Chinese Control Over Rare Earth Metals Continues
Rare earth metals. Stuff that is critical to 21 st century technology that most people don’t talk about. Stuff like ytterbium, dysprosium, and other exotic minerals that most people can’t even pronounce. But they don’t talk about it not because they can’t pronounce the words, but because they don’t like to admit that the Chinese control the world’s production.
In other words, if the Chinese decide to stop exports of rare earth metals, the market for such commercial items as smart phones and digital cameras and computer disks will be negatively impacted. Not to mention LED lights and flat screen televisions. In other words, most of the current electronic “gadgets” that Americans have come to rely upon basically disappear.
And the US defense industry will be negatively impacted as well.
Defense items at risk include:
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night-vision goggles (lanthanum)
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laser range-finders, guidance systems, communication systems (neodymium)
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high-temperature magnets, precision guided munitions, stealth technology (samarium)
Thus, if the Chinese decide to restrict exports (as they did in 2010) or cut them off entirely, it puts the national security posture of the United States at risk.
All of the above is not new news. It’s been known for at least a decade. For example, in 2010 we devoted an entire article to the topic, discussing a then-recent GAO report on the situation. Then, in the Summer of 2012, the American Bar Association published an article of mine in its Public Contract Law Journal, in which I took issue with the thoughts of another author in a previous PCLJ article. While I took issue with the author’s proposed strategies that might be employed by the Federal government, I had no problem agreeing with his basic thesis that the government should do something to address the unpalatable fact that China controlled (and still controls) the market for rare earth metals.
Since then, not much has changed. There was a company (called MolyCorp) that tried to develop a domestic source for rare earth metals via use of the Mountain Pass mine (located in California). After a series of management missteps (that cost me thousands of dollars), the company went bankrupt in 2015. In 2017, the mine was acquired by “MP Minerals.” According to Wikipedia, “MP Materials is majority owned by Chicago hedge fund JHL Capital Group and New York's QVT Financial LP, while China's Shenghe Resources Holding Co. Ltd. holds a 9.9% stake. They acquired Mountain Pass in July 2017 with the goal of reviving America's rare earth industry.” In July, 2020, MP Materials merged with Fortress Value Acquisition Corp. (a private equity “blank check” company with multiple investors, including at least one registered in the Cayman Islands).
Thus, the entirety of the United States’ domestic supply of rare earth metals is found in one California mine, run by a company that is at least 10% owned by a Chinese investment company.
In an interesting coincidence, in July 2020, the Pentagon announced it would fund two domestic facilities to process and produce rare earth metals. One facility is located in Texas and is run by Lynas Group1 out of Australia, and the other located in California and run by MP Materials.
One might think the Pentagon was (finally) taking the threat of Chinese dominance of the rare earth market seriously.
But there are always critics.
In an article critical of the Pentagon’s decision, James Kennedy wrote for Defense One that it was a mistake for the Department of Defense to fund MP Materials. You can read the article for yourself, but here’s the kicker (at least for me)—
But there are other reasons to question the Pentagon’s judgment. One is that MP is partially funded by a Chinese company that acts as MP’s sole off-taker. This Chinese participation should have raised serious questions within the Pentagon, as it has within the U.S. Department of Energy.
The first question anyone should ask is: Why would the Chinese commit to buying rare earth concentrates with such a high dead-weight value? More than 82 percent of the [Mountain Pass mine] concentrate is cerium and lanthanum. These elements are in oversupply and sell below their mined and processed cost.
And then: Why would China bother to haul these low-value materials across California and the Pacific Ocean for processing when it has access to much better rare earths from new producers in Asia and Africa?
Some industry analysts suspect that China’s interest in propping up MP is to use this U.S. company as a proxy to influence U.S. policy with the simple objective of protecting and extending its monopolistic advantage.
Another obvious problem is that MP, like its predecessor Molycorp, ships these materials to China to be converted into their usable form, metals, alloys or magnets, doing nothing to minimize U.S. dependence on China.
Thus, while the Pentagon may be doing something, at least one critic suspects it is the wrong thing.
What should the Pentagon be doing? Well, if you must ask…
In the 2012 PCLJ article, I suggested that the best first step towards solving the problem would be to have the Pentagon become the buyer for Mountain Pass’ output. The Department of Defense should work towards creation of a strategic stockpile of rare earth metals, with as much content as possible coming from domestic sources (such as, but not limited to, Mountain Pass mine). Then it should make those rare earth metals available to its prime contractors, so that they would not have to be responsible for sourcing the commodities on their own.
