USMMA: REEs, Technology Transfer to China and How the West Is Lost

October 19, 2011 (Source: USMMA) — This month, officials from the U.S., E.U., and Japan met in Washington to discuss China’s dominance of the rare earths sector and what can be done to address it. 

While America’s leaders seek collaborative, multi-lateral solutions to this issue, they would be wise to remember China’s dominance does not just threaten the price of iPods and fluorescent light bulbs. It is facilitating a gradual technology transfer that threatens to consume our defense industrial base.

Case in point: recently General Motors announced that it was partnering with a Chinese government-controlled firm to develop a hybrid vehicle in China; a move that will effectively transfer all of GM’s hybrid development to China.

Earlier this month, the news broke that Toyota, for the first time ever, is considering moving a plant that manufactures components for its hybrid vehicles to China.

Now, no one would mistake the Chevy Volt or a Prius for cutting edge weapons technology, but these moves are just the latest in a troubling pattern that the United States Magnetic Materials Association (USMMA) has been warning about for years. 

While Toyota and General Motors have claimed moving these production facilities to China is only about better capitalizing on the booming Chinese car market, the reality is far more troubling.

Toyota can’t manufacture their car components without the rare earth minerals China has a near-monopoly on.  To get access to those minerals China has given industry an uncomfortable choice: move their production plants to China or pay huge mark-ups for the limited and ever-shrinking supply of Chinese exports.

Similarly, GM can’t competitively sell its cars in China thanks to high tariffs in China on imported vehicles and Chinese subsidies for domestic car manufacturers. To get around those obstacles, China says you have to team with a Chinese company and provide that company the know-how to make your products.

China has been playing this mercantilist racket for years. In industry after industry, technology developed in the United States has been ceded to China as companies have succumbed to China’s demands in order to gain access to their raw materials and their markets. 

How long until this technology transfer – now limited to the likes of hybrid cars and solar panels – includes missiles, satellites and advanced fighters?  Until recently, it is an issue the Department of Defense has struggled to address.

For years, the USMMA warned the DoD that the Chinese were dominating rare earth mining and raw material production, forcing rare earth refiners and permanent magnet makers to rely on China for their raw materials.

Then, the USMMA warned the DoD that rare earth alloy and magnet makers were moving to China, forcing component manufacturers to rely on Chinese industry for their parts supplies.

Finally, the USMMA warned the DoD that China would begin to dominate not just the rare earth industry but also component manufacturing, forcing product designers and assemblers to rely on China for the primary components of their systems. The latest moves by Toyota and GM demonstrate our prediction may soon be reality.

The result: defense and industry supply chains face a very real future of total dependence on China to produce some of America’s most advanced products.  Even when new rare earth producers outside China come online in the years ahead, those raw materials will still have to be routed through China because that’s where the vast majority of metal, magnet, and component makers will be based.

Soon enough, China will begin to dominate assemblies and full system development because companies have to move there to access the necessary components.  Eventually, it may not be just Toyota and GM, but it may be that major defense suppliers will also announce that their relocation of production facilities to China.  By then, when every new F-35 or spy satellite has “made in China” stamped on its side, it will be too late.

Thankfully, DoD officials appear to be acknowledging this reality. In this year’s Industrial Capabilities Report to Congress, the department recognized that it needs a non-Chinese source of rare earths to protect its supply chain from unexpected disruptions.

While we applaud this step in the right direction, more must be done. To truly secure our supply chain from the threat of Chinese manipulation, America needs not just one but many rare earths miners, refiners, and producers. 

The USMMA calls on the Obama administration, Congress, and the Department of Defense to take a stand against China’s extortionist market polices to defend our access to rare earth products, to encourage the development of domestic mines but to not rest our hopes on a single source solution, and to rebuild a domestic, competitive, multi-source rare earth supply chain to support America’s defense industrial base.