By the late 1990s, China still possessed one of the most technologically backward defence industries in the world; most indigenously developed weapons systems were at least 15 to 20 years behind those of the West—basically comparable with 1970s or (at best) early 1980s-era technology—and quality control was consistently poor. China’s defence R&D base was regarded to be deficient in several critical areas, including aeronautics, propulsion (such as jet engines), microelectronics, computers, avionics, sensors and seekers, electronic warfare and advanced materials. Furthermore, the Chinese military-industrial complex remains weak in the area of systems integration—that is, the ability to design and develop a piece of military equipment that integrates hundreds or even thousands of disparate components and subsystems and have it function effectively as a single unit (Medeiros et al. 2005:4–18).

Consequently, aside from a few ‘pockets of excellence’ such as ballistic missiles, the Chinese military-industrial complex appeared to demonstrate few capacities for designing and producing relatively advanced conventional weapon systems. China generally confronted considerable difficulties in moving prototypes into production, resulting in extended development phases, frequent program delays and limited production runs. For example, the J-10 fighter jet—China’s premier fourth-generation-plus combat aircraft—took more than a decade to move from program start to first flight, and more than 20 years before it entered operational service with the PLA Air Force (Medeiros et al. 2005:161–2; Shambaugh 2002:261–2). Even after the Chinese began building a weapon system, production runs were often small and fitful. According to Western estimates, during much of the 1990s the entire Chinese aircraft industry of about 600 000 workers manufactured only a few dozen fighter aircraft a year, mainly 1960s and 1970s-vintage J-8 IIs and J-7s (Allen 1997:244). According to the authoritative Jane’s Fighting Ships, China launched only three destroyers and nine frigates between 1990 and 1999—a little more than one major surface combatant a year. Moreover, the lead boat in the Song-class submarine program—China’s first indigenously designed diesel–electric submarine—was commissioned only in 1999, eight years after construction began (Jane’s Information Group 1999:119–20, 124–5).

Consequently, despite years of arduous efforts, the inability of China’s domestic defence industry to generate the necessary technological breakthroughs for advanced arms production meant that Beijing continued to rely heavily—even increasingly—on direct foreign technological inputs in critical areas. It is believed that the J-10 fighter, for example, is based heavily on technology derived from Israel’s cancelled Lavi fighter-jet program. Chinese dependency is especially acute when it comes to jet engines, marine diesel engines and fire-control radar and other avionics. For example, endemic ‘technical difficulties’ surrounding the JH-7 fighter-bomber’s indigenous engine resulted in significant program delays, forcing the Chinese to approach the British in the late 1990s about acquiring additional Spey engines in order to keep the aircraft’s production line going; additionally, current versions of the J-10 are being outfitted with a Russian engine, until the Chinese aviation industry is able to perfect an indigenous replacement (Medeiros et al. 2005:170–1). The new Song-class submarine uses a German-supplied diesel engine, while the Ming and Han-class submarines have reportedly been upgraded with a French sonar and combat system. Chinese surface combatants incorporate a number of foreign-supplied systems, including Ukrainian gas-turbine engines, French surface-to-air missiles, Italian torpedoes and Russian naval helicopters.

Finally, and perhaps most significant, in the past decade—and particularly since the turn of the century—the PLA has increasingly favoured imported weapons platforms over locally built counterparts. From this, one can infer that the Chinese military remains dissatisfied with the quality and capabilities of weapon systems coming out of domestic arms factories, or that local industry is unable to produce sufficient numbers of the kinds of weapons required by the PLA. In the early 1990s, for example, despite the fact that China already had four fighter aircraft programs either in production or development—the J-7, J-8 II, JH-7 and J-10—the PLA nevertheless decided to buy several dozen Su-27 fighters; this purchase was later supplemented by an agreement to license-produce 200 Su-27s and a subsequent purchase of approximately 100 more advanced Su-30 strike aircraft. The PLA Navy (PLAN) is currently acquiring 12 Kilo-class submarines and four Sovremennyy-class destroyers (armed with supersonic SS-N-22 anti-ship cruise missiles), even though Chinese shipyards are building the Song and several new types of destroyers. In addition, China has reportedly purchased precision-guided munitions, advanced air-to-air missiles, airborne warning and control aircraft and transport aircraft from Russia, as well as acquiring several hundred S-300 and SA-15 surface-to-air missiles. Consequently, China has become one of the world’s largest arms importers, and, between 1998 and 2005, Beijing signed new arms import agreements worth some US$16.7 billion; in 2005 alone, it purchased US$2.8 billion worth of foreign weapon systems (Grimmett 2006:56, 57).

