After suffering technological and industrial stagnation and contraction over the past several decades, China’s defense industry has undergone an extensive restructuring since the late 1990s to make it leaner, more efficient and better able to meet the high-technology needs of the People’s Liberation Army (PLA).
This has led to a dramatic turnaround in the defense industry’s performance and long-term prospects, which defense chiefs claim is doing better than at anytime in its history. At the defense industry’s annual meeting this past January, Executive Vice Premier Huang Ju declared that “remarkable achievements” were made over the past year.  Supported by a sharp rise in funds for procurement and research and development, the country’s defense plants have been stepping up the design, development and production of new generations of warships, aircraft, satellites, missiles and other sophisticated military systems.
But despite its reinvigorated performance, the defense industry continues to suffer from deep-seated structural, organizational and institutional problems that are serious barriers to innovation, project management and systems integration. These obstacles threaten to thwart the successful development of next-generation projects that the Chinese defense industry hopes will narrow the gap with other advanced arms producers by the end of the next decade.
The government overhauled the defense industry’s management and corporate structures in the late 1990s to inject competition into a moribund apparatus. At the center of the organizational reforms was the separation of the military and civilian components of the Commission of Science, Technology and Industry for National Defense (COSTIND), which oversaw the management of the defense industrial complex.
Under the old Soviet-copied state planning system, COSTIND’s role was to represent and balance the interests of both the defense industry and the PLA. But this led to constant bureaucratic infighting because these two groups had widely divergent interests. As the consumer, the military wanted weapons that could be produced on time, meet its specifications and were cost-effective. But the defense industry had little incentive to meet the PLA’s requirements because it faced little competition.
Under the new system that was introduced in 1998, the military component of COSTIND was incorporated into a newly established General Armament Department (GAD) and the civilian portion was retained and kept its COSTIND title. The GAD assumed direct and expanded responsibility for managing weapons development programs and has sought to impose tougher competitive and evaluation procedures that were largely absent.
The defense industry’s corporate structure also has undergone major restructuring. The eleven leading state-owned defense industrial corporations that oversee the corporate management of the defense industry have undergone streamlining and management reform to inject greater efficiency, cut waste and adopt market discipline in their operations. This has seen the number of defense industrial workers fall from around 3 million in 1990 to around 2 million today, and more than 100 firms closed down.
These cost-cutting measures, debt restructuring and access to new sources of capital combined with a strong pickup in defense orders saw the defense industry declare an end to nearly a decade of consecutive losses in 2002. A handful of the ten defense industrial conglomerates spearheaded this rebound in performance, including space, aviation and shipbuilding corporations.
The defense industry’s two principal shipbuilding entities, China State Shipbuilding Corporation (CSSC) and China Shipbuilding Industry Corporation (CSIC) have enjoyed strong production and profit growth over the past few years because of strong demand for their commercial and naval ships. CSSC, the larger of the two and the country’s principal naval manufacturer, produced nearly 3.6 million tons of ships last year, a 65 percent increase over the previous year. CSIC registered a 30 percent jump in output to 2.14 million tons.
To further improve the performance of these conglomerates and to raise much-needed capital to fund their expansion plans, the government is pushing them to introduce modern Western-style management methods and to publicly list their civilian operations. By the end of 2004, there were 49 defense-affiliated firms listed on the Chinese and Hong Kong stock markets.
Key Weapons and Technological Achievements
These structural reforms have led to a noteworthy improvement in the defense industry’s ability to successfully complete or make major progress in the development of a number of key projects across key industrial sectors in the past couple of years. Many of these programs date back to the 1980s and 1990s and their development was often hampered by technical, management and funding problems.
Naval Shipbuilding Industry
Since the late 1990s, the quality and quantity of output from China’s commercial and naval shipyards has risen sharply. The country became the world’s third largest commercial shipbuilder in 1995 and has set its sight on overtaking Japan and South Korea within the next decade. It also has the world’s largest naval shipbuilding program with more than eight different types of nuclear and conventional submarines, destroyers and frigates in production or under development. The production and development of support vessels such as transport craft and landing ships is also being stepped up. Moreover, the PLA Navy has made major purchases of Russian submarines and destroyers in the past few years, including orders for a dozen Kilo-class conventional submarines.