Will that suggestion ever come to pass?
Who knows?
But in the meantime, if you believe in the national security of the United States and the vibrancy of its technology in both commercial and defense applications, then you better start watching what’s going on with rare earth metals.
Stopping Self-Dealing
The term “self-dealing” is commonly understood to mean an individual’s conduct that consists of taking advantage of their position to act in their own interests rather than in the interests of a corporation or its shareholders. If the individual is an officer of the company, it’s often postured as a breach of the individual’s fiduciary duty.
I think it’s safe to say that most of us have experienced somebody’s self-dealing at least once in our work lives. Maybe it’s been the President or CEO who made sure the son-in-law (or nephew) was hired when there were more qualified candidates available for the position. Maybe it’s the Vice President who hired his old friend as a consultant even when there was no meaningful work to be done. Or perhaps it was the salesperson who closed the deal just in time to make their quota (and receive a bonus) by offering such a steep discount that the company was sure to lose money.
In each of the above examples, the individual put personal desires ahead of the company’s best interest, and used the authority of their positions to make it happen. They didn’t obtain any direct financial benefit from doing so (which likely would have been viewed as a prohibited conflict of interest), but they obtained an intangible benefit. In the hypothetical situation of the salesperson, there was a financial benefit (the bonus), but if that person had the authority to offer a discount (and/or it was approved by somebody who did), then they did nothing actionably wrong and got to pocket their bonus despite the harm they caused to the company’s bottom-line.
Thus, self-dealing is putting an individual’s interests ahead of the company’s interests, but doing so within approved channels.
We frequently see this situation when a company is organized into autonomous or semi-autonomous “silos.” Those silos have leaders, and those leaders tend to think first about the interests of their silos rather than the interests of the company as a whole. For example, one silo may compete with another for new business. In another example, one silo may deny providing resources or other assistance to another silo, even though (when viewed from the company’s perspective) that would be a logical action to take. Think of one silo that has a lot of top-notch software engineers: the other silo is struggling with a software project and could really use some temporary help. It would make sense to provide some high-end software engineers because a successful project benefits the company’s bottom-line; however, doing so might conceivably hurt the other silo’s projects.
So the request for assistance is denied and the company’s bottom-line is hurt. Importantly, though, nobody did anything wrong. There was no requirement to provide assistance and there were no consequences for refusing to provide assistance. It’s just the way things worked out.
Are we describing your company culture? Is your company largely comprised of independent silos that don’t cooperate very much?
How does a company culture get to be that way?
Simple: You get the behavior you incentivize.
If you tie salespeople’s compensation to sales quota—i.e., if you make the quota all about deal volume rather than profitable deal volume, then you get volume but not profit. If you create silos and then tie the compensation of those who run the silos to their individual performance, you get behavior that maximizes the individual silo’s performance at the expense of the other silos. We call it self-dealing but it’s just human nature.
Moreover, when you give people responsibility without accountability for their actions, then you pave the way towards self-dealing. If there are no consequences for hiring friends or relatives then it becomes part of the day-to-day culture. It is what it is, so to speak.
If you want to stop self-dealing you have to incentivize proper behavior and create consequences for improper behavior.
I worked at a multi-national engineering company for eight years. It was huge, with offices across America as well as Europe, Australia, and Asia. Despite its size and complexity, the company consistently ranked amongst the top tier of all companies in its industry. Often, it was ranked Number One. Forbes once named it “the most admired company” in its industry niche. How did it accomplish those feats?
First, the company tied all variable and incentive compensation to the company’s bottom-line, and not to individual or silo performance. There was an incentive compensation formula, and every executive knew it. The better the company performed, the more bonus payouts they received. They were actively incentivized to help each other out and keep the company’s bottom-line healthy.
The link between compensation and behavior flowed to the sales force. Salespeople were supposed to be businesspeople, and deals had to make sense financially or they wouldn’t be approved.
That same company took other measures to penalize poor decision-making and to reward smart decision-making. Could a person hire a relative or friend? Sure. It happened. But if that relative or friend didn’t perform up to expectations, then they didn’t last long.
