Fortifying China: The Struggle to Build a Modern Defense Economy 9780801468506

Table of contents :
Contents
Preface and Acknowledgments
Abbreviations
1. Bridging the Civil-Military Technological Divide in the Information Age
Integrating the Civilian and Defense Economies
China’s Enduring Quest for Wealth and Military Power
The National Innovation Systems Framework
Examining the Defense Economy through the NIS Prism
Understanding How Defense Technological Innovation Takes Place
2. Innovation and Stagnation during the Maoist Era
The Building of the Conventional and Strategic Weapons Bases
The Defense Economy’s Relationship with the Maoist NIS
The Setup of the Conventional and Strategic Weapons Systems
The Floundering of the Conventional Defense Industrial System
Barriers to Conventional Weapons Innovation
The Flourishing of the Strategic Weapons System
The Consolidation of the Defense Economy in the Late 1970s
3. The Eclipse of the Defense Economy under Deng Xiaoping
The Defense Economy and Its Relationship with the NIS in the 1980s
Defense Conversion
The Impact of Conversion on the Defense Economy
Successes and Drawbacks of Conversion
The Struggle to Overhaul the Legacy Defense Industrial Base
Key Activities of the System
The State of the Defense Economy by the Late 1990s
4. The Revival of the Defense Economy in the Twenty-first Century
Setting the Stage for Bold Reforms
The Relationship between the Defense and National Innovation Systems
Reform and Consolidation Begin
Key Activities of the Rejuvenated Defense Innovation System
The Prospects for Catching Up and Leapfrogging
5. Building a Dual-Use Economy
From Defense Conversion to Dual Use and Spin-On
Defining the Yujun Yumin Dual-Use Economy
Chinese Approaches to Civil-Military Integration and Spin-On
Building Linkages between the Civilian and Defense Economies
Harnessing Civilian High Technology Companies for Military Purposes
The Geographical Landscape of Dual Use and CMI
The Chinese Approach in Comparative Perspective
6. Can the Chinese Defense Economy Catch Up?
The Techno-Nationalist Underpinning of the Catch-Up Approach
The Debate over China’s Military Technological Catching Up
The Developmental Models for Catching Up
Conditions for Technological Catching Up and the Case of the Space Industry
Policy Challenges for the United States
Chinese Terms
Historical Official Exchange Rates between the Renminbi and U.S. Dollar, 1955–2008
Select Chinese-Language Bibliography
Index

Citation preview

Fortifying China

Fortifying China The Struggle to Build a Modern Defense Economy Tai Ming Cheung

Cornell University Press ithaca and london

Copyright © 2009 by Cornell University All rights reserved. Except for brief quotations in a review, this book, or parts thereof, must not be reproduced in any form without permission in writing from the publisher. For information, address Cornell University Press, Sage House, 512 East State Street, Ithaca, New York 14850. First published 2009 by Cornell University Press Printed in the United States of America

Library of Congress Cataloging-in-Publication Data Cheung, Tai Ming, Fortifying China : the struggle to build a modern defense economy / Tai Ming Cheung. p. cm. Includes bibliographical references and index. ISBN 978–0–8014–4692–4 (cloth : alk. paper) 1. China—Defenses—Economic aspects. 2. Defense industries— Technological innovations—China. 3. Military-industrial complex— China. 4. China—Economic policy—1976–2000. 5. China—Economic policy—2001– I. Title HC430.D4C447 2008 338. 4'735500951—dc22

2008022864

Cornell University Press strives to use environmentally responsible suppliers and materials to the fullest extent possible in the publishing of its books. Such materials include vegetable-based, low-VOC inks and acid-free papers that are recycled, totally chlorine-free, or partly composed of nonwood fibers. For further information, visit our website at www.cornellpress.cornell.edu.

Cloth printing 10 9 8 7 6 5 4 3 2 1

This book is dedicated to Ai, to my mother, Woo Sok Yin, and to the memory of my late father

Contents

Preface and Acknowledgments

ix

Abbreviations

xiii

1. Bridging the Civil-Military Technological Divide in the Information Age

1

Integrating the Civilian and Defense Economies 2 China’s Enduring Quest for Wealth and Military Power 5 The National Innovation Systems Framework 9 Examining the Defense Economy through the NIS Prism 13 Understanding How Defense Technological Innovation Takes Place 16

2. Innovation and Stagnation during the Maoist Era

22

The Building of the Conventional and Strategic Weapons Bases 23 The Defense Economy’s Relationship with the Maoist NIS 25 The Setup of the Conventional and Strategic Weapons Systems 26 The Floundering of the Conventional Defense Industrial System 31 Barriers to Conventional Weapons Innovation 36 The Flourishing of the Strategic Weapons System 40 The Consolidation of the Defense Economy in the Late 1970s 48

3. The Eclipse of the Defense Economy under Deng Xiaoping The Defense Economy and Its Relationship with the NIS in the 1980s 53 Defense Conversion 60 The Impact of Conversion on the Defense Economy 73

[vii]

52

Contents

Successes and Drawbacks of Conversion 74 The Struggle to Overhaul the Legacy Defense Industrial Base 75 Key Activities of the System 88 The State of the Defense Economy by the Late 1990s 98

4. The Revival of the Defense Economy in the Twenty-first Century

101

Setting the Stage for Bold Reforms 102 The Relationship between the Defense and National Innovation Systems 105 Reform and Consolidation Begin 111 Key Activities of the Rejuvenated Defense Innovation System 146 The Prospects for Catching Up and Leapfrogging 170

5. Building a Dual-Use Economy

176

From Defense Conversion to Dual Use and Spin-On 177 Defining the Yujun Yumin Dual-Use Economy 183 Chinese Approaches to Civil-Military Integration and Spin-On 197 Building Linkages between the Civilian and Defense Economies 202 Harnessing Civilian High Technology Companies for Military Purposes 215 The Geographical Landscape of Dual Use and CMI 223 The Chinese Approach in Comparative Perspective 227

6. Can the Chinese Defense Economy Catch Up?

235

The Techno-Nationalist Underpinning of the Catch-Up Approach 237 The Debate over China’s Military Technological Catching Up 242 The Developmental Models for Catching Up 245 Conditions for Technological Catching Up and the Case of the Space Industry 247 Policy Challenges for the United States 258

Chinese Terms Historical Official Exchange Rates between the Renminbi and U.S. Dollar, 1955–2008

263

Select Chinese-Language Bibliography

267

Index

273

[viii]

265

Preface and Acknowledgments

An ever-present danger of writing about contemporary developments in a country changing as fast as China is that your topic can disappear or become irrelevant before you finish. In the midst of my first scholarly examination of the Chinese military’s involvement in commercial activities during the 1990s, the Chinese authorities abruptly ordered the army to divest from its money-making operations. That book consequently turned from the imperious rise of the Chinese military business empire into a historical study of its entrepreneurial pursuits and ignominious demise. This time, I sought to avoid having events overtake me again. An abiding interest in the political economy of security led me to focus on the nexus between economic development, technological innovation, and defense modernization in China—which concerns the place of the defense economy in the country’s economic, technological, and military transformation. This topic undoubtedly has staying power, but it was not so obvious at the beginning of this century because the Chinese defense industry was floundering from decades of neglect and isolation. Over the course of this decade, though, the Chinese defense economy has risen from its sickbed and appears to be returning to good health. This book charts its painful recovery and examines how the defense economy is positioning itself at the heart of the country’s long-term revitalization and its quest to become a world power. “Defense economy” refers primarily to the defense technology and industrial base: the combination of people, organizations, institutional rules, technological expertise, and production capacity that provide defense-related

[ix]

Preface and Acknowledgments

and dual-use goods and services.1 A key subcomponent is the defense innovation system, which consists of laboratories, research institutes, and academic institutions that are involved in the development, diffusion, and use of innovations for military and national security applications. Acting as a bridge between the defense economy and the broader civilian economy is the dual-use economy, in which common technologies, processes, labor, equipment, material, and/or facilities are used to meet both defense and commercial needs.2 For China, a key element of the dual-use base is former defense enterprises that have converted from military to civilian production but still retain linkages and residual military capacity. While this book primarily explores the ability of the Chinese defense economy to become a technologically innovative powerhouse over the long term, a broader but connected question is whether technological innovation can flourish in an authoritarian system. Is there a fundamental incompatibility between China’s efforts to be a world leader in technological innovation and its maintenance of a restrictive, authoritarian political system? Fundamental aspects of the Chinese system appear to be major obstacles to the nurturing of a sustainable innovation environment. They include the absence of a robust and independent legal system, highly controlled flows of information and knowledge within society, and the lack of encouragement of pluralism that would allow for greater autonomy and self-governance within the S&T community.3 Some scholars believe that intellectual and personal freedom is essential in encouraging new thinking. Although authoritarian states can cultivate and motivate scientific invention, state-controlled science is highly fragile in the information age. If China wants to become a world-class power in information technology, David Gompert argues, it will have to yield to economic and political liberalization. But if China chooses to remain an authoritarian, nationalistic, and self-sufficient state, it “will find it hard to compete in the very technology on which both its economic prospects and future military power depend.”4 The collapse of the Soviet Union and the decline of its 1. See U.S. Congress Office of Technology Assessment, Adjusting to a New Security Environment: The Defense Technology and Industrial Base Challenge (Washington, D.C.: U.S. Government Printing Office, 1991), 2–3; and Gordon Boezer, Ivars Gutmanis, and Joseph E. Muckerman II, “The Defense Technology and Industrial Base: Key Component of National Power,” Parameters, (Summer 1997), 26. 2. This definition of the dual-use base is adapted from the U.S. Congress, Office of Technology Assessment, Assessing the Potential for Civil-Military Integration: Technologies, Processes, and Practices (Washington, D.C.: U.S. Government Printing Office, 1994), 44. 3. Richard P. Suttmeier, “Assessing China’s Technology Potential,” Georgetown Journal of International Studies (Summer/Fall 2004), 104–5. 4. David Gompert, Right Makes Might: Freedom and Power in the Information Age, McNair Papers (Washington, D.C.: Institute for National Strategic Studies, National Defense University, 1998), 10, 25.

[x]

Preface and Acknowledgments

defense industrial complex showed the dire consequences of the excessive rigidity of a central planning system.5 This claim calls into question whether China’s technological transformation can narrow the gap with its more developed and democratic competitors in the West and in East Asia. Not surprisingly, Chinese policymakers do not accept the premise that technological modernity cannot flourish in an authoritarian system. Their latest long-term S&T development plans emphasize the importance of top-down “big science” programs. But the central authorities are nonetheless willing to hedge their bets and integrate other, market-based approaches into their continued reliance on the stateowned defense industry. This book scrutinizes the strategic logic behind the drive to develop a dual-use economy as well as allow select portions of the defense industry to open up to the outside world. This book has greatly benefited from the advice of Matt Uttley and David Betz, who carefully read the manuscript during its evolution. Others who have been helpful in providing feedback on whole or partial readings of earlier portions include Steven Tsang, Warren Chin, Barry Naughton, and Paul Godwin. Midway through the writing of this book, I relocated from London to the sunnier shores of Southern California and the Institute on Global Conflict and Cooperation at the University of California, San Diego (UCSD). I have had the distinct honor of working with and learning from Susan Shirk, director of the institute, who is not only an outstanding China scholar but also an inspired leader and friend. I have also had the opportunity to get useful feedback from students who have taken my courses at UCSD’s Graduate School of International Relations and Pacific Studies. In addition, many thanks go to the Smith Richardson Foundation, and especially Allan Song, for generous financial support and kind guidance for this project, especially in its early stages. My editor at Cornell University Press, Roger Haydon, also deserves praise for his insightful advice in making this book much more succinct and readable. This book is dedicated to my wife, Ai, who has been unstinting in her love, support, and care for me, especially as we moved across three continents during the course of the writing. She has kept things moving along smoothly with exceptional grace and kindness. The book is also dedicated to my late father and to my mother, who worries that it will remove more trees from this planet.

5. James Robinson, “Technology, Change, and the Emerging International Order,” SAIS Review 15, no. 1 (Winter/Spring 1995) 153–73. See also Matthew Evangelista, Innovation and the Arms Race (Ithaca: Cornell University Press, 1988).

[xi]

Abbreviations

211 project

511 project 863 program 973 program second ministry third ministry fourth ministry fifth ministry sixth ministry

amep asat avic 1 avic 2 cac cad

Ministry of Education program established in 1995 to raise teaching and research standards in one hundred universities COSTIND program to train skilled S&T personnel for defense S&T positions High-Technology Research and Development Plan National Basic Research Program Second Ministry of Machine Building, in charge of the nuclear sector Third Ministry of Machine Building, in charge of the aviation sector Fourth Ministry of Machine Building, in charge of the telecommunications and electronics sectors Fifth Ministry of Machine Building, in charge of the ordnance sector Sixth Ministry of Machine Building, in charge of the shipbuilding sector Annual Military Equipment Research, Development, and Program Plan Antisatellite Aviation Industry Corp. of China One Aviation Industry Corp. of China Two Chengdu Aircraft Corp. Computer-aided design

[xiii]

Abbreviations cam capumit

Computer-aided manufacturing China Association for Peaceful Uses of Military Industrial Technology Chinese Academy of Sciences China Aerospace Science and Industry Corp. China Aerospace Science and Technology Corp. Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance Commission for Defense Science and Technology Equipment China Electronics Technology Group Co. Central Intelligence Agency Computer-integrated manufacturing systems Center for Information Technology, PLA Institute for Information Engineering Central Military Commission Civilian-military integration China National Nuclear Corp. China Nuclear Engineering and Construction Corp. China Ordnance Equipment Group Corp. (also known as China South Industries Group Corp.) China Ordnance Industrial Group Corp. (also known as China Northern Industries Group Corp., or NORINCO) Commission of Science, Technology, and Industry for National Defense Commission of Science and Technology for National Defense Commercial off-the-shelf China Posts and Telecommunications Industrial Corp. Contract Responsibility System Central Special Commission China Shipbuilding Industry Corp. China State Shipbuilding Corp. China Space Technology and Industrial Corp. Defense Conversion Liaison Office U.S. Department of Defense Dual-Use Applications Program European Aeronautic Defence and Space Company Enterprise resource planning General Armament Department Great Dragon Telecommunications Equipment Co. Ltd. General Staff Department

cas casic castc c4isr cdste cetc cia cims cit cmc cmi cnnc cnecc coeg coig costind costnd cots cptic crs csc csic cssc cstic dclo dod duap eads erp gad gdt gsd

[xiv]

Abbreviations hit ict ieu iie it kip lp mei mes mii mis mlp most mpt mro mrp mrpii naau ndic ndio ndrc ndstu nis nit npu pla ppc pri r&d sac scm sastind sec setc si sndmc spc

Harbin Institute of Technology Information and communications technology Information Engineering University of the PLA Institute for Information Engineering of the PLA Information technology Knowledge Innovation Program Lean production Ministry of Electronics Industry Modern Enterprise System Ministry of Information Industries Management information systems Medium- and Long-Term Science and Technology Development Plan Ministry of Science and Technology Ministry of Posts and Telecommunications Military representative offices Materials requirement planning Manufacturing resource planning Nanjing Aeronautics and Astronautics University National Defense Industry Commission National Defense Industry Office National Development and Reform Commission National Defense Science and Technology University National innovation system Nanjing Institute of Technology Northwestern Polytechnic University People’s Liberation Army Productivity Promotion Center Public research institute Research and development Shenyang Aircraft Corp. Supply chain management State Administration of Science, Technology and Industry for National Defense State Economic Commission State Economic and Trade Commission Systems of innovation State National Defense Mobilization Committee State Planning Commission

[xv]

Abbreviations sstc s&t td-scdma tei trp wto zte

[xvi]

State Science and Technology Commission Science and technology Time Division Synchronous Code Division Multiple Access Technology exploitation institute Technology Reinvestment Project World Trade Organization Zhongxing Telecommunications Equipment Co. Ltd.

[1] Bridging the Civil-Military Technological Divide in the Information Age

Innovation, China’s leaders assert, is the soul of a nation’s progress and the guarantee of its national security.1 But for many years this vital source of creativity and competitiveness was lacking on the factory floors and research laboratories of the country’s sprawling defense economy. Decades of stultifying central planning, bureaucratic compartmentalization, political upheavals, and isolation from the outside world produced a sterile system that held back initiative, new thinking, and risk taking. Stagnation and backwardness took root instead, and the defense economy became a burden to the building of the country’s military power. There was little urgency in seriously addressing these shortcomings because of inadequate government funding and the reluctance of the defense industry’s leadership to carry out meaningful reforms. Moreover, after China opened its doors to economic reforms and the outside world, its security situation improved, and defense modernization dropped toward the bottom of state priorities at the end of the 1970s. Since the 1990s, however, the situation has changed. Despite the end of the cold war, Beijing has faced major security challenges, of which the most pressing are the containment of Taiwan’s quest for autonomy and keeping pace with the global revolution in military affairs. China’s emergence as a thriving, globally connected, market-oriented, and prosperous power, coupled with a sharp acceleration in the rearmament needs of the People’s Liberation Army (PLA), has led to a concerted effort to tackle the defense 1. “Hu Jintao: Ba Tuidong Zizhu Chuangxin Wo Zai Quan Keji Gongzuo Tuchu Weizhi” [Place the Promotion of an Independent Innovative Capability in a Prominent Position Throughout S&T Work], Keji Bao [Science and Technology Daily], 6 January 2005.

[1]

Fortifying China

economy’s deficiencies and put it on a development path with the goal of catching up with the West within a couple of decades. Bringing the defense economy into the twenty-first century by creating an environment that will allow technological innovation to flourish has been a colossal and costly challenge. But the Chinese authorities appear determined to carry out this task. They see an independent and vibrant defense economy as a core pillar of the country’s national security and standing as an emerging global power. This book examines the complex and protracted struggle for the transformation of the Chinese defense economy since the beginning of the reform era in the 1980s and the efforts to establish a civil-military dual-use economy since the 1990s. Beijing has used a two-pronged approach. First is the internal reengineering of the defense economy. This focuses on breaking down bureaucratic barriers and paring back the role of the state in conjunction with the nurturing of a more competitively minded and entrepreneurial institutional culture that encourages the nurturing, diffusion, and absorption of technology and knowledge. The second plank of the strategy is to integrate the defense economy into the broader civilian economy to form a dual-use technological and industrial base that serves both military and civilian needs. The Chinese authorities view this move as central to the longterm modernization of the country’s military capabilities, as well as in the development of its science and technology (S&T) establishment.

Integrating the Civilian and Defense Economies The backdrop to this book is the intense technological and industrial competition among the world’s arms manufacturers in the information age and the blurring between the civilian and military pillars of their economies. It is becoming apparent that states that seek to join or remain in the top tier of military technological innovation and production in the digital era can do so only if they are able to integrate their military and civilian economies.2 Those that do not vigorously pursue this goal risk falling behind in the technological race because they will be unable to exploit the synergies that arise from a growing convergence in the development of civilian and defense technologies.

2. Only a handful of countries currently possess a sufficiently capable indigenous military industrial base with which to pursue such a goal. They include the United States, Russia, France, China, and a collaborative alliance of several Western European countries led by the United Kingdom, Germany, Spain, and Italy. See Richard Bitzinger, Towards a Brave New Arms Industry, Adelphi Paper 356 (London: International Institute for Strategic Studies, 2003).

[2]

Bridging the Civil-Military Technological Divide

The importance of civil-military integration in determining long-term military technological competitiveness is due to at least three major trends that have become increasingly influential since the 1990s. First, the advent of the information age has helped to bring about a revolution in military affairs among major powers. Information technology is profoundly transforming the nature of future wars and the makeup of armies to fight them. In a 1999 assessment, the U.S. Defense Science Board pointed out that the civilian commercial sector “is now driving the development of much of the advanced technology integrated into modern information-intensive military systems,” such as software and microelectronics hardware.3 Second, globalization is challenging the traditional configuration of defense industries structured along national lines. Since the 1990s, we have seen a growing trend in the global merger and acquisition of defense firms and cross-border collaboration on weapons development projects, especially between U.S. and European companies. The result is a “world characterized by the routine diffusion of weapons and technology, embedded security of supply issues, and reduced national control over indigenous defense industrial bases.”4 An important feature of this globalization is a high degree of outsourcing for components and subsystem technology to civilian firms around the world. Consequently, “the majority of militarily useful technology is or eventually will be available commercially.”5 Third, commercialization is prompting far-reaching changes in the way that countries manage their defense industrial bases. The adoption of commercial practices requires defense industrial entities to operate according to market demands from customers and shareholders, who want products that are more cost-efficient, quicker to develop, and less prone to obsolescence.6 This more entrepreneurial and flexible approach is a sharp departure from the rigid, government-based procedures of the past. This situation applies to all leading military industrial powers. The United States, the United Kingdom, France, and Russia have faced the same dilemmas in 3. Defense Science Board, Final Report of the Defense Science Board Task Force on Globalization and Security (Washington, D.C.: U.S. Defense Department, 1999), ii, http://www.acq.osd.mil/ dsb/reports/globalization. 4. National Intelligence Council, Transformations in Defense Markets and Industries (Washington, D.C.: National Intelligence Council, 2002), 1, http://www.dni/nic/PDF_GIF_research/ defensemkts/transformations. See also Mark Lorell et al., Going Global? U.S. Government Policy and the Defense Aerospace Industry (Santa Monica: RAND Corp., 1999). 5. Defense Science Board, Final Report, vi. 6. See Jacques Gansler, Defense Conversion: Transforming the Arsenal of Democracy (Cambridge, Mass.: MIT Press, 1995), 87–99. Some analysts counter that the existing defense industry will continue to lead the way in future defense technology development despite the coming of the information age. See Peter Dombrowski and Eugen Gholz, Buying Military Transformation: Technological Innovation and the Defense Industry (New York: Columbia University Press, 2006).

[3]

Fortifying China

restructuring the relationships between the civilian and military components of their economies in the aftermath of the cold war and the advent of the information age.7 In the case of China, the establishment of a vibrant dual-use economy provides a valuable opportunity for the defense economy to gain access to advanced technologies, knowledge, techniques, and practices and narrow the gap with the top tier of advanced defense industrial powers. During the cold war, the military sector in China enjoyed privileged access to economic resources that allowed it to become the most advanced pillar of the national economy. But the civilian economy has powered ahead in the postcold war era and has enjoyed strong and sustained growth that has fueled technological modernization, rising levels of prosperity, and a highly competitive manufacturing base. The defense sector has meanwhile struggled to keep pace because of falling budgets and downsizing. Coupled with the revolution in military affairs, globalization, and other systemic changes, the commercial sector has either caught up or overtaken the defense sector in performance, expertise, and technological capabilities. With the civilian economy in the ascendancy, the armed forces and the defense economy are actively embracing the integration of the commercial and defense sectors. To reap these benefits, the defense economy has had to overcome an insular, secretive, highly bureaucratic, and risk-adverse institutional culture that is deeply rooted in its socialist past. The outcome of this titanic struggle will determine whether the defense economy is able to close the yawning gap in technological innovation and capabilities with the world’s leading military powers. This book addresses key questions about this epic quest to transform the Chinese defense economy: • What are the nature, role, and activities of the Chinese defense econ-

omy, and how has that economy adapted to the challenges of the post-cold war and reform era? Has the restructuring of the defense economy successfully addressed deep-seated systemic problems

7. For the U.S. case, see U.S. Congress, Office of Technology Assessment, Assessing the Potential for Civil-Military Integration: Technology, Processes, and Practices (Washington, D.C.: U.S. GPO, 1994); and Jacques Gansler, Affording Defense (Cambridge, Mass.: MIT Press, 1989). For the United Kingdom and European cases, see Jordi Molas-Gallart, “Which Way to Go? Defense Technology and the Diversity of ‘Dual-Use’ Technology Transfer,” Research Policy, no. 26 (1997): 367–85; and Jordi Molas-Gallart and Tom Sinclair, “From Technology Generation to Transfer: The Concept and Reality of the ‘Dual-Use Technology Centres,’ ” Technovation, no. 19 (1999): 661–71. On Russia, see Glenn Schweitzer, Swords into Market Shares: Technology, Economics and Security in the New Russia (Washington, D.C.: Joseph Henry Press, 2000); and Steven Rosefielde, Russia in the 21st Century: The Prodigal Superpower (Cambridge: Cambridge University Press, 2005).

[4]

Bridging the Civil-Military Technological Divide

that have hampered technological innovation? Can these reforms be sustained over the long term? • How successful has China been in the integration of the civilian and defense economies through dual-use strategies such as spin-off and spin-on? What kinds of civil-military integration initiatives are being pursued? • How does the Chinese approach to the forging of a dual-use economy compare and contrast with policies being undertaken elsewhere by more experienced participants in civil-military integration, such as the United States and Japan? • What are the prospects that the Chinese defense economy will catch up as it becomes more innovative and is able to harness the resources of the civilian economy?

China’s Enduring Quest for Wealth and Military Power The relationship between the civilian and military components of the Chinese economy has often been turbulent, especially since the Communist Party took power in 1949. The quest for wealth and power has been an enduring aspiration of China’s rulers throughout the country’s long history, but finding an appropriate balance has been elusive. Whenever the pendulum has swung too far in either direction, the results have been calamitous. Excessive military spending invariably plunged the state into financial crisis, such as during the late Song Dynasty. But when military needs were neglected—especially during times of external threat, as in the late Qing period—the country was often too enfeebled to repel foreign invasion.8 Today’s leaders face the same conundrum of how to pursue prosperity while ensuring the country’s military might. Since embarking on the “Open Door” policy of economic reform and liberalization in the late 1970s, the ruling elite has emphasized economic development over defense priorities. This has led to rapid and sustained economic growth and the emergence of a competitive market-driven economy. While the military establishment and defense economy have been significantly reduced in size, national security remains a central priority for the leadership, which subscribes to the

8. For examples of these trends, see F. W. Mote, Imperial China 900–1800 (Cambridge, Mass.: Harvard University Press, 1999); and Chen Gaohua and Qian Haigao, Zhongguo Junshi Zhidushi: Houqin Zhidu Quan [The History of Chinese Military Systems: Volume on Logistics Systems] (Zhengzhou: Daxiang Chubanshe, 1997).

[5]

Fortifying China

traditional view that economic progress and military strength are intimately intertwined. Forging a mutually beneficial relationship between the competing interests of wealth and power is crucial for ensuring sustainable long-term growth and security. The country’s civilian and military leaderships consider the establishment of extensive ties between the civilian and defense economies to be one of the best means of achieving this strategic goal. But daunting obstacles exist, not the least of which is that this integrative approach goes against the traditional principle of the separation of the two economies. Nonetheless, the integration is likely to accelerate as China seeks to build up its defense capabilities to meet long-term challenges to its national security. A host of strategic, economic, political, military, institutional, personality, and developmental factors and concerns explains why Deng Xiaoping, the father of the Open Door policy and reform era, and his successor, Jiang Zemin, were so enthusiastic in promoting spin-off and spin-on initiatives to assist in realigning the relationship between the civilian and military economies. Under Deng, the strategic rationale for the continued militarization of the economy faded as he switched strategic and domestic priorities from cold war confrontation to economic engagement. This led to a significant easing in military tensions. Harnessing the strengths of the civilian economy has been considered an important mechanism for China to promote self-reliance and mitigate its dependence on foreign sources, especially for critical technologies. Indigenization has become a crucial component of Chinese thinking on the relationship between technology, national security, and economic prosperity, which is sometimes referred to as techno-nationalism.9 Decisions makers, especially senior military leaders, have become increasingly reluctant to rely exclusively on the defense economy to meet the needs of the military establishment, particularly because of its poor track record in weapons development and innovation. Leaders have also argued that dual-use transfers of technology, research, and production capacity, especially through the conversion process, are a cost-efficient and effective means of making use of surplus defense industrial capabilities. Official Chinese statistics claim that around 80 percent of the production output value of the defense industry in the late 1990s were civilian goods compared with less than 10 percent in the late 1970s.10 The actual experience may not be as

9. Evan A. Feigenbaum, China’s Techno-Warriors: National Security and Strategic Competition from the Nuclear to the Information Age (Stanford: Stanford University Press, 2003), 37–39. 10. Zhongguo Junzhuanmin Dashiji Bianxiezu [Chronicle of China’s Defense Conversion Editorial Writing Group], Zhongguo Junzhuanmin Dashiji, 1978–1998 [Chronicle of China’s Defense Conversion, 1978–1998] (Beijing: Guofang Gongye Chubanshe, 1999), 204–5. See also

[6]

Bridging the Civil-Military Technological Divide

clear-cut because much of the military-to-civilian output came from newly added rather than converted production facilities. Nonetheless, the result is a defense economy that today is decidedly dual-use in nature. The dual-use strategy has been developed and implemented over the last three decades. The military-to-civilian conversion initiative—known as the “Combine the Military and Civilian Sectors,” or Junmin Jiehe strategic guidance—was first put forward by Deng in 1978 and subsequently adopted as state policy.11 The strategy, also referred to as the “sixteen character guideline,” was initially a political response by a new leadership seeking an alternative approach to tackling the burdens of excessive militarization that had contributed to stifling the growth of the civilian economy during the Maoist period. The actual definition of this slogan was left deliberately ambiguous because it served more as a political statement of intent than a detailed policy announcement. One of the key political purposes of the guidelines was to allay the concerns of the powerful military and defense industrial establishments that the shift from military industrialization to civilian economic development would lead to a serious erosion of the country’s defense industrial base. The four original phrases contained in the Junmin Jiehe guidance addressed a number of key issues pertaining to the country’s transition from cold war preparedness to economic construction: • Combining military and civilian activities ( Junmin Jiehe): The original

meaning of this term was that defense enterprises should engage in both civilian and military production rather than focus exclusively on military output. Since the 1990s, though, it has been reinterpreted to mean the development of an integrated dual-use technological and industrial base. • Combining peacetime and wartime preparations (Pingzhan Jiehe): This phrase refers to the need to ensure that wartime mobilization requirements are taken into consideration during peacetime economic construction. The concern at the beginning of the 1980s was that the focus on economic development might lead to the neglect of the country’s military preparedness, especially as the cold war threat from the Soviet Union had still not receded.