Compounding these technological deficiencies was a number of structural and organisational/cultural deficiencies that impeded the design, development and manufacture of advanced conventional arms. Overall, arms production in China has largely been an inefficient, wasteful and unprofitable affair. One reason for this was over-capacity: quite simply, China possessed far too many workers, too many factories and too much productive capacity for what few weapons it produced, resulting in redundancy and a significant duplication of effort, inefficient production and wasted resources. The Chinese aircraft industry, for example, was estimated in the late 1990s to possess a workforce nearly three times as large as it required (China Daily, 3 October 1997). Within the shipbuilding industry, output during the same period was only 17 tonnes a person a year, compared with about 700 tonnes a person in shipyards in more advanced countries (Gangcan 1998:17).

By the mid 1990s, at least 70 per cent of China’s state-run factories were thought to be operating at a loss, and the arms industries were reportedly among the biggest money-losers. As a result, most defence firms were burdened with considerable debt, much of it owed to state-run banks (which were obliged to lend money to state-owned firms); at the same time, arms factories were owed money, which was nearly uncollectible, by other unprofitable state-owned companies (Frankenstein 1999:197–9; ‘Industry embraces market forces’, Jane’s Defence Weekly, 16 December 1998, p. 28; Jencks 1999:617).

The creation of China’s ‘third-line’ defence industries—that is, the establishment of redundant centres of armaments production in the remote interior of southern and western China—in the 1960s and 1970s only added to the overcapacity, underutilisation and unprofitability of the Chinese military-industrial complex. Estimates are that from 1966 to 1975, third-line construction consumed perhaps two-thirds of all industrial investment. Even by the late 1990s, approximately 55 per cent of China’s defence industries were located within the third line, yet most of these industries were much less productive than coastal factories and continued to operate in the red (Shambaugh 2002:277; Frankenstein and Gill 1996:403).

Another structural impediment affecting the Chinese defence-industrial complex was the emergence of a highly compartmentalised and vertically integrated defence-industrial base. Such a stratified environment had several repercussions for the local defence industry. It restricted the diffusion of advanced, relevant civilian technologies to the defence sector. It also limited communications between the R&D institutes that designed the weapons and the factories that produced them, between defence enterprises when it came to collaborating on weapons projects and even between the defence industry and its major consumer, the PLA, when it came to requirements and specifications. It also exacerbated redundancy and the duplication of effort within the arms industry, as each defence enterprise tried to ‘do it all’, resulting in the maintenance of expensive but under-utilised manufacturing processes, such as dedicated second and third-tier supplier networks and the establishment of in-house machine shops for parts production, instead of outsourcing such manufacturing to other firms.

Finally, China’s military-industrial complex functioned for a long time under an organisational and managerial culture that, in a manner typical of most SOEs, was highly centralised, hierarchical, bureaucratic and risk averse. This stymied innovation, retarded R&D and further added to program delays. In a study on Chinese capacities for innovation, two Western analysts (Arayama and Mourdoukoutas 1999) argued that ‘Chinese managers do not have the will, the expertise, or the freedom to take the risks and make the adjustment associated with innovations’. Consequently, production management was often highly centralised and ‘personality-centric’, with most critical project decisions being made by a single chief engineer. At the same time, lower-level managers tended to be ‘conformist, adhering to standard rules and procedures rather than to personal judgments based on their professional experiences’. Hence, they were usually reluctant to make ‘learning mistakes’ or to act on their own to deal with problems that might arise on the factory floor, thereby inhibiting experimentation and innovation (Arayama and Mourdoukoutas 1999).

An American aerospace industry representative best summed up China’s problems with armaments production in the 1990s, writing that: