nor any guarantee it will happen.

Looming Threat

Peter Leitner, who left the Pentagon last year after 21 years as a senior strategic trade advisor and is now president of the Higgins Counterterrorism Research Center in Arlington, Virginia, says an understanding and acknowledgement of the REE situation is essential to U.S. defense strategy. “It’s a form of economic warfare, and no one is really paying a whole lot of attention to what the Chinese are doing,” he says. “Rare-earths, in general, represent the technologies of tomorrow in terms of metallurgy. They are strategic and critical. The future development of advanced alloys, matrixes and compounds incorporating their unique properties will form many of the breakthrough advances in 21st century military technology.”

Photo courtesy of Northrop Grumman

Sheila Ronis, Ph.D., director of the MBA program at Walsh College in Troy, Michigan, and a systems scientist and former consultant to Congress and the Pentagon, says the possibility of Chinese extortion looms if U.S. industrial policy for defense is not addressed and corrected.

The Pentagon refused to comment on any specific issue raised by its critics. Major defense contractors, including Boeing, Lockheed Martin, Raytheon and Rockwell, also declined to comment. However, Pentagon public affairs officer Chris Isleib, in a written statement, said, “The industrial base supporting defense generally is healthy, in that it is able to provide the Department [of Defense] with reliable and cost-effective industrial capabilities sufficient to meet DoD’s strategic objectives. I am not aware of any important military product the domestic industrial base cannot produce.”

Under Section 1211 of the National Defense Authorization Act of 2006, the Pentagon is forbidden from buying munitions list items from China. Wessel, Ronis and Leitner concur that crossing that threshold for a weapon as critical as the Hellfire missile would be enormously dangerous. However, in USCC testimony that followed Greenwalt’s, Tina Ballard, deputy assistant secretary of the Army for policy and procurement, characterized the butanetriol/China issue as “very minor.”

Such a response exposes an alarming disconnect at DoD. “The Pentagon puts out the pabulum they want you to hear,” Ronis says. “They say, ‘Everything is fine.’ I think that is very dangerous.”

The problem the Pentagon and defense contractors do not want to talk about lies in the complex mysteries of the increasingly global supply chain. “DoD does not, as a routine matter, track which specific parts of weapons systems are sourced overseas,” Isleib says. “Such a department-wide data collection effort would impose significant costs and be of questionable utility.” Asked how the Pentagon assesses the risk of foreign sourcing, Isleib did not offer an explanation. In fact, in its own April 2006 report, Foreign Sources of Supply: Assessment of the United States Defense Industrial Base, the Pentagon acknowledged it does not track subcontractors below the third tier.

Experts concur the global supply chain has become so complex that neither the Pentagon nor prime defense contractors know where parts of subcomponents come from below the top tiers. “There is a tremendous lack of information,” Wessel says.

Or perhaps it is, equally, stonewalling. “When I worked on Capitol Hill, we would always try to get the Pentagon to report to us on foreign sources of defense components,” says William R. Hawkins, a former aide to Rep. Hunter and now senior fellow for national security studies at the U.S. Business & Industry Council. “They just refused.” Jeff Green, president of Washington, D.C.-based lobbying firm J. A. Green & Co. and a former counsel to the House Armed Services Committee, says he received the same response from the Pentagon when he worked for Congress.

As a result, in its 2006 annual report, USCC recommended “Congress require the U.S. Department of Defense to trace the supply chains of all components of critical weapons systems.”

Congress, however, has not implemented the USCC’s recommendation. Instead, led by Hunter while still chairman of the House Armed Services Committee, Congress created, as part of the FY 2007 Defense Authorization Act, a Strategic Materials Protection Board charged with assessing and addressing U.S. vulnerabilities in products such as specialty metals. The Pentagon ignored the legal requirement that it form the new board and meet. Last July, Hunter testified at the USCC hearing that the Pentagon was in “statutory violation” of the Congressional mandate. Four days later, the board finally convened, only to issue a report that simply stated it had formed and met, and would meet again in two years.