Huai Guomo, chief ed., Zhongguo Junzhuanmin Shilu [Record of China’s Military Conversion] (Beijing: Guofang Gongye Chubanshe, 2006). 11. For a short history of the Junmin Jiehe concept, see Wu Jianeng, “My Opinion on the ‘Combining Military and Civilian, Combining Peacetime and Wartime’ Guiding Principles of New China’s Defense Technology and Industry,” Junshi Jingji Yanjiu [Military Economic Research] ( July 2002), 34–36.

[7]

Fortifying China • Giving priority to military products ( Junpin Youxian): This term was

added to the sixteen-character guideline in 1982 and called on the defense economy as well as the rest of the civilian economy to ensure that military research and development (R&D) and production requirements were put ahead of commercial interests. • Letting the civilian sector support the military sector (Yimin Yangjun): The meaning behind this saying was that the military establishment would benefit from the growing prosperity and progress that would come from overall economic development. The implication was that civilian economic priorities would come before military security considerations, which was in line with the “Four Modernizations” program that set out the country’s national priorities when the sixteen-character policy was drawn up. The Junmin Jiehe strategy can be divided into three phases of evolution. The first period covered the 1980s, when the authorities adopted a handsoff ad hoc approach by encouraging firms in the defense industry to convert from military to civilian production to fill the gap left by the sharp fall in defense spending. These entities were generally left on their own to respond to these changed circumstances. The government provided more direct support and guidance in the mid-1980s for the establishment of a strategic high-technology project known as the 863 program, which included the development of dual-use technologies. In the second phase in the early to late 1990s, the authorities took a more involved role in the management and funding of the defense conversion process by incorporating the program into its five-year development plans. Financial assistance was earmarked for key projects, and efforts were made to foster linkages and partnerships to assist defense firms to find financing, markets, and information for their products. Since the late 1990s, a third phase has seen the focus of the government, military, and defense economy switch from conversion to spin-on activities. The integration of the civilian and defense technology and industrial bases has become a central priority for the defense economy. In the Tenth Five-Year Plan of the Commission of Science, Technology, and Industry for National Defense (COSTIND), which began in 2001, one of the key policy objectives was to actively promote the development of “two-way civil-military technology cooperation, transfers, promotions, and joint development.” COSTIND considered that “the transfer of military industrial technology for civilian use and the transfer of advanced civil high technology for military use are of great importance . . . [and China] must establish a capable civil-military industrial foundation.”12 12. “COSTIND Director Liu Jibin on Military Conversion in the Tenth Five-Year Plan,” Hangtian Gongye Guanli [Space Industry Management] ( June 2001), 1.

[8]

Bridging the Civil-Military Technological Divide

This intensifying discussion of dual-use strategy eventually led to the adoption of a new set of guiding principles that superseded Deng’s original Junmin Jiehe strategic guidance in 2003.13 This new sixteen-character list of principles included Junmin Jiehe (Combining Civil and Military Needs), Yujun Yumin (Locating Military Potential in Civilian Capabilities), Dali Xietong (Vigorously Promoting Coordination and Cooperation) and Zizhu Chuangxin (Conducting Independent Innovation).14 The most important of these concepts was Yujun Yumin, which refers to the forging of an integrated dual-use system, especially the establishment of a civilian apparatus that has the technological and industrial capabilities to meet the needs of the PLA and defense economy. At the third plenum of the Sixteenth Party Congress in 2003, a decision was made to construct a new civilian technological and industrial base with embedded military capabilities. This called for the building of an innovative “Junmin Jiehe, Yujun Yumin”based system that focused on the “mutual promotion and coordinated development of the defense and civilian technological sectors.”15 Thus, Yujun Yumin became the strategic outline for the future dual-use economy.

The National Innovation Systems Framework At the heart of this book is the relationship among technology, innovation, national security, and a country’s developmental trajectory. How innovation takes place in the military-security sphere has been examined through organizational, societal, business management, structural realist, diffusion, and military doctrinal frameworks of analysis.16 Another useful

13. Zhang Nanzheng and Zhang Shengwang, eds., Dangdai Guofang Jingji Lilun Qianyan Wenti Yanjiu [Research into the Forward Problems of Contemporary Defense Economic Theory] (Beijing: Guofang Daxue Chubanshe, 2003), 145–49. 14. “Outline of the 10th People’s Republic of China Economic and Social Development Five Year Plan,” Guangming Ribao, 18 March 2001, chap. 24. 15. “ ‘Decision’ on the Direction of the Science and Technology Industry,” Zhongguo Gaoxin Jishu Changye Daobao [China New High-Technology Industry Newspaper], 29 October 2003, http://www.cutech.edu.cn/zhonghe. 16. Key writings on these various perspectives include Harvey M. Sapolsky, The Polaris System Development: Bureaucratic and Programmatic Success in Government (Cambridge, Mass.: Harvard University Press, 1972); Barry R. Posen, The Sources of Military Doctrine: France, Britain and Germany between the World Wars (Ithaca: Cornell University Press, 1984); Clayton M. Christensen, The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail (Cambridge, Mass.: Harvard Business School Press, 1997); Emily O. Goldman and Leslie C. Eliason, eds., The Diffusion of Military Technology and Ideas (Stanford: Stanford University Press, 2003); Matthew Evangelista, Innovation and the Arms Race (Ithaca: Cornell University Press, 1988); Jeffrey A. Isaacson, Christopher Layne, and John Arquilla, Predicting Military Innovation (Santa Monica: RAND Corp., 1999); Stephen P. Rosen, Winning the Next War: Innovation and the

[9]

Fortifying China

approach, especially in its application to late-industrializing states, is the concept of the national innovation system (NIS), which views technological development and innovation as a constantly evolving process.17 Because innovation is a highly complex and little-understood process, competing views abound as to what constitutes an NIS. In general terms, though, there is broad agreement among scholars that it includes “all important economic, social, political, organizational, institutional and other factors that influence the development, diffusion and use of innovations.”18 Under this definition, the key components of an NIS are organizations and institutions. Organizations are “formal structures that are consciously created and have an explicit purpose,” such as firms, universities, and government agencies that are involved directly or indirectly in supporting the innovation process.19 In this book, entities that are directly engaged in innovation such as research institutes, enterprises, and universities will be referred to as primary actors, and those that are indirectly involved, such as government agencies, are termed secondary actors. Institutions are, as Douglass North points out, akin to the “rules of the games,” which refer to “sets of common habits, norms, routines, established practices, rules or laws that regulate the relations and interactions between individuals, groups and organizations.”20 The different ways that organizations and institutions are set up within countries help to explain the variation in the national style of innovation. Research universities, for example, play an important role in the NIS in the United States but are more peripheral in Japan and Germany.21 Much of the research conducted on the NIS has concentrated on the components of the system, but understanding the systems-level functions and activities is equally as important. According to Steven White and Liu Xielin, these functions are related to the “creation, diffusion and exploitation of Modern Military (Ithaca: Cornell University Press, 1994); and Adam Grissom, “The Future of Military Innovation Studies,” Journal of Strategic Studies 29, no. 5 (October 2006): 905–34. 17. This is an alternative perspective to the static and linear neoclassical economic theories of growth focusing on rationality and allocations. See C. Edquist and B. Johnson, “Institutions and Organisations in Systems of Innovation,” in Systems of Innovation: Technologies, Institutions and Organizations, ed. C. Edquist (Washington, D.C.: Pinter/Cassell Academic, 1997), 41–63. See also Richard R. Nelson, ed., National Innovation Systems (New York: Oxford University Press, 1993), 3. 18. Charles Edquist, “Systems of Innovation: Perspectives and Challenges,” in The Oxford Handbook of Innovation, ed. Jan Fagerberg, Richard R. Nelson, and David C. Mowery, (Oxford: Oxford University Press, 2004), 183. 19. Ibid., 188. 20. Douglass North, Institutions, Institutional Change and Economic Performance (Cambridge: Cambridge University Press, 1990), 4–5. See also Edquist and Johnson, “Institutions and Organisations,” 46–47. 21. See J. Rogers Hollingsworth, “Some Reflections on How Institutions Influence Styles of Innovation,” September 2002, http://history.wisc.edu/hollingsworth/documents.

[10]

Bridging the Civil-Military Technological Divide

technological innovation within a system.”22 Activities that they and others have identified as fundamental to nurturing innovation include R&D, implementation for manufacturing use, end use, education, and linkages to bring together complementary knowledge.23 In late-industrializing states such as China, the focus of technological development and innovation diverges markedly from that in industrialized economies. These states emphasize absorption and incremental innovation rather than the development of new or radical products or processes.24 Absorptive capacity is regarded as especially critical in determining whether developing countries can close the technological gap with their developed counterparts. Absorption of already existing technology by developing countries can come in a number of forms. Reverse engineering of existing foreign technologies, which Linsu Kim and Richard Nelson term “imitation,” has been instrumental in the successful development of newly industrializing economies in Asia.25 They point to two distinct forms of imitation that correspond with different stages of development. The initial phase is “duplicative imitation,” in which products are closely copied with little or no technological improvements. The second, more advanced stage is “creative imitation,” which aims at “generating imitative products but with new performance features.”26 This normally requires substantial R&D investment and benchmarking. Creative imitation can come in several forms. The lowest form is design copying, which mimics the style or design of the market leader but in which the copier has its own brand name and engineering specifications. The intermediate level is “creative adaptation,” in which products are inspired by existing products but differ from them. At the top of the ladder is “technological

22. Xielin Liu and Steven White, “Comparing Innovation Systems: A Framework and Application to China’s Transitional Context,” Research Policy 30 (2001): 1093. 23. Edquist offers a list of activities that he argues are important for systems of innovations. They include the provision of R&D; competence building through education and training; formation of new product markets; the articulation of requirements for products emanating from the demand side; the creation and changing of organizations and institutions needed for the development of new fields of innovation; and networking through markets and other mechanisms. Edquist, “Systems of Innovation: Perspectives and Challenges,” 190–91. 24. Charles Edquist, “Systems of Innovation for Development” (background paper for the UNIDO World Industrial Development Report, 2001), quoted in Stephen Feinson, “National Innovation Systems Overview and Country Cases,” in Center for Science, Policy and Outcomes, Knowledge Flows and Knowledge Collectives: Understanding the Role of Science and Technology in Development, vol. 1, Knowledge Flows, Innovation and Learning in Developing Countries (Washington, D.C.: Center for Science, Policy and Outcomes, 2003), 20, http://www.cspo.org/ products/report. 25. Linsu Kim and Richard R. Nelson, eds., Technology, Learning, and Innovation (Cambridge: Cambridge University Press, 2000), 3–5. 26. Ibid., 5.

[11]

Fortifying China

leapfrogging,” which takes place when a latecomer gains access to a newer technology and uses it with a more accurate understanding of the market than was possessed by the original innovator. The distinction between creative imitation and indigenous innovation is a fine one because innovations often do not involve the development of breakthrough inventions but are the products of already existing ideas. This emphasis on the role played by absorption and the incremental and imitative nature of technological advancement in the development of the NIS is especially appropriate for China. The development of the Chinese NIS has attracted growing scholarly and policy interest over the past decade, with much of this focus on the transition from a planned to a market-oriented economy.27 These studies have made the following observations about the characteristics and functions of the Chinese NIS in the reform period: • Decision-making authority is becoming increasingly decentralized.

The government has given up its dominant role and allowed enterprises, factories, and research institutes extensive autonomy in the running of their operations and resource allocations. • The government has encouraged competition among organizations within the NIS and has sought to abolish monopolies in nonstrategic sectors. • A rigid division of labor that separated the activities of research institutes, manufacturing enterprises, and end users during the planning era has been largely dismantled. This compartmentalization was a major obstacle to innovation because organizations were severely restricted in pursuing activities outside their narrow areas of specialization. In the reform era, organizations are permitted to diversify into other functional activities. • The principal sources of R&D funding, especially for applied R&D, in the reform era have shifted from the government to enterprises. The government has reduced financial support to research institutes 27. The research has covered various aspects of the Chinese NIS, including the rise of the knowledge-based economy, changing role of public research institutes, regional innovation networks, and innovation systems in a diverse range of industrial sectors, such as the information technology, computer, and electronics industries. See Carl J. Dahlman and Jean-Eric Aubert, China and the Knowledge Economy: Seizing the 21st Century (Washington, D.C.: World Bank, 2001); Lan Xue, “A Historical Perspective of China’s Innovation System Reform: A Case Study,” Journal of Engineering and Technology Management 14 (1997): 67–81; Q. Wang, X. Lan, and N. von Tunzelmann, “Regional Variations and National Policies in China’s System of Innovation” (paper presented at the DRUID Conference, Aalborg, Denmark, June 12–15, 2001); and Gu Shulin, China’s National Innovation System Approach to Participating in Information Technology: The Innovative Recombination of Technological Capability (Maastricht, Neth.: Institute for New Technologies, The United Nations University, 1997).

[12]

Bridging the Civil-Military Technological Divide

and required them to find their own sources of funding from the marketplace. This has made the R&D establishment more responsive to the downstream interests and needs of manufacturers and end-users. • Foreign firms have become a major presence in the Chinese NIS, although there is disagreement over their contribution to technological innovation. • The education system has not undergone decentralization and diversification to the same extent as the rest of the NIS, and it remains under the tight oversight of the Ministry of Education. There are concerted efforts, however, to provide more funds to modernize and expand advanced S&T education.28 While these reforms have led to a far-reaching overhaul of the Chinese NIS, they are uneven and incomplete. Serious problems remain to be addressed. One key issue is the need to establish a more sophisticated and robust legal and regulatory regime that will allow for the transfer and protection of property rights and assets. Another structural problem is a widening regional discrepancy in technological development and innovation. These difficulties have led to divergent conclusions about the extent to which the Chinese NIS is being successfully reformed. While productivity, economic activity, and technological product development have significantly improved, the results have been more mixed for diffusion, profitability, return on assets, and other efficiency-based performance indicators.

Examining the Defense Economy through the NIS Prism The NIS approach offers an excellent conceptual starting point from which to examine the defense economy and the dual-use process because there is presently a lack of a suitably rigorous alternative analytical framework in studies in this field. In an early study of the NIS of fifteen leading developed and developing countries, Richard Nelson pointed out that in many of these states, “national security concerns had been important in shaping innovation systems.”29 The largest portion of government funding for industrial R&D projects in countries such as the United States, the United Kingdom, France, Taiwan, and Brazil came from the military purse. However, Nelson noted that there was no consensus among analysts as to

28. Liu and White, “Comparing Innovation Systems,” 1100–6. 29. Nelson, National Innovation Systems, 508.

[13]

Fortifying China

whether military R&D and procurement “ha[d] been a help or a hindrance to the commercial competitiveness of national industry.”30 A compelling case can be made for applying the NIS approach to the defense economy. Judith Reppy points out that the defense industrial complex has many of the attributes that the NIS framework is most concerned with, such as systems, well-defined boundaries, and robust institutions and organizations.31 The definition of innovation is also sufficiently broad to include technology transfer and diffusion. Countries with large defense economies such as the United States, Russia, France, China, and the United Kingdom offer the best examples of the NIS approach because of their national and systemic attributes and their extensive role in innovation. But the actual application of the NIS approach to the defense industrial sector has so far been limited.32 An examination of the defense economy using a systems-of-innovation framework would focus on activities, structures, and processes of the system, such as knowledge diffusion, learning processes, and the interactions between organizations and institutions that have been ignored in more conventional treatments of the defense industrial sector. In the case of China, its ability to absorb technological knowledge would also be an important concern. Examining the Chinese defense economy from a NIS perspective would help to shed light on critical processes that have so far been largely overlooked in studies of the Chinese defense industry and military moderni-

30. Ibid., 513. 31. Judith Reppy, ed., “Conceptualizing the Role of Defense Industries in National Systems of Innovation” (Occasional Paper No. 25, Peace Studies Program, Cornell University, April 2000). 32. One exception is a short study of the UK defense industry. See Andrew D. James, “The Place of the UK Defense Industry in Its National Innovation System: Co-evolution of National, Sectoral and Technological Systems,” in Reppy, “Conceptualizing the Role of Defense Industries,” 11. See also Paul Bracken, Linda Brandt, and Stuart Johnson, “The Changing Landscape of Defense Innovation,” Defense Horizons, no. 47 ( July 2005), 1–9. For Chinese perspectives, see Zhongguo Keji Fazhan Zhanlue Yanjiu Xiaozu [Research Group on Chinese Science and Technology Development and Strategy], Zhongguo Keji Fazhan Yanjiu Baogao 2004–2005: Junmin Ronghe Yu Guojia Chuangxin Tixi Jianshe [Annual Report of Science and Technology Development of China 2004–2005: The Construction of the Civil-Military Integration and National Innovation Systems] (Beijing: Zhishi Changquan Chubanshe, 2005); and Wen Xinmin, “Woguo Guofang Chuangxin Tixide Jianshe Mubiao He Qieru Dian” [The Goals and Methods in the Construction of Our Country’s Defense Innovation System], Junshi Jingji Yanjiu, January 2006, 12–15. Chinese officials have defined the Chinese defense innovation system as consisting of four major components: a weapons research and development segment; a civil-military high technology system; a basic R&D sector; and an innovation support segment. “The Interpretation of COSTIND S&T Section Head Wu Weiren of the ‘Outline of the State Medium and Long-Term Science and Technology Development Plan,’ ” COSTIND website, 2 July 2007, http://www.costind.gov.cn.

[14]

Bridging the Civil-Military Technological Divide

zation.33 A few studies have appeared since the late 1990s that offer valuable new insights and perspectives on different aspects of Chinese defense technological innovation, the dual-use process, and the complex ideological, organizational, and historically shaped interaction between the military and civilian sectors. They include research on how the PLA and defense industrial establishments played a decisive role in China’s economic development up until the 1980s; the potential of military applications from various commercial industries; an examination of the PLA’s role in adjusting to the information warfare era; and case studies of technological developments in China’s aerospace, space, electronics, high-energy, shipbuilding, and missile sectors.34 Important analytical and knowledge gaps exist, however.35 There has been limited examination of how the design, development, and production cycles for weapon systems and key technologies take place. The analysis of the output of the defense economy has concentrated on the development and manufacturing of complete weapons systems rather than subsystems and components, which are especially important for spin-on and civil-military integration. Moreover, little is known about how the R&D and procurement processes work. Even more surprisingly, the examination of the roles of innovation, knowledge learning, diffusion, and absorption within the Chinese defense economy has been largely overlooked. This book seeks to remedy these deficiencies by examining the structure, dynamics, and performance of the defense technological and industrial innovation system from a systems-level perspective. We look at the actors, institutional mechanisms, and key functional activities that promote technological innovation within the defense and dual-use systems. The principal areas of inquiry are how the R&D process works, competence building through 33. The key Western works have covered issues such as the structure and reform of the defense industry, defense conversion, development of the strategic weapons sector, arms trade and proliferation, Russian military assistance, weapons developments, commercialization, and technology transfer activities. The bulk of work on dual-use-related issues has focused on defense conversion that appeared during the heyday of the Chinese defense conversion drive in the 1980s and first half of the 1990s. For an excellent critique of the state of the field in the study of the Chinese defense economy at the beginning of the twenty-first century, see Bates Gill, “Chinese Military-Technical Development: The Record for Western Assessments, 1979–1999,” in Seeking Truth from Facts: A Retrospective on Chinese Military Studies in the PostMao Era, ed. James C. Mulvenon and Andrew N. D. Yang (Santa Monica: RAND Corp., 2001). 34. See Feigenbaum, China’s Techno-Warriors; Roger Cliff, The Military Potential of China’s Commercial Technology (Santa Monica: RAND Corp., 2001); Nan Li, ed., Chinese Civil-Military Relations (London: Routledge, 2006); James Mulvenon and Richard Yang, eds., The People’s Liberation Army in the Information Age (Santa Monica: RAND Corp., 1999); Mark Stokes, China’s Strategic Modernization: Implications for the United States (Carlisle Barracks, Pa.: Strategic Studies Institute, Army War College, 1999); and Evan Medeiros et al., A New Direction for China’s Defense Industry (Santa Monica: RAND Corp., 2005). 35. Gill, “Chinese Military-Technical Development,” 167–72.

[15]

Fortifying China

education and training of the workforce, the manufacturing implementation process, the role of downstream end users in influencing upstream R&D and implementation activities, and the bringing together of complementary knowledge through linkage activities within the system. This analytical framework also considers several important characteristics of the system, in particular its structure, internal dynamics, performance, and the role of absorption and imitation. We will address the following key questions: • System structure: Is there a distinct division of labor among organizations? Do organizational boundaries correspond to clusters of fundamental activities? What groups of activities are found within the same organizational boundaries? Is coordination of the system centralized or decentralized? • System dynamics: How does the structure of the system evolve? How are new actors and organizations formed and established? How do the relationships between actors and institutions change? What draws the activities and actors together to bring about innovation from conception to use? • System performance: How do the structure and dynamics of the system affect its efficiency in introducing and diffusing innovations or in absorbing technologies from outside the system? What are the key indicators for measuring performance, and do these change over time? • The role of absorption and imitation: What types of absorptive and imitation practices are being pursued, and how effective are they in promoting technological development?

Understanding How Defense Technological Innovation Takes Place Exploring the Chinese defense economy through the NIS framework offers a number of new insights into how innovation takes place within the defense establishment as well as affirming or questioning the findings from other scholarly work in this field. The first observation is that outside intervention is crucial in enabling innovation within the defense economy. This affirms the organizational theory argument of Barry Posen and other institutionalists that civilian intervention is a key factor in paving the way for military innovation.36 While Posen’s focus was primarily on the dynamics of military doctrinal innovation involving the civilian and

36. Posen, Sources of Military Doctrine, 224–26.

[16]

Bridging the Civil-Military Technological Divide

military establishments, in defense technological innovation, the contest for influence, authority, and dominance is among three powerful constituencies: the military (end user), the defense scientific and industrial community (creator/producer), and the civilian authorities (regulator).37 The interrelationships among these groups have had a far-reaching impact on innovation. For China, changing patterns of alignment among these organizational entities as well as the evolution of their institutional identities over the past sixty years have played a defining role in altering the nature of the defense technological innovation landscape: • During the Maoist era, the defense S&T community and the civilian

authorities were closely aligned in the strategic weapons sector, and this allowed for the establishment of an interlocking demand-pull, discovery-push relationship that encouraged technological innovations and breakthroughs. • In the 1980s and early 1990s, the three constituencies had widely divergent institutional interests and priorities, and this lack of alignment and absence of pull-push drivers were responsible for technological stagnation and a near breakdown of the innovation cycle. • In the mid- to late 1990s, the interests of the civilian and military authorities became closely aligned as they grew frustrated at the inability of the defense scientific and industrial complex to meet their needs. This eventually provided the political and bureaucratic basis for the civilian authorities to intervene and bring the defense industry into line. • Since the end of the 1990s, all three constituencies have become closely aligned with one another, and this has produced a wellcoordinated demand-pull, discovery-push dynamic that has become a powerful engine of innovation. While the Chinese defense economy has distinctive political, organizational, and developmental characteristics that may make a comparison with the United States and other advanced powers difficult, some generalizations about the interactions of these three constituencies are possible:38 • Significant and sustainable innovation can take place only if all three

groups are aligned and work together.

37. This is sometimes referred to as the Iron or Digital Triangle. See Gordon Adams, The Politics of Defense Contracting: The Iron Triangle (New Brunswick, N.J.: Transaction Books, 1982); and Medeiros et al., A New Direction, chap. 5. 38. In his study of military technological innovation in the U.S. defense establishment, Stephen Rosen employed a two-actor model, which consisted of the military and the

[17]

Fortifying China • Innovation is absent if all three constituencies are not cooperating or

working with one another. • The alignment of the military and civilian authorities is an insuf-

ficient prerequisite for technological innovation. The defense scientific and industrial communities provide the essential foundation for innovation to take place. • Cooperation between the defense industrial and civilian groups will allow for select types of technological innovation, such as strategic weapons, but this may not produce the technologies and weapons that the military needs or wants if it is not involved. • If the defense industry and military were aligned by themselves without the support of the civilian authorities, innovation would likely be painfully gradual and uphill because of fundamental structural resistance within these two establishments and limited access to resources. Another insight on the important linkage between innovation and access to foreign knowledge and technology supports the findings of developmentalstate theorists who point out that openness to foreign knowledge is one of the most critical factors in the ability of late-industrializing states to catch up.39 This is especially relevant in the crucial area of absorptive capacity. Since the early 1990s, the Chinese defense economy’s extensive access to Russian defense technological and industrial hardware and knowledge, especially to underlying designs and production processes, has allowed for major technological advances through adaptation and upgrading. Without access to foreign knowledge and technologies, as was the case for China during the 1960s and 1970s, innovation becomes sporadic and uncertain. To improve this absorptive capacity, significant investment is being made to train a more capable workforce of designers, scientists, and engineers, primarily through the upgrading of the defense educational apparatus. The argument of the structural realist school that a “state’s external security environment determines whether it will have a strong incentive to innovative militarily” is also borne out in this book.40 During the 1980s scientists. His argument was that innovation was largely driven by the military and the scientists had limited impact. In other words, the search for technological innovation was based on demand-pull factors rather than technology-push drivers. The military’s central concerns revolved around managing the uncertainties stemming from the lack of intelligence and knowledge about the technological efforts of adversaries and the costs and benefits of the development of new technologies. Rosen, Winning the Next War, chaps. 7 & 8. 39. For a review of critical factors in catching up, see Jan Fagerberg and Martin Srholec, “Catching Up: What Are the Critical Factors for Success?” (Working Papers on Innovation Studies from Centre for Technology, Innovation and Culture, University of Oslo, 2005), http://folk.uio.no/janf/downloadable_papers. 40. Isaacson, Layne, and Arquilla, Predicting Military Innovation, 12–13.

[18]

Bridging the Civil-Military Technological Divide

and early 1990s, the Chinese defense economy floundered because a lack of external concerns meant that the state paid little attention to security priorities. This situation changed when Taiwan’s quest for independence in the mid-1990s led Beijing to embark on a far-reaching shake-up and modernization of the PLA and defense industrial complex. It committed considerable resources and devoted high-level political attention to raising technological competence and promoting innovation. This book also supports the theory put forward by advocates of the societal approach that the ability of military organizations to innovate is significantly influenced by the relationship between the military and the broader society.41 The Chinese defense economy’s accelerating integration with the civilian economy since the late 1990s has played an important role in its technological revitalization, but the support of the state has also been vital to ensure that this revival is sustainable. When the defense economy was forced to fend for itself during the 1980s, innovation took a backseat to economic survival. The argument advanced by Peter Dombrowski and Eugene Gholz that the established defense industrial base remains the most effective organizational structure to meet the needs of the military despite the transformational gales brought about by the revolution in military affairs is also applicable to China.42 The building of the Chinese dual-use economy is still in its infancy, but its long-term structure is likely to be composed of two connected parts. One is a new high-technology-focused base that is embedded within the civilian economy. The other will be made up of traditional state-owned defense industrial entities that are seeking to transform themselves into more nimble new-technology outfits able to meet the information warfare needs of the military. The ability of these legacy firms to successfully remake themselves will be constrained, however, by deep-seated resistance to change from within. These two sectors will likely operate in a complementary manner alongside each other as they offer different products and services that their customers will need. The civilian high-technology base will be more focused on pursuing technological innovations that are more “disruptive” in nature, while the legacy sector will likely seek to pursue more “sustaining” technological innovations. In other words, these two sectors will enjoy a sufficient division of labor and responsibilities to allow for cohabitation and cooperation. This book covers several distinct periods in the evolution of the Chinese defense economy since 1949. Chapter 2 examines how, between the early 41. Ibid., 14–15; and Stephen Rosen, “Military Effectiveness: Why Society Matters,” International Security (Spring 1995), 5–31. 42. Dombrowski and Gholz, Buying Military Transformation, chap. 2.