Part of that company’s culture was the linking of pay and performance. Now, a lot of companies pay lip-service to that idea, but this company lived it. The theory was: if you are good then people will want to work with you. Project managers will fight to have you assigned to their projects. You’ll never want for work. But if you are a low performer, then you’ll have trouble finding work. People won’t want you around. Thus, the company spent a good deal of time looking at how people charged their time and seeking to identify those who had trouble finding projects to charge to. Too long without meaningful charges? Sorry, time to move on.
And then somebody was going to ask the hiring manager what they had been thinking during the original hiring decision. That was going to be a difficult decision to rationalize.
If you want to stop self-dealing you have to create a culture where not only is it frowned-upon, but it is actively disincentivized.
If you create positive incentives for supporting the company’s bottom-line and if you create disincentives for self-dealing, you have a good chance of creating a workplace culture where self-dealing will be minimized. I don’t think you’ll ever stamp it out entirely—because people are humans—but you should be able to minimize it.
If you work to minimize self-dealing, you may find you have created a culture of teamwork, where collaboration is the status quo. That kind of culture should lead to reduced attrition, reduced sick time, and a healthier bottom-line.
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Concurrent Changes to Cost Accounting Practice – Back at Court of Federal Claims
We’ve written three articles on the topic of concurrent changes to cost accounting practice; the latest was published in August 2015—five years ago. If you type “concurrent” into the search feature on our home page (at the top on the right) you can find all of them. Those articles focused on litigation at the Armed Services Board of Contract Appeals (ASBCA) involving Boeing and Raytheon.
In the more recent (2015) article, we discussed how the Board was not persuaded by Raytheon’s arguments that the rules currently at FAR 30.606—rules that were issued in 2005—were an illegal usurpation of the CAS Board’s statutory authority. Judge O’Connell, writing for the Board, stated that “Due to the lack of any guidance from Congress or the CAS Board that addresses offsetting multiple changes, we are unwilling to disturb the actions of the FAR Councils.” In other words, the CAS Board’s lack of action created a legal vacuum that the FAR Councils used to their advantage. As a result of that interpretation, today the government is able to chose which changes it wants to calculate a cost impact for—resulting in the government recovering more costs than the actual net impact of all the changes taken together as a whole. Or, as we wrote in 2015—
… as DCAA saw things, the FAR rules permitted the government to cherry-pick which changes would result in a contract adjustment and which changes would be ignored. Naturally, any changes that were favorable to the government and resulted in cost savings would be ignored (i.e., the price of FFP contracts would not be increased if the contractor shifted costs to its FFP contracts). In contrast, changes that were unfavorable to the government and resulted in cost increases, no matter how minute, would result in demands for payment with interest calculated from the date of the change (even if the government intentionally delayed its audit so as to increase interest payable).
Indeed, that’s exactly how concurrent changes to cost accounting practice are interpreted by DCAA, DCMA, and other Federal agencies today, five years later.
But maybe not.
In 2019, Boeing tried to litigate similar arguments at the Court of Federal Claims. They never got the chance to argue their case. The suit was dismissed based on the Government’s motions, before it ever got to trial. The court held that Boeing had “waived its breach of contract claim by failing to object to FAR 30.606” before entering into contracts that were subject to the post-2005 rules. In addition, the court also found that it could not hear Boeing’s other arguments because it did not have jurisdiction over them.
We were so disappointed at that dismissal that we couldn’t bring ourselves to write about it at the time.
But wait.
Boeing appealed and the Court of Appeals, Federal Circuit, reversed the dismissal and remanded the suit back to the Court of Federal Claims.
Let’s quote some of the Appellate decision, just for the record. As usual, internal footnotes and legal citations are omitted.
Boeing contends that the trial court incorrectly ruled that Boeing waived its challenge to the lawfulness of FAR 30.606. We agree. … A pre-award objection by Boeing to the Defense Department would have been futile, as the government concededly could not lawfully have declared FAR 30.606 inapplicable in entering into the contract…. We therefore reverse the trial court’s waiver ruling
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Boeing’s challenge appears on its face to involve a matter of contract administration: it objects to the government following FAR 30.606 to determine the amount of a price adjustment when Boeing chose to adopt changes in cost accounting practices during the performance of the contract. The government has not explained why this particular dispute could have been brought to court under the bid protest statute before the contract was formed, rather than under the CDA if and when FAR 30.606 was applied in a way adverse to Boeing during contract performance.
But wait. There’s more.
