The American war machine depends on tiny bits of metal, some as small as dimes. Rare-earth magnets are needed for F-35 jet fighters, missile-guidance systems, Predator drones and nuclear submarines.

The problem: China makes most of the world’s rare-earth magnets, with 92% of the global market share.

Now, Washington is doling out hundreds of millions of dollars in grants and tax credits to revive magnet-making in America. Defense manufacturers are on a clock.

A U.S. law in 2018 restricted the use of made-in-China magnets in American military equipment, shriveling the list of potential suppliers to a small number in Japan and the West. By 2027, the curbs will extend to magnets made anywhere that contain materials mined or processed in China, covering nearly all of the current global supply.

After three decades of post-Cold War deindustrialization, rebuilding the industry—against China’s market heft—is an uphill battle, even with government help. Only one company in the U.S. is in production of the dominant type of rare-earth magnet. 

“We’re not going to be able to simply flip a switch and get to where we want to be,” said Anthony Di Stasio, a senior U.S. defense official. “The only thing that you can really judge success on right now is how many positive ripples have you made from throwing the rock into the lake.”

The office Di Stasio runs in the Defense Department is diving into supply chains to invest in the pieces and parts that make the military work. Much of what they invest in is processing minerals and making metals, betting that regardless of how, for example, submarine technology evolves, the same building blocks will be needed.

“Let’s go as close to the dirt as we can so we know we’re still going to need it in 15 years,” said Di Stasio.

The Defense Department in the past few years has committed more than $450 million toward rare earths and the magnets they power. The Energy Department is offering its own incentives because the magnets are also critical for electric vehicles.

The funding is helping a German magnet-maker set up its first North American factory, which broke ground in March, two decades after its last U.S. factory shut down. The facility, in Sumter, S.C., will buy rare earths locally. Those supplies could come from other projects that are receiving government funding—such as processing plants coming up in California and Texas, owned by American and Australian miners, respectively.

Their highest hurdle is low Chinese prices. A U.S. Commerce Department probe in 2022 found that China’s dominant position enabled it to set prices low enough to make production unsustainable for competitors.

In the West, mines and processing facilities face more regulations. There are only a small number of experts left in the field, requiring pricey workarounds such as importing foreign talent, sending Americans abroad for training and automating.

“If you want it to be commercially viable, how are you going to accomplish it, because there’s a reason we don’t do it domestically anymore,” said Moshe Schwartz, a senior fellow for acquisition policy at the National Defense Industrial Association, a trade group representing the defense industry.

Pushing defense suppliers to buy more-expensive magnets that are made in the U.S. would raise costs and have a knock-on effect, potentially affecting how many defense systems such as submarines and jet fighters the Defense Department is able to buy, Schwartz said. 

The other question is who else will buy the magnets. Defense demand, while considerable, isn’t enough. Other industries that use magnets, such as makers of EVs, wind turbines and MRI machines, would need to be willing to pay more today in exchange for a reliable supply chain.

At least one major player, General Motors, has agreed to buy American-made magnets when production starts. Some others say they are interested.

“If you think about how many bloody noses and black eyes and coronaries people had over the past two years over supply-chain disruptions, and how many millions were lost, having a regionally or near-shored product…is very valuable,” said Kirk Anderson, director of government affairs for Nidec Motor, a Japanese company that manufactures motors in the U.S.

Nidec is in talks to buy magnets from a U.S. company that has received government funding.

‘Scattered to the four winds’

The first rare-earth magnets were discovered in the 1960s by scientists at a U.S. Air Force laboratory. In the following two decades, military investments led to more-powerful versions capable of maintaining their pull in extremely high and extremely low temperatures. That allowed for new engineering feats, such as the advanced electronic-warfare systems of F-15 jet fighters that can work up to 70,000 feet in the sky.

These magnets were expensive, limiting their applications. In the 1980s, scientists at GM and Sumitomo, a Japanese company, separately invented a new type of rare-earth magnet. They used less-expensive materials but which were so powerful they could attract objects hundreds of times their own weight, improving the torque and efficiency of electrical motors, said John Ormerod, an industry consultant.

By the late 1980s, the U.S. was one of the top producers, second only to Japan. The minerals were mined and processed in California and manufactured into magnets in the Midwest. GM spun off a magnet division called Magnequench, selling to the auto, electronics and defense industries.

By then, China had entered the game. A Chinese rare-earth mining boom coupled with lower Asian labor costs eroded U.S. advantages. In 1995, GM divested from Magnequench, which was acquired by an investment group that included a Chinese state-run company. The deal was approved by the U.S. government.

One engineer, Mitchell Spencer, was dispatched to the port city of Tianjin in 1998 to help set up what he was told would be a sister factory to the magnetics plant in Anderson, Ind. Shortly after he returned to Indiana, Magnequench closed the Anderson plant and eventually its entire U.S. manufacturing operations.  

“I built my own gallows,” Spencer said. U.S. talent, he said, was “scattered to the four winds.”

Back to the future

The breakdown in supply chains during the Covid-19 pandemic rang alarm bells. Pandemic-era funding enabled the government to back Texas-based Noveon Magnetics, a startup that had begun small-scale magnet production in 2018. The company received around $29 million to boost production at its San Marcos, Texas, facility.

Magnets made there are used in cruise missiles, missile-defense systems and helicopters.

As tensions with China rose, the Defense Department between 2020 and 2022 announced $45 million in funding for MP Materials—America’s dominant rare-earth miner—to set up facilities to process minerals in the U.S. The first such facility came online last year. The company plans to start making magnets in Texas by next year.

Around $250 million also went to Australia’s Lynas Rare Earths to build a rare-earth processing complex in Seadrift, Texas. Last year, the government announced nearly $100 million for the German company, VAC, for its South Carolina magnet-making facility.

VAC had hung on for decades as one of the West’s few rare-earth magnet makers and now plans to mass-produce magnets at its U.S. facility. It has sent U.S. workers to Germany for training, and will automate to save on costs. Its magnets will be around 50% more expensive than Chinese ones depending on the specifications, executives said.

Companies have encountered unexpected challenges, including an organized campaign by fake pro-China social-media accounts that cybersecurity researchers dubbed “Dragonbridge.” After Lynas, the Australian producer, announced its Texas plant, a flurry of online posts from accounts posing as locals argued the project would be environmentally destructive and affect community health.

More recently, a drop in prices of rare earths, caused in part by expanding Chinese production, has raised concerns over new projects. On an earnings call held earlier this year, an analyst asked executives at MP Materials if they would reconsider their plans given current low prices.

“What I would tell you on that is that we’re talking about a Western-world supply chain that basically doesn’t exist,” said Chief Executive James Litinsky. “Even though the environment is tough, from what we’re hearing from customers, there’s still a desire for this supply chain to exist.”