Minding the Store

Just as troubling, a 2007 report from the National Research Council, co-funded by the National Academy of Sciences and Department of Defense, found the Pentagon has failed to comprehend or manage the 21st century needs of the National Defense Stockpile (NDS), which stores more than 80 commodities at 11 staffed depots and 66 unstaffed depots worldwide. “The Department of Defense appears not to fully understand its needs for specific materials nor have adequate information on their supply,” the report says. “The current stockpile system is not properly designed to meet national defense materials needs in the 21st century. A lack of good data and information—both domestic and offshore—on the availability of materials impedes the effective management of defense-critical supply chains.”

Leitner says neodymium iron boron and other defense-critical REE should be stockpiled. The Industrial College of the Armed Forces, which prepares selected military and civilian leaders for strategic leadership roles in the development of national security strategy, including resource management, agrees. In its 2004 and 2005 reports, it listed neodymium as a strategic material. Yet the government’s 2006 NDS inventory report lists none. Given the criticality of materials management, Hunter has added new provisions to the FY 2008 defense act, still in House-Senate conference at press time, that would further strengthen the Strategic Materials Protection Board.

In his testimony last July, Greenwalt noted there is “the potential of buying commercial products that incorporate Chinese parts at the sub-tier level from either U.S. or foreign sources who are statutorily exempt from the Buy American Act.” In her testimony at that time, Rear Admiral Kathleen M. Dussault, deputy assistant secretary of the Navy for acquisition and logistics management, confirmed, “The Navy does not have visibility into commercial items indirectly purchased [from China] via second- and third-tier producers.”

“They’re embarrassed by the fact that they don’t understand their own acquisition process,” Leitner says of the Pentagon. “We are totally at the mercy of contractors, subcontractors and sub-sub-subcontractors. The Pentagon simply doesn’t understand where things come from. When it comes down to actually understanding where our dependencies are and whether we can confront them, those are issues that nobody at the Pentagon really wants to face.”

U.S. Navy photo by Mass Communication Specialist 2nd Class Chantel M. Clayton

Last year, USCC issued its own request for proposal and undertook a pilot study of three major weapons systems—the Air Force’s F/A-22 Raptor fighter-attack aircraft, the Army’s UH-60 Blackhawk utility helicopter and the Navy’s new DDG- 1000 destroyer—to track their supply chain all the way down.

“For two years, the Commission has tried unsuccessfully to ascertain the extent to which the industrial base relies upon Chinese components to supply critical weapons systems,” USCC said in its 2007 annual report. Commenting on its own efforts to do groundbreaking research and issue a public report originally due by the end of the year, USCC said, “The contractor has experienced considerable difficulty in obtaining access to parts and component databases, and its initial work suggests that information beyond the secondary or tertiary levels is sparse or nonexistent.” However, Wessel said in mid-December the report would be presented to the House and Senate Armed Services Committees by the end of the year.

Wessel thinks Congressional pressure will be needed to force the Pentagon to investigate and report on the issue. “It needs Congressional input and direction, and the Pentagon hasn’t had enough of that yet,” he says. “Individuals like myself and others have spoken out, individuals with DoD have raised concerns. But you have yet to have broad policy players—and by that I mean the White House, Congress and DoD leadership—seek to implement a systemic approach to this.”

The broader issue is the strategic advantage the Chinese have gained by doing precisely what the United States has failed to do. “Through a mix of preferential trade and investment policies, government subsidies and other policies favoring domestic industries and production, China has made the development of its technology sector a national priority,” USCC says.

Meanwhile, U.S. policymakers and the defense industry have rejected any such U.S. commitment—or defense industrial policy. “The Pentagon is currently working for an administration that is vehemently free-trade and anti anything that appears protectionist,” says Green, who now serves as a lobbyist for the remnants of the U.S. high-performance magnet industry. “I fear that the criticality of certain strategic materials and capabilities to the national security is lost in that ideology.” The entrenched ideology, Green and others say, prevents any good faith debate over what U.S. defense industrial policy should be and why.