[19]

Fortifying China

1950s and the late 1970s, the Maoist regime was able to build a defense economy capable of simultaneously producing both conventional and strategic weapons. The chapter focuses on the characteristics, structure, dynamics, and performance of the conventional and strategic weapons bases and highlights the activities related to the creation, diffusion, and exploitation of innovation. The conventional weapons base was concerned with the development and production of ordnance, aviation, naval, and military electronics equipment, while the strategic weapons base specialized in the research and development of nuclear weapons and strategic missiles. Though they were very closely related, these two systems were distinct and competing entities. It is particularly interesting to explore how these activities were organized and coordinated and how the components of the systems, their actors and institutions, interacted with each other. This detailed assessment of the two systems is important for understanding subsequent developments because the Maoist period laid down the organizational structures for the post-1978 reform era, such as the dominance of the vertical functional system and the compartmentalization of the R&D and production apparatuses. How the defense economy fared under the rule of Deng Xiaoping from 1978 to the late 1990s is covered in chapter 3. The focus during this period was on government attempts to transition China from central planning to the so-called socialist market economy, which took place in two distinct stages. From the late 1970s to the Fourteenth Communist Party Congress in 1993, reforms were introduced to replace mandatory planning with guidance planning in which the market and the state coexisted in an uneasy and uncertain balance. From 1993 to the Fifteenth Party Congress in 1997, the foundations of the socialist market economy were laid down with the adoption of key reform measures intended to accelerate the transformation toward a more market-oriented system. The chapter looks at the range of initiatives that were carried out to make the defense economy more innovative, flexible, and productive, but it also considers the deep-seated obstacles that ultimately frustrated these efforts and left the defense industrial sector increasingly stranded and separated from the rest of the vibrant economy. Chapter 4 scrutinizes the defense economy’s reckoning with its Maoist past as the leaderships of Jiang Zemin and Hu Jintao sought to undertake concerted efforts to bring about reform and restructuring in the moribund system. The central focus is on government efforts to rectify the deep-seated obstacles stemming from the Maoist period that have limited China’s ability to absorb, create, and diffuse technological innovations in the defense and civilian sectors. Among these efforts are the restructuring of the R&D apparatus and its ties with the production sector, changing the relationship between the national innovation system and the defense technological [20]

Bridging the Civil-Military Technological Divide

innovation system, and the reform of major defense enterprises. In addressing these issues, the chapter evaluates whether the reform program can be sustained over the long term and whether the defense technological and industrial base has finally shed the constraints imposed by its Maoist legacy. As this concerted effort to revamp the defense industry is taking place, a major initiative is also under way to embrace civil-military integration and forge close linkages between the civilian and defense economies. Chapter 5 identifies the rationales that led to leadership interest in the dual-use and spin-on paradigms; the elements of Chinese thinking on dual-use and spin-on; the concepts, policy initiatives, and doctrines that have been developed; the types of dual-use activities that are being pursued; and the sectors in the adoption of dual-use and civil-military integration that are being most vigorously undertaken. In doing so, the chapter evaluates whether the leadership’s attempts to build a dual-use economy are successfully promoting innovation and enabling China to narrow the technological gap with the world’s advanced defense technological and industrial powers. Chapter 5 also addresses how the Chinese approach to forging a dual-use economy compares and contrasts with policies pursued by the United States and Japan, which are considered among the most experienced and advanced participants in this area. Chapter 6 examines the long-term dynamics and strategic challenges in the Chinese defense economy’s efforts to transform and catch up. What are the ideological drivers behind the Chinese approach to technological catching up? What debates are taking place among Chinese policymakers as to the strategies and goals for catching up with the top tier of military industrial states within two decades? What are the competing paths of development that China can choose from in its quest for military technological parity? What are the strategic implications for the United States of China’s defense economic transformation, and how feasible and sustainable is the current U.S. policy of seeking to contain China’s defense technological modernization through a rigid embargo regime?

[21]

[2] Innovation and Stagnation during the Maoist Era

When Mao Zedong and his Communist fighters emerged as the newly victorious rulers of China in 1949, they inherited a country ruined by civil war and foreign invasion. They had little time to savor victory. The new leadership had to embark immediately on the pressing tasks of nation building, economic development, and military modernization. The possession of a credible defense capability was especially urgent because the fledging regime faced major threats to its national security. As a latecomer to economic modernization and defense industrialization, China lagged far behind the world’s leading powers in the research, development, and production of military technology and weaponry. At the beginning of its reign, the Communist government’s defense industry consisted of a small, ramshackle collection of outdated and dilapidated factories inherited from the ousted Nationalist regime.1 Undeterred by this parlous state of affairs, the Chinese leadership drew up plans to build a modern, comprehensive, and self-sufficient defense economy that would be able to develop and produce not only state-of-the-art conventional arms but also nuclear bombs and strategic missiles. This ambitious strategy rested on a dual approach of imitation and innovation: importing and copying Soviet equipment while at the same time developing an indigenous R&D and manufacturing capability. This chapter examines how the Maoist regime was able to achieve its goal of building a defense economy capable of producing both conventional 1. Zhongguo Renmin Jiefangjun Lishi Ziliao Congshu Bianshen Weiyuanhui [PLA Historical Materials Collection Editorial Committee], Junshi Gongye: Genjudi Wuqi [Weapons Base Areas] (Beijing: Jiefangjun Chubanshe, 2000).

[22]

Innovation and Stagnation during the Maoist Era

and strategic weapons in less than two decades. It focuses on the characteristics of the conventional weapons base—which developed and produced traditional ground, naval, and air force equipment—and the strategic base—which was involved in the R&D of nuclear bombs, strategic missiles, and satellites. While closely related, these two weapons bases developed during the Maoist period within distinct and competing systems. How these systems were organized, coordinated, and managed is significant because they exerted a profound impact on the shaping and operations of the defense economy well into the reform era.

The Building of the Conventional and Strategic Weapons Bases One of the first strategic decisions for the new leadership upon taking power was to commence the construction of a major indigenous defense industrial base. Although the war-torn country could ill afford such a costly burden, the regime believed that it had little choice but to pursue guns over butter because of the dire external threats it faced from the United States.2 The Communist leadership saw China as being on the front line of an escalating East-West confrontation and prepared for conflict against an adversary that was armed with both nuclear and conventional weapons. This cold war mind-set dominated the outlooks of Chinese decision makers throughout the Maoist era and provided the central rationale for the aggressive build-up of the defense industrial apparatus. During the 1950s and 1960s, China engaged in a series of military conflicts and tense showdowns with the United States and its Asian allies around the country’s periphery. This began with the Korean War in 1950 –53 and continued with military crises in the Taiwan Strait in 1954–55 and 1958 and in Indochina during the 1960s as Beijing provided military support to North Vietnam.3 The country’s security environment became even more complicated in the 1960s when the Soviet Union deployed troops along the Sino-Soviet

2. According to John Lewis and Xue Litai, China’s first five-year economic plan, which was the blueprint for the reconstruction of the Chinese economy, had to be delayed from 1951 to 1953 because of the precarious international situation facing China. When the plan was finally approved, defense industrialization was listed as one of the most urgent priorities. Lewis and Xue, China Builds the Bomb (Stanford: Stanford University Press, 1988), 11; and Xie Guang, chief ed., Dangdai Guofang Keji Shiye [The Contemporary Chinese Defense Science and Technology Sector] (Beijing: Dangdai Zhongguo Chubanshe, 1992), 10 –11. 3. Allen S. Whiting, “China’s Use of Force, 1950 –56, and Taiwan,” International Security 26, no. 2 (2001): 103–31.

[23]

Fortifying China

border and targeted a sizable portion of its nuclear arsenal against China. This confrontation continued until the late 1980s. At the outset of the building of the Chinese defense industry in 1950 –51, the initial priority was on laying the foundations of a conventional arms manufacturing base geared toward meeting the needs of the ground forces.4 Chinese military units sent to fight in Korea urgently needed artillery, tanks, munitions, and small arms. Following the end of the Korean War, interest shifted to the production of aircraft, warships, and electronics to bolster the country’s air and offshore maritime defenses.5 As the Chinese defense economy lacked any previous experience or technological capabilities in these areas, it was dependent on substantial Soviet technical and material assistance. After the focus on the conventional sector in the early 1950s, the leadership then turned its attention to the development of nuclear weapons, deciding in January 1955 to acquire such a capability. The immediate catalyst was a military showdown with the United States in the Taiwan Strait, but the Chinese leadership had become increasingly concerned about the U.S. nuclear threat during the Korean War.6 Consequently, China embarked on a crash program to develop the atomic bomb, which initially relied on Soviet assistance. In the late 1950s, Beijing had to depend on its own capabilities to develop the nuclear bomb after Moscow halted its assistance, and this led to the construction of a separate strategic weapons R&D and production base. The friction over nuclear weapons cooperation contributed to a more general breakdown in Sino-Soviet ties in 1960. While external security threats provided the principal justification for the rapid construction of the conventional and strategic weapons bases during the 1950s and 1960s, domestic political upheavals during this same period almost derailed the building process. This was most evident from the late 1950s to the mid-1970s, when the country went through two severe internal crises. The first event was the Great Leap Forward, which occurred between 1958 and 1962. This was a catastrophic attempt by Mao to promote high-speed economic development through a radicalized mass mobilization effort in which political zealots replaced technical specialists in running the economy. This wreaked havoc on the conventional defense industry as unqualified teams of workers launched dozens of weapons development

4. See Ma Chenyi, Zhongguo Changgui Bingqi Shiyan Jishi [The History of the Testing of Conventional Weapons] (Beijing: Zhonggong Zhongyang Dangxiao Chubanshe, 2005). 5. Xie, Dangdai Guofang Keji Shiye, chaps. 1 and 2. 6. Lewis and Xue, China Builds the Bomb, chap. 3. By contrast, when the Chinese leadership deliberated over its decision to enter into the Korean War in 1950, it concluded that the United States would not use its nuclear arsenal against China. See Chen Jian, China’s Road to the Korean War (New York: Columbia University Press, 1994), 178.

[24]

Innovation and Stagnation during the Maoist Era

projects, including those for fighter aircraft and missiles, which had no chance for success.7 The next disaster was the Great Proletarian Cultural Revolution, which between 1966 and 1975 threw the country into political turmoil and led to the near collapse of many elements of the political system and economy.8 Many of the R&D and production activities of the conventional weapons apparatus were crippled for extended periods of time. The strategic weapons base, however, was able to insulate itself from much of the political mayhem.9

The Defense Economy’s Relationship with the Maoist NIS With its extensive access to state resources, trained personnel, and strong support from the civilian and military leaderships, the defense economy was the principal engine driving the development of China’s technological and industrial innovation capabilities during the Maoist era. Virtually all of the country’s most advanced industrial sectors were either directly or indirectly associated with the defense economy.10 As Evan Feigenbaum points out, “the military scientific and engineering elite helped China’s leaders, generals and visionaries come to terms with the implications of technological change. In so doing, they shaped the distinctive process of innovation and change” that took place in China.11 The country’s key technological goals and achievements were inextricably tied to the activities of the defense economy. When the central government issued its first Twelve-Year National Science and Technology Plan in 1956, the top twelve tasks listed were drawn from a parallel defense S&T development plan. These included the development of nuclear energy,

7. Xie, Dangdai Guofang Keji Shiye, 61– 62; and Kenneth Lieberthal, “The Great Leap Forward and the Split in the Yan’an Leadership, 1958– 65,” in The Politics of China, 1949–1989, ed. Roderick MacFarquhar (Cambridge: Cambridge University Press, 1993), 87–147. 8. See Harry Harding, “The Chinese State in Crisis, 1966 – 9,” 148 –247, and Roderick MacFarquhar, “The Succession to Mao and the End of Maoism, 1969– 82,” 248 –339, in MacFarquhar, The Politics of China. 9. Xie, Dangdai Guofang Keji Shiye, chap. 3. 10. See Gu Shulin, China’s Industrial Technology: Market Reform and Organizational Change (London: Routledge, 1999); Lan Xue, “A Historical Perspective of China’s Innovation System Reform: A Case Study,” Journal of Engineering and Technology Management, 14 (1997), 67– 81; and Yuan Qingming, Jishu Chuangxinde Zhidu Jieguo Fenxi [The Analysis and Research of the Institutional Structure of Technological Innovation] (Beijing: Jingji Guanli Chubanshe, 2003), 219–26. 11. Evan A. Feigenbaum, China’s Techno-Warriors: National Security and Strategic Competition from the Nuclear to the Information Age (Stanford: Stanford University Press, 2003), 228.

[25]

Fortifying China

electronics, semiconductors, rocket technology, computer technology, and automation technology.12 The nuclear, space launch, and satellite programs, which were the most important achievements of the Chinese NIS during the Maoist period, were undertaken by the strategic weapons community.

The Setup of the Conventional and Strategic Weapons Systems The importance of the defense economy in the country’s pursuit of technological modernity, economic development, and national security meant that it attracted the attention of the Chinese leadership. Many of the leading decision makers within the defense economy leadership were also prominent figures within the country’s governing elite. They included the following: • Premier Zhou Enlai, who also served as the director of the Central

Special Commission (CSC) that oversaw the development of the country’s strategic weapons programs. • Marshal Nie Rongzhen, a vice premier and director of the Commission of Science and Technology for National Defense (COSTND) between 1958 and 1968. • General Luo Ruiqing, chief of the PLA General Staff and director of the National Defense Industry Office, which put him in charge of the conventional weapons system. • Marshal He Long, a vice premier and director of the National Defense Industry Commission between 1959 and 1963. He was a distinguished civil war soldier who wielded considerable influence in the central leadership. The leaders focused on the development of two distinct but closely related defense technological and industrial systems: a conventional weapons apparatus covering the development and production of ordnance, aerospace, naval, and defense electronics-related equipment, and a strategic weapons base that specialized in the R&D of nuclear weapons, strategic missiles, and strategic electronics systems such as satellites.

The Conventional Defense Industrial Base The structures and developmental processes of these two systems were fundamentally different. The conventional weapons sector was a highly

12. Xie, Dangdai Guofang Keji Shiye, 33.

[26]

Innovation and Stagnation during the Maoist Era

centralized and tightly compartmentalized apparatus in which bureaucrats were in charge and scientists and engineers adhered to administrative orders. Innovation took a backseat to urgent production priorities. The Chinese government initially relied on the Soviet Union to provide many of the critical technologies and industrial capabilities required to establish a comprehensive defense manufacturing capability. Of the 134 medium and large-sized defense industrial enterprises that were in operation by the end of the 1950s, forty-one were built using Soviet assistance.13 The development of another fifty heavy industrial plants that directly supported defense industrial output, such as iron and steel and chemical factories, was also dependent on Soviet aid and technological input.14 Detailed figures for the conventional weapons system at the end of the 1950s showed that virtually all production plants belonged directly to defense industrial ministries. Only a few dozen electronics enterprises engaged in military production were affiliated with local governments.15 The ordnance industry had the largest number of factories, totaling 53, followed by the electronics sector with 39 plants, the aviation industry with 29 enterprises, and the shipbuilding sector with 13 facilities. The aviation and electronics industries were technologically the most advanced and were able to build first-generation jet fighters, transport aircraft, and radio and electronic equipment. The administrative structure of the conventional weapons base underwent constant changes during its formative years, which, as John Lewis and Xue Litai have pointed out, “reflected both a resolve to stay apace of the evolving R&D process and the politics of high technology” in China during that period.16 The organizational setup of the conventional sector and the principal governmental secondary actors involved can be divided into several stages:17 • Early to late 1950s: All the various components of the conventional

defense industry were placed under the Second Ministry of Machine Building (Second Ministry), which was the principal government secondary actor responsible for coordinating the activities of the system. Another important early governmental actor was the Ordnance Industry Commission. 13. See Zhang Baichun, Sulian Jishu Xiang Zhongguo De Zhuanyi, 1949–1966 [Technology Transfer from the Soviet Union to China, 1949–1966] (Jinan: Shandong Jiaoyu Chubanshe, 2005). 14. Xie, Dangdai Guofang Keji Shiye, 14–16. 15. Ibid., 18. 16. John Wilson Lewis and Xue Litai, China’s Strategic Seapower (Stanford: Stanford University Press, 1994), 77. 17. Ibid., chap. 4; and Xie, Dangdai Guofang Keji Shiye, chaps. 2–4.

[27]

Fortifying China • Beginning of 1960s to mid-1960s: The Third Ministry of Machine Build-

ing (Third Ministry) took charge of the conventional system at the end of the 1950s. It was under the dual leadership of the Communist Party Central Military Commission (CMC), the country’s principal politico-military policy-setting organ, and the State Council, or central government. The CMC delegated its oversight of the Third Ministry to the Ministry of National Defense and COSTND. The State Council entrusted its management to the National Defense Industry Commission (NDIC), a small but powerful coordinating supra-organ at the apex of the system that had ultimate decision-making authority on the planning and allocation of resources and activities. The NDIC was merged into the National Defense Industry Office (NDIO) in 1963. He Long and Luo Ruiqing headed the NDIC/NDIO and were the principal leaders in charge of the conventional arms industry. • Mid-1960s to early 1970s: The intervention of the Cultural Revolution led to a lengthy period of leadership and organizational turmoil within the conventional system. Changes to structures and leadership teams took place almost continuously. In general terms, though, there were four ministries responsible for conventional defense industrial matters: the Third Ministry, in charge of the aviation sector; the Fourth Ministry, responsible for telecommunications and electronics; the Fifth Ministry, dealing with ordnance; and the Sixth Ministry, overseeing the shipbuilding sector. The NDIO became defunct during this period and was replaced by a succession of ad hoc committees known as leading groups. • Early 1970s to early 1980s: In 1973, the NDIO was restored to oversee the conventional defense industry, which continued to be organized around the Third, Fourth, Fifth, and Sixth ministries. Exhausted by the chaotic organizational upheavals of the Cultural Revolution, the authorities left this administrative setup largely intact until the beginning of the 1980s.

The Strategic Weapons Apparatus In contrast to the organizational shortcomings of the conventional system, the strategic weapons sector was organized more flexibly, there was close collaboration between the R&D and production systems, and scientists and engineers played an integral role in decision making. The nurturing and diffusion of innovation were paramount and allowed the strategic weapons establishment to achieve impressive successes in the indigenous development of nuclear weapons, nuclear-powered submarines, intercontinental ballistic missiles, space rockets, and satellites. [28]

Innovation and Stagnation during the Maoist Era

Other important ingredients in the success of the strategic weapons base were its privileged access to funding and resources and the fact that it had greater operational autonomy than its conventional counterpart. The nuclear weapons program was accorded top priority because the Communist Party leadership and Mao Zedong in particular regarded the possession of a nuclear capability as crucial in guaranteeing China’s national security and independence. Mao believed that if China were a nuclear-armed power, it could not be blackmailed by other nuclear states.18 This powerful political support for the nuclear and strategic missile programs gave the scientists and engineers working on these projects the necessary political capital to safeguard themselves from the ideological interference that caused so much mayhem elsewhere in the economy. Consequently, the administrative structure of the strategic weapons base remained more stable than that of its conventional counterpart. The key governmental actors and major stages of institutional evolution were as follows:19 • Mid- to late 1950s: After the nuclear program was given the go-ahead

in the mid-1950s, the Politburo and State Council directly oversaw the running of the project through the establishment of several small ad hoc bodies. These included a three-member group of senior military and civilian leaders appointed by the Politburo and two special offices created by the State Council. In 1956, the Third Ministry was officially established to take over formal control of the program. • Late 1950s to early 1960s: COSTND was established in 1958 under the leadership of Nie Rongzhen to take charge of the strategic weapons base and reported directly to the CMC and the Politburo. In 1959, the Third Ministry was reconstituted into the Second Ministry and oversaw the management of the nuclear weapons program. At the same time, the strategic missile program that was under the control of the Ministry of National Defense was transferred to COSTND. Within COSTND and the Second Ministry, administrative bureaus and academies were established that were in charge of research institutes and laboratories across the entire bureaucratic spectrum. Units that belonged to the Ministries of Geology, Metallurgy, Chemical Industry, Posts and Telecommunications, Public Health and other agencies were placed under the strategic weapons system. • Early 1960s to mid-1970s: In late 1962, the Central Special Commission was established to take over control of the strategic weapons

18. Lewis and Xue, China Builds the Bomb, 35–36. 19. Ibid., 46 –59.

[29]

Fortifying China

programs. It was headed by Zhou Enlai along with fourteen other senior political and military industry leaders. The NDIO functioned as the CSC’s secretariat. In 1968, Nie was purged from his leadership posts, and the influence of COSTND was severely weakened. But Zhou was able to use his authority to insulate the strategic weapons complex from the turmoil of the Cultural Revolution. An important structural feature of the strategic weapons complex was its direct control of R&D facilities, which were a key primary actor within the system. These R&D institutions specialized in nuclear and missile-related research, especially applied research. The Fifth Academy, for example, was responsible for missiles and space-related research, and the Ninth Academy, also known as the Northwest Nuclear Weapons Research and Design Academy, conducted nuclear weapons research. The strategic weapons bureaucracy also maintained close ties with an extensive network of R&D organizations in the civilian sector, including universities under the Ministry of Education system and the Chinese Academy of Sciences (CAS).20 Much of the basic research for the nuclear weapons, strategic missiles, nuclear submarine, and space programs was conducted by laboratories and departments belonging to civilian universities. More than a dozen universities in Beijing, Shanghai, Lanzhou, Hangzhou, Dalian, and other cities were involved in strategic weapons-related research in areas such as optical physics, nuclear physics, hydrodynamics, electronic technology, and radiation chemistry.21 Of particular importance was the nuclear research laboratory at Qinghua University, which unsuccessfully participated in reactor design for the country’s first nuclear submarine project and was also engaged in plutonium separation research. The conventional and strategic weapons apparatuses coexisted uneasily throughout the Maoist era as they competed fiercely for funding and control over important defense technological and industrial assets. There was also a keen personal rivalry between Nie, who oversaw the strategic sector, and Luo, who was in charge of the conventional system, and they constantly battled to gain control over each other’s fiefdoms. The central authorities occasionally intervened to curb the infighting, but the two systems largely operated along parallel tracks.

20. Wen Xisen and Kuang Xinghua, Guofang Kexue Jishu Lun [The Theory of National Defense Science and Technology] (Beijing: Guofang Keji Daxue Chubanshe, 1997), 62. They pointed out that more than four hundred government research institutes belonging to twenty ministries were involved in research in the nuclear weapons development program. More than a thousand higher educational research organizations and enterprises also took part. 21. Xie, Dangdai Guofang Keji Shiye, 39–40 and 129.

[30]

Innovation and Stagnation during the Maoist Era

The Floundering of the Conventional Defense Industrial System In building R&D facilities, the conventional weapons system lagged behind its strategic counterpart, which was accorded higher priority and greater access to resources and technical personnel. The first conventional weapons R&D institutes were established in the mid-1950s and numbered around thirty at the beginning of the 1960s. These units were dispersed across the entire system, including in the electronics, aviation, shipbuilding, and ordnance sectors, and there was little coordination of their activities. A small number of PLA R&D institutes were also established to complement the activities of these civilian research institutes, but they were largely ineffective in providing any useful technological support.22 The slow pace of R&D progress led the leadership of the conventional weapons system in 1960 to restructure the R&D apparatus and bring its activities under central control. Most of these disparate research institutes were merged into three specialized research academies that were each responsible for aviation, shipbuilding, and electronics research. These units were eventually organized into the Sixth, Seventh, and Tenth Research Academies and placed under the control of COSTND. By the mid1960s, the R&D apparatus had expanded to thirty-eight research institutes with more than eighty thousand professional staff members. In addition, there were twenty-two PLA research organizations that provided R&D support.23 During the 1950s, these institutes were engaged in copying technology and equipment acquired from the Soviet Union. Following the Sino-Soviet split in 1960, their focus expanded from simply duplicating technology to more complicated creative imitation activities, including reverse engineering and improving upon existing Soviet designs. There were also concerted efforts to develop indigenously designed weapons, although this was limited to artillery guns, infantry weapons, and other less sophisticated equipment.24 By the mid- to late 1960s, the aviation, shipbuilding, ordnance, and electronics sectors of the conventional weapons system were able to claim that they had advanced from the mastering of duplicative imitation processes and were now able to improve upon existing Soviet technologies and, in a few cases, embark upon the development of indigenously designed products. But the progress and momentum gained in the first half of the 1960s 22. Ibid., 337. 23. Ibid., 37–38. 24. Wang Li, Long Tianyi and Yu Guichen, chief eds., Dangdai Bingqi Gongye [The Contemporary Chinese Ordnance Industry] (Beijing: Dangdai Zhongguo Chubanshe, 1993), 63– 65.

[31]

Fortifying China

were lost when many of these R&D establishments were adversely affected by the Cultural Revolution, leading to widespread disruption of key weapons development projects over the next decade. The responsibilities of the research institutes were confined to R&D, and they had little interaction with the manufacturing sector. After the completion of their R&D tasks, the institutes would simply hand over the results to the enterprises responsible for production and move on to their next projects. There was little competition among the institutes because of their different specializations. Moreover, there was plenty of governmentfunded work available, and many institutes struggled to cope with the heavy demand and strong flow of project work that came from the government and military authorities. This reached excessive levels during the Cultural Revolution when radical leaders made outlandish demands that were well beyond the capabilities of the research institutes to carry out but that they were still obligated to undertake. In 1969, for example, the central leadership called for the development of twenty different types of aircraft.25 By the end of the Maoist era, the conventional weapons R&D apparatus had made only limited progress in driving forward technological innovation. The improvements achieved during the early to mid-1960s were negated by the impact of the Cultural Revolution, and many of the efforts of the R&D apparatus in serving political goals had resulted in little accumulation of knowledge and capabilities. In qualitative terms, the performance of the R&D system in the design and development of new weapons and equipment was disappointing, especially the lack of breakthroughs in crucial areas such as aviation and shipbuilding. Universities were peripheral in the provision of research and training for the conventional weapons system during the Maoist era. By contrast, their counterparts in the United States and other developed economies, as well as in the Chinese strategic weapons system, played a central role in defense-related R&D. One reason was the plight of the civilian academic S&T research system, which had been ravaged by the country’s internal upheavals during the first half of the twentieth century.26 Another, more important factor was that the conventional weapons system relied upon its own dedicated network of universities and engineering institutes that operated independently from the rest of the national educational apparatus. Eleven universities and institutes specializing in defense science and technology were set up during the 1950s and 1960s. Many of 25. Xie, Dangdai Guofang Keji Shiye, 86. 26. See Wu Heng and Yang Kai, chief eds., Dangdai Kexue Jishu Shiye [The Contemporary Chinese Science and Technology Industry] (Beijing: Dangdai Zhongguo Chubanshe, 1992), 4– 9.

[32]

Innovation and Stagnation during the Maoist Era

the newly trained defense scientists and engineers did not work for the conventional weapons system but were instead allocated to the strategic weapons system. More than six thousand graduates of these institutes and other civilian schools were transferred into the strategic weapons programs at the beginning of the 1960s.27 As these colleges and institutes began to establish themselves, they, along with the civilian university system, were severely hit by the Cultural Revolution and “fell into extreme chaos.”28 From the mid-1960s to the beginning of the reform era, they were effectively closed down. Research and training ground to a halt as teachers and researchers found themselves under political and physical attack in the extreme anti-intellectual atmosphere of the Cultural Revolution. As these universities and engineering institutes struggled to survive, there was little room for the pursuit of innovation. As the R&D apparatus made substantial progress in technological innovation and upgrading of weapons systems and equipment in the early to mid-1960s, the conventional weapons production base had to make corresponding technological and engineering enhancements to its manufacturing capabilities and processes to be able to undertake serial production of these new systems. Its record of accomplishment was mixed: there were lengthy delays in bringing key weapons projects into production, such as the F-8 fighter and the Ming class submarine, which took seven years to be put into service.29 Many of these weapons were obsolete by the time they reached the front line. The problems in the performance of the production base during the 1960s were caused by the Cultural Revolution and the diversion of resources to building a new defense industrial base in the country’s interior. The role of end users was marginalized in this centrally planned administrative system. As the monopoly customer of the conventional weapons system, the PLA wanted weapons that could be produced on time, met its specifications, and were cost-effective. But the system had little incentive to meet the military’s requirements because it faced little competition and enjoyed state-guaranteed orders and profits. Although the PLA and its service arms participated in the drafting of long-term strategic blueprints— such as the five-year defense S&T development plan, which defined the priorities, tasks, and programs of the defense economy—the military establishment had to compete with the defense economy and the political leadership in setting out its specific demands for actual programs. Despite its considerable clout, the PLA frequently lost out to these other parties in getting its demands incorporated in the approved versions of the 27. Xie, Dangdai Guofang Keji Shiye, 39–40 and 51. 28. Ibid., 129. 29. Ibid., 118.

