Metals Trade Group Surprised By Hitachi ITC Complaint, But Supports It

Skullcandy said “there’s no proof that Hitachi, its licensees or a third party can replace more than a small part of the volume of articles potentially subject to an exclusion order and a cease and desist order within a commercially reasonable time,” in comments Friday on an ITC complaint brought by Hitachi over unfair trade practices on the manufacture of sintered rare earth magnets. The commission “should not simply take Hitachi Metals’ word for it,” Skullcandy said. Skullcandy said China manufactures 75 percent of the world’s neodymium magnets, a lower number than other projections that have put China’s share of rare earth production at more than 95 percent. “Even if U.S. rare earth production ramps up, much of the processing/alloying and metal fabrication would occur in China,” it said.

Skullcandy, named in the complaint along with CE companies Bose, Harman, Beats Electronics, Monster, AKG and Shure, was the first audio company to lodge a comment with the ITC in response to the complaint filed by Hitachi Metals on Aug. 17 (CED Aug 28 p6) alleging unfair trade practices under Section 337 of the Tariff Act of 1930. In addition to CE products, the complaint seeks to bar importation of products containing certain sintered rare earth magnets from a wide range of industries including golf clubs, automotive motors and tools. Adidas, Calloway Golf, Taylor Made, DeWalt, Milwaukee Tool and Bosch Security Systems were among the other respondents.

Urging the ITC to decline to institute an investigation, Skullcandy said Hitachi Metals’ “far-reaching” general exclusion order “threatens to exclude a vast and indeterminable array of consumer devices, including those likely used to facilitate the public health, safety and welfare.” According to Skullcandy’s filing, Hitachi Metals seeks a “dramatic remedy threatening a massive upset to the national economy on the basis of four patents that claim to cover commoditized components of downstream products.”

Skullcandy also noted that the use of sintered rare earth magnets, made from neodymium and samarium cobalt, extends beyond those categories named to include computer hard drives and aerospace applications used by a “wide variety of U.S. consumers and consumer electronics.” That includes an “uncountable number” of CE devices, including some “possibly utilized in furtherance of the public health, safety and welfare,” it said. Emergency first responder audio devices, ambulance, police and fire department “motors” or “automobile component assemblies,” or hospital MRI “electronic circuitry components” also possibly could be affected, it said. Hitachi Metals’ “unsupported assertion that the accused products ‘will not adversely affect emergency personnel’ …cannot and -- as a matter of public interest -- should not go untested,” Skullcandy said.

In calling for a cease and desist order for the sintered rare earth magnets in question, Hitachi Metals said in its Public Interest Statement that it and its licenses would be able to fill any void caused by the exclusion of the accused products because Hitachi and its licensees have “vast resources and numerous OEMs at their disposal, who already make and sell directly competitive articles for the United States market.” Hitachi said it plans to begin production of rare earth magnets in the U.S. next year.

The U.S. Magnetic Materials Association (USMMA) commented in support of Hitachi Metals’ complaint with the ITC. “Our concern is that people who are not licensed are not following the patent laws of the United States and are importing illegally,” Ed Richardson, president of USMMA and vice president of magnet manufacturer Thomas & Skinner, told us. “We play by the rules,” Richardson said, citing laws and rules that govern trade and manufacturing. “If suddenly a manufacturer from outside the country doesn’t have to follow the rules that we have to, that’s unfair.”

According to the USMMA filing, its members are concerned that the manufacture, importation, sale, and use “of unlicensed neodymium magnets unfairly distort the market.” Competitors using unlicensed products “may be able to more cheaply acquire” neodymium magnets “providing an undue competitive advantage over companies that obtain these component parts through properly-licensed sources,” Richardson said.

At issue in the Hitachi complaint is the sintering process used in manufacture of neodymium iron boron magnets. The patents in question focus on the manufacture of the alloy and pressing the metal powder in a magnetic field, Richardson said. Hitachi owns multiple steps in the process of making sintered neodymium iron boron magnets, he said, and because of the unique characteristics of the neodymium iron boron alloy, a magnetic field is necessary to orient the magnetic particles in a specific pattern at the same time that the metal is being pressed. The patents were originally owned by Sumitomo, which Hitachi purchased along with the patents in 2004. Hitachi’s patented process is “the only way to do it,” Richardson said.

Richardson said he was surprised that Hitachi chose to file a complaint because it was well known that the company “was not being very aggressive” in protecting the patents. He cited industry speculation that some of the most important patents would start to expire in 2014 and the company was “trying to defend them to the bitter end.” A recent flood of unlicensed materials coming into the U.S. could have been a “test to see if Hitachi was going to do anything,” he said. Hitachi didn’t respond to our questions by our deadline. But as a U.S. supplier, Richardson said, it supports Hitachi’s action. When laws involving component manufacturing are “ignored or not enforced, it only adds to the further decline of manufacturing capabilities here."

The recent spike in the cost of neodymium has put considerable financial pressure recently on companies whose products rely on neodymium magnets, including loudspeakers and headphones (CED Aug 31/11 p1). Harman, for one, has referred to the financial blow from neodymium magnets in its last several earnings calls and said last October that rising neodymium prices had taken a $90 million toll on the company, forcing it to pass along costs to customers.

Richardson said neodymium prices have “moderated considerably,” plummeting from more than $400/kilogram at its height last year to $145/kilogram. But loudspeaker companies largely haven’t felt the relief, he said, because component makers “have been slow to give up that higher price.” The lower metal prices “haven’t necessarily translated to lower prices for consumers,” he said. “They went up so fast and suddenly, but it’s been a much more slow and steady decline,” he said. While loudspeaker manufacturers’ “lives are going to get better,” in terms of lower neodymium magnet prices, “they still face a tremendous risk because of their dependence on China and China’s control over so much of the rare earth industry."

Harman said in its most recent earnings call that it had the neodymium situation “under control” largely through substitute magnets but didn’t disclose what those magnets were (CED Aug 13 p1). Richardson said the possible choices were a “short list” that includes samarium cobalt, ceramic and alnico magnets. Samarium is another rare earth, and Toshiba recently announced it had developed a samarium cobalt magnet with properties “superior to neodymium.” Harman didn’t respond to our questions about whether that was the substitute material it would use. Richardson told us that the problem a speaker designer would have in switching magnet types is the impact it would have on “a host of other components.” To get the same magnetic field from samarium cobalt, he maintained, “you're going to have to use more magnet, so it has to be bigger,” he said. Samarium pricing is also volatile, he said.

Last year Harman said it was looking at a U.S. source for neodymium but didn’t name that source. If Harman’s source was Molycorp in the U.S., “there are other issues,” Richardson said, “because no one in the U.S. has a patent to make these.” Molycorp is “just getting started” and will likely send most of its supply to China for processing and refinement, he said. “Ultimately, China is still going to control the pricing for rare earths.” Harman didn’t respond to our requests for comment.

Skullcandy was the only audio company that had filed a comment with the ITC by our deadline Friday. We sought comment independently from the audio respondents Thursday. Bose told us the company would not publicly comment on the complaint. A spokesman for Shure told us that according to company policy he was not able to comment on the complaint because it is “still under legal review.”