Nevertheless, Chinese efforts to reform its military-industrial complex have been disappointing. If the intention of creating new industrial enterprise groups was to inject greater competition into China’s military-industrial complex—and therefore spur innovation and greater responsiveness to PLA systems requirements—these restructuring efforts have largely been a failure. The GAD, for example, has yet to implement competitive bidding and market pricing into the overall arms procurement process; in particular, competitive bidding is apparently still not used when it comes to major weapons programs, as any purchases of more than CNY2 million (less than US$250 000) are exempt (Crane et al. 2005:167).

There is also little evidence to suggest that recent institutional reforms have strengthened PLA oversight of armaments manufacturing, particularly when it comes to quality control. RAND notes that the military has long had a Military Representative Office (MRO) system in place in many factories to watch over production, but even it admits that this system is woefully understaffed and ineffective when it comes to overseeing armaments production and quality control, and that the effectiveness of current reform efforts is ‘far from clear’ (Medeiros et al. 2005:45–6).

Moreover, at one time it was expected that the Chinese would create large, trans-sectoral, cross-competing defence conglomerates, similar to the South Korean chaebols or, more specifically, to horizontally integrated mega-defence companies such as Lockheed Martin or Britain’s BAE Systems. Such a strategy would have entailed a much more complicated restructuring of the defence industry, crafting enterprise groups that would have competed with each other to produce a broad array of weaponry. Instead, all Beijing did was break up each of its former defence corporations into smaller groups.

With few exceptions, too, China’s new DIEGs still do not compete with each other when it comes to defence materiel. Of the two new enterprise groups replacing the old AVIC, for example, all fighter aircraft production is concentrated within one DIEG, while all helicopter and trainer-jet production is centred in the other. The nuclear industry will be split into separate enterprises for either construction or nuclear energy development, while Norinco appears to have been subdivided into one enterprise group concerned mostly with armoured vehicles and ground ordnance, while the other is almost entirely civilianised, specialising in automobile and motorcycle production. In fact, Beijing appears to have intended that these new defence industries not vie directly with each other. For example, the two new aerospace (missile) enterprise groups do not compete in terms of products, but rather ‘in terms of their systems of organization and their operational mechanisms’ (‘Applying technology to national defence’, China Space News, 26 May 1999). Naval construction is the only defence sector that appears to be truly competitive in that both major shipbuilding companies (CSSC and CSIC) vie with each other for PLAN contracts.

It could even be that the Chinese have abandoned the idea of competing defence firms: in 2008, Beijing announced that AVIC I and AVIC II would merge, creating, again, a single aviation company. This new, reunited AVIC will also establish a cross-corporate subsidiary, similar to Europe’s Airbus, dedicated to developing and manufacturing large passenger jets (Minnick 2008).

Rationalisation of the defence industry has also been much slower than expected. Details are sketchy, but according to one Western estimate, no more than 20 per cent of the labour force in the overall defence sector has been laid off (‘Chinese defence industry: Chinese puzzle’, Jane’s Defence Weekly, 21 January 2004). AVIC, for example, had downsized by only 10 per cent overall, and this was likely accomplished through retirement and job leavers (‘Chinese defence industry: Chinese puzzle’, Jane’s Defence Weekly, 21 January 2004). At the same time, there have been few cases of arms factories being closed or merged. Much of the defence industry therefore appears to still suffer from excess capacity, in terms of the workforce and redundant manufacturing capacity.

It is also unclear how independent these new defence enterprises will be of government control or how responsible they will ultimately be for their own profits and losses. Beijing made it clear from the beginning that arms production was a strategic industry too critical to national security to be privatised, and that it would keep the new DIEGs under much stricter supervision than other types of reformed SOEs. At the same time, these same rules will work in favour of the arms industries, as Beijing will likely feel pressured to continue to prop up unprofitable defence enterprises in order to preserve key arms programs.

Above all, the reform initiatives implemented so far do not directly address those impediments affecting technology absorption and upgrading of China’s defence industry—that is, the lack of advanced technical skills and expertise, compartmentalisation and redundancy within the industrial base and a bureaucratic/risk-averse corporate culture. As a result, it is doubtful that these reforms will go very far in injecting market forces that will, in turn, drive the modernisation of the Chinese military-industrial complex and affect China’s ability to develop and manufacture highly advanced conventional weapons systems. It is also doubtful whether there really exists much of a latecomer advantage when it comes to extremely esoteric high-tech sectors such as arms production, where the technological demands are very high and the economic pay-offs are very low. Even RAND noted that while ‘the technological gap between China’s military aviation industry and that of the United States and other major aviation producers will likely narrow in coming years, [it] will still remain significant unless China makes fundamental changes in contracting and enterprise management’ (Crane et al. 2005:180).