[33]

Fortifying China

plans. The third and fourth defense S&T development plans, which covered the most turbulent periods of the Cultural Revolution from 1966 to 1975, were hijacked by radical leaders who had assumed control over key party, government, and military posts. They instead submitted and approved their own politically inspired targets, which called for tasks to be carried out that were well beyond the capabilities of the defense economy, including the development of fourteen versions of spacecraft, twenty aircraft models, and the launch of nine satellites annually.30 Governmental secondary actors tightly managed the interactions among primary actors and controlled the allocation and transfer of resources among functionally specialized organizations. Primary actors such as research institutes and production enterprises had little independent means to forge links with their counterparts within their own functional systems or even with organizations in other systems because of the lack of industry associations and the rigid separation of industrial sectors. Conventional weapons designers, for example, were not permitted to liaise with production enterprise managers, and they were denied regular access to their customers within the PLA high command.31 Military services had difficulty stationing their representatives in defense factories to ensure the quality of products being manufactured. A fledging military representatives system was established in the beginning of the 1950s, but this mechanism was suspended with the Cultural Revolution and was not reinstated until 1977.32 Overall, the structure and activities of the conventional weapons system had major implications for the performance of its innovation system. The system lacked any incentives for primary actors to innovate proactively.33 Their role was to wait passively for the government and military authorities to allocate resources and issue orders that would instruct them as to their tasks. The absence of a market economy that would encourage competition and the search for profits meant that there were no institutional mechanisms to push R&D institutes and enterprises to become more efficient and make improvements in their performances, such as through investing in technological upgrading. In a high-level official review of the planning process that was responsible for the drawing up of R&D projects 30. Ibid., 85– 86. 31. Wendy Frieman, “People’s Republic of China: Between Autarky and Interdependence,” in Scientists and the State: Domestic Structures and the International Context, ed. Etel Solingen, 127–44 (Ann Arbor: University of Michigan Press, 1994). 32. Junshi Zhuangbeixue Daolun [Introduction to the Study of Military Armaments], ed. Wen Xisen, Kuang Xinghua, Chen Yingwu, 297 (Changsha: Guofang Keji Daxue Chubanshe, 2002]; and Xie, Dangdai Guofang Keji Shiye, 127. 33. Xielin Liu and Steven White, “Comparing Innovation Systems: A Framework and Application to China’s Transitional Context,” Research Policy 30 (2001): 1098.

[34]

Innovation and Stagnation during the Maoist Era

for the conventional weapons sector at the end of the 1970s, one of the findings was that too much spending was being devoted to engineering development and too little was being allocated to R&D activities.34 The only mechanism for the promotion of innovation came from governmental secondary actors such as the political leadership, COSTND, and the line ministries. With the lack of organizational incentives to innovate, much of the technological development that took place within the conventional weapons system was duplicative imitation, in which products were closely copied with little or no technological improvement. The shoots of creative imitation, or the generation of imitative products with new performance features, began to spring up during the short period of political stability in the early 1960s, but they were limited to a handful of prestige projects and largely withered away with the onset of the Cultural Revolution. Primary actors had no incentives to forge linkages with counterparts within or outside the conventional weapons system. Research institutes, production enterprises, distributors, and end users made little effort and were not encouraged by government agencies to develop ties with one another that might have facilitated the sharing of information and knowledge. Government actors were reluctant to allow these linkages because “this would erode part of the power that the central government bodies had over them.”35 When government agencies did want the research institutes, manufacturing enterprises and end users to get together and provide technical or policy input, they usually organized the meetings and carefully managed their proceedings. A typical example of this highly bureaucratic and timeconsuming process was the drafting of the Third Five-Year Defense S&T Plan in the mid-1960s, in which COSTND and the NDIO listened to opinions from research institutes, production units, and end-user departments and then “made repeated amendments and revisions” before formulating a formal report to the CMC for approval. As a result, this plan was not approved until more than a year after its original start date.36 The frequent bouts of political instability during this period not only had a profound effect on operational activities but severely damaged the underlying processes that fundamentally distorted the long-term structural evolution of the conventional weapons system. One of the most serious examples was the stunted development of effective routines, established practices, rules, and other norms that are crucial in regulating the relations and interactions among organizations and individuals within the system. These institutions provide the necessary rules of the game to guide activities, but 34. Xie, Dangdai Guofang Keji Shiye, 133. 35. Liu and White, “Comparing Innovation Systems,” 1098. 36. Xie, Dangdai Guofang Keji Shiye, 84– 85.

[35]

Fortifying China

in their absence the procedures that were in place were often ad hoc, politicized, and in a constant state of flux. This was a central factor contributing to the limitations in R&D and production between the mid-1960s and late 1970s.

Barriers to Conventional Weapons Innovation From the outset, the structure and organization of the conventional weapons system created barriers to innovation. The first barrier stemmed from a separation of activities among the primary actors. The organizational boundaries of activities undertaken by primary actors within the conventional weapons system were strictly compartmentalized, and there was little overlap or integration of these functions. Research and development was undertaken by research institutes, production was the sole responsibility of factories, and linkage and coordination activities were confined to governmental secondary actors.37 This rigid separation of activities between the R&D and manufacturing sectors created serious gaps in management oversight and knowledge flows. The separation was especially problematic in the development of complex weapons and technological systems and contributed to lengthy delays in a number of major projects. One example was the design and development of the Shenyang F-8 fighter aircraft, which was one of the most technologically ambitious projects of the Chinese military aircraft sector in the 1960s. Initial design of this plane took place between 1964 and 1968; the blueprints were then handed over to the Shenyang Aircraft Factory, which took another seventeen years to successfully develop the aircraft and begin serial production, by which time the technology was obsolete.38 A second barrier stemmed from fragmentation in the decision-making process. The conventional weapons system was organized as a vertically functional system in which industrial ministries played a dominant and pervasive role in overseeing virtually all the activities of primary actors. This included weapons development, production, and coordination. The organization of the system along vertical functional lines was typical of the structure of the rest of the Chinese industrial system during the Maoist era. As Kenneth Lieberthal and Michel Oksenberg have pointed out, each central ministry or State Council commission oversaw a vertical functional

37. Ibid., 35–38. 38. Zeng Huafeng, ed., Zhujian Weili [Casting Swords into Ploughshares] (Beijing: Beijing Youdian Daxue Chubanshe, 2000), 136 –39.

[36]

Innovation and Stagnation during the Maoist Era

system, or Xitong, which was composed of a hierarchy of ministries, bureaus, and lower-level units.39 The governmental secondary actors at the top of the system underwent frequent reorganizations and title changes, but the general hierarchical structure of power between the 1950s and late 1970s remained largely consistent. While the formal structure of the national government apparatus appeared to be unified, disciplined, and clearly defined, in reality it was “divided, segmented and stratified,” a situation that Lieberthal and Oksenberg termed ”fragmented authoritarianism.”40 Decision making on policies related to the conventional weapons system involved the participation of multiple secondary actors from within the system and across different vertical systems. The lines of decision-making authority in the vertical functional system (tiao tiao) competed with horizontal lines (kuai kuai) that cut across other functional systems, such as the PLA or local governments at the provincial or municipal level. The importance of these competing matrix lines of authority varied according to the types of issues and the actors involved, but reaching a consensus required extensive negotiations, bargaining, and exchanges that took place exclusively among governmental secondary actors. Primary actors rarely had an input into these deliberations.41 A third constraint was that under the tightly regulated central planning system, the top priority for primary actors such as enterprises was to fulfill state-mandated production quotas in which the dominant measure of performance was scale of output. As there was no market competition and all inputs were provided by the state, there was little incentive to focus on efficiency or quality. This emphasis on quantity reached its most extreme during the Great Leap Forward movement in the late 1950s, when enterprises were ordered to rapidly expand production at the expense of quality control. The consequences for the conventional weapons system were severe. The aircraft industry, for example, was unable to produce any aircraft for three years after the start of the Great Leap Forward because of the substandard quality of component parts.42 Fourth, knowledge flows were hampered by a lack of codification of practices and processes related to information sharing. The accumulation and flow of technical knowledge within the conventional weapons system were impeded by excessive secrecy, political interference, and poor standardization. During the 1950s, China’s defense R&D and production were heavily

39. Kenneth Lieberthal and Michel Oksenberg, Policy Making in China: Leaders, Structures, and Processes (Princeton: Princeton University Press, 1988), 135– 68. 40. Ibid., 137. 41. Ibid., 141 and 23–24. 42. Xie, Dangdai Guofang Keji Shiye, 61.

[37]

Fortifying China

dependent on Soviet assistance for the development and manufacturing of weapons systems. But after the rupture in Sino-Soviet relations in 1960 and the pullout of Soviet military advisers, the conventional weapons system lost access to critical sources of knowledge, such as blueprints and technical manuals that were essential for their R&D and production activities.43 In response, defense scientists and engineers sought to fill the gaps in their knowledge through hands-on experience in copying, testing, and experimentation. Much of the knowledge was tacit, embedded in the work experience of individuals and organizational routines. This was summed up in a directive issued after the Soviet pullout by Zhou Enlai to the defense industrial bureaucracy to “cross the river by feeling for one stone at a time.”44 The rigid barriers to interaction among primary actors within the conventional weapons system also hampered knowledge flows, preventing information from being shared. The existence of information clearinghouse organizations in the strategic weapons system was inconceivable in the compartmentalized and insular conventional weapons apparatus.45 A fifth barrier was the absence within the conventional defense industry of effective institutions. This included the absence of mechanisms to define and protect intellectual property rights, such as patent laws, and inadequate regulations and procedures to check that the design, development, and production of technological products met basic standards. Even when effective rules and regulations were developed to oversee R&D and production activities, they were cast aside during the chaos of the Cultural Revolution. One glaring omission was the lack of an effective certification regime throughout most of the Maoist period to ensure quality control over weapons and equipment before they entered into production and service. Although a preliminary equipment certification system was established in the early 1960s, it was in operation for only a short period before it was abolished with the onset of the Cultural Revolution. Without independent procedures to ensure that prototype weapons and equipment worked properly and met specifications, many weapons projects that went into serial production were found to have serious defects. An effective certification regime was not set up again until the mid-1970s, when a leading group for military industrial product certification activities was created along with subcommittees to develop and oversee certification procedures for all the PLA’s key branches and services.46

43. Ibid., 44–45. 44. Ibid., 45–46; and Lewis and Xue, China Builds the Bomb, 121–25. 45. The nuclear program, for example, had a special bureau “devoted to the collection, indexing, translation, and abstraction of foreign technical materials,” according to Feigenbaum, China’s Techno-Warriors, 57. 46. Xie, Dangdai Guofang Keji Shiye, 127 and 94– 95.

[38]

Innovation and Stagnation during the Maoist Era

A sixth barrier was the dispersed nature of the conventional weapons system, which was spread throughout much of the country. For example, aircraft production was concentrated in Shenyang in northeast China and Chengdu in southwest China, while ordnance production was focused in Taiyuan in central China.47 However, some geographical concentration of activities did take place beginning in the mid-1960s, when the national authorities decided to relocate key parts of the defense industry away from parts of the country seen as vulnerable to external attack—such as coastal areas and major cities—into the deep interior. Under this “Third Line” policy, provinces such as Sichuan, Guizhou, Gansu, and Jiangxi were the hosts of hundreds of relocated and newly built defense-related enterprises.48 Clusters of enterprises belonging to the ordnance industry were established in Chongqing; more aviation clusters were formed in Guizhou, Xian, and Nanchang; and military electronics firms concentrated in Mianyang in Sichuan Province. The formation of these selective geographic clusters of defense-related R&D and production facilities was one of the few positive steps in the promotion of innovation activities within the conventional weapons system during the Maoist era. Overall, though, the dispersal of large chunks of the defense industrial base to remote regions of the country was a serious obstacle to effective communications and sharing of knowledge. Finally, because the conventional weapons system was a key symbol of power and prestige for the country’s leadership, it often became entangled and engulfed in the periodic political struggles and sharp and abrupt changes in economic policies that rocked the country during this period. The system was adversely affected in the late 1950s by the Great Leap Forward and the Cultural Revolution, which wreaked havoc on the country’s economic and political development. During the Cultural Revolution, competing political factions fought to take over control of the conventional weapons system as part of a broader contest for political power. The result of this instability was that large numbers of key weapons projects were delayed, resources diverted, and the training of technical personnel disrupted. For example, radical cadres with plenty of revolutionary zeal but little technical know-how were put in charge of the aviation industry, approving the development of twenty aircraft R&D projects in 1971 alone, some of which did not even undergo detailed concept study.49 As long as the conventional weapons system was a hostage of these political upheavals, its capability to develop, nurture, and diffuse innovation suffered enormously. 47. Ibid., 16. See also Wen and Kuang, Guofang Kexue Jishu, 61. 48. Barry Naughton, “The Third Front: Defence Industrialisation in the Chinese Interior,” China Quarterly, no. 115 (September 1988), 351– 86. 49. Xie, Dangdai Guofang Keji Shiye, 86.

[39]

Fortifying China

The rigid compartmentalization within the different components of the conventional weapons system, the weakness of institutions, the absence of incentives to encourage competition and entrepreneurialism, and the stifling and pervasive control of the state were formidable barriers to innovation. The technological progress that was achieved came primarily from the importation of Soviet technological know-how and products and the massive allocation of resources by the state. By the end of the Maoist period, the conventional weapons system was in a dilapidated state, and far-reaching systemic reforms were urgently needed if further technological progress and innovation were to be achieved.

The Flourishing of the Strategic Weapons System In stark contrast to the situation for conventional weapons, technological innovation flourished in the Chinese strategic weapons system during the Maoist era, and impressive breakthroughs in the development of nuclear, missile, and other strategic high-technology capabilities were achieved. An important question is why the strategic weapons system succeeded when its conventional counterpart did not. The key reason is that the strategic weapons community took fundamentally different approaches in establishing the structures and processes of its innovation system. Between the mid-1950s and mid-1970s, the key activities of the strategic weapons system were in R&D, competence building, and linkages. This was because the technological output of most of these programs did not enter into production or operation until toward the end of the Maoist period or the beginning of the reform era. Thus the involvement and interaction with production enterprises or end users were peripheral. Research and development was the foremost priority of the strategic weapons system, which built one of the largest and most advanced S&T research and development capabilities in the country. According to an estimate by Lewis and Xue, the cost of developing the atomic bomb from the drawing board to detonation was around 10.7 billion renminibi (Rmb), or U.S. $4.1 billion, in 1957 prices, which was the equivalent of the total defense budgets for 1957 and 1958.50 Given sweeping authority by the Politburo to acquire whatever resources they thought necessary to achieve their goals, strategic weapons leaders were able “to ‘steal’ personnel, gather resources, and raid other bureaucratic systems” to meet their needs.51 Indeed,

50. Lewis and Xue, China Builds the Bomb, 107– 8. 51. Feigenbaum, China’s Techno-Warriors, 52.

[40]

Innovation and Stagnation during the Maoist Era

at its peak in the late 1960s, the strategic weapons system controlled more than one hundred research institutes with a workforce of more than 130,000 technicians and workers. Though its size and influence were later reduced following the downfall of Nie Rongzhen, the system continued to receive special political treatment.52 The rapid and impressive progress in R&D that the strategic weapons community made between the late 1950s and 1964, when it detonated its first atomic device, was due to a number of key factors that allowed innovation to flourish. The organizational system that Nie built was highly flexible and adaptable and permitted a rich diversity of actors and activities. This stood in stark contrast to the excessively centralized and bureaucratic systems that were the norm in the conventional weapons system. Allowing “organizational variety and bottom-up initiative” was “the secret of its success,” according to Lewis and Xue.53 Tied in with this organizational flexibility was the rise of an institutional and management culture that encouraged mutual cooperation and scientific, engineering, and bureaucratic experimentation. As R&D in the nuclear and missile programs progressively advanced, many of the problems that arose became industrial and engineering issues rather than purely scientific or technological matters. As Lewis and Xue point out, this meant that the strategic weapons system had to undertake “political and bureaucratic system experiment in novel modes of nationwide cooperation with the science and technology system. When the managerial institutions worked best, innovative concepts and engineering designs either functioned well the first time or were revised through trial and error.”54 The close working relationship between the country’s national decision makers and technical specialists in the management of the strategic weapons system, especially the nuclear bomb program, allowed for “demandpull and discovery-push in weapons innovation” to go hand in hand. Although political leaders set challenging demands and deadlines, they were usually realistic and were informed by the constant dialogue that decision makers had with the scientists in charge of the strategic weapons programs.55 Unlike its conventional weapons counterparts, the strategic weapons community was involved in the pursuit of only a small number of programs. It initially focused on the atomic bomb and strategic missile projects, although the focus was later expanded to include the development of nuclear submarines and hydrogen bombs. This approach allowed the system 52. 53. 54. 55.

Lewis and Xue, China’s Strategic Seapower, 83– 84. Lewis and Xue, China Builds the Bomb, 223. Ibid., 225. Ibid.

[41]

Fortifying China

to concentrate on tackling these issues without other distractions that might have led to the same kinds of delays and diversion of resources that befell the conventional weapons system. The extensive access the strategic weapons community had to foreign know-how and knowledge helped to provide guidance, benchmarks, and, in some cases, shortcuts in its R&D activities. This foreign influence was of three types. Between 1956 and 1959, the Soviet Union provided initial assistance and training for the nascent Chinese nuclear program. In parallel, a number of prominent Chinese scientists and engineers were trained overseas: • Qian Xuesen, who ran the Chinese missile and space programs in

the 1950s and 1960s, studied and taught in the United States during the 1930s and 1940s before he was arrested and deported to China in 1955. • Qian Sanqiang, a nuclear physicist, oversaw the atomic bomb project and was trained in France. • Luo Peilin, a leading electronics specialist, studied at Caltech in the United States. Finally, the strategic weapons community closely followed the latest technological developments through foreign technical journals and publications that were widely circulated within the system.56 In the arena of competence-building activities, the strategic weapons community was able to forge deep and extensive ties across the entire civilian university and scientific research establishments. These close ties with the academic scientific research community provided important support for the strategic weapons system’s R&D efforts, especially in basic research. Critical here was the role played by the strategic weapons community in the development of many of the country’s most important scientific education and training establishments and the cultivation of new generations of highly skilled and qualified scientists and engineers. As Feigenbaum points out, “until the post-Mao reform era, the only consistently stable environment for scientific research and engineering in China existed in the highpriority facilities attached to the strategic weapons programs.”57 This legacy of training and education by the strategic weapons system was crucial to the country in the reform era because it provided a sizable contingent of technical personnel that assumed leading roles in overseeing the country’s quest for technological modernization.

56. Feigenbaum, China’s Techno-Warriors, 57. 57. Ibid., 67.

[42]

Innovation and Stagnation during the Maoist Era

As for linkage activities, primary actors, most notably R&D institutions, within the strategic weapons system were given wide-ranging freedom to forge ties with their counterparts elsewhere in the system. Indeed, this was actively encouraged and supported by COSTND and its subordinate administrative organs, which regarded these exchanges as beneficial to promoting innovation rather than as a threat to their bureaucratic authority. The main role of government secondary actors in facilitating linkages was to liaise with and lobby higher-level government organizations and bureaucratic systems to locate and gain access to resources for their projects. Nie and other senior COSTND officials frequently went to the Politburo and other government ministries to request funds, personnel, and other resources. While this approach by COSTND would hardly be out of place in China in the reform era, it was unique in the zealous bureaucratic environment of the Maoist period.58 From an overall performance perspective, the structure and activities of the strategic weapons system fostered an institutional environment and operational culture that strongly encouraged the pursuit and diffusion of innovation, which was supported by ample access to an extensive range of resources, foreign knowledge, and the concentration of a large pool of the country’s most skilled and knowledgeable technical personnel. At the same time, this community enjoyed solid and consistent political backing from the highest levels of the leadership, and this helped to shield it from many, although not all, of the excesses of the Cultural Revolution and other political turmoil. Although the strategic weapons system, like its conventional counterpart, lacked market-based incentives to drive its research institutes to become more efficient and to innovate, it was able to establish effective alternative ideological, bureaucratic, and professional mechanisms to fill this gap. The strategic weapons programs became powerful symbols of the country’s nationalistic aspirations to become self-sufficient in order to defend itself against external aggression. This helped to instill a strong sense of patriotic duty in the workforce. The Communist Party turned this “spirit” into a state creed that it called Liangdan Yixing (Two Bombs, One Satellite), which emphasized selfless devotion to duty and innovative thinking.59 In addition, technical personnel in these programs developed a close-knit professional camaraderie, which encouraged them to experiment and take risks in order to make progress.60 Moreover, the close

58. Ibid., 48 –57. 59. Dong Sheng, Tiandi Song: Liangdan Yixing Neimu [The Eulogy of Heaven and Earth: The Inside Story of “Two Bombs, One Satellite”] (Beijing: Xinhua Chubanshe, 2000). 60. Feigenbaum, China’s Techno-Warriors, 59, says that “a culture of experiment” contributed to the progress that was made in the various strategic weapons programs.

[43]

Fortifying China

interaction between scientists and top-level decision makers created an interlocking demand-pull, discovery-push process that ensured constant but not overbearing political pressure for progress.61 In such a collegiate and motivated climate, innovation flourished and crucial technological and engineering breakthroughs were made in a wide range of areas at a rapid and sustained pace. From a standing start in 1955, the strategic weapons community was able to test its first atomic bomb in 1964, drop its first thermonuclear bomb in 1967, launch its first satellite into space in 1970, and begin sea trials of its first nuclear-powered attack submarine in 1971. When compared with the nuclear bomb programs of the Soviet Union, the United States, Britain, and France, which all had access to more advanced national scientific and technological resources, the innovative performance of the Chinese strategic weapons community is all the more remarkable.62

Facilitators of Strategic Weapons Innovation In contrast to the conventional weapons system, the strategic weapons system had a number of attributes that enhanced innovation. The system during the Maoist period was predominately oriented toward R&D, which meant that manufacturing, distribution, and other downstream activities were limited in scope. Consequently, the strategic weapons community avoided the difficulties encountered in the conventional weapons system stemming from the separation of R&D and production activities. Where manufacturing was undertaken to build prototypes for testing and experimentation, the problems afflicting the conventional weapons system were avoided because it was undertaken by plants that were specially built for this mission and were directly under the control of the R&D community. In the case of the nuclear weapons program, the Jiuquan Atomic Energy Complex at Subei in Gansu Province was responsible for handling all processing and production activities. A nuclear component manufacturing plant was established within the Jiuquan complex to handle all the stages involved in the building of a nuclear device.63 Indeed, it was only when the strategic weapons community had to go to its conventional counterpart for assistance to produce its most complex weapons that it encountered problems with the division of labor between the R&D and production sectors. The construction of the country’s first

61. Lewis and Xue, China Builds the Bomb, 225. 62. After the detonation of its first atomic bomb, it took China three years before it exploded its first thermonuclear device. The intervals for the United States, United Kingdom, France, and the Soviet Union were three, five, eight, and one year, respectively. 63. Lewis and Xue, China Builds the Bomb, 111–14 and 160 – 69.

[44]

Innovation and Stagnation during the Maoist Era

nuclear-powered missile submarine suffered this situation. In 1970, approval was given for its construction, but because of problems caused by the Cultural Revolution and other technical difficulties, it was not launched until 1981 and did not enter service for another two years.64 The strategic weapons system successfully overcame the compartmentalization that was deeply rooted in the division of the Chinese economic and industrial apparatus into separate vertical functional systems. Scientists and engineers in the strategic weapons systems were able to successfully argue that their work required extensive cooperation across numerous industrial sectors, and they put in place horizontal collaboration mechanisms that cut across vertical systems and promoted interactions.65 Several different layers of linkages and coordination were developed that led to an impressive expansion of the strategic weapons system across the Chinese bureaucratic landscape. Research service centers, for example, were organized to permit information and product exchanges among R&D institutes in different bureaucratic systems. More important, the priority assigned to strategic programs meant that the Politburo approved the setup of small but powerful project offices, which were granted wide-ranging coordinating authority to handle budgets, personnel assignments, and other resource issues. Scientists, engineers, and technical personnel assumed important roles in the decision making and management of the strategic weapons system. This was in contrast to the conventional weapons system, where government bureaucrats and political decision makers were responsible for setting priorities, allocating resources, and managing programs, while scientists, engineers, and factory managers were largely confined to carrying out administrative orders and had little decision-making input. This integration of scientists and engineers into the management of highly complex and technical projects was crucial in ensuring that decision making was technically informed and not simply driven by political and administrative considerations. Senior technical personnel were regularly consulted and invited to take part in top-level policy meetings of the CSC and other influential party, state, and military bodies. Technical personnel were also put in charge of running the R&D facilities involved in the development of the nuclear, missile, and other strategic programs.66 With technical priorities in the ascendancy in the strategic weapons system, the measurement of performance criteria was very different from the output-scale approach that was the norm in the conventional weapons 64. Xie, Dangdai Guofang Keji Shiye, 147–48; and Lewis and Xue, China’s Strategic Seapower, 115–20. 65. Feigenbaum, China’s Techno-Warriors, 48 –49. 66. Ibid., 40 –48.

[45]

Fortifying China

system and the rest of the Chinese economy. In other words, the focus for the nuclear and strategic missile community was quality over quantity. The key indicators of performance progress within the strategic weapons system were benchmarked against international standards.67 The ability of the strategic weapons community to compare its technological progress with the outside world was possible only because it enjoyed extensive access to information from abroad, especially to foreign technical materials, which was denied to its conventional counterpart. The Second Ministry of Machine Building, which was at the heart of the strategic weapons system, established a special bureau to collect, translate, and disseminate foreign technical journals and other information across the entire strategic weapons community. In the assessment of Feigenbaum, this clearinghouse system “proved crucial to China’s initial success with nuclear weapons technology.”68 One of the most remarkable consequences of this open access to knowledge flows was that it led to the rise of a competitive development process within one corner of the system. This occurred in the design of China’s nuclear submarine reactor. In the mid-1960s, COSTND and the Second Ministry permitted two research units to compete for the project using different foreign designs. The Second Ministry’s own reactor engineering and technology institute in conjunction with other ministry and navy research units focused on the possible use of nuclear reactors that powered Soviet icebreakers. The other approach—taken by a nuclear research institute affiliated with Qinghua University, a civilian organization under the Ministry of Education—was to install a pressurized water reactor developed by a West German firm. Competition between these two teams was intense, but the Qinghua University institute ultimately lost because, as Lewis and Xue concluded, “it had no formal standing in the military industrial system.”69 While this competitive activity was the exception rather than the norm within the strategic weapons system, it did show how flexible, innovative, and unique the system was, especially at the height of the country’s political turmoil. The dissemination of codified information in publications, seminars, and other forums within the strategic weapons system promoted the accumulation and sharing of knowledge that would otherwise have remained tacit and compartmentalized in other parts of the Chinese system. Technical personnel benefited from the work of colleagues elsewhere in the system, and this culture of openness and collaboration played an invaluable role in laying the foundations for the eventual technological breakthroughs.70 67. 68. 69. 70.

Ibid., 57. Ibid., 58. Lewis and Xue, China’s Strategic Seapower, 31. Feigenbaum, China’s Techno-Warriors, 57–58.

[46]

Innovation and Stagnation during the Maoist Era

Another important development was the fostering of working cooperative institutions. In the strategic weapons system, the rules, established practices, and other norms that governed the interactions between individuals and organizations quickly became embedded in the fabric of the community. These institutions played a crucial role in fostering innovation by ensuring that the rules of the game within the system were adhered to and that practices and standards were not compromised. Nie Rongzhen was a keen advocate of rules and regulations to ensure the maintenance of effective work practices and a stable and cooperative professional environment. Nie was especially concerned that the political and policy upheavals that were taking place in the rest of the country might adversely affect the operations of the system. He worried that the Great Leap Forward had produced a climate in which there was “a lack of respect for the objective laws governing research.”71 After carefully investigating the impact of the Great Leap Forward on the activities of various research academies belonging to the strategic weapons system, Nie and his staff drew up detailed guidelines that clearly spelled out the importance of scientific and intellectual research and how it should be conducted, and they emphasized that such research should not be undermined by political requirements. These opinions, known as the “Fourteen Points of Scientific Research,” were approved by the party leadership in 1961 and widely promulgated.72 Some of these working procedures and regulations were eventually turned into formal or ad hoc organizations to improve their effectiveness and ensure their permanence. The regime for the certification of special weapons, for example, was organized into a bureaucratic structure in 1963 when a Special Weapons Certification Commission was established by the State Council.73 This was a positive step forward as it established a formal process for checking the quality and operational suitability of completed weapons projects. A further facilitator of innovation stemmed from the geographical clustering of key installations. The strategic weapons system was a loosely controlled and widely dispersed complex of nine hundred factories, research institutes, and schools spread across twenty provinces, municipalities, and autonomous regions, including some of the most remote corners of the country. But within this decentralized network, there were areas of expertise and industrial concentration that helped to provide the geographical proximity necessary to encourage innovation and knowledge exchanges.

71. Nie Rongzhen, Inside the Red Star: The Memoirs of Marshal Nie Rongzhen (Beijing: New World Press, 1988), 713. 72. Ibid., 713–26. 73. Xie, Dangdai Guofang Keji Shiye, 50.