Boeing also contends that the trial court, in ruling that it lacked jurisdiction over the ‘illegal exaction’ claim, mistakenly required that the asserted basis of illegality be a ‘money-mandating’ statute. We agree with Boeing.
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… to establish Tucker Act jurisdiction for an illegal exaction claim, a party that has paid money over to the government and seeks its return must make a non-frivolous allegation that the government, in obtaining the money, has violated the Constitution, a statute, or a regulation. Under this standard, Boeing has established jurisdiction for its illegal exaction claim. Boeing alleged that the government ‘demanded that Boeing pay it . . . $940,007’ to cover the ‘increased costs caused by two of the changes,’ that the government ‘also demanded $124,766 in compound interest,’ and that Boeing had already ‘paid $71,276 to the Government.’ And Boeing alleged that the government’s ‘demand for payment of $1,064,773 [$940,007 plus $124,766] is in direct violation of 41 U.S.C. § 1503(b), which requires that the Government ‘may not recover costs greater than the aggregate increased cost to the Federal Government.’’ In short, Boeing alleged that the government has demanded and taken Boeing’s money in violation of a statute. Whatever its ultimate merits, this allegation suffices for jurisdiction to adjudicate the illegal exaction claim.
Readers must understand that Boeing did not win a victory for CAS-covered contractors. Instead, the Federal Circuit directed the Court of Federal Claims to hear the case on its merits, to allow Boeing to make its arguments. We don’t know whether or not those arguments will be sufficiently persuasive to lead the Court to overturn the allegedly illegal 2005 revisions for FAR 30.606.
Thus, we must stay patient and wait for the case to proceed.
However, this is certainly the best CAS-related news we’ve had in a long time.
Upcoming Training Opportunities
From time to time I participate in conferences, seminars, and/or other training opportunities. It looks like I’ll be doing so again, at two venues. For your information:
August 24 – 26 – I will be participating in the American Conference Institute’s 11th Annual Advanced Forum on DCAA & DCMA Cost, Pricing, Compliance & Audits. Link for the Conference is here. I have two pieces of the multi-day conference.
First, on August 24th I will be leading a 3-hour workshop on Contractor Purchasing System Reviews (CPSRs). My co-instructors will be Mark Hijar (who has scads of experience with CPSRs) and Luis Avila (a Director from KPMG’s Government Contractor Services team). We’ll start with the basics and move into more advance areas, such as counterfeit electronic parts, cyber security, and the interplay between commercial items and inter-organizational transfers. I’ve seen the preliminary slide deck and it should be a valuable learning experience—if I do say so myself.
Second, on August 26th I will be participating in a panel discussing commercial item determinations. Led by Brent Calhoon of Baker Tilly, the other panelist will be Ryan Connell, of DOD’s Commercial Item Group (CIG). The three of us have spoken and decided we will be presenting a “Myth-Busting” panel primarily directed at prime contractors who have to assess the commerciality of their subcontractors. Together, we came up with more than 20 myths to be busted, and we are currently working to whittle the number down to ten. (After all, we only have one hour.) I’m excited to speak along side these two experienced, knowledgeable gentlemen.
Then in September, I’ll be co-instructing with “Don Acquisition” at a virtual class entitled “The FAR/DFARS Subcontract Flow-Down Course.” I love co-instructing with Don because he’s got years of experience and knowledge. He’s a former Professor at Defense Acquisition University (DAU), a former Contracting Officer, and has instructed numerous “FAR Boot Camps®.” I learn so much just watching him teach! Don’s teaching style is informed by his FAR Boot Camp® experience—i.e., minimal PowerPoint slides and maximum hands-on experiential learning. I touched on (some of) what I learned the last time I co-instructed with Don in this article.
Course objectives include:
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Given a federal contract, determine which FAR and DFARS clauses were erroneously omitted or included
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Given a federal contract, determine which FAR and DFARS clauses must be included in (i.e. flowed down to) a given subcontract
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Given a federal contract, determine which FAR and DFARS clauses should be included in (i.e. flowed down to) a given subcontract to minimize the prime contractor’s risk
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Given a set of flow down clauses from a prime contractor or higher-tier subcontractor, determine which clauses were included erroneously (subcontractor push-back)
If those objectives sound like something you might be interested in learning, the link to Don’s course is right here.
Anyway, that’s what’s happening in the upcoming training department. If you or your team would like customer-designed training, don’t hesitate to let Apogee Consulting – or Don Acquisition – know.
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