Chinese authorities have long been aware of the deficiencies in their defence industry and have undertaken several rounds of reform to improve and upgrade their R&D and production processes. The intention of this overall restructuring effort was to spur the defence SOEs to act as true industrial enterprises and therefore be more responsive to their customer base (that is, the PLA), and to reform, modernise and ‘marketise’ their business operations.

These goals are central to the PLA’s new modernisation strategy, as laid out in China’s 2004 defence white paper, of ‘generation leap’—that is, to skip or shorten stages of R&D and generations of weapons systems. This process, in turn, entails a ‘double construction’ approach of mechanisation and ‘informisation’ in order to concurrently upgrade and digitise the PLA. Part of this strategy also depends on China’s ‘latecomer advantage’ of being able to more quickly exploit technological trails blazed by others, as well as avoiding their mistakes and technological dead ends (Ji 2004).

In the early 1990s, in an effort to ‘corporatise’ the defence-industrial base, the Chinese transformed their military-industrial complex from a series of machine-building ministries into large SOEs. The Ministry of Aerospace, for example, was broken up into the Aviation Industries of China (AVIC; aircraft) and the China Aerospace Corporation (CASC; missiles and space), while the Ministry of Atomic Energy was converted into the China National Nuclear Corporation (CNNC). Other ‘super SOEs’ within the defence industry included the China Ordnance Industry Corporation (COIC, often referred to as Norinco; ground combat systems) and the China State Shipbuilding Corporation (CSSC; naval systems). At the same time, control of individual production facilities, research units and trading companies was transferred to these new corporations.

The most recent round of defence industry reforms began more than a decade ago, in September 1997, when the Fifteenth Communist Party Congress laid out an ambitious agenda for restructuring and downsizing the SOE sector (including the defence industries) and for opening up SOEs to free-market forces—that is, supply-and-demand dynamics, competitive products, quality assurance and fiscal self-responsibility. In March 1998, the Ninth National People’s Congress further refined this agenda by announcing plans to reorganise the government’s defence industry oversight and control apparatus and to establish new defence enterprise groups.

One of the most important decisions to come out of the 1998 congress was the creation of a new PLA-run General Armaments Department (GAD), acting as the primary purchasing agent for the PLA, overseeing defence procurement and new weapons programs. As a 2005 RAND report put it, the GAD is part of a process ‘to create [a] system that will unify, standardize, and legalize the [Chinese] weapons procurement process’ (Crane et al. 2005:165). In particular, the GAD is supposed to ensure that local arms producers meet PLA requirements when it comes to capabilities, quality, costs and program milestones.

Another key element of current defence reforms was the creation in July 1999 of 10 new defence industry enterprise groups (DIEGs) (Table 1). These DIEGs were supposed to function as true conglomerates, integrating R&D, production and marketing. Breaking up the old SOEs was also intended to encourage the new industry enterprise groups to compete with each other for PLA procurement contracts, which it was hoped would pressure them to be more efficient and technologically innovative. At the same time, the government’s role in the daily operations of the defence industry was to be greatly reduced, and these new enterprise groups were given the authority to manage their own operations as well as to take responsibility for their own profits and losses.

Another crucial aspect of these new reform initiatives was the declared intent to significantly downsize the Chinese military-industrial complex, including eliminating (through retirement, attrition or even lay-offs) as much as one-third of its workforce. The aircraft industry, for example, intended to downsize by 200 000 workers. The rationalisation of the defence industry was also supposed to include factory closings and consolidation as a result of government-encouraged mergers, as part of the policy of ‘letting the strong annex the weak’.