[47]

Fortifying China

Among the various strategic weapons projects, the nuclear weapons program was the most geographically concentrated. Research and development, building, and testing of nuclear weapons were concentrated in several key locations deep in China’s interior. The design and development of the atomic bomb were conducted by the Northwest Nuclear Weapons Research and Design Academy, which was initially based in Beijing in the late 1950s and then transferred to Haiyan County in remote Qinghai Province in Western China.74 Importantly for the diffusion of know-how, the construction of the materials and components of the bomb, as well as final assembly, was located in the Jiuquan complex. Finally, the strategic weapons community was able to escape many of the political and policy excesses that affected the rest of the country during the Maoist period because of high-level political patronage. This political protection ensured stability within the system that allowed scientists and engineers to concentrate on their work, especially during the mid- to late 1960s, when the Cultural Revolution was at its most violent. At the same time, some of the strategic programs were in their most critical phases of development. Despite the best efforts of its high-level supporters and its own leadership, the strategic weapons community was not completely insulated from the political extremism taking place outside its system, and there were occasional disturbances that caused disruptions to operations. The nuclear submarine program was targeted by Red Guard radicals in the late 1960s, and some of its leading technical personnel, such as Qian Lingxi and Huang Xuhua, were attacked for their “reactionary” backgrounds and dismissed from their posts. Huang, who was the chief designer of the nuclear submarine, ended up working on a pig farm.75 However, when compared with the trauma suffered by the conventional weapons system and other bureaucracies, the damage inflicted on the strategic weapons complex was relatively light.

The Consolidation of the Defense Economy in the Late 1970s The winds of change brought by the ending of the Maoist era and the rise to power of a reform-minded leadership under Deng Xiaoping in 1978 had profound implications for the defense economy and especially the continued division of the conventional and strategic weapons systems. The new leadership assessed that the pressing external security threats that China

74. Lewis and Xue, China Builds the Bomb, 140 –55. 75. Feigenbaum, China’s Techno-Warriors, 45; and Xie, Dangdai Guofang Keji Shiye, 90 – 91.

[48]

Innovation and Stagnation during the Maoist Era

had faced in the 1960s and the first half of the 1970s, especially a possible nuclear conflict with the Soviet Union or the United States, had subsided sufficiently that the country could stand down from its heightened level of war preparedness and scale back the extensive militarization of the economy.76 As the leadership began to shift priorities from military to civilian economic development, it concluded, by the end of the 1970s, that the country could not continue to afford the costs of pursuing parallel buildups in conventional and strategic weapons capabilities. The strategic weapons system had achieved many of its development goals, and the leadership realized that maintaining a large and independent strategic R&D base could no longer be financially or bureaucratically justified. In December 1977, at a session of the CMC, it was decided that the priority in military modernization would be adjusted and the focus in the future would be on the development of conventional weapons that were more useful in an environment in which the risk of nuclear war with the two major superpowers had receded significantly.77 While many of the strategic weapons development programs already under way would continue to be supported, few new projects would be approved. The main outcome was that the once-successful, innovative, and well-funded strategic weapons system would now come under the umbrella of its less successful and poorer conventional counterpart. This realignment of priorities had important organizational implications. A new Commission for Defense Science and Technology Equipment (CDSTE) was established in November 1977 to oversee this change in weapons procurement and development activities. Although CDSTE was initially placed within COSTND, it was subsequently moved into the PLA General Staff Department.78 This uneasy arrangement of competing bureaucratic entities with overlapping lines of authority at the top of the defense economy was tolerated for several years before they were all merged in 1982 into COSTIND, which would report jointly to the CMC and the State Council. COSTIND would be responsible for the management of all aspects of the country’s conventional and strategic weapons programs and facilities.79 Although the conventional weapons bureaucracy had apparently triumphed, the defeat of the strategic weapons community was tempered by the selection of a number of its key supporters, primarily technocrats rather 76. See Ellis Joffe, The Chinese Army after Mao (London: Weidenfeld and Nicolson, 1987), 35–46. 77. This was known as “The Decision on Accelerating Army Weapons Modernization.” See Xie, Dangdai Guofang Keji Shiye, 130. 78. Ibid., 133. 79. Benjamin C. Ostrov, Conquering Resources: The Growth and Decline of the PLA’s Science and Technology Commission for National Defense (Armonk, N.Y.: M.E. Sharpe, 1991); and Feigenbaum, China’s Techno-Warriors, 107–10.

[49]

Fortifying China

than scientists, to senior posts in the military leadership and COSTIND. The most important of these appointments was Zhang Aiping as CMC vice chairman and defense minister in 1982. Zhang was a longtime aide to Nie and played a leading role in the management of the strategic weapons system during the 1960s and 1970s. One of his responsibilities as CMC vice chairman was to oversee and coordinate defense science, technology, and industrial affairs, which put him in effective charge of the defense economy. Two other key moves were the appointment of Nie Rongzhen’s son-in-law Ding Henggao as COSTIND minister and Ding’s wife and Nie’s daughter, Nie Li, as the head of COSTIND’s electronics bureau. With their specialist skills no longer in demand, many of the leading scientists and engineers of the strategic weapons programs left the defense industry to work in the civilian S&T community, including the State Science and Technology Commission (SSTC) and CAS.80 While the strategic priorities of the defense economy were now clearly focused on conventional weapons modernization, the organizational and operational methodologies that would be applied to carry out this work would be heavily shaped by the successful experiences of the strategic weapons system. The role of scientific personnel would assume much greater importance in decision making than in the old conventional weapons system. There would be more attention and resources devoted to basic and advanced research, especially of emerging technologies, which had previously been neglected by the conventional weapons system in favor of applied R&D on existing weapons technologies.81 There would also be more organizational flexibility in the allocation and application of R&D resources. Outstanding technical personnel could be selected and placed into elite R&D teams to tackle priority projects. Since this could include civilian personnel from outside the defense economy, more effort would be placed on cultivating ties with the civilian university system. This pooling of the best talent available into problem-solving “strike” teams was based on the approach taken by Nie Rongzhen at the outset of R&D work on the nuclear and missile programs.82 Moreover, one of the guiding principles of the strategic weapons system had been that there should be “more research, less production.” This was also adopted as a key policy guideline for the postMaoist defense economy.83 Last, quality-control checks and independent 80. Feigenbaum, China’s Techno-Warriors, 118 –21. 81. Xie, Dangdai Guofang Keji Shiye, 162. 82. Nie, Inside the Red Star, 685– 86. 83. Yang Shangkun, “A Speech Delivered at the 60th Anniversary Celebrations of the PLA,” Renmin Ribao [People’s Daily], 1 August 1987, overseas ed. Yang, who was CMC executive vice chairman at the time, said, “Scientific research should go ahead, and greater importance should be attached to research and development [on weapons systems] as well as the technological reserve.” See also Xie, Dangdai Guofang Keji Shiye, 169.

[50]

Innovation and Stagnation during the Maoist Era

certification procedures, which had been lacking in the conventional weapons system, would be rigorously implemented in future. While these organizational and operational concepts would improve the performance of the defense economy, many of the features of the old conventional weapons system that had created barriers to innovation continued to persist. They included the dominance of the vertical functional system, the uncertain influence of end users, the lack of competition, and the compartmentalization of R&D and production activities. The overall result was a technological innovation system at the beginning of the reform era that had improved on the Maoist conventional weapons system but fell far short of the strategic weapons system in its flexibility, integration, and determined drive for success. The legacy of this imperfect and hybrid system, as subsequent chapters demonstrate, would be a serious Achilles heel in Chinese efforts to narrow the defense economy’s technological gap with other advanced military powers in the reform era.

[51]

[3] The Eclipse of the Defense Economy under Deng Xiaoping

The rise to power of Deng Xiaoping heralded a new dawn for China, the defense economy, and the defense technological innovation system. Domestic political turmoil and international isolation brought about by cold war hostilities throughout the 1960s and 1970s had plunged the country into economic, technological, and intellectual stagnation. Deng sought to reverse this through a strategy of demilitarization, liberalization, and opening up of China’s economy to market forces through closer integration with the international economy. In this new climate, the defense economy quickly lost its privileged status and priority access to national resources and underwent significant downsizing and reform. This set of developments fundamentally affected the organization and performance of the country’s innovation system. This chapter assesses the changes to the defense economy and defense technological innovation system during the early reform era from 1978 to 1997. The primary goal was to reconfigure the defense economy to serve the country’s economic development, which required a clean break from its Maoist past. This was attempted with mixed results by spinning off a large segment of the defense economy from military to civilian operations and retaining only a limited capacity for military utilization. At the peak of this conversion process in the 1990s, civilian output accounted for more than 80 percent of the value of the defense industry’s total annual production.1

1. Zhongguo Junzhuanmin Dashiji Bianxiezu [Chronicle of China’s Defense Conversion Editorial Writing Group], Zhongguo Junzhuanmin Dashiji, 1978–1998 [Chronicle of China’s Defense Conversion, 1978–1998] (Beijing: Guofang Gongye Chubanshe, 1999), 204–5.

[52]

The Defense Economy under Deng Xiaoping

While the converted portion of the defense economy had to fully embrace the country’s economic reforms to survive, the military segment of the defense industrial bureaucracy was a reluctant participant in the reform process and put up stiff resistance. It sought to delay or avoid altogether the implementation of important measures designed to promote competition, autonomy, entrepreneurship, decentralization, and opening up to the outside world that were crucial to the promotion and diffusion of innovation. The results of this opposition were clear by the late 1990s: an inefficient and isolated defense technological and industrial apparatus that was struggling to keep up and compete with an increasingly more dynamic national innovation system.

The Defense Economy and Its Relationship with the NIS in the 1980s Deng wasted no time after taking office to begin making policy changes that would fundamentally transform the external and domestic circumstances under which the defense economy had thrived during the Maoist era. He sought to end China’s international isolation and concentrate on economic development rather than preparing for war. The starting point for this grand transformation was the realignment of the country’s international economic and strategic posture from estrangement to engagement. One of Deng’s first initiatives was to implement a policy of economic openness to the outside world that would promote the development of external trade and attract foreign investment, technology, and know-how into China.2 Economic development, though, could take place only in a peaceful strategic environment. China had been on a near-permanent war footing since the outbreak of the Korean War in 1950, first confronting the United States and subsequently facing off against the Soviet Union. With Sino-Soviet relations still strained at the end of the 1970s, Chinese military chiefs insisted that the country still faced the danger of an “early war, a major war and a nuclear war” with the Soviet Union.3 This justified the costly maintenance of a sprawling defense infrastructure. Deng regarded this cold war thinking by his generals as outdated and a major obstacle to his reform plans. After a disastrous border war with Vietnam in 1979 that displayed serious military deficiencies, Deng used

2. Richard Baum, Burying Mao (Princeton: Princeton University Press, 1994), 56–63. 3. China Daily, 5 September 1985, 1.

[53]

Fortifying China

the opportunity to order military chiefs to begin a comprehensive review of the country’s military situation with the intention of downgrading the threat posture and streamlining what he decried as a bloated and inefficient force.4 The savings that would be generated could be ploughed into economic development. This defense review took several years to complete, and a consensus was not reached until 1984, when the PLA high command finally agreed with Deng and officially declared that China no longer faced the danger of major war.5 This paved the way in 1985 for an announcement that the PLA’s ranks would be reduced by 25 percent, or around one million soldiers.6 Deng built upon this decision by declaring that he hoped China would enjoy a peaceful environment for at least the next fifty years to allow the country to concentrate on economic development.7 These remarks from the paramount leader were the equivalent of a strategic directive, and the PLA leadership appeared to accept this guideline. Throughout the rest of Deng’s reign and into his successor Jiang Zemin’s tenure, the PLA adhered to this lowered threat assessment despite a sharp increase in tensions in the Taiwan Strait from the mid-1990s.8 In the domestic arena, Deng and his reformist leadership embarked upon economic and organizational reforms to promote economic development and market liberalization that led to a far-reaching transformation of China’s NIS. The declared objective was to replace the ossified command economy with a structure that gave greater autonomy to enterprises, reduced the role of the state in economic management, encouraged foreign investment and cooperation, and promoted the development of science and technology. This called for the transition from central planning to a so-called socialist market economy, which took place in two main stages. In the first phase, from the end of the 1970s to the Fourteenth Communist Party Congress in 1993, the mandatory planning of the Maoist era was replaced with guidance planning, whereby the market and the state coexisted in an uneasy and uncertain balance. In the second phase, from 1993 to the Fifteenth Party Congress in 1997, the foundations of the socialist market 4. Chinese Communist Party Central Committee Editorial Committee for Party Literature, Selected Works of Deng Xiaoping (1975–1982) (Beijing: Foreign Languages Press, 1994), 269–75. 5. See Gao Liansheng and Guo Jingtan, chief eds., Deng Xiaoping Xinshiqi Jundui Jianshe Sixiang Fazhanshi [The History of the Development and Construction of the Army in the New Period of Deng Xiaoping] (Beijing: Jiefangjun Chubanshe, 1997), 167–218. 6. Tai Ming Cheung, “Disarmament and Development in China: The Relationship between National Defense and Economic Development,” Asian Survey ( July 1988), 757–74. 7. Ibid., 765; and Evan A. Feigenbaum, China’s Techno-Warriors: National Security and Strategic Competition from the Nuclear to the Information Age (Stanford: Stanford University Press, 2003), 93. 8. See David Shambaugh, Modernizing China’s Military (Berkeley: University of California Press, 2002), 284–327.

[54]

The Defense Economy under Deng Xiaoping

economy were laid down with the adoption of key reform measures that set the stage for more wide-ranging and ambitious reforms in the late 1990s.9 As the dominant component of the NIS in the Maoist era, the restructuring of the defense economy was considered essential to the overall reform effort.10 Between 1978 and 1997, this restructuring led to the implementation of aggressive policies to convert large segments of the defense industrial R&D and production apparatus from military to civilian or dual-use functions. The conventional arms–strategic weapons axis that had defined the defense economy during the Maoist era was replaced by a new division of labor and output between defense work and conversion to civilian activities. However, in contrast to the earlier separation of the conventional and strategic weapons communities, there was no clear-cut organizational or structural division in the reconfigured system. This was because a central goal was to establish a combined dual-use base in which military and civilian activities could take place side by side in the same factories and research institutes. When Deng first put forward his proposal of reconfiguring the defense economy, he stressed that he did not want China to continue to implement the Soviet-derived model of a rigid separation of the military and civilian industrial sectors. “We mechanically copied the Soviet system and this has been wasteful,” Deng pointed out at a defense industry meeting in August 1978. He insisted that we must “liberate ourselves and move away” from the Soviet past.11 Deng’s approach to this liberation of the defense economy from its shackled military past was decisive and far-reaching in scope and purpose. At a defense industry meeting in July 1978, Deng said that between half and two-thirds of the workforce employed by the defense industry should be reassigned to work on civilian activities.12 This was a hugely ambitious target as only 8 percent of the output of the defense industry in that year was categorized as civilian products. Despite this daunting challenge, the defense economy underwent drastic and deep-seated changes to its organization, operations, performance, and relationship with the rest of the national economy. By the end of the 1980s, Deng’s original goal was met and exceeded. By the end of the 1990s, more than 80 percent of the annual output of the defense economy was civilian products.13 At the outset of the defense conversion process, the system responsible for overseeing the running of the defense economy was in the initial stages

9. 10. 11. 12. 13.

Jun Ma, The Chinese Economy in the 1990s (London: Palgrave, 1999). Feigenbaum, China’s Techno-Warriors, 71–115. Zhongguo Junzhuanmin Dashiji Bianxiezu, Zhongguo Junzhuanmin Dashiji, 39. Ibid., 39. Ibid., 204–5.

[55]

Fortifying China

of a drastic transition and lacked the organizational capacity and leadership clout to take charge of the shift from military to civilian production.14 Even when the first phase of this bureaucratic restructuring was completed in 1982 with the establishment of COSTIND, the new entity lacked the expertise, financial resources, and bureaucratic links with other parts of the civilian economy to effectively manage the defense conversion process.15 The inevitable consequence was that until the mid-1980s, it was left to the defense enterprises themselves to convert to civilian production.16 To overcome the bureaucratic restraints and deficiencies of the outdated and compartmentalized vertical functional system, the central authorities in 1982 ordered COSTIND to jointly work with civilian counterparts such as the State Planning Commission (SPC) and the State Economic Commission (SEC) to coordinate and formulate plans to guide the conversion process. By the end of 1982, the first long-term development plan was drawn up by these three commissions for the transfer of several hundred types of military technologies and manufacturing processes to the civilian economy. This was followed over the next few years by more coordination meetings and joint planning efforts between the defense industrial and civilian economic bureaucracies.17 These initial ad hoc bureaucratic arrangements were institutionalized in 1984 when the State Council Science and Technology Leadership Group created the All-Country Defense Industrial and Technological Conversion Liaison Group, which included representatives from COSTIND, SPC, and SEC. This organization became known internally as the Defense Conversion Liaison Office (DCLO) and publicly as the China Association of Peaceful Uses of Military Industrial Technology (CAPUMIT).18 As the central authorities slowly began to devote attention and organizational resources to overseeing the conversion process, one of their priorities was to classify entities in the defense economy according to the extent of their involvement in military or civilian work. These categories would determine whether entities would be eligible for state support and whether they would be retained by the central government or transferred to local 14. Feigenbaum, China’s Techno-Warriors, 101–2; and Cao Shixin, ed., Zhongguo Junzhuanmin [China’s Military Conversion] (Beijing: Zhongguo Jingji Chubanshe, 1994), 12–16. 15. See Xie Guang, chief ed., Dangdai Guofang Keji Shiye [The Contemporary Chinese Defense Science and Technology Sector] (Beijing: Dangdai Zhongguo Chubanshe), 175–77. 16. During the 1980s, when the Chinese economy remained highly centralized, most of the civilian output of the defense economy was not listed in state plans. These plans were crucial for enterprises as they determined the allocation of raw materials and access to distribution channels. See Chen Zhiqiang, “Reform Has Wrought Major Changes in China’s Defense Industry,” Liaowang, no. 11 (14 March 1988), overseas ed., 7–8, in Foreign Broadcast Information Service (FBIS), 23 March 1988, 18–21. 17. Xie Guang, Dangdai Guofang Keji Shiye, 176. 18. CAPUMIT website: http://www.capumit.org.cn/introduce/zhengce.

[56]

The Defense Economy under Deng Xiaoping

authorities. This was a difficult and complex task because of the constant migration from military to civilian work, but enterprises were grouped into three broad categories that corresponded to a hierarchical division of the defense economy: • The first category consisted of backbone defense enterprises with

advanced or specialized defense manufacturing or R&D capabilities that were considered critical to national security. Many of the enterprises in this category were top-tier prime contractors that were responsible for the final assembly of weapons systems and the production of key subsystems.19 At the beginning of the 1990s, estimates are that there were around a thousand large and medium-sized industrial enterprises with a total workforce of more than three million employees included in this category.20 After more pruning, the number of enterprises in this category is estimated to have decreased to around five hundred entities by the late 1990s.21 • In the second category were enterprises engaged in manufacturing both military and civilian goods, although the bulk of their output was civilian products. Second-tier specialized subcontractors that produced key subsystems and components were included in this category, as were some third-tier parts producers.22 • In the third category were former defense R&D institutes and enterprises that were no longer involved in defense work but whose military production lines could, in principle at least, be mobilized for use in a national emergency. Many were from the electronics industry and the deep interior of the country. There was intense debate among defense industrial policymakers during the 1980s and early 1990s over whether this increasingly outdated reserve military

19. Interview with Jin Zhude, president of China Association for Peaceful Use of Military Industrial Technology, Beijing, September 1993; and Jorn Brommelhorster and John Frankenstein, eds., Mixed Motives, Uncertain Outcomes: Defense Conversion in China (Boulder, Colo.: Lynne Rienner, 1997), 14–15. It was reported that large-sized enterprises accounted for 51 percent of the total number of enterprises within the defense industry in 1993. Li Yintao, “Conversion in Large and Medium-Sized Defense Enterprises,” Junshi Jingji Yanjiu (February 1997), 14–15. 20. Interview with Jin Zhude. 21. Yang Huizhong, Chen Yan, and Lin Kaocheng, chief eds., Guofang Jingji Zonghe Junhengfa [The Laws of Equilibrium in the Comprehensive Development of the Defense Economy] (Beijing: Haichao Chubanshe, 1999), 182. 22. Ibid., 78. See also Chen Zhiqiang, “Reform Has Wrought Major Changes,” 19. In this article, Premier Zhao Ziyang defined two categories of enterprises in the defense industry: those that integrated civilian and military production and those that engaged in civilian production. He emphasized that these two categories “are totally different.”

[57]

Fortifying China

production capacity was necessary or useful for the country.23 CMC executive vice chairman General Liu Huaqing, who oversaw the running of the defense economy during most of the 1990s, said in 1994 that “as the focus of the country’s agenda is shifted onto economic construction, many old military industrial enterprises have begun to produce civilian goods. In consideration of the country’s needs, we must still retain some of the essential enterprises.”24 Most enterprises in the first category were regulated by COSTIND either directly or through former line ministry bureaucracies that had been converted into state-owned defense corporations. While their defense-related activities were closely controlled by the authorities, their civilian commercial operations were not. The bulk of enterprises in the second and third categories were not included in state plans that would have allowed them to receive subsidized raw materials and other commodities. Moreover, growing numbers of the entities in these two categories were transferred out of the control of the defense industrial bureaucracy to civilian and local authorities from the mid-1980s.25 Because these local governments lacked the resources or expertise to supervise the activities of the converted enterprises, they essentially operated without any official oversight or support. The economic results were disastrous, as few of the entities had enough expertise or know-how to compete in an open economy.26 During the mid-1980s, a small group of senior scientists and engineers from the former strategic weapons community came together to formulate an initiative to establish a new technological innovation system concentrating on the development of dual-use high-technology sectors.

23. A symposium at the end of 1989 held by the National Defense University and the Naval Academy discussed the issue of how big the defense industry should reasonably be. “On the whole, the participants said, the building of the national defense economy should be capable of meeting the economic needs of future partial wars. The ordnance enterprises and relevant procurement and supply organs are responsible for the equipment needs of the standing Army in peacetime. However, the ordnance enterprises are responsible for weaponry required for future wars. In light of domestic and external experience and figures, the scope of mobilization for full-scale war should be eight to nine times that of peacetime while mobilization for partial war should be 1.5 to three times that of peacetime.” Ku Guisheng and Li Qingyun, “China’s Defense Economy Moves Ahead in the Course of Readjustment and Reform: Roundup of a Symposium on Theories Concerning the Defense Economy,” Jiefangjun Bao [Liberation Army Daily] 9 August 1990, 3, in FBIS, 7 September 1990, 42. 24. “Military Commission Vice-Chair Urges Retention of Essential Military Enterprises,” Xinhua Domestic Service, 18 March 1994, in British Broadcasting Service/Summary of World Broadcasts/Far East (BBC/SWB/FE) 1955/S1/5, 25 March 1994. 25. Ku Guisheng and Li Qingyun, “China’s Defense Economy Moves Ahead” and Xie, Dangdai Guofang Keji Shiye, 146. 26. Cao, Zhongguo Junzhuanmin, 18.

[58]

The Defense Economy under Deng Xiaoping

These were considered critical to enhancing the country’s long-term strategic competitiveness. In March 1986 the proposal was submitted to Deng Xiaoping, who enthusiastically approved it. Known formally as the “High Technology Research and Development Plan,” but dubbed the “863 program” to commemorate the date of its establishment, this blueprint initially highlighted seven areas deemed central to China’s future national security and economic prowess: automation, biotechnology, energy, information technology, lasers, new materials, and space technology. The 863 program was directly modeled on the organizational structure and operational procedures of the Maoist strategic weapons program.27 The 863 program allowed the defense economy the opportunity to regain a foothold in the vanguard of the country’s technological innovation process, although more modestly than in the prereform era. COSTIND assumed a prominent position in the management of key aspects of the 863 program, along with other government agencies such as the SSTC, the SPC, and CAS. COSTIND was put in charge of sectors that were especially important for military exploitation, such as lasers and space technology. The importation of foreign technology was initially in the hands of the SEC but was transferred to the SPC following the SEC’s abolition in 1988. These functions were subsequently taken over by the newly created State Economic and Trade Commission (SETC) after the SPC was abolished in 1992.28 In their analysis of the key institutional changes to the NIS in the reform era, Liu and White point out that two developments had a particularly profound effect on the structure, dynamics, and performance of the NIS during this period. The first was a change in the legitimate criteria for evaluating performance from output scale to economic measures reflecting economic activity, such as contract and licensing fees, sales, and other resources. The second reform was the decentralization of decision-making authority over resource allocations and operational decisions among primary actors. Although the central leadership’s chief priority was the reform of the civilian economy, it was also committed to implementing these changes within the poorly performing defense economy. Deng had repeatedly called for the overhaul of the defense economy since the late 1970s, arguing that the “existing system of the defense industry failed to allow the full play of its production capabilities.”29 The defense economy responded by making limited organizational changes such as renaming bureaucratic entities and

27. Feigenbaum, China’s Techno-Warriors, 144–88. 28. Ding Jingping, “Using Imported Technology to Transform Existing Enterprises in China,” in Chinese Technology Transfers in the 1990s, ed. Charles Feinstein and Christopher Howe (Cheltenham, U.K.: Edward Elgar, 1997), 106–9. 29. Xie, Dangdai Guofang Keji Shiye, 145.

[59]

Fortifying China

shuffling responsibilities among its different administrative agencies. Only when political pressure became too intense did defense industrial policymakers finally make meaningful structural reforms. Resistance was especially strong among defense industrial enterprises to the introduction of new efficiency-based criteria for measuring performance, such as revenues, costs, and production-to-labor ratios. Defense factory managers and bureaucrats were accustomed to the Maoist traditions of “only worrying about going into production and not production itself, placing all emphasis on the value of production and not of improving profits, and relying only on the state plan and not calculating the cost of production.”30 But because of the close scrutiny that Deng and other top leaders gave to its restructuring, the defense economy could postpone but not ultimately avoid implementing the changes.

Defense Conversion Throughout the early reform period, though civilian and defense-oriented activities took place side by side within the defense economy, there were fundamental differences between them. The conversion process was primarily concerned with transforming former military-oriented enterprises into organizations that could compete effectively and profitably in the commercial marketplace, whereas the military sector was to remain focused on meeting the technological, engineering, and manufacturing requirements of the government and the PLA, paying only limited attention to commercial and financial performance. Moreover, the operational dynamics, institutional culture, organization, and approach to the creation and diffusion of innovation within the conversion sector in this period differed significantly from the military component of the defense economy. One of the biggest institutional obstacles to initiative and innovation within the defense economy was a deeply ingrained management and work culture that was passive, lacked competitive instincts, and was dependent on the state. This “iron rice bowl” mentality severely hampered the ability of defense enterprises to adapt and become self-reliant. By forcing enterprises to convert to civilian production, the authorities sought to replace the institutional mind-set of “waiting, relying and demanding” with a more dynamic approach that emphasized “competition, innovation and action.”31 Changing this stifling bureaucratic and risk-averse institutional culture was a painstakingly slow and time-consuming process, however. On the

30. Cao, Zhongguo Junzhuanmin, 28. 31. Ibid., 29–30.

[60]

The Defense Economy under Deng Xiaoping

one hand, during the first half of the 1980s, many enterprises only halfheartedly embraced conversion because they believed that the policy was a temporary measure and the government would eventually reverse course.32 Even as this hope steadily faded in the second half of the 1980s and the early 1990s, many enterprises held on to the belief that the government would not force them to shut down because they were economically unviable.33 They had ample evidence to back up their views because the authorities continued to provide financial subsidies to keep most factories and research institutes within the defense economy open despite mounting losses. The iron rice bowl attitude was especially prevalent in manpower-intensive heavy industrial sectors such as the munitions and machine-building industries and interior Third Line areas (San Xian).34 A few enterprises, however, chose to take advantage of this strategic opportunity to reduce their dependence on the defense economy and embrace the civilian economy. Companies such as Jialing Machine Factory in Sichuan, Jianshe Machine Tools Factory in Chongqing, and Guangzhou Shipyard in Guangdong undertook their own initiatives to develop marketable products, find new markets, and attract investment partners. Most of these successful firms were located in coastal areas, in major cities, and in more technologically sophisticated sectors.35 On the other hand, the conversion process provided defense enterprises the opportunity, often for the first time, to engage in external trade and gain access to foreign technology, expertise, management and business practices, and capital. This opening up to the outside world played an important role in promoting innovation and the pursuit of technological and commercial excellence among converted defense firms. An official Chinese study of the defense conversion process emphatically pointed out that “it may be stated with no exaggeration that without foreign directed development, the production of civilian goods would not have enjoyed such great success.”36 In the first stage of their acquisition of foreign, predominately Western, technological products and processes during the early to late 1980s, defense 32. Jean-Claude Berthelemy and Saadet Deger, Conversion of Military Industries in China (Paris: Organisation for Economic Co-operation and Development, 1995), 46; and Cao, Zhongguo Junzhuanmin, 18. 33. Paul Humes Folta, From Swords to Plowshares (Boulder, Colo.: Westview Press, 1992), 54–55; and Berthelemy and Deger, Conversion of Military Industries, 46. 34. Seven provinces were designated as belonging to the “Big Third Line” (Da San Xian): Sichuan, Guizhou, Gansu, Jiangxi, Ningxia, Shaanxi and Yunnan. There were also “Small Third Line” (Xiao San Xian) regions within many other provinces. See Xiao Min, “A Tentative Discourse on Readjusting the Set-up of Industry in the Third-Line Region,” Jingji Ribao, 14 July 1989, 3, in FBIS, 2 August 1989, 32–36; and Barry Naughton, “The Third Front: Defence Industrialisation in the Chinese Interior,” China Quarterly, no. 115 (September 1988). 35. Berthelemy and Deger, Conversion of Military Industries, 78–81. 36. Cao, Zhongguo Junzhuanmin, 30.