A new generation of conventional and nuclear attack as well as missile submarines is being developed to replace the PLA navy’s outdated Ming-class conventionally powered (SS), first-generation Han class nuclear powered submarines (SSN) and Xia class nuclear powered ballistic missile submarines. The first hull of the new generation Type 093 SSN, which is equivalent to the US navy’s first generation Los Angeles class SSN, is reported to have been launched in the past year or so and is expected to enter service soon. The Chinese are believed to have received Russian assistance in the development of the submarine, such as with quieting technology.
More than six vessels of the indigenously developed Song-class SS have so far been built. The initial development of the Song encountered significant design and engineering problems, especially related to propulsion, but they appear to have been resolved and are now coming off the production lines at a rate of one annually.
The Type 052C Lanzhou-class guided missile destroyer has been developed by the Chinese shipbuilding industry and is reportedly equipped with stealth features and a long-range area air-defense missile system that has been compared to the early models of the US Aegis-class cruiser. The first ship of this class was reportedly delivered to the PLA Navy last summer and a second vessel is expected to be completed later this year. Their weapons systems are reported to be similar to the Soveremenny-class missile destroyers that the PLA Navy has acquired from Russia.
Despite these advances, the Chinese shipbuilding industry still has a long way to go to reach the technological and manufacturing levels of its international rivals. Most of the naval hardware being produced is at least one or two generations behind their counterparts in the West. Chinese shipbuilders are also 5 to 20 times less efficient and profitable than Japanese and South Korean shipyards.
Space and Missile Industry
The defense industry’s development and production of ballistic, tactical, cruise and other types of missiles have made rapid progress since the late 1990s. Several new models of intercontinental ballistic missiles (ICBM), M-series tactical battlefield missiles, cruise missiles and air-to-air missiles are under development. This includes the three-stage solid-propellant ICBM Dongfeng 31, which is forecast to enter service in the next few years, and a submarine-launched version, the Julang 1.
Taiwanese President Chen Shui-bian said in September 2004 that the PLA had deployed around 610 short range ballistic missiles in the Nanjing Military Region. They consisted of CSS-6 and CSS-7 models, although the Chinese space industry is developing improved variants with satellite-aided navigation for use at targets in Okinawa and possibly other parts of Japan.
The space, aviation and electronics industries have been developing satellites and other electronic intelligence and reconnaissance systems to fill a major gap in the PLA’s strategic intelligence gathering and surveillance capabilities, especially to monitor potential trouble-spots such as the Taiwan Strait and Spratly Islands. Key projects being undertaken domestically and with foreign cooperation include long-range airborne surveillance aircraft, airborne warning and air control systems and high-resolution reconnaissance and navigation satellites with advanced optical and radar technologies.
The Next Phase of the Defence Industrial Reform Program
COSTIND has set its sights on more ambitious targets for the defense industry’s long-term growth. At the beginning of 2003, COSTIND leaders said that the commission had put forward new objectives for the development of the defense industry over the next 20 years. They included:
Catching up with the technological standards of the world’s leading arms producers.
Quadrupling the defense industry’s aggregate economic output.
Establishing a new R&D and production system that focuses on civilian-military integration.
Adapting management and operational mechanisms to the country’s socialist market economy.
Making additional breakthroughs in institutional reform and further adjusting the size and structure of the defense industry.
These targets reflect a different approach to the management and operation of the defense industry from the previous closed state planning system. The more open, flexible and partially market-based structure reflects the increasingly strong influence of civilian initiatives as well as concepts and practices borrowed from overseas, especially from the West.
Tai Ming Cheung is a research fellow at the Institute on Global Conflict and Cooperation at the University of California, San Diego.
1. “Defense Science Industry Urged to Contribute to China’s Economy”, Xinhuanet, 21 January 2005,