 

Table 10.1 China defence industry restructuring, July 1999

At the same time, Beijing prodded defence industries to undertake more civilian production as a means of acquiring dual-use technologies that could also be used to support arms production. This strategy goes back to the late 1970s and the enunciation of Deng Xiaoping’s so-called 16-character slogan: ‘Combine the military and civil/combine peace and war/give priority to military products/let the civil support the military.’ Whereas earlier efforts at civil–military integration (CMI) tended to revolve mostly around conversion—that is, switching military factories over to civilian use—China’s approach to CMI after 1997 entailed a critical shift in policy towards promoting integrated dual-use industrial systems capable of developing and manufacturing defence and military goods; or, as one Western analyst (Folta 1992:1) put it, ‘swords into plowshares…and better swords’. This new strategy was embodied and made a priority in the defence industry’s tenth Five-Year Plan for 2001–05, which emphasised the dual importance of the transfer of military technologies to commercial use and the transfer of commercial technologies to military use, and which therefore called for the Chinese arms industry to not only develop dual-use technologies but to actively promote joint civil–military technological cooperation. Consequently, the spin-on of advanced commercial technologies to the Chinese military-industrial complex and in support of the overall modernisation of the PLA was made explicit policy.

The key areas of China’s new focus on dual-use technological development and subsequent spin-on include microelectronics, space systems, new materials (such as composites and alloys), propulsion, missiles, computer-aided manufacturing and particularly information technologies. In the past decade, Beijing has worked hard to encourage further domestic development and growth in these sectors and to expand linkages and collaboration between China’s military-industrial complex and civilian high-technology sectors. In 2002, for example, the Chinese Government created a new industry enterprise group, the China Electronics Technology Corporation, to promote national technological and industrial developments in the area of defence-related electronics. Under the tenth Five-Year Plan, many technology breakthroughs generated under the so-called ‘863’ science and technology program, initiated in March 1986, were finally slated for development and industrialisation. Defence enterprises have formed partnerships with Chinese universities and civilian research institutes to establish technology incubators and undertake cooperative R&D on dual-use technologies. Additionally, foreign high-technology firms wishing to invest in China have been pressured to set up joint R&D centres and to transfer more technology to China.

In this regard, China’s military shipbuilding appears particularly to have benefited from CMI efforts in the past decade. After an initial period of basically low-end commercial shipbuilding—such as bulk carriers and container ships—China’s shipyards have, since the mid 1990s, progressed towards more sophisticated ship design and construction work. In particular, moving into commercial shipbuilding began to bear considerable fruit beginning in the late 1990s, as Chinese shipyards modernised and expanded operations, building huge new dry docks, acquiring heavy-lift cranes and computerised cutting and welding tools, and more than doubling their shipbuilding capacity. At the same time, Chinese shipbuilders entered into a number of technical cooperation agreements and joint ventures with shipbuilding firms in Japan, South Korea, Germany and other countries, which gave them access to advanced ship designs and manufacturing technologies—in particular, computer-assisted design and manufacturing, modular construction techniques, advanced ship-propulsion systems and numerically controlled processing and testing equipment. As a result, military shipbuilding programs co-located at Chinese shipyards have been able to leverage these considerable infrastructure and software improvements when it comes to design, development and construction (Medeiros et al. 2005:140–52).

China’s nascent space industry has also spurred the development and application of dual-use technologies. This includes telecommunications satellites, as well as China’s rudimentary Beidou navigation satellite system and its Ziyuan-1 and Ziyuan-2 Earth-observation satellites. In addition, many of the technologies being developed for commercial reconnaissance satellites, such as charge-coupled device cameras, multispectral scanners and synthetic aperture radar imagers, have obvious spin-on potential for military systems.

Finally, the PLA has clearly profited from exploiting the development and growth of the country’s commercial information technology (IT) industry. The PLA is striving to expand and improve its capacities for command, control and communications, information processing and information warfare, and it has been able to enlist local IT firms—many of which have close ties with China’s military-industrial complex and were even founded by former PLA officers—in support of its efforts. Consequently, the PLA has developed its own separate military communications network, utilising fibre-optic cable, cellular and wireless systems, microwave relays and long-range high-frequency radios, as well as computer local area networks.