[61]

Fortifying China

enterprises and their civilian counterparts concentrated on the import of large-scale plant equipment that was based on the requirements and orders of government ministries. This approach was reminiscent of the wholesale importation of Soviet factories during the 1950s. The primary objective of the procurement strategy was to renovate outdated manufacturing capabilities. The technological hardware acquired for the defense economy included production equipment to produce color televisions, numerically controlled lathes, and oceangoing vessels.37 This state-controlled technology import strategy was decentralized in the early 1990s, and enterprises were given greater autonomy to make their own acquisition decisions. Coproduction joint ventures also became more popular from the late 1980s as cash-strapped civilian and defense firms sought to attract foreign investment to fund their technological renovation and expansion. Enterprises located in coastal regions and in large-scale capital-intensive and technologically advanced sectors such as aviation, vehicle production, and shipbuilding were in the forefront of this push to open up to the outside world.38 A measure of the success of this coproduction was that in the early 1990s, half of the sales of the shipbuilding industry were to foreign countries.39 This industry was the highest export earner of the five defense industrial sectors in 1993, with foreign sales totaling U.S. $440 million, closely followed by the aviation sector with $426 million. The space and nuclear industries lagged well behind with export earnings of $134 million and $160 million, respectively, in the same period. Consequently, a positive product of the conversion process was the ability of formerly defense-oriented enterprises to develop and exploit new commercial export opportunities. Similarly, the benefits that the defense economy and its enterprises were able to reap from inward technological investment and exports were extensive. First, gaining access to advanced civilian technology, investment capital, expertise, and processes allowed defense enterprises to make important strides in technological innovation.40 Second, in its efforts to reform and modernize its antiquated organizational and management systems, the defense economy could learn and selectively adopt state-of-the-art foreign practices and arrangements, especially in weak but critical areas such as financial management, corporate organization, and manufacturing

37. Xu Jiangping, “China’s International Technology Transfer: The Current Situation, Problems and Future Prospects,” in Feinstein and Howe, Chinese Technology Transfers, 86. 38. Berthelemy and Deger, Conversion of Military Industries, 78–81. 39. Ibid., 30. 40. Zeng Huafeng, ed., Zhujian Weili [Casting Swords into Ploughshares] (Beijing: Beijing Youdian Daxue Chubanshe), 38.

[62]

The Defense Economy under Deng Xiaoping

operations.41 Third, foreign markets represented a lucrative opportunity to make higher profits and attract foreign investment for cash-strapped defense enterprises. In 1993, for example, the defense economy earned U.S. $1.4 billion (Rmb 8.12 billion) from export revenues, or nearly 20 percent of total civilian output value for that year.42

Establishing Performance-Based Criteria and New Regulatory Frameworks Between 1978 and 1997, the transition from central planning to market competition in the conversion process required defense enterprises to adjust their criteria for measuring performance from crude indicators of output to efficiency-based standards that were being adopted throughout the national economy. Enterprises quickly began to realize that clinging to past practices were not tenable in the market economy. They could become competitive only by “learning from civilian counterparts and improve their productionto-labor ratios and capital utilization efficiency, and lower their production cost of goods.”43 While this marked a major step forward in improving efficiency and quality among primary actors, there was still hesitancy in the use of market-based performance criteria such as profitability and return on assets. Profitability was regarded as a secondary priority during the early reform era as enterprises continued relying on government subsidies to cover losses and ensure their survival.44 Output scale continued to be the primary concern. The soft budget constraints that enterprises enjoyed during the mandatory planning era were carried over into this period. While firms gained growing autonomy over their operations, they were not burdened with the responsibility of ensuring their own survival because they were able to obtain assistance from the government in acquiring funds to stay in business.45 As a consequence, for most of the period between the beginning of the 1980s and the late 1990s, the defense economy posted substantial annual losses and only occasionally made slender profits. Table 3.1 provides

41. Cao, Zhongguo Junzhuanmin, 30; and Xinhua Domestic Service, “Defense Industry Sets Up Joint Ventures,” 5 June 1992, in FBIS, 16 June 1992. 42. Zhongguo Gongye Nianjian Bianjibu [China Industrial Yearbook Editorial Board), Zhongguo Gongye Nianjian 1994 [China Industry Yearbook 1994] (Beijing: Zhongguo Gongye Nianjian Chubanshe, 1995), 153–54; and Zeng, Zhujian Weili, 75–82. 43. Cao, Zhongguo Junzhuanmin. 44. Ibid. 45. David Li and Liang Minsong, “Causes of the Soft Budget Constraint: Evidence on Three Explanations,” Journal of Comparative Economics, March 1998, 104–16; and World Bank, China’s Management of Enterprise Assets: The State as a Shareholder (Washington, D.C.: World Bank, 1997).

[63]

14.17 9.41 11.01 2.58 4.28 41.45

46.7% 39.6 39.9 46.7 4.9 30.8

Percentage increase over 1992 21.6 billion

1993 sales revenue −193 million 380 million 547 million −48.8 million −60 million 625 million

Profits (including military and civilian profits)

−6.7%

Percentage increase over 1992

−1.36% 4 5 −1.89 −1.4 1.5

Return on output value

220 460 426 160 134 1,400

1993 export value (U.S.$ million)

Source: Zhongguo Gongye Nianjian Bianjibu [China Industrial Yearbook Editorial Board] Zhongguo Gongye Nianjian 1994 [China Industry Yearbook 1994] (Beijing: Zhongguo Gongye Nianjian Chubanshe, 1995), 153–54.

Ordnance Shipbuilding Aviation Nuclear Space Total

Industry

1993 Civilian output (billion)

Table 3.1. The Chinese defense industry’s economic performance in 1993

The Defense Economy under Deng Xiaoping

a snapshot of the economic performance of the defense industry in 1993. For that year, the defense industry recorded a profit of Rmb 625 million from total civilian and military production of Rmb 50 billion, or a meager return on output of 1.5 percent. Only the shipbuilding and aviation sectors were profitable, with returns on output of 4 and 5 percent, respectively.46 This represented a high-water mark in the financial performance of the defense industry as it subsequently posted heavy losses until the beginning of the next decade. The transition from central planning to a socialist market economy in the reform era also entailed the creation of a regime of new rules, established practices, conventions, and norms to replace outdated institutions to guide the behavior and activities of primary and secondary actors. For the defense economy, along with other sectors of the economy, this changeover proved difficult, uncertain, and prolonged throughout the early reform period. The replacement of Maoist-era administrative regulations and directives with new laws, rules, and procedures—along with the addition of many new regulations and legislation to cover new developments—was slow and often lagged behind the economic and political changes that took place on the ground. One of COSTIND’s primary roles in the reform era was to draft and implement new policies, regulations, and laws dealing with defense industrial-related issues. On defense conversion matters, the DCLO played a central role in supporting the formulation of specific policies, regulations, announcements, and working practices. Institution building in the defense conversion arena was more focused on developing conventions, norms, and procedures based on the experiences that enterprises underwent in their switch to civilian activities. Typical of this was a 1989 workshop that COSTIND, SPC, and the SSTC held to revise existing regulations and policies and formulate new ones.47 New regulations and policies were also promulgated to guide the defense conversion process between the mid-1980s and mid-1990s. These included regulations concerning management procedures and the role of defense R&D institutes in supporting spin-off.48 The biggest problem, though, was the difficulty in implementing these new guidelines and regulations. The lack of effective enforcement mechanisms hampered their acceptance by organizations and individuals as credible replacements for outdated rules of the game.49 The authorities within the defense economy made strenuous efforts to promote these new policies through educational campaigns, meetings, and training 46. 47. 48. 49.

Zhongguo Gongye Nianjian Bianjibu, Zhongguo Gongye Nianjian 1994, 153–54. Xie, Dangdai Guofang Keji Shiye, 161–62. CAPUMIT website: http://www.capumit.org.cn/introduce/zhengce.htm. Interview with CAPUMIT official, Beijing, December 2003.

[65]

Fortifying China

sessions, but many defense enterprises and government organs devoted little concrete effort in studying or adopting them.50 This lack of regularization contributed to the poor economic performance of enterprises by creating disorder in the marketplace.

Research and Development in the Conversion Process The rigid organizational boundaries that separated the activities of research institutes, production enterprises, distributors, and end users during the Maoist era began to be gradually rolled back in the 1980s as the central government sought to harness the capabilities of the civilian and defense S&T R&D systems to support economic development. The principal impetus for the erosion of these divisions of labor was conversion-led reforms in the civilian sector, where the barriers that separated R&D from manufacturing came down. A key focus in the reform era was locating R&D activities within both the R&D and production sectors.51 In 1985, the State Council held a high-level conference on the reform of the national S&T system that established key principles for a major restructuring of the research institutions and their relations with other primary actors. For the first time, the government recognized that technology was a commodity rather than a public good and that R&D units could sell, transfer, or commercialize research results.52 Civilian and defense R&D institutes, especially those involved in applied technological exploitation, were told that funding for their activities, which had been overwhelmingly dependent on the state, would be curtailed and they would have to find their own income sources to fill this gap. They were encouraged to forge close ties with production enterprises, through either commercial contracting work or merging with state-owned enterprises. Within three years of the 1985 conference, more than half of all the country’s estimated 5,700 stateowned R&D units either had been transferred into the corporate sector or had forged close working alliances with production enterprises.53

50. Sun Guangyun, Zhongguo Guofang Keji Gongyede Gaigehe Fazhan Wenti [The Reform and Development Problems of the Chinese Defense Technological Industry] (Beijing: Hangkong Gongye Chubanshe, 2003), 246. 51. Liu and White, “Comparing Innovation Systems,” 1100. 52. Tang Yuli, “Review of the Reform of Research Institutes,” in Conference on China’s New Knowledge Systems and Their Global Interaction, ed. Jon Sigurdson (Lund: Stockholm School of Economics, 2003), 27–28. 53. Kong Xinxin, “Corporate R&D in China: The Role of Research Institutes,” Working Paper No. 179, on the project “Emergence of New Knowledge Systems in China and Their Global Interaction,” (Stockholm: Stockholm School of Economics, October 2003), 5–6.

[66]

The Defense Economy under Deng Xiaoping

For R&D institutes within the defense economy, only those whose work was deemed to be nonessential to military requirements were allowed to be transferred or taken over by civilian firms. The vast majority of defense research institutes were permitted instead to engage in civilian contracting work to compensate for the steady reduction in military-related business resulting from the sharp cutback in defense spending beginning in the early 1980s. According to one COSTIND survey, by 1985, civilian-related activities accounted for 41 percent of the income of defense R&D units.54 The Wuhan Second Ship Design and Research Institute, for example, which was involved in the design work on the country’s first nuclear submarine, had to take on commercial contract work in the mid-1980s following a severe cut in its budget allocations.55 While these reforms led to a major improvement in the economic performance of the defense R&D system from the mid-1980s, it soon became apparent that the measures did not adequately tackle the fundamental structural factors that were behind the separation between the R&D and production systems. Many research institutes struggled to find dependable sources of civilian contracting work. Between 1986 and 1995, a COSTIND survey of defense conversion in the defense industrial R&D system found that only one out of every four commercial projects was successful.56 Moreover, the defense R&D system’s entrenched conservatism and institutional secretiveness continued to remain a formidable barrier both to integration with the production system and to the forging of close ties between the civilian and defense sectors. While the revenues that the defense R&D system had received from its civilian activities had increased by more than 300 percent between 1985 and 1995, civilian income as a proportion of total revenue had remained unchanged at around 41 percent.57

Competence Building In their struggle to survive in the commercial marketplace, defense enterprises involved in the conversion process had little time or resources in the initial stages of the reform era to devote to competence building. The central government provided some special funding to support programs to retrain and reeducate personnel, but this was belated and inadequate

54. Liu Linshan, “Investigative Research into the Defense Conversion Situation of Military Industrial R&D Institutes,” Zhongguo Guofang Keji Xinxi [China Defense Technology Information], no. 5 (1997): 27–28. 55. John Wilson Lewis and Xue Litai, China’s Strategic Seapower (Stanford: Stanford University Press, 1994), 100–101. 56. Liu, “Investigative Research,” 30. 57. Ibid., 29.

[67]

Fortifying China

compared with the gigantic shift of the workforce.58 Two-thirds of the three million workers estimated to have been employed in the defense economy in the late 1980s to early 1990s were redeployed to civilian work. Most enterprises and their workforces that shifted to civilian work had to acquire their new work skills through on-the-job learning and experimentation. The lack of efforts to nurture new competence capabilities was a major contributory factor to the dismal performance of the conversion sector during the 1980s, especially its headlong rush into indiscriminate production without studying market conditions and demand.59 This haphazard rush into the civilian marketplace led to a chronic mismatch between the high technology and educational capabilities of the workforces of defense enterprises and the low-value-added products that they often chose to manufacture. For example, Chengdu Aircraft Corp. is one of the country’s foremost military aircraft producers, but its range of civilian products during the 1980s included birdcages.60 On average, 12 percent of the staff of Third Line defense enterprises during the 1980s was composed of technical personnel, compared with just 3 percent for civilian plants.61 This wasteful use of well-trained researchers, scientists, and engineers led to falling morale and the steady departure of younger skilled workers for better opportunities in the civilian economy.62 Many of the poor decisions made by defense enterprises can be blamed on enterprise and factory managers, who were granted increased decisionmaking authority and operational autonomy in the conversion process. The overwhelming majority of these managers were bureaucrats, technicians, or party members who were trained during the heydays of the state planning era in the 1950s and 1960s and had little experience in balancing their financial books or operating in a competitive environment. They tended to be highly conservative and risk-averse with little appetite to support innovation or long-term investment in their enterprises.63 For the expanding ranks of converted enterprises that were commercially successful or enjoyed special state support, the attention and resources they were able to devote to competence building began to increase gradually during the 1990s, and this provided the basis for their long-term

58. Sun, Zhongguo Guofang Keji, 72–77. 59. Berthelemy and Deger, Conversion of Military Industries, 59. 60. Hou Jianwu, “Strategic Changes in Military Industry Enterprises,” Jingji Guanli [Economic Management], no. 6 ( June 1989): 25–27, in FBIS, 17 August 1989. 61. Jiang Baoji, Zhang Shengwang, and Ji Bing, “Several Problems on the Strategic Readjustment and Structural Reform of the National Defense Industry,” Jingji Yanjiu, no. 12 (December 1988): 63–68. 62. Sun, Zhongguo Guofang Keji, 135. 63. Berthelemy and Deger, Conversion of Military Industries, 101–2.

[68]

The Defense Economy under Deng Xiaoping

improvement in performance.64 The skills of the workforces were upgraded through increased training and education, and the enterprises were also able to attract new recruits. The situation of loss-making laggards, however, continued to deteriorate as their labor forces fell further behind in know-how, skill sets, and efficiency, and they had to lay off growing numbers of these employees.65

Implementation of the Conversion Process Defense production enterprises struggled to adapt to the harsh realities of the market economy after enjoying a secure and privileged life in the closed military system during the Maoist era. In the first few years of the conversion drive from the late 1970s to the early 1980s—which the Chinese authorities defined as “spontaneous” in nature—there was little government oversight and financial support for these enterprises. They were left on their own to find civilian goods to produce and sell, and they performed poorly because few plants had any commercial experience and most lacked access to up-to-date market information and financial capital.66 This expansion in civilian output capacity within the defense economy took place primarily through the addition of new manufacturing facilities rather than the conversion of military production lines. This included the construction of more than six hundred new civilian production lines in the late 1980s to early 1990s.67 The specialized nature of military production processes meant that they could not be readily configured for civilian use. Tank factories, for example, could not be adapted to manufacture civilian motor vehicles. With little planning or investigation of market conditions, many firms simply chose to engage in duplicative imitation of cheap, low-quality consumer goods already being widely produced by other civilian firms. Poor quality and cost-containment controls meant that their products were inferior and more expensive, however.68 This saddled many enterprises with mounting stockpiles of unsold goods. Production lines were closed as quickly as they opened, and the conversion program was in dire straits by the early 1980s. The innovation and competition that the authorities had hoped to cultivate through this shock therapy had instead left the defense economy shell-shocked and in severe financial distress. 64. Folta, From Swords to Plowshares, 93–95. 65. Sun, Zhongguo Guofang Keji, 72–77. 66. Cao, Zhongguo Junzhuanmin, 18. 67. Liu Jibin, “Implement the Guideline of Military-Civilian Integration, Rejuvenate the National Defense Science and Technology Industry,” Renmin Ribao, 2 February 1999, 2, in FBIS, 2 February 1999. 68. Cao, Zhongguo Junzhuanmin, 18–19.

[69]

Fortifying China

This initial debacle forced the central government to step in and provide financial aid and planning support. The conversion program was finally included in the government’s five-year economic development plans, beginning with the Seventh Five-Year Plan, which covered 1986 to 1990. The central authorities invested Rmb 13.6 billion during the Seventh and Eighth Five-Year Plans to assist more than seven hundred conversion projects. Central and local authorities altogether provided more than Rmb 20 billion in investment credit for defense conversion between the late 1970s and mid-1990s. This figure was small, though, when compared with the central government’s lavish subsidies to the state sector, which totaled Rmb 360 billion between 1985 and 1992.69 This state assistance gave defense enterprises a much-needed opportunity to learn from their mistakes and adopt more effective strategies to compete in the marketplace. By the early 1990s, between 40 and 60 percent of defense industrial enterprises were reported to have been able to find one or two mainstay civilian goods to produce that could ensure their economic survival.70 With additional government support, the goal was to increase this figure to between 80 and 90 percent by the end of the Eighth Five-Year Plan in 1995.71 By the end of the early reform era, a sizable proportion of defense enterprises had successfully made the transition to producing marketable commercial goods. However, only a small percentage of them were profitable.72 This hard-earned commercial experience offered valuable insights for firms that could be applied in the management of their military projects. They learned the importance of financial discipline, ensuring quality control, and paying attention to end-user needs. For top-tier prime contractors that had previously specialized in the production and assembly of complex equipment such as aircraft and warships, the transition to civilian production represented an even bigger challenge than it did for smaller outfits. This was because these behemoths were accustomed to small-batch production of single products. To be competitive in the commercial market, though, they had to change their product mix to large-batch production to take advantage of economies of scale. To make these adjustments, they had to cast off their traditional aversion to taking risks or consistently investing in technological renewal and adopt a radically different business culture that encouraged risk taking and promoted

69. Berthelemy and Deger, Conversion of Military Industries, 45. 70. Cao, Zhongguo Junzhuanmin, 24. 71. Ibid., 21. 72. Sun Lan and Ren Haiping, “On Jiang Zemin’s Thoughts of National Defense Industry Construction,” Junshi Jingji Yanjiu ( January 2001), 27. This article estimated that only 20 percent of defense enterprises were profitable.

[70]

The Defense Economy under Deng Xiaoping

continuing investment in technological modernization.73 Under this more flexible, more efficient, and forward-looking business model, technological innovation was regarded as crucial to long-term competitiveness and profitability.74

Linkages and Information Exchanges In the early years of the conversion process, linkages and knowledge flows among defense enterprises switching to civilian production were poor. The Maoist legacy of excessive secrecy and compartmentalization meant that many defense enterprises had few links with the civilian economy, and they struggled to acquire timely and relevant market information. With little experience in investigating market conditions, enterprises relied instead on replicating the activities of competitors by copying their products.75 The rigid separation between primary actors meant that many enterprises were isolated and were unable or unwilling to seek assistance and information within or outside the defense economy. As this flaw in knowledge flows became an increasingly pressing problem in the mid-1980s, COSTIND and other government agencies began to organize trade fairs, industry associations, information exchange forums, and other ways to share and disseminate information more quickly and efficiently. CAPUMIT took the lead in conducting research, providing strategic guidance to policymakers, raising funds, drawing up policies and regulations, and organizing local, national, and international exhibitions and trade shows to promote defense conversion.76 Technology fairs for converted defense enterprises began to be organized across the country in the mid-1980s to introduce firms to other defense-related and civilian enterprises operating in the same sector.77 Enterprises involved in similar production activities also began to form industry and trade associations to exchange information and form collaborative partnerships. Economic associations, for example, were established

73. Hou Jianwu, “Strategic Changes,” 27–28. 74. Chen Xiushan and Hu Tiecheng, eds., Guofang Gongye Fazhan Zhanlue Yu Guofang Gongye Zhengce Yanjiu [Research into Defense Industry Development Strategy and Defense Industry Policies] (Beijing: Bingqi Gongye Chubanshe, 2004), 14–31. 75. This was especially the case with Third Line defense enterprises. See Xiao Min, “A Tentative Discourse,” 32–33. 76. Interview with CAPUMIT official, December 2003. CAPUMIT’s website, http://www. capumit.org.cn, has extensive details of the association’s coordination activities. 77. Cao, Zhongguo Junzhuanmin, 20; and Zhonghua Renmin Gongheguo Kexue Jishu Bu [Chinese Ministry of Science and Technology] Zhongguo Xingao Jishu Changye Fazhan Baogao [China High Technology Industry Development Report] (Beijing: Kexue Chubanshe, 1999), 281.

[71]

Fortifying China

for manufacturers of motorcycles, refrigerators, automobiles, cameras, and electric fans.78

End Users One of the most traumatic experiences of the conversion process for defense enterprises was their exposure to market competition and the need to respond to the demands of end users. During the central planning era, the PLA was the only captive customer of the defense economy, and the relationship between the two was as cooperating partners with the same interests. Enterprises faced virtually no competitive pressures to innovate, and end users had little market-derived leverage to demand improvement. A common characteristic of defense enterprises operating in the civilian marketplace that had an inhibiting impact on their capability to innovate was that they primarily targeted the lower end of the market spectrums they pursued.79 In the motor vehicle sector, for example, defense manufacturers concentrated on the production of inexpensive small cars and minivans. This pattern was replicated in household electronic appliances and other electrical products. Defense enterprises struggled throughout the early reform era to identify, understand, and satisfy the demands of consumers. In the initial stages of the conversion process, they paid scant attention to end-user needs and concentrated instead on copying the activities of civilian competitors or following the planning advice of government agencies. There were numerous reasons that defense enterprises found themselves in this situation. First, because many of them were not included in official state plans, they were unable to get access to funds and cheap commodities. This prevented them from investing in manufacturing equipment and technology for higher-end products.80 Second, their labor forces did not have the necessary skills, experience, or processes to match the quality-control and efficiency standards of civilian competitors, especially from overseas. Third, their knowledge and understanding of their customers lagged behind the marketplace. They did not fully appreciate the importance of marketing, sales, and after-sales strategies. As the market economy developed during the 1990s and defense enterprises gained more experience in their commercial operations, they reportedly were able to listen and respond more quickly and accurately to end-user needs. This led to the establishment of more efficient and flexible management and production processes that would allow for improved

78. Chen Zhiqiang, “Reform Has Wrought Major Changes,” 19. 79. Cao, Zhongguo Junzhuanmin, 25. 80. Ibid., 21–22.

[72]

The Defense Economy under Deng Xiaoping

product adaptation and innovation.81 By the end of the early reform era, end-user requirements had assumed greater prominence in shaping the activities of the converted defense enterprises.

The Impact of Conversion on the Defense Economy The entrepreneurial approach that was adopted in the pursuit of conversion allowed enterprises extensive autonomy to undertake activities according to their own needs and requirements. With scant guidance and supervision from the authorities, these firms conducted commercial and defense-related activities simultaneously, and there was often little effort to separate the management of these operations. For example, there was no independent cost accounting for military and commercial projects.82 On factory floors, production lines were often located next to one another within the same plants, and workers could be assigned to civilian or military projects depending on demand. For administrative purposes, enterprises established separate military and civilian departments to handle their different responsibilities, but in reality they often lacked the management, commercial and financial tools, and expertise to effectively segregate these activities.83 This lack of clear-cut separation between the activities of the civilian and military systems caused considerable confusion and impaired performance, especially in the early years of the reform process. The experience of the Chengdu Aircraft Corporation during the 1980s offers a typical example. According to one study, “in the initial stage of developing civilian products, the Chengdu Aircraft Corporation did not have special production lines for major civilian products and instead mixed the production of military and civilian products. This not only adversely affected the development, trial manufacture and production of aviation products, but also affected the quality and quantity of civilian products.”84 These and other systemic shortcomings were gradually addressed in the 1990s as the conversion process became more mature and benefited from increasing government financial and policy support. By not imposing a rigid organizational separation of the civilian and military systems at the enterprise level, the authorities encouraged defense enterprises to share what they had learned in their commercial operations and to adapt these practices to their military activities. 81. Ibid., 49–54. 82. Ibid., 31. 83. Di Guohua, “The Perfection and Consolidation of the Reform of Military-Civilian Production Management Separation,” Hangtian Gongye Guanli, no. 1 (1994): 9–15. 84. Hou Jianwu, “Strategic Changes,” 27.

[73]

Fortifying China

Successes and Drawbacks of Conversion The conversion process was a massive and time-consuming undertaking that yielded a mixed track record. It achieved some notable successes. From a comparative and historical perspective, China’s military industrial drawdown was one of the largest-ever transfers of industrial capacity from the military to civilian spheres. The only other examples of defense conversion processes on such a grand scale occurred in the United States following the end of the Second World War and in the United States, Western Europe, and Russia after the cold war.85 To be able to compete in the marketplace, these converted entities had to fully embrace economic and organizational reforms that were being pursued by civilian firms. They became a valuable source of insight and knowledge into the realities of the market economy for the segregated military component of the defense economy.86 The commercial revenues that converted firms earned were used to subsidize loss-making military operations.87 Conversion also provided the opportunity for thousands of enterprises that employed several million workers and dependents the opportunity to stay in business. It contributed meaningfully to the country’s economic development, especially in aviation, electronics, shipbuilding, nuclear power generation, industrial manufacturing, and many of the areas of traditional defense industrial specialization. But the conversion process was also marred by major drawbacks and failures. The quality of civilian output from converted defense plants was often poor and uncompetitive, especially during the 1980s. Many of the converted enterprises were uncompetitive. They were plagued by low efficiency, the inability to be profitable, and a struggle to develop saleable products. Many should have been closed down because they were chronically loss-making, but the conversion process allowed them to remain open. In addition, the defense industrial leadership used the conversion process as the centerpiece of its reform and restructuring of the defense industrial apparatus, which allowed attention to be drawn away from the lackluster efforts to overhaul the military component of the defense economy. Overall, though, the impact of the conversion process on the defense economy and the country was positive. Without this drawdown of defense

85. See Judith Reppy, ed., Conversion of Military R&D (London: Macmillan, 1998); and J. Davidson Alexander, “Military Conversion Policies in the USA: 1940s and 1990s,” Journal of Peace Research 31, no. 1 (1994): 19–33. 86. See Cao, Zhongguo Junzhuanmin, for sectoral and specific enterprise case studies, chapters 5 to 21. 87. Ibid., 45–46.

[74]

The Defense Economy under Deng Xiaoping

industrial capabilities, the scale and pace of China’s economic development would likely have been adversely affected as the central authorities continued to devote significant resources to the maintenance of the bloated defense industrial sector. Another key legacy of the conversion process was the dismantling of the entrenched separation between the defense economy and the civilian economy. This was especially important because it laid the basis for the post-1998 reforms and the focus on the establishment of a dualbase economy.

The Struggle to Overhaul the Legacy Defense Industrial Base The central leadership’s strategic decision at the outset of the 1980s to sharply reduce the military burden in order to promote economic development meant that the defense economy’s involvement in military-related R&D and production activities contracted drastically during the early reform period. As table 3.2 illustrates, between the beginning of the 1980s and the late 1990s, annual defense industrial output fell from more than 80 percent as a proportion of total output of the defense economy to less than 20 percent. Moreover, the numbers of workers employed in defenserelated work during this same period shrank drastically, from around three million to between one and two million.88 Between 1978 and 1997, this drastic downsizing and reorientation of the functions and activities of the defense economy presented a major opportunity for defense industrial policymakers to address the structural problems that had stifled innovation during the Maoist era. However, rather than embrace reforms, the conservative and cocooned defense industrial bureaucracy fought to preserve the essential features of the mandatory planning system on defense-related activities. This included maintaining the separation of the activities of primary actors and allowing enterprises to continue to enjoy soft budget constraints in their financial accounting. Moreover, there was strong resistance to the introduction of market reforms such as the abolition of fixed price controls and the implementation of competitive mechanisms of the sort that had affected those defense-related enterprises required to undergo conversion.89

88. Li Yintao, “Conversion in Large and Medium-Sized Defense Enterprises,” Junshi Jingji Yanjiu (February 1997), 14–15; and “Jiaqiang Guofang Jichu Yanjiu Gongzuo” [Strengthen Basic Defense Research Work], Zhongguo Jichu Kexue [China Basic Science] (February 2000), 27. 89. When Liu Jibin was appointed COSTIND minister in 1998, he provided a litany of problems that he pinpointed as responsible for the defense industry’s shortcomings. See Zhang Yi, “Liu Jibin, Minister of the Commission of Science, Technology and Industry for

[75]

Fortifying China Table 3.2. Changing ratios of military-civilian production in the Chinese defense economy, 1978–1997

Year

Military production as a percentage of total annual output of the defense economy

Civilian production as a percentage of total annual output of the defense economy

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

92% 84 78 72 66 60 54 48 38 37 28 26 26 23 20 19 15.5 17 15.5 15.5

8% 16 22 22 34 40 46 52 62 63 72 74 74 77 80 81 84.5 83 84.5 84.5

Source: Zhongguo Junzhuanmin Dashiji Bianxiezu [Chronicle of China’s Defense Conversion Editorial Writing Group], Zhongguo Junzhuanmin Dashiji, 1978– 1998 [Chronicle of China’s Defense Conversion, 1978–1998] (Beijing: Guofang Gongye Chubanshe, 1999), 206.

