China possesses one of the oldest, largest, and most diversified military-industrial complexes in the developing world: an agglomeration of around 1,000 enterprises employing some three million workers, including 300,000-plus engineers and technicians. Moreover, China is one of the few countries in the developing world to produce a full range of military equipment including small arms, armored vehicles, fighter aircraft, warships, submarines, nuclear weapons and intercontinental ballistic missiles.
But China’s military-industrial complex suffers from a number of shortcomings. It is one of the most technologically backwards defense industries; until recently, most indigenously developed weapons systems were at least 20 years behind the West – basically comparable to 1970s or 1980s-era technology – and quality control was consistently poor. Similarly, China’s defense research and development (R&D) base was long viewed 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 have traditionally been 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 to function effectively as a single unit. Consequently, China’s defense industry has often experienced difficulties “translating theory and design into reliable weapon systems.” 
Exacerbating these technical deficiencies has been a number of structural and organizational problems that traditionally afflict the Chinese military-industrial complex. Overall, arms production in China has largely been an inefficient, wasteful, and unprofitable affair. China’s defense sector has long been plagued by excess capacity – quite simply, the country possesses too many workers, factories, and assembly lines, resulting in redundancy, inefficient production, and underutilized resources. Military R&D programs have often experienced considerable delays due to inadequate funding, while production runs were small and sporadic.
Finally, China’s military-industrial complex has long functioned under an organizational and managerial culture that, in a manner typical of most state-owned enterprises (SOEs), was often highly centralized, hierarchical, bureaucratic, and risk-averse.  This, in turn, stymied innovation, retarded R&D, and further added to programmatic delays. Consequently, production management has often been highly centralized and personality-centric, under the leadership of a single chief engineer or director, while lower-level managers tended to be “conformist, adhering to standard rules and procedures rather than to personal judgments based on their professional experiences.” 
Reforming China’s Defense Industry: 1997 to the Present
The Chinese have long been aware of the deficiencies in their defense industry and have undertaken several rounds of reforms to improve their defense R&D and production processes. The most recent efforts began in September 1997, when the Fifteenth Communist Party Congress laid out a radical agenda for restructuring and downsizing the state-owned enterprise sector (including the defense industries) and for opening up SOEs to free-market forces. The following March, the Ninth National People’s Congress (NPC) further refined this agenda by announcing plans to reorganize the government’s defense industry oversight and control apparatus and establish new defense enterprise groups.
One of the most important decisions to come out of the 1998 NPC was the breakup of COSTIND and the subsequent creation of a new People’s Liberation Army (PLA)-run General Armament Department (GAD), with the latter now acting as the purchasing agent for the PLA, overseeing defense procurement and new weapons programs. Another key element of current defense reforms was the creation in July 1999 of ten new defense industry enterprise groups (DIEGs); an eleventh DIEG, covering defense electronics, was added in 2001. 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 defense industry was greatly reduced, leaving these new enterprise groups the authority to manage their own operations as well as 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 laying off as much as one-third of the defense sector’s workforce. At the same time, rationalization of the defense industry was 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.”
A Disappointing Track Record
The outcome of these reforms, however, has been disappointing. Beijing has largely failed to “marketize” its military-industrial complex. If the intention of creating new DIEGs was to inject greater competition into China’s military-industrial complex – and therefore spur innovation and greater responsiveness to PLA systems requirement – then 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 still not apparently used when it comes to major weapons programs. With few exceptions, China’s new DIEGs still do not compete with each other when it comes to defense materiel. Of the two new enterprise groups replacing the old Aviation Industries of China (AVIC), for example, all fighter aircraft production is concentrated within one DIEG, while all helicopter and trainer jet production is centered in the other. In fact, Beijing appears to have intended that these new defense industries do 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.” 
Rationalization of the defense industry has also been much slower than expected. According to one Western estimate, no more than 20 percent of the labor force in the overall defense sector has been laid off. AVIC, for example, has downsized by only 10 percent overall, and this was likely accomplished through attrition, that is, retirement and job-leavers.  At the same time, there have been few incidents of arms factories being closed or merged. Therefore, much of the defense industry continues to suffer from excess capacity.
It is also unclear how independent these new defense 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 is a strategic industry too critical to national security to be privatized, and that it will keep the new DIEGs under much stricter supervision than other types of reformed SOEs. At the same time, the central government has provided billions of dollars in subsidies to the defense sector to cover outstanding debts. 
Above all, the reform initiatives implemented so far do not directly address those impediments affecting technology absorption and upgrading of China’s defense industry – that is, the lack of advanced technical skills and expertise, compartmentalization and redundancy, 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 would, in turn, drive the modernization of the Chinese military-industrial complex.
In Spite Of Itself?
Despite making little progress on reforming itself, the Chinese defense industry is booming. Production and sales are up 19 percent and 14 percent, respectively, in 2001 – and China’s military-industrial complex technically broke even in 2002, after eight straight years of losses. The missile and shipbuilding sectors have been particularly profitable in recent years. 
China’s defense industry has also begun manufacturing several new types of advanced weapons systems, including the fourth-generation J-10 fighter, an improved version of its FB-7 fighter-bomber, the HQ-9 long-range surface-to-air missile, the Song-class diesel-electric submarine, and the Type-052C destroyer (which incorporates low-observable features and a rudimentary Aegis-type phased-array radar into its design). Moreover, the quality and capabilities of Chinese weaponry has also apparently improved. The Song-class submarine, for example, is outfitted with a skewed propeller for improved quieting and is capable of carrying an encapsulated anti-ship cruise missile that can be launched underwater.
Much of this progress, however, seems to have been made despite the new defense industry reforms rather than because of them. Many of the so-called successes in generating new-generation weapon systems actually have their genesis in design and development decisions made years, even decades, ago – that is, long before the reforms of the late 1990s were inaugurated. In other words, these weapons programs were already in the pipeline and on schedule to enter production in the late 1990s and first years of the 21st century. The most recent reform efforts may have helped to accelerate or expand production of these weapons systems, but they certainly did not play any role in their initiation.
Rising defense spending also likely had much to do with the recent expansion in Chinese arms production. China’s defense budget has more than doubled since the late 1990s, with an increase in the procurement budget alone from $3.1 billion to $6.9 billion per year between 1997 and 2002. (This does not account for hidden spending on R&D and arms imports, which together is likely another $2 billion annually.) It could be argued, therefore, that simply throwing more money at the defense industry has had a considerable impact – through increasing procurement and therefore production, and by providing more funds for R&D.
Overall, though, it appears that Beijing’s strategy regarding its defense sector is still mainly to muddle through with arms production, with some minor structural changes and a healthy increase in defense spending. While this has resulted in some technological breakthroughs in weapons R&D and production, China’s military-industrial complex remains in many respects an inefficient and less-than-optimal model. This will continue to exert a drag on the Chinese military modernization process and make it harder for the PLA to close technology and capability gaps with its rivals.
Richard A. Bitzinger is an Associate Research Professor with the Asia-Pacific Center for Security Studies, Honolulu, Hawaii. The opinions expressed in this paper are strictly his own.
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