Paul Taibl, a retired Air Force lieutenant colonel who serves as vice president of policy at the non-profit public interest group Business Executives for National Security in Washington, D.C., explains the extraordinary challenge he and others say Congress faces if it really wants to address the issue.

“There has never been, to my knowledge, a long-term defense industrial policy,” Taibl says. “In fact, for all the years I’ve been associated with the Department of Defense, it has been anathema to even consider having an industrial policy. The Pentagon has typically taken a Darwinian approach to industrial production. It says ‘adios’ if a supplier goes out of business, ‘let the market decide.’ And as they come up against shortages of capacity, they look offshore. But as far as a long-range industrial plan, I don’t think you’re going to find one.”

In his USCC testimony last July, Greenwalt even acknowledged that no such policy exists with regard to potential threats from foreign dependencies. “Globalization of supply chains is the reality of the 21st century,” he said. “The Department [of Defense] has to develop a strategy to reap the benefits of this globalization and mitigate the risks.”


A little-known Midwest company that manufactured high-performance magnets for critical defense applications in America’s most advanced weapons systems—before it shuttered its domestic operations and moved to China in 2004—provides an instructive study of the head-on collision between globalization and U.S. national security interests.

Magnequench, launched as a subsidiary of General Motors in the 1980s, sold neodymium iron boron (Nd-Fe-B), or rare earth, magnets to Department of Defense subcontractors that made components for Joint Direct Attack Munition (JDAM) smart bombs, cruise missiles and submarines. Today, however, there are no longer any U.S. manufacturers of Nd-Fe-B magnets. Magnequench, acquired in 1995 by a consortium that included two government-affiliated Chinese companies, exited the United States in 2004. China now controls that technology, thanks in large part to a 10-year quest to dominate the rare-earth marketplace.

“Magnequench is just one example of how critical elements of our industrial base—both the jobs and the products—have been transferred overseas,” says U.S. Sen. Evan Bayh (D-Indiana), who tried and failed to block the Magnequench move to China in 2004. “I continue to have serious concerns that we do not have a good process in place to appropriately and exhaustively examine both the economic and national security implications of allowing jobs and production to be shipped overseas.”

Magnequench’s winding road to China began in the 1980s, when the company discovered a new alloy—Nd-Fe-B—and developed a process to make powders and magnets from it. Magnequench purchased raw materials from both Mountain Pass, the now-closed U.S. rare-earth mine, and China.

By 1995, the company had become the world’s leading supplier of Nd-Fe-B powders, used to create high-performance magnets. That year, a consortium that included two Chinese companies—Onfem Holdings Ltd., a publicly listed Hong Kong company controlled by China’s State Nonferrous Metals Industry Administration, and San Huan New Materials and Hi-Tech Company, owned by the Chinese Academy of Sciences—bought the company from General Motors. Archibald Cox, Jr., the son of the late Watergate prosecutor, served as the public face of the deal and ran Magnequench.

Participation in the Magnequench deal delivered a strategic bonanza that China had long coveted: a technology that could help it develop a cruise missile that is competitive with the United States, says Peter Leitner, a former senior strategic trade advisor with the Pentagon and now president of the Higgins Counterterrorism Research Center in Arlington, Virginia.

In 2003, facing mounting losses from its magnet business, which had become a supplier to Pentagon subcontractors far down the supply chain and out of sight, Magnequench announced it would close its U.S. operations in Indiana and move to China.

Bayh appealed to both the White House and U.S. Treasury Department to block the move on national security grounds, but to no avail.

Today, the Magnequench facility in China is the world’s largest producer of rare-earth powders. The company operates a smaller plant in Thailand that produces powders for Japanese hard-drive disk manufacturers. San Huan Hi-Tech, which no longer holds any interest in Magnequench, is now a supplier of Nd-Fe-B magnet technology.

“The situation raises serious concerns,” Bayh says. “At some point in the future, China may decide to halt or disrupt sales of these magnets to the United States, and production of the JDAM could be disrupted. Magnequench’s sale raises critical questions related to our national security and the consequences of leaving our nation dependent on foreign sources, namely China, for the very things we need to protect our citizens and defend our country.”