Subsequently, as the reform process gathered momentum in the rest of the national economy with the shift from mandatory to guidance planning, the defense economy was ordered to adopt a number of reform measures. Enterprises, for example, were granted more decision-making and financial autonomy.90 Some of COSTIND’s administrative and decision-making responsibilities were transferred to end users such as PLA departments. Defense industrial ministries were reconfigured into quasi corporations to allow them to use commercial rather than only administrative mechanisms. Moreover, a new regulatory regime was established to improve

National Defense, Says in a Meeting That China’s High-Technology Industry for National Defense Will Be Restructured on a Large Scale,” Xinhua Domestic Service, 27 October 1999, in FBIS, 27 October 1999. 90. See World Bank, China: Between Plan and Market (Washington, D.C.: World Bank, 1990), 73–76; and Barry Naughton, “China’s Experience with Guidance Planning,” Journal of Comparative Economics, no. 14 (1990): 743–67.

[76]

The Defense Economy under Deng Xiaoping

management oversight, quality control, and the relationship between contractors and end users.

The Continued Dominance of Central Planning One of the most important changes in reinvigorating the NIS during the Dengist period was the devolution of decision-making authority by the central government to primary actors such as enterprises and research institutions. However, a barrier to this initiative was the defense industrial bureaucracy, which tried to hold on tightly to its control over the management of the defense economy by arguing that state control was vital in ensuring the smooth operation of military programs. COSTIND, the defense industrial bureaucracy, and the PLA oversaw defense work through the administration of a number of detailed plans that they drew up in consultation with the SPC and other government agencies. These military equipment R&D and procurement plans set out detailed budgets and contracts for defense R&D projects, trial production, and serial production of weapons and military equipment.91 They were legal statutes and could not be changed without permission from central government and military departments.92 In the R&D sector, COSTIND and the PLA oversaw the management of defense projects and activities through a number of annual, medium and longterm planning processes. They included the Five-Year Military Equipment Research, Development, and Production Plan; the Ten-Year Military Equipment Research, Development, and Production Program; and the Annual Military Equipment Research, Development, and Program Plan (AMEP). The five-year plan was the most important and was closely coordinated with the central government’s five-year economic development plans.93 The procurement of weapons systems and military equipment was governed by the Annual State Plan for Military Equipment Orders (Niandu Zhuangbei Dinghuo Jihua) and its longer-term counterpart, the Five-Year State Plan for Military Equipment Orders. Any items and programs listed on this equipment plan were counted as military products. Products with dual-use functions were also sometimes included in this plan, although

91. See Jiao Qiuguang, chief ed., Junshi Zhuangbei Guanli Xue [The Study of Military Armaments Management] (Beijing: Junshi Kexue Chubanshe, 2003), 273–75; and “Meeting on Ordering of Goods in Weapons Industry Ends,” Zhengzhou Henan Provincial Broadcasting Service, 13 December 1989, in FBIS, 13 December 1989. 92. Ding Henggao, “Reforming Defense, Science, Technology and Industry,” in Chinese Views of Future Warfare, rev. ed., ed. Michael Pillsbury (Washington, D.C.: National Defense University, 1997), 170. 93. Jiao, Junshi Zhuangbei Guanli Xue, 252–63.

[77]

Fortifying China

they were also separately categorized as civil-military items.94 Output produced by defense industrial enterprises that were not part of the military equipment plan were counted as civilian goods.95 These weapons plans were closely linked with other state mandatory plans, and this permitted defense industrial enterprises to have special access to state-controlled supplies of low-cost commodities. This access, though, was steadily curtailed as the size of the command economy shrank with the accelerating transition to a market-based economy in the 1990s. During the 1980s, spending associated with these plans fell sharply because of the cutbacks in overall defense spending. Weapons procurement as a proportion of the official defense budget fell 12 percent over the decade to just 16.4 percent of overall military expenditures in 1990.96 In 1990 alone, the Chinese government was reported to have planned to cut arms production by 45 percent.97 The annual output value of military production by the defense economy as a proportion of its total output fell from 92 percent in 1978 to 26 percent in 1990 and reached its nadir of 15.5 percent in 1997. While these heavy cuts forced manufacturing plants to shutter production lines and lay off surplus workers, the overall result was an enhancement in the quality of defense activity. This was because much of the output had been of badly outdated equipment that the PLA did not want. Military chiefs instead demanded that the defense economy channel more of the remaining funds toward research and development rather than production. Unlike in the defense conversion arena and the overall economy, the organizational barriers that separated primary actors were not dismantled for entities engaged in military work, and this adversely affected innovation within the defense economy. This reflected the deep-seated resistance of decision makers within the bureaucracy to fundamentally restructure the system, as this would have eroded their power over these primary actors. Some limited efforts were made, however, to overcome organizational restrictions and allow primary actors to establish linkages with each other. An important reform was the decision taken by the central government and

94. Xie, Dangdai Guofang Keji Shiye, 146. 95. During the 1980s, COSTIND, SPC, and the State Economic Commission formulated extensive lists of civilian products that they would allow defense enterprises to develop and produce. Ibid., 160. 96. Zhu Qinglin and Meng Renzhong, chief eds., Zhongguo Caijun Yu Guofang Ziyuan Peizhi Yanjiu [China’s Disarmament and the Research of the Disposal of Defense Resources] (Beijing: Junshi Kexue Chubanshe, 1999), 125; and Yu Liankun, chief ed., Zhongguo Guofang Jingji Yunxing Yu Guanli [The Management and Functions of the Chinese Defense Economy] (Beijing: Guofang Daxue Chubanshe, 2002), 301. 97. Xinhua Domestic Service, 15 January 1990, reported in BBC SWB/FE/0663I, 16 January 1990.

[78]

The Defense Economy under Deng Xiaoping

the CMC in 1987 to transfer control of the defense S&T research and trial production budget from COSTIND and defense industrial ministries to the PLA General Staff Department and subordinate military equipment units.98 Under the previous system, the ministries often abused their responsibilities and used the appropriations for their own purposes, thus seriously undermining the R&D process.99 Under the new arrangements, military end users were permitted to directly approach R&D units and task them with specific projects. Although this new budget management framework helped to foster ties between primary actors at the expense of governmental secondary actors, it suffered serious weaknesses. PLA departments had little expertise in the direct management of weapons R&D projects. Moreover, the relationship between military end users and R&D institutes continued to be based on central planning rather than market principles. PLA departments assumed all the financial risks for the projects and R&D units faced few if any financial consequences if they failed to meet their contractual obligations.100 These and other reform measures had mixed success because they either did not address underlying structural impediments or were not vigorously pursued. The skepticism and opposition of COSTIND to the chipping away of its institutional clout were also formidable barriers to overcome.101 By the end of the formative reform period, the archaic separation of primary actors had become a major obstacle to product innovation and development within the defense economy. One informed Chinese assessment of the defense R&D system noted that while some reforms had taken place, the military component of the system continued to be selfenclosed, maintained its own separate organizational system, remained overly reliant on state funding, lacked close ties with the production system, and had a poor track record at commercializing its R&D results.102

COSTIND and the Preservation of the Vertical Functional System The polarization of the defense economy into two competing vertical functional systems concerned with conventional and strategic programs 98. Jiao, Junshi Zhuangbei Guanli Xue, 83. 99. Zhu and Meng, Zhongguo Caijun Yu Guofang Ziyuan Peizhi Yanjiu, 149–50. 100. Guo Zengming and Zeng Weirong, chief eds., Zhuangbei Jingji [The Economics of Military Equipment] (Beijing: Jiefangjun Chubanshe, 2001), 182–83; and Li Gang and Yang Huansen, “Guangyu Shixing Guojia Junshi Dinghuo Zhidu De Yanjiu” [Feasibility of the National Military Procurement System], Junshi Jingji Yanjiu (March 1998), 27–28. 101. Interviews with General Armament Department officers, Beijing, December 2003. 102. Sun, Zhongguo Guofang Keji, 184. See also Liu, “Investigative Research,” for a similar assessment.

[79]

Fortifying China

during the Maoist era was replaced in the reform era by the emergence of COSTIND, which successfully recentralized decision-making and management oversight under a single powerful and united entity. COSTIND was established in 1982 through the merger of the NDSTC, NDIO, and the CDSTE into a military-civilian organization that reported both to the CMC and the State Council, although its primary affiliation and loyalty were with the military establishment. One of the key goals of COSTIND was to overcome the deep-seated rivalries that had marred cooperation between competing administrative bodies in the Maoist era, when the defense economy was facing more profound challenges to its power and resources in a period of falling defense budgets. The former strategic weapons community won out in the battle to take charge of this powerful new entity, and COSTIND quickly established itself as a well-managed organization that tightly oversaw the activities of the defense economy.103 COSTIND’s primary responsibility was overseeing the planning and administration of the research, development, evaluation, and production of the country’s conventional and strategic weapons systems. The commission also had jurisdiction over a number of high-technology-related special projects, such as the country’s space and nuclear programs. It also established a number of provincial offices in regions with heavy concentrations of defense industrial facilities, such as Sichuan, Shaanxi, and Henan. The dominance of the former strategic weapons elite at the top of COSTIND allowed the development of informal horizontal ties with science and technology-related organizations in other functional systems.104 Former strategic and conventional weapons scientists and engineers had risen to the top of bodies such as the SSTC, CAS, and SPC. As Evan Feigenbaum points out, the presence of senior weapons scientists and engineers throughout the top layers of the country’s industrial, science, and planning apparatus during the reform period allowed the defense economy to expand its influence and play a central role in shaping or taking charge of important projects that might otherwise have been beyond its bureaucratic reach.105 Examples of such successful initiatives included key elements of the 863 and space programs. The 863 program grew steadily in size, scope, and importance during the 1990s. Through the establishment of expert leading groups and specialized research centers, this program helped to introduce, nurture, and diffuse cutting-edge technological products and processes in leading economic sectors. In the information technology industry, for example,

103. Feigenbaum, China’s Techno-Warriors, 107–10. 104. See Wang Yue, chief ed., Guofang Keji Yu Junshi Jiaocheng [Course of Study on Defense Science and Technology and Military Affairs] (Harbin: Harbin Gongcheng Daxue Chubanshe, 2002), 444–61. 105. Feigenbaum, China’s Techno-Warriors, 143–52.

[80]

The Defense Economy under Deng Xiaoping

projects have focused on the development of optical electronics, telecommunications, and artificial intelligence and computing. Defense scientists and engineers have played active roles in these projects to ensure that defense requirements are taken into consideration and to identify and gain access to any technologies that may be useful for military application. The close cooperation between the defense economy and civilian counterparts in the 863 program highlights the deepening interrelationship between the civilian and defense technological and industrial innovation systems that has taken place in the reform era. While the 863 program has become the principal mechanism of coordination and interaction between the defense economy and the civilian science and technology establishment at the national and sectoral levels, it has also facilitated the forging of exchanges and ties at the enterprise level and among individuals. These linkages have been predominately in the dual-use arena, but there has also been limited cooperation between the defense economy and the NIS in defenserelated R&D activities since the 1990s. The defense economy was highly selective, though, in its scope of participation in government-run technology innovation and development schemes. Besides the 863 program, the government organized at least fourteen other projects during the 1980s and first half of the 1990s to promote the development of key S&T and high-technology sectors. But the defense economy chose to take an active part in only one of these programs. This was a defense conversion project that was set up in 1988 and jointly administered by COSTIND, SSTC, and SPC.106 The reluctance of the defense economy to open itself up and forge closer and broader linkages with the rest of NIS reflected its cautious nature and preoccupation with secrecy. This conservatism also meant that it viewed the reforms being pursued by the national leadership with considerable trepidation. The defense economy sought to use its status as a critical strategic sector and its separation from the civilian economy to thwart or dilute the introduction of economic and organizational reforms that had caused so much upheaval in the rest of the national economy.

Transforming Ministries into State Corporations The reorganization and relabeling of industrial ministries into stateowned corporations within the defense economy between the early 1980s and early 1990s was a cosmetic reform designed to reduce excessive and 106. Zhonghua Renmin Gongheguo Kexue Jishu Bu [People’s Republic of China Ministry of Science and Technology], Zhongguo Gaoxin Jishu Changye Fazhan Baogao 1999 [Development Report of China’s New and High-Technology Industry, 1999] (Beijing: Kexue Chubanshe, 1999), 21–22.

[81]

Fortifying China

overlapping layers of bureaucratic management that had built up during the Maoist era. This overhaul, though, was painstakingly slow because of deep-seated opposition by the defense industrial bureaucracy, which feared the reforms would lead to job losses and a cutback in its institutional clout.107 The first changes took place in 1982 when the Sixth Ministry of Machine Building was renamed the China Shipbuilding Corp. The restructuring stalled for the next few years, resuming only after a public rebuke from Deng Xiaoping. At a defense industrial meeting in June 1986 he stated, “[W]e have been talking about the reform of the military industry system for several years. We cannot wait anymore.”108 Shortly afterward, the Ministries of Ordnance and Machine Building were abolished and their personnel transferred to other government agencies, such as the State Commission for the Machine Building Industry, or assigned to newly created conglomerates such as China Northern Industries Corporation (NORINCO).109 This was followed in 1988 by the restructuring of the Ministry of Nuclear Industry into the China National Nuclear Corp. By the mid-1990s, all five ministries under the defense industry had been transformed into state-owned corporations. However, the headquarters of these corporations continued to function as administrative entities, and their interactions with COSTIND and the government bureaucracy changed little under this new system. For example, the heads of the corporations also served concurrently as COSTIND vice ministers. The key changes were intended to be in the relationships between the corporate headquarters and their subordinate entities. Instead of relying on administrative controls to run their operations, corporate headquarters had to practice business management techniques and treat organizations under their jurisdiction as autonomous business firms rather than bureaucratic units.110 Subordinate firms were, on paper at least, given full responsibility for their own financial affairs, ensuring that they were profitable, while central headquarters oversaw strategic issues, such as long-term planning. In reality, the vast majority of enterprises struggled to make ends meet and remained dependent on the largesse of the state, which provided large financial subsidies to keep production lines in operation and cover mounting losses. COSTIND was unable to address the soft budget constraints that were a legacy of the mandatory/guidance planning system.

107. Interviews with PLA and COSTIND officials, Beijing, June 1999 and July 2001. 108. Xie, Dangdai Guofang Keji Shiye, 145. 109. Zhu Ling, “Military Told to Make More Products for Civilian Use,” China Daily, 4 January 1986, 1. 110. Interview with COSTIND vice minister Huai Guomo, Beijing, August 1993. For an account of the interview, see Tai Ming Cheung, “Elusive Ploughshares,” Far Eastern Economic Review (14 October 1993), 70–71.

[82]

The Defense Economy under Deng Xiaoping

Although from the mid-1980s defense factory managers were told that they were responsible for balancing the books of their enterprises, many still believed more than a decade later that the government would not allow them to go bankrupt because of their military importance and concerns about labor unrest. According to a commentary by the Xinhua News Agency in November 1999, “[A]lthough the enterprises are facing many problems and suffering heavy losses, they lack the necessary pressure and erroneously believe that the problems of war industry enterprises can only be resolved by depending on the state.”111 While cosmetic changes were made in the organization of these firms, such as the selective trimming of staff and adjustments in their legal status, more fundamental reforms to make them truly function as commercial enterprises in a market economy had to await the results of experiments that the central government was carrying out in other parts of the economy. This included the introduction of modern management systems and shareholding arrangements. These reforms were not approved by the central leadership for widespread adoption until 1997, and COSTIND did not have to begin to apply these changes until the end of the 1990s.112

Adopting the Contract Responsibility System Weapons and equipment projects that came under the AMEP were placed under the management and supervision of COSTIND and PLA departments. In the early years of the reform era, R&D and production activities were allocated and overseen through Maoist-style administrative procedures. But this unwieldy and inefficient system was replaced in 1987 by the contract responsibility system (CRS). The CRS was first introduced in the early 1980s and had helped to rejuvenate the ailing agricultural sector. The central government then decided to implement the system in the state industrial sector, which included the defense economy. Under this new arrangement, defense economy enterprises were required to negotiate contracts, budgets, profits, schedules, and quality standards directly with PLA departments. Within two years of the adoption of this new system, it was claimed that more than 90 percent of all the country’s new weapons development and satellite projects were based on contracts that

111. Zhang Yi, “War Industry Enterprises Too Must Operate According to Market Laws,” Xinhua Domestic Service, 28 November 1999, in FBIS, 28 November 1999. 112. “Zhu Rongji Talks at Defense Industry Group Ceremony,” Beijing Central Television Program One Network, 1 July 1999, in FBIS, 1 July 1999; and “PRC Minister on Future Projects for Defense Commission,” Beijing Central People’s Radio Network, 30 March 1998, in FBIS, 31 March 1998.

[83]

Fortifying China

led to shortened delivery times and cheaper costs.113 The development period for a new radar system was said to have been reduced by eight years, and the cost of making a new unmanned airplane was trimmed by Rmb 10 million.114 During the Eighth Five-Year Plan, the defense economy was said to have put out contract tenders for around thirty “large-type” projects, which led to savings of Rmb 100 million and guaranteed the delivery schedule and quality of equipment in the research phases of development.115 Despite these reported successes, the archaic and entrenched working practices of this centrally planned system proved to be highly resistant to reform. Contracts were often awarded on the basis of bureaucratic connections and patronage, and factory bosses had limited decision-making authority on many issues crucial to the running of their enterprises, including the hiring and firing of employees and long-term strategic investment planning. The lack of penalties if enterprises did not adhere to their contracts was a serious problem that would undermine the long-term performance of the system.116 The CRS encouraged enterprises to seek short-term profits at the expense of long-term planning and project management. A widespread practice was for research institutes and enterprises to bid for contracts by submitting ambitious proposals that could not be realistically fulfilled. If they won, the enterprises would quickly spend the funds from the contracts and then ask for additional funding or renege on their obligations with little fear of punishment.117 Writing in a military journal in 1994, more than seven years after the introduction of the CRS, COSTIND director general Ding Henggao alluded to the drawbacks of the existing model by saying that the defense economy needed to design a new contract system in which “there should be clear relations of interests between the supply and demand sides, and there should be unity of responsibility, rights and interest. The essence of a purchaser/contract system is to shift to the market economy.”118 Moreover, the CRS failed to address the issue of soft budget constraints and property rights. The central government decided to replace the CRS in 1993 with the Modern Enterprise System (MES) model that more directly 113. Yu Qingtian, “A Historic Change in Standpoint: Initial Results Obtained in Restructuring and Structural Readjustment of National Defense Science and Technology,” Renmin Ribao, 20 September 1989, 5. 114. “Contract System Rejuvenates Military Industry Enterprises,” Xinhua Domestic Service, 5 March 1988, in BBC//SWB/FE W0018 A6. 115. Fan Juwei and Su Kuoshan, “COSTIND Provides Effective Support for Scientific Research in National Defense,” Jiefangjun Bao, 22 May 1996, 1, in FBIS, 22 May 1996. 116. For a critique of the CRS, see Chai Benliang, “Conversion and Restructuring of China’s Defense Industry,” in Brommelhorster and Frankenstein, Mixed Motives, Uncertain Outcomes, 73–76. 117. Sun, Zhongguo Guofang Keji, 119. 118. Ding, “Reforming Defense Science, Technology and Industry,” 163.

[84]

The Defense Economy under Deng Xiaoping

addressed issues such as ownership rights and the separation of government administration from enterprise management. The MES was not widely adopted by the defense economy however until the end of the 1990s.119

Opposition to Performance-Based Criteria The implementation of the CRS was intended to lead to the adoption of more performance-based criteria for defense work. Under the Maoist-era mandatory planning regime, appropriations for defense R&D and production projects were decided and allotted by the central authorities such as COSTIND and government ministries. The highly centralized and excessively bureaucratic nature of these arrangements led to serious problems, including poor capital utilization, deficient project supervision, and a lack of coordination between government agencies and primary actors. But the switch to the CRS ran into considerable resistance because COSTIND and its subordinate government organizations remained firmly anchored to the principles, procedures, and culture of the socialist planning system.120 As the reform process gathered momentum during the 1980s and 1990s, the national economy transitioned slowly but steadily from an overwhelmingly state-dominated system into one in which market forces began to play an increasingly important role. For the defense industrial bureaucracy, though, the shift from mandatory planning to the market economy was much more hesitant and lagged well behind the civilian sector. Senior defense industrial policymakers paid lip service to the importance and benefits of market reforms, but they were unwilling to relinquish their authority and control to any significant extent. Ding Henggao acknowledged that “the research and production of military products should follow the law of value and adapt to the changes in supply and demand, making full use of the role of the market.” But he qualified this statement by pointing out that “at the same time, control by the state should not be weakened or negated.” He further added that “during a shortage of resources or in an imperfect market, the strengthening of state control would be conducive to giving full play to the advantage of socialism in concentrating resources on big projects and achieving better results and efficiency from limited resources.”121 119. Zhang Yi, “Liu Jibin,” and Yu Liankun, chief ed. Zhongguo Guofang Jingji Yunxing Yu Guanli [The Management and Functions of the Chinese Defense Economy] (Beijing: Guofang Daxue Chubanshe, 2002), 145–51. 120. Harlan W. Jencks, “COSTIND Is Dead, Long Live COSTIND! Restructuring China’s Defense Scientific, Technical, and Industrial Sector,” in The People’s Liberation Army in the Information Age, ed. James C. Mulvenon and Richard H. Yang (Santa Monica: RAND Corp., 1999), 59–77. 121. Ding, “Reforming Defense Science, Technology and Industry,” 163–64.

[85]

Fortifying China

The introduction of the CRS to improve performance among defense enterprises was seriously compromised, however, by the retention of a rigid fixed price regime for military products. Prices were set according to the formula of cost plus 5 percent profit. Until the mid-1980s, companies were able to contain costs because the raw materials required for military production could be obtained at low subsidized prices set by the government. But as price controls for most materials on the state plan were gradually relaxed or abolished beginning in the late 1980s, the underlying costs for military products began to escalate. For example, the military’s allocation of subsidized steel in the state plan from the mid-1980s onward was sufficient to meet only 60 percent of its needs, which meant that military units had to acquire their remaining supplies at a much higher cost in the open market.122 The cost of building a Luwei-class destroyer, for example, jumped from around Rmb 20,000 per metric ton in 1980 to around Rmb 40,000 in 1985 and reached Rmb 80,000 by 1990.123 Defense industrial policymakers claimed that the rise in production costs prevented them from making reforms to the pricing system even though they were keenly aware of “the importance of price as a lever.”124 Ding Henggao pointed out in 1994 that while “there is a strong desire to reform the pricing of defense products,” the “budget for the armed forces is very tight and because there have been big increases in the prices of raw materials, it would be very difficult to carry out such reform.”125 One study that examined the losses suffered by the ordnance industry during the 1980s concluded that the “low profit policy has robbed enterprises of the ability to self-develop and upgrade” because the low profit retention rate meant that they were “always out of funds.”126 In this environment of rising costs and diminishing fixed returns, defense contractors and R&D institutes had few incentives to innovate. They were more concerned with finding more lucrative commercial activities. The impact was said to be particularly acute in the development of advanced defense technologies. Important projects were postponed or delayed because of a shortage of funds and the unwillingness of enterprises to take risks or use their initiative because of the lack of rewards.

122. Yu Liankun, Zhongguo Guofang Jingji Yunxing Yu Guanli, 326. 123. Zhu Songshan et al., eds., Wuqi Zhuangbei Jingji Jiben Lilun [Fundamental Theories of the Economics of Weapon Armaments] (Beijing: Guofang Gongye Chubanshe, 2002), 61. 124. Ding, “Reforming Defense Science, Technology and Industry.” 125. Ibid. 126. Miao Qipei et al., “Investigative Report on Losses Sustained by Enterprises under the Former Ministry of Arms Industry,” in Investigation and Research on Deficits in Industrial Enterprises (1989 Neibu [Internal] Study), published in Chinese Economic Studies 26, no. 2 (Winter 1992–93): 66.

[86]

The Defense Economy under Deng Xiaoping

Geographic Clusters The restructuring and downsizing of the defense economy led to the emergence of a more rational and compact defense industrial complex. Many defense-related enterprises in outlying areas of the country, especially Third Line factories located in the interior of the country, permanently switched from military to civilian production. This left the bulk of remaining defense industrial enterprises and facilities located in more accessible parts of the country, such as in coastal provinces or near major cities and transportation routes.127 This led to the rise of new or the revamping of existing geographic clusters of industrial and technological innovation that served defense and joint civilian-military needs. A number of Third Line provinces in western China took advantage of the consolidation and relocation of defense industrial enterprises in their areas by promoting designated cities and regions to be centers of defense and civil-military industrial expertise. One new hub began to form around the National Defense Science and Technology University (NDSTU) in Changsha in central China from the mid-1990s. NDSTU is the country’s premier defense S&T university and has developed a number of new technological products that have been commercially successful, such as the Yinghe computer system.128 Other cities that sought to attract current and former defense firms included Mianyang in Sichuan, Guiyang in Guizhou, and Xian in Shaanxi.129

Implementing New Rules of the Game Concerted efforts were made during the reform period to establish a robust set of institutions to govern the activities of the defense economy and its transition to a more open mode of operation. In the chaos of the Cultural Revolution, many important rules, established practices, and standards that had been put in place, especially by the strategic weapons community, had been overturned or abolished, and this led to a precipitous fall in quality standards and production output.130 127. The massive investment in defense-related production capabilities during the 1960s and 1970s led to the development of twenty-four major bases for defense-related R&D and production. See Wang Sui, “Special Report on the Economy of the New China over the Past Five Decades,” Xinhua Hong Kong Service, 25 August 1999, in FBIS, 25 August 1999. 128. “NDSTU and Changsha New High-Technology Enterprises Cooperate,” Tongxun Changyebao [Communications Weekly], 3 May 2000, 15. 129. Liu Lei, Wan Difang, and Liang Lingli, “Junshi Gongye De Jishu Waiyi Yu Zhongxibu Dichu Jishu Jinran” [Technology Spillovers and Technological Progress of the Military Industry in China’s Central and Western Regions], Zhongguo Ruan Kexue [China Soft Sciences], July 2004, 124. 130. Xie, Dangdai Guofang Keji Shiye, 126–28.

[87]

Fortifying China

In the early years of the reform process, the focus was on restoring many of the institutions created during the Maoist era. This included the reestablishment of procedures and agencies to certify the development of weapons systems, the enactment of administrative regulations to cover internal operational practices, and the introduction of new contract arrangements to govern procurement and project management activities.131 Product certification committees for weapons systems were reactivated at the onset of the reform period to ensure quality control. From the late 1990s, attention focused on the establishment of legal statutes covering weapons management, R&D, production, and other related issues.132

Key Activities of the System Research and Development Research and development in the reform period rose to the top of the priorities for the defense economy as it set its sights on overcoming the decades of international isolation that had left it a technological backwater, especially in the conventional weapons arena. While the rest of the defense industrial establishment endured shrinking budgets, falling output, and waning political support, the R&D establishment saw its share of the diminishing resource pie increase. A robust and self-sufficient S&T research capability was deemed by the defense economy leadership to be crucial to the long-term revival of the defense industrial apparatus. “More research, less production” was a slogan that defined the balance between R&D and production during these long years of military austerity. An assessment of Chinese military spending by the U.S. Central Intelligence Agency (CIA) from 1978 to 1986 estimated that defense R&D spending had increased by 25 percent during this period, while weapons procurements at the same time contracted by 10 percent.133 Drawing from their experience of the Maoist-era strategic weapons programs, defense policymakers decided in the mid-1980s that their foremost priority should be on the development of advanced conventional technology for next-generation weapons systems rather than on making incremental improvements in existing equipment. At a 1987 CMC meeting to discuss the country’s Seventh Five-Year Defense S&T Plan, military and defense

131. Ibid., 115–17. 132. Jiao, Junshi Zhuangbei Guanli Xue, 183–91. 133. Central Intelligence Agency, CIA Report on the Chinese Economy (Hong Kong: U.S. Consulate General, 1988).

