Exclusive: Chinese raw materials also found on U.S. B-1 bomber, F-16 jets

By Andrea Shalal WASHINGTON (Reuters) - After discovering China-made components in the F-35 fighter jet, a Pentagon investigation has uncovered Chinese materials in other major U.S. weaponry, including Boeing Co's B-1B bomber and certain Lockheed Martin Corp F-16 fighters, the U.S. Defense Department said. Titanium mined in China may also have been used to build part of a new Standard Missile-3 IIA being developed jointly by Raytheon Co and Japan, said a senior U.S. defense official, who said the incidents raised fresh concerns about lax controls by U.S. contractors. U.S. law bans weapons makers from using raw materials from China and a number of other countries, amid concerns that reliance on foreign suppliers could leave the U.S. military vulnerable in some future conflict. The Pentagon investigated the incidents in 2012 and 2013, and granted the waivers after concluding the non-compliant materials posed no risk, Defense Department spokeswoman Maureen Schumann told Reuters. Frank Kendall, the Pentagon's chief arms buyer, issued five such waivers after a change in U.S. law in 2009 expanded the restrictions on specialty metals to include high-performance magnets, Schumann said. The change affected a radar system built by Northrop Grumman Corp for the F-35, which uses a number of such magnets. Reuters reported in January that the Pentagon permitted Lockheed to use Chinese magnets to keep the $392 billion F-35 program on track, even as U.S. officials were voicing concern about China's espionage and military buildup. The other, previously undisclosed waivers covered the B-1 bomber, F-16 fighter jets for Egypt equipped with a specific radar system, and the SM-3 IIA missile, Schumann said in response to a query from Reuters. The U.S. Government Accountability Office is expected to brief Congress in April on its comprehensive audit of the issue of Chinese specialty metals on U.S. weapons systems. TWO-DOLLAR MAGNETS China is the largest supplier of specialty metals and materials needed to build magnets that work even at very high temperatures, although congressional aides say progress has been made on developing alternate sources in the United States. Kendall initiated a broader Pentagon review after the initial F-35 issue was reported in late 2012, but ultimately granted the waivers because there was no risk involved with the parts, said the senior defense official. In some cases, it would have been expensive to take apart complex equipment to swap out magnets potentially made with Chinese rare earths; in others, the parts will be swapped out during future routine maintenance. "You don't break a multimillion dollar radar to replace twenty dollars' worth of magnets. There was no technical risk," said the official, who added that the issue involved only raw materials. No weapons systems specifications were sent to China, the official said. The F-35 waivers included a range of equipment, including $2 magnets used in radars on 115 F-35 jets. The F-16 and B-1B bomber waivers also involved magnets made from Chinese raw stock, the official said. A separate issue involving thermal sensors built for the F-35 by a Chinese subsidiary of Honeywell International Inc did not require a formal waiver because it involved a unit of a U.S. company, the official said. Honeywell now builds that part in Michigan. Honeywell acknowledged in January that the U.S. Justice Department was investigating import and export procedures at the company after the incident. 'JUST SLOPPINESS' Defense officials say the incidents underscore the need for greater vigilance by arms makers about their supply chain to ensure they comply with U.S. laws. "It's really just sloppiness, frankly, when this happens," said the defense official. "It's not enough to say, 'I'm pretty sure it didn't come from China.' That doesn't work for us. We're looking for documents." Officials at Lockheed, Northrop, Boeing and Raytheon referred all questions to the U.S. government. Without the waivers, the companies could have faced stiff penalties for violating U.S. laws; instead the Pentagon is likely to seek compensation from the companies. The defense official said the waivers were granted with the expectation that the companies would tighten up their buying procedures to reflect changes in procurement rules. "It's not a 'get out of jail' free card. This is something we should be good at. We shouldn't be caught short on these," said the official. "Hundreds of regulations change yearly and there's a whole group of folks whose job it is to make sure that those (changes) are properly implemented in contracts." Kendall initiated a review of all systems on Lockheed aircraft programs after Northrop Grumman, which builds the active electronically scanned array (AESA) radar for the F-35, found it may have used non-compliant Japanese magnets. The Pentagon's Contracts Management Agency later widened its review to include high-performance electronics across the industry. "We have looked very hard and systematically to flag these (issues)," said the official. One industry official declined to estimate the costs involved, but said the department was clearly taking a more aggressive approach on supply chain problems. The Pentagon had shared the cost of such incidents in the past, but U.S. officials were now insisting that companies paid for the cost of retrofits with their own funds. The case of the SM-3 missile that Raytheon is developing jointly with Japan involved titanium produced in China, and the incident was self-reported. But the missiles were produced for testing and the Chinese materials would not be used in any subsequent missiles, the defense official said. (Reporting by Andrea Shalal; Editing by Ros Krasny and Ken Wills)