[88]

The Defense Economy under Deng Xiaoping

industry chiefs decided that more R&D spending should be directed to financing of long-term weapons development projects.134 Particular attention was paid to the nurturing of advanced R&D capabilities (Yuxian Yanjiu)—that is, basic and applied research. These fundamental research activities had been woefully neglected during the Maoist era as the focus was on R&D of serial equipment (Xinghao Yanzhi) that covered the copying, adaptation, and incremental development of weapons system acquired from overseas, especially the Soviet Union during the 1950s. As a consequence, “advanced research work was neglected and this delayed weaponry development.”135 More resources were made available, and organizational changes were implemented to promote cooperation on advanced R&D activities. An important initiative by COSTIND was the establishment of cross-industry R&D groups in 1986 in critical technology areas, including precision guidance, nuclear radiation hardening, and composite materials. These ad hoc groups were composed of leading scientists and researchers from different R&D organizations that regularly met to share and coordinate their research. Funding for advance research projects was specially set aside by COSTIND and guaranteed under defined ratio targets.136 These cross-industry knowledge links were largely confined to the defense economy and select government R&D institutions that had already participated extensively in defense work, such as laboratories and institutes under the CAS. The defense economy was hesitant to develop ties with the rest of the civilian S&T sector, such as universities, private enterprises, or foreign technology companies, because of concerns over secrecy. This aversion to opening up to the outside world prevented the defense economy from gaining access to an increasingly dynamic and sophisticated civilian sector. By comparison, the U.S. Defense Department during this same period allocated as much as half of its R&D budget to university research laboratories and other civilian institutions.137 The benefits of this increased funding were seriously compromised, however, by a chaotic and wasteful budget management system. One major problem was the extensive duplication of research activities. Another flawed practice was spreading funds over too many projects and failing to set aside sufficient resources for key programs. As a result, it was common

134. Xie, Dangdai Guofang Keji Shiye, 169. 135. Ibid., 169. 136. Ibid., 169–71. 137. Stuart W. Leslie, The Cold War and American Science: The Military-Industrial-Academic Complex at MIT and Stanford (New York: Columbia University Press, 1993).

[89]

Fortifying China

for projects to be halted when budgets ran out.138 During the Eighth FiveYear Defense S&T Plan from 1991 to 1995, for example, all the defense economy’s key R&D projects exceeded their allocated budgets. To ensure that work on these priority projects continued, the authorities had to allocate much of the funding earmarked for the Ninth Five-Year Plan to these programs, which meant that there was significantly reduced financing available for new projects.139 Throughout the reform period, senior leaders had repeatedly emphasized to the defense economy that it needed to better manage the use of its funds and concentrate resources on key projects.140 However, the overriding concern of defense industrial policymakers was not to improve on the quality of output but to ensure that all R&D outfits under their administrative jurisdiction received sufficient funds to stay afloat, a practice described as “sprinkling pepper.” During the 1980s, fewer than half of all R&D entities involved in defense work received project funding, and it is estimated that as much as 50 percent of the R&D capabilities of the defense economy were surplus to requirements.141 As the state provided virtually all funding for defense R&D projects, it exclusively owned the intellectual property rights for all the research output developed by the R&D community. As a consequence, there was little incentive for design and R&D institutes to continue to be involved in projects once they had finished their assignments and the results had been handed over to government and military agencies.142 This strictly compartmentalized division of responsibilities between the R&D and production systems was a major cause of the persistent failure of the defense economy to produce military equipment that met the requirements of end users in a timely fashion. Manufacturing enterprises faced enormous difficulties in absorbing and mastering the blueprints and design data that were handed over to them by military and government departments, especially in the absence of close cooperation with the design and research laboratories that had produced this work.143 Even when R&D institutes were successful in producing technologies and know-how that could

138. Sun, Zhongguo Guofang Keji, 119; and Jiang Huacheng and Zheng Shaoyu, “Jianli Wanshen Zhuangbei Caigou Gongzuozhong ‘Sige Jizhi’ De Sikao” [Some Ideas to Build a Perfect Equipment Acquisition System], Zhuangbei Zhihui Jishu Xueyuan Xuebao [ Journal of the Academy of Equipment Command and Technology] 14, no. 3 (June 2003): 5–8. 139. Zou Guowan, “Raising the Beneficial Use of Defense Science and Technology Research Funds,” Junshi Jingji Yanjiu, March 1998, 46–47. 140. Xie, Dangdai Guofang Keji Shiye, 159–74. 141. Jiang Baoji, Zhang Shenwang, and Ji Bing, “Several Problems,” 63–68. 142. Zhu and Meng, Zhongguo Caijun Yu Guofang Ziyuan Peizhi Yanjiu, 153. 143. Huang Qiang, “Will China’s Aviation Industry Be Able to Get Out of the Doldrums Soon?” Keji Ribao, 8 July 1999, 8, in FBIS, 8 July 1999.

[90]

The Defense Economy under Deng Xiaoping

be put into operation, there was often no subsequent effort to pursue this end-use development. One assessment found that less than 15 percent of the annual research output of defense R&D institutes was actually turned into commodities for military or civilian use.144 An important catalyst for the success of the strategic weapons program in the 1960s and 1970s was the unparalleled interest and close supervision by top political leaders, who often set challenging targets and deadlines. In the reform era, though, the country’s senior leaders were preoccupied with economic development and did not pay close attention to the development of key weapons projects. Notwithstanding the occasional exhortations of top policymakers that the defense economy must catch up with the world’s advanced military powers, the central leadership did not seek to actively mobilize the R&D community to achieve its goals. The innovation cycle suffered in the absence of this demand-pull and discoverypush dynamic.145 As China gradually opened its doors to the outside world during the reform period, the defense economy began to develop ties and gain access to badly needed foreign expertise and technology to address the serious shortcomings of its system. But with a deep-seated institutional culture of secrecy, the defense economy proceeded cautiously. During the 1980s, when China enjoyed good military-to-military relations with the West, delegations from the defense economy regularly visited advanced Western countries to gather information and selectively acquire off-the-shelf weapons systems.146 A few joint-venture projects were permitted in technologically critical areas in which the defense economy was unable to meet the requirements. Ventures were established, for example, with U.S. and Western European companies to upgrade the avionics and power plants of fighter aircraft. The defense economy was also keen to acquire civilian technologies with dualuse applications, such as electronics and high technology products.147 The imposition of military sanctions against China following the 1989 Tiananmen Square crackdown led to a major disruption in this information and technology acquisition effort. The defense economy had clearly learned the costs of being cut off from the outside world; it quickly readjusted its strategy and began to cultivate ties with other non-Western countries that could provide alternative access to advanced defense technological and 144. Xin Guoping, “A Study on Industrialization and Commercialization of Science and Technology Achievements from Military Industry,” Ranqi Wolun Shiyan Yu Yanjiu [Gas Turbine Experimentation and Research] 14, no. 2 (2001): 55–58. 145. Feigenbaum, China’s Techno-Warriors, 158–64. 146. See Bates Gill and Taeho Kim, China’s Arms Acquisitions from Abroad (Oxford: Oxford University Press, 1995), 34–41. 147. Richard A. Bitzinger, “Arms to Go: Chinese Arms Sales to the Third World,” International Security 17, no. 2 (Autumn 1992): 101–7.

[91]

Fortifying China

industrial knowledge and equipment.148 While the termination of defense technological and industrial exchanges between China and Western countries did have negative ramifications for the Chinese defense economy, especially in areas such as aviation, it was able to overcome these difficulties by establishing extensive linkages with countries such as the Soviet Union and Israel. By the end of 1997, one informed assessment of the defense R&D system was that it remained self-enclosed, continued to maintain its own separate organizational system, was still overly reliant on the state for funding, and lacked close ties with the production system, and that the commercialization of its R&D results remained poor.149 Senior defense economy officials acknowledged that rigid compartmentalization within the defense industry had prevented the establishment of a “virtuous circle” in military-civilian integration.150

Competence Building The restructuring and downsizing of the defense economy during the reform era had a profound impact on the training, employment, and morale of its workforce. The sharp and prolonged decline in work forced many enterprises to idle production lines, lay off workers, and scramble to find new avenues for business. As the Maoist-era guarantees of lifetime job security and cradle-to-grave welfare benefits were steadily cut back, the motivation, commitment, and competence of the labor force also began to erode. This inevitably had an adverse effect on work quality and innovation.151 As the defense economy shifted its priorities from the mid-1980s to concentrate on the development of high-technology projects, it found that most of its employees lacked the necessary skills to meet these new challenges. Many of its leading scientists and engineers had been trained in the 1950s and 1960s, when China was heavily dependent on the importation and exploitation of Soviet technology. Their skillsets and experience were unsuited to the new demands of the electronics and information era. This problem could have been mitigated had the defense economy invested sufficiently in the training and education of its scientific research personnel. But the severe budget cuts that the defense economy endured during the 1980s included sharp reductions in educational funds. A survey of the

148. Gill and Kim, China’s Arms Acquisitions, 48–96. 149. Sun, Zhongguo Guofang Keji, 184. 150. Liu Jibin, “Implement the Guideline of Military-Civilian Integration, Rejuvenate the National Defense Science and Technology Industry,” Renmin Ribao, 2 February 1999, 12, in FBIS, 2 February 1999. 151. Zhu and Meng, Zhongguo Caijun, 153–54.

[92]

The Defense Economy under Deng Xiaoping

defense industrial scientific and technical corps in the late 1980s found that per capita investment in defense research in China was just one-eighth of that in the United States and one-fourth of that in the United Kingdom and West Germany. Moreover, per capita investment in defense R&D institutes was lower than in the civilian sector, when it should have been at least two or three times larger because of the higher cost of defense work.152 COSTIND did make an effort to revitalize the dilapidated defense S&T academic system, which had been hard hit by the Cultural Revolution. This included the establishment of the NDSTU in Changsha in 1978 and the creation, reopening, and upgrading of a large number of other universities, academies, and colleges involved in defense and strategic high-technologyrelated R&D. By the late 1980s, there were twenty-nine educational facilities under COSTIND’s mandate, some of which had close cooperative ties with civilian universities.153 The long-term aftermath of the Cultural Revolution had a serious impact on the structure of the scientific and technical corps during the 1980s and 1990s. The recruitment and education of scientists, technicians, and engineers were adversely affected as defense universities and academies had to halt their activities or even shut down during this period of domestic upheaval.154 By the end of the 1980s, an overwhelming majority of scientists and engineers involved in production work and at least half of the personnel engaged in defense R&D were in their mid-forties and older. With large numbers of these employees scheduled to retire by the end of the 1990s, there were real concerns that the defense economy would suffer an acute shortage of experienced scientific and technical staff that “could lead to slow or stagnant development in national defense science and technology.”155 An assessment of the defense scientific and technological workforce in the late 1990s confirmed these fears. Of an estimated one hundred thousand professional researchers, scientists, and engineers who worked in the defense economy, around 80 percent were in their fifties or older, and only 8 percent were considered “young.” Another survey in 1998 of the educational qualifications of scientific and technological personnel in the ten

152. Zhang Jianshu, Ma Dangsheng, and Liang Zhenxing, “Analysis of the Present State of the National Defense Scientific and Technical Corps and an Exploration of Policies for Developing It,” Zhongguo Keji Luntan [Forum of Science and Technology in China], no. 5 (18 September 1989), in Joint Publications Research Service (JPRS), 25 January 1990, 76. 153. Xie, Dangdai Guofang Keji Shiye (Xia), 463–65. 154. Ibid., 460–63. 155. Zhang Jianshu, Ma Dengsheng, and Liang Zhenxing, “Analysis of the Present State,” 78.

[93]

Fortifying China

leading defense S&T and weapons testing bases revealed that fewer than 15 percent had advanced graduate degrees.156 As the country’s economic reforms gathered momentum in the 1980s and 1990s and led to the creation of increasingly attractive career opportunities in the civilian sector, the defense economy had to confront a growing brain drain of its best and brightest young scientific personnel as well as face severe competition to recruit new generations of S&T graduates. It was handicapped in this task by the retention of an outmoded wage, benefits, and seniority system that lacked financial incentives to keep talented staff, offered limited opportunities for promotion for younger employees, and maintained low wages with little differentiation between scientific personnel and factory workers.157 Efforts were made from the late 1990s to improve the pay, conditions, and opportunities to retain and attract young scientific personnel, but the morale and motivation among the younger ranks of the defense S&T workforce continued to be under pressure from the prosperity generated by the booming national economy.

Implementation/Manufacturing Production capabilities in the defense economy stagnated throughout the reform era as a drastic curtailment in procurement orders forced large numbers of defense enterprises to abandon military-related manufacturing activities and concentrate instead on civilian operations. In the early to mid-1980s, there was heated internal debate among Chinese defense and economic planners over how much to reduce manufacturing output capability.158 With little possibility of China’s becoming embroiled in a major war for the foreseeable future, a growing chorus of senior military and defense economy officials argued that the strategic rationale for maintaining a large-scale defense production base no longer existed. The central leadership concurred with these views and gave instructions to their defense industrial counterparts to draw up plans to streamline and reorganize the defense economy with the goal of retaining a small core of primary contractors supported by a broader network of subcontractors able to engage in both civilian and military work.159

156. Junshi Zhuangbeixue Daolun [Introduction to the Study of Military Armaments], ed. Wen Xisen, Kuang Xinghua, and Chen Yingwu (Changsha: Guofang Keji Daxue Chubanshe, 2002], 219–20. 157. Li Bin, “Thoughts on Establishing a System to Industrialize Achievements Made by Defense R&D Institutes,” Jianchuan Kexue Jishu [Ship Science & Technology] 24, no. 6 (December 2002): 4. 158. Xie, Dangdai Guofang Keji Shiye, 161–62. 159. Yang Huizhong, Chen Yen, and Lin Kaocheng, Guofang Jingji Zonghe Junhengfa, 139.

[94]

The Defense Economy under Deng Xiaoping

After a lengthy period of consultation and foot dragging by the defense industrial bureaucracy, the restructuring and consolidation of the defense economy finally began in a three-stage process between 1988 and 1990. Large numbers of defense industrial enterprises were transferred to local government and civilian ministries, while many others were merged or ordered to mothball underused production lines.160 More than 120 Third Line arms plants, for example, were transferred, merged, or closed down by the end of 1991.161 Total defense production capacity was reduced by two-thirds, and R&D capabilities were cut by one-third by the beginning of the 1990s.162 Despite this large-scale pruning, defense output capacity in the first half of the 1990s was still considered twice the optimal scale required.163 Some officials said defense plants were one-third less efficient than civilian counterparts and the quality of their goods was significantly below that of civilian competitors. The utilization levels of many Third Line defense industrial plants at the end of the 1980s were less than 10 percent of capacity.164 Throughout most of the reform era, the defense production base endured mounting losses that severely constrained its ability to invest in new technology or production processes. In the early 1990s, 40 percent of plant equipment belonging to defense industrial enterprises was more than twenty years old, and only 3 percent of manufacturing equipment was considered technologically advanced, compared with 12.9 percent in the civilian sector.165 But enterprises fighting for their economic survival paid scant attention and devoted few resources to promoting innovation, even though this was their only viable long-term solution to resolving their difficulties. The overwhelming strategic response of loss-making defense enterprises was to continue with traditional approaches of depending on government subsidies and engaging in commercial activities through product imitation to cover losses in defense work. While the trend in the civilian economy from the late 1980s was toward the location of manufacturing and R&D activities within the same organizations, this did not take place in the defense sector.

Linkages The nature of linkage activities within the defense economy underwent revision in the 1980s and 1990s with the goal of reducing the direct role of 160. Ibid., 182. 161. China Daily, 5 December 1991, 1. 162. Guo and Zeng, Zhuangbei Jingji, 245; and Xie, Dangdai Guofang Keji Shiye, 146–47. 163. Yang Huizhong, Chen Yen, and Lin Kaocheng, Guofang Jingji Zonghe Junhengfa, 182. 164. Xiao Min, “A Tentative Discourse,” 32. 165. Shun Zhenhuan, “Reform of China’s Defense Industry,” in Pillsbury, Chinese Views of Future Warfare, 202.

[95]

Fortifying China

governmental secondary actors in operational management and allowing firms, research institutes, and end users greater involvement and autonomy in the management of their own affairs and in the forging of ties with one another. The dominant role that COSTIND had in controlling resource allocations, personnel assignments, technology, and other inputs required by primary actors was gradually curtailed, although this was a slow and uneven process as the commission was reluctant to relinquish its authority in these areas.166 The PLA assumed some of the responsibilities turned over by COSTIND, especially in promoting networking and linkage activities among defense entities involved in technological innovation. Military representative offices (MRO) ( Jun Daibiao Zhidu) staffed by PLA personnel and reporting to the PLA General Staff Department and service arms were given a leading administrative role in coordinating and supervising weapons and equipment projects with defense R&D institutes and factories. The MRO system was sidelined during the Cultural Revolution but was revived in the late 1970s.167 MROs were placed at different levels throughout the defense industrial and military systems, including in factories and at municipal, provincial, and military region commands. This allowed the MRO system to develop extensive linkages and networks that cut across the entrenched compartmentalization of the defense economy. An example of how the MRO system helped to bring together complementary knowledge through networking was the activities of the Xian military representative bureau in the development of an artillery cannon system during the 1980s. A defense research institute located in the bureau’s area of jurisdiction was responsible for the project, but the project required substantial input from optical, electrical, and mechanical specialists that the institute did not possess. The Xian bureau arranged with more than two dozen research institutes across the country to participate in the project and also oversaw the evaluation of the results of the research by bringing in outside experts.168 But the MRO system during the 1980s and 1990s suffered from serious systemic problems that undermined its effectiveness. Many of the military personnel assigned to the MRO system lacked technical, financial, or specialist skills essential in understanding and promoting technological innovation. Moreover, MRO personnel were not regularly rotated, and this affected networking connections and led many MRO staff members to switch their institutional loyalties to the enterprises and institutes that they 166. Feigenbaum, China’s Techno-Warriors, 119–25. 167. Xie, Dangdai Guofang Keji Shiye, 127. 168. Liu Hongbin, “Xian Military Representative Bureau Organised Joint Programs to Overcome Technical Hurdles,” Jiefangjun Bao, 24 October 2001, 10, in FBIS, 24 October 2001.

[96]

The Defense Economy under Deng Xiaoping

were responsible for supervising, especially as these entities paid their salaries and employed family members.169 To further facilitate linkages and knowledge sharing, the defense economy significantly modernized and expanded its collection, organization, and dissemination of defense technological and industrial information from the mid-1980s. During the Maoist era, information related to defense technological and industrial issues, especially from foreign sources, was generally considered sensitive, and its dissemination was restricted.170 This serious impediment to knowledge flows adversely affected technological innovation. In the reform era, COSTIND, through its S&T intelligence bureau, undertook a far-reaching renovation of its information collection and distribution system. It set up software databases that could be accessed throughout the defense industrial system, established a centralized defense S&T information center to coordinate the collection and analysis of defenserelated intelligence and information, and began to publish defense S&T reports that had different channels of distribution, depending on their level of classification.171

End Use One of the most significant structural changes to the defense technological innovation system during the reform period was the increased prominence accorded to the PLA in overseeing R&D and production activities. In the late 1980s, the military took over direct control of R&D budgets and assumed an active role in the formulation, management, and coordination of projects throughout all the different phases of their development cycles. This allowed PLA departments to set more challenging goals, closely monitor progress, and intervene when required to sort out problems.172 To be able to effectively carry out its expanded duties, the PLA overhauled its S&T and weapons management apparatus in the late 1980s. Each of the service arms consolidated its various equipment units into a single S&T bureau that was responsible for overseeing R&D and production activities.

169. Yu Liankun, Zhongguo Guofang Jingji Yunxing Yu Guanli, 225–27. 170. Feigenbaum, China’s Techno-Warriors, 57–58. 171. This was the China Defense Science and Technology Information Center based in Beijing. It was originally established under COSTIND but was transferred to the PLA General Armament Department in 1998. See “Databank for Defense Industry,” Xinhua Domestic Service, 3 August 1988, in BBC/SWB/FE/W0038 A/4, 10 August 1988; and Huo Zhongwen and Wang Zongxiao, Guofang Keji Qingbaoyuanji Huoqu Jishu [Sources and Techniques of Obtaining National Defense Science and Technology Intelligence] (Beijing: Kexue Jishu Wenxuan Chubanshe, 1991), chap. 4, at http://www.fas.org/irp/world/china/docs/sources. 172. Zhu and Meng, Zhongguo Caijun, 149–50.

[97]

Fortifying China

Their activities were coordinated and overseen by the equipment section of the General Staff Department (GSD). This initiative to give a greater role to the end user was only partially successful, though, because the reforms failed to address the PLA’s conflicted role in the defense technological innovation system. On the one hand, it was the principal consumer of the output of the defense economy, but on the other it was also intimately involved in the administration of the system through its participation in COSTIND, which was staffed by military and civilian personnel and reported to both the State Council and the CMC. Straddling both sides of the consumer-producer relationship, the PLA was unable to act as a fully fledged customer that could take its business elsewhere if it was not satisfied. Without the effective development of market and competitive mechanisms, the PLA was constrained in its ability to push for improvements in the performance of the defense economy.

The State of the Defense Economy by the Late 1990s The defense technological innovation system lagged well behind the rest of the NIS in its efforts to address fundamental shortcomings in its performance during the 1980s and most of the 1990s. The stubborn reluctance of the defense industrial leadership during this period to embrace reforms to promote competition, remove structural barriers holding back linkages among primary actors, and reduce the clout and interference of governmental secondary actors adversely affected the ability of the defense economy to adjust to the rapidly changing economic, technological, and military circumstances. Defense industrial decision makers, scientists, and engineers firmly believed that their Maoist-era Liangdan Yixing model of strategic innovation remained the most appropriate framework for the technological rejuvenation of the defense technological innovation system in the reform period. Consequently, the defense industrial bureaucracy sought to preserve the core features of the structure and workings of its state-dominated innovation system while allowing some limited reforms.173 This included the CRS, the PLA’s expanded say in R&D, the formation of defense conglomerates, the revamping of the R&D process to focus on basic and applied activities, and the downsizing of the defense economy. Many of these reforms, though, were limited in scope, and their implementation was patchy and slow. They tackled the symptoms rather than the root causes of the problems that afflicted the defense economy and held

173. Feigenbaum, China’s Techno-Warriors, 141–88.

[98]

The Defense Economy under Deng Xiaoping

back its capability to innovate. Consequently, their effectiveness was questionable. By the late 1990s, as the performance of the defense economy continued to decline and the flow of significant technological breakthroughs and innovations slowed to a trickle, the central leadership came to the conclusion that a more drastic overhaul was required.174 The defense conversion process was a bright spot in this checkered reform track record. After a shaky beginning, the scale and pace of the switch to civilian production surpassed the goals of the central authorities. While the economic returns from commercialization were meager for most enterprises, they nonetheless did allow firms to keep production lines open and workers employed. More important, the conversion process was a back channel into the open-door and market-style reforms being implemented nationally for the defense technological innovation system. The front door to reform was kept firmly shut by the defense industrial bureaucracy. Defense enterprises engaged in civilian work had no choice but to embrace competition, decision-making autonomy, and all the other reforms that enabled them to operate in the market economy. As a result, the civilian R&D and production segment of the defense economy became significantly more efficient, competitive, flexible, and profitable than its military counterpart. Moreover, the conversion process benefited technological innovation in the defense sector in important ways. First, the defense technological innovation system was able to gain access to foreign technological knowledge, hardware, and processes that converted defense enterprises acquired for their civilian operations. Some of these civilian technologies and processes could be exploited for military application. Second, many formerly moribund converted defense enterprises began to shed their passive, conservative, and state-dependent institutional culture and develop a more outward-looking, proactive, and independent spirit. This boost to morale and entrepreneurship helped shape a more positive and creative environment to promote technological innovation that overcame the divisions between civilian and military work in these entities. Third, defense enterprises engaged in civilian work were much more effective in commercializing the research output of defense R&D institutes that was often ignored or rejected for military development. As a consequence, the defense technological innovation system was required to pay closer attention and make greater effort to exploit the potential of R&D findings from its defense research laboratories and research institutes.

174. “More on Zhu at Defense Group Ceremony,” Xinhua Domestic Service, 1 July 1999, in FBIS, 1 July 1999.

[99]

Fortifying China

The extent to which the reforms and technological advances in the defense conversion sector trickled over into the defense technological and industrial sphere varied and was influenced by the structural configuration, policies, and mind-sets of individual sectors and enterprises. For example, the barriers between the military and civilian segments in the space and shipbuilding sectors appeared to be more permeable than in the ordnance and aviation sectors. This was because many of the technological and industrial processes used in the construction of ships or rocket launchers were dual-use in nature. Overall, the workings and structures of the civilian and military components of the defense economy diverged during the 1980s and 1990s. By the late 1990s, the defense conversion sector was increasingly integrated into the national economy, while the military sector remained separated and stranded as it clung to the legacy of state planning. The gap between the defense technological innovation system and the national innovation system also continued to widen. At the same time, the rapid growth of the civilian economy led to the marginalization of the military-oriented component of the defense economy. Starved of resources and burdened by the legacy of excessive state control, it struggled to adapt and keep abreast of the broader economic, organizational, and technological changes taking place. By the late 1990s, the defense economy was no longer at the forefront of technological innovation in China but found itself lagging behind the civilian economy. After fruitlessly waiting for so long for the defense economy leadership to address its deep-seated problems, the patience of the central authorities ran out, and they decided to step in to undertake a painful but much-needed overhaul of the defense economy.

[100]

[4] The Revival of the Defense Economy in the Twenty-first Century

The Great Leap Forward of the late 1950s, an ill-conceived attempt to catch up with the West, failed because of a combination of technological backwardness, organizational impediments, and leadership hubris. Half a century later, the country is trying once more to leapfrog its way to the front ranks of the industrialized world by taking advantage of the opportunities generated by its remarkable economic growth and its access to foreign technologies and knowledge. A central issue is whether China has finally learned how to catch up technologically. One of the key institutions in this quest for accelerated technological development is the defense economy. Military chiefs and defense industrial policymakers have urged the country’s defense scientists and engineers to strive to become a “world-class military technological power” by 2020.1 While such an ambitious target may be more an aspiration than an attainable objective, given the current wide gulf in technological standards between China and the United States, Russia, and Western Europe, the Chinese defense innovation system has since the turn of the twenty-first century begun to achieve technological breakthroughs. New generations of fighter aircraft, missiles, submarines, warships, and other sophisticated hardware are coming off production lines at a pace and quantity unmatched over the previous fifty years.

1. Zhang Zhaoyin, “Firmly Seize the Period of Important Strategic Opportunities to Promote Leap-Type Development,” Jiefangjun Bao, 25 February 2003, in Foreign Broadcast Information Service (FBIS), 7 April 2003. See also http://news.xinhuanet.com/english/ 2002–11/18.

[101]

Fortifying China

This chapter examines the efforts to transform the Chinese defense economy and its innovation capabilities since the late 1990s. It focuses on reforms to tackle the deep-seated obstacles holding back China’s ability to absorb, create, and diffuse technological innovation; the restructuring of the R&D apparatus and its ties with the production sector; the evolving nature of the relationship between the national and defense innovation systems; and the reform of major defense enterprises.

Setting the Stage for Bold Reforms By the mid-1990s, the Chinese defense economy was in a serious state of atrophy. While the conservative defense industrial leadership had used the military conversion process to display its supposedly reformist credentials, in reality the restructuring of the defense economy was hesitant, piecemeal, and incoherent, and the emphasis continued to be on centralized planning. From the second half of the 1990s, however, the defense economy’s resistance to reform came under intensifying scrutiny and political pressure as the country faced an increasingly complicated international security environment, the pace of domestic economic reforms accelerated, and generational turnover led to the dismantling of the old-guard leadership at the top of the defense economy. Chinese leaders had been growing more apprehensive about the international security environment, which became more acute from the mid-1990s.2 They saw developments that would directly pose challenges and outright threats to China’s national security. Two issues in particular stood out. The first was the global revolution in military affairs as exemplified by the 1991 Persian Gulf War, in which the United States and its allies used overwhelming technological superiority to easily defeat Iraq.3 This conflict served as a sobering wake-up call to Chinese military planners as to how far they were trailing in the technological transformation of modern warfare.4 Over the next two years following the Gulf War, the Chinese military establishment carefully assessed the lessons of this campaign and its implications for the country’s own defense modernization.5 2. See David Shambaugh, Modernizing China’s Military (Berkeley: University of California Press, 2002), chap. 7. 3. Tim Benbow, The Magic Bullet? Understanding the Revolution in Military Affairs (London: Brassey’s, 2004), chap. 3. 4. U.S. Defense Department, Annual Report to Congress on the Military Power of China 2002 (Washington, D.C.: Office of the Secretary of Defense, 2002), http://www.defenselink.mil/ news/Jul2002. 5. Paul Godwin, “The PLA Faces the Twenty-First Century: Reflections on Technology, Doctrine, Strategy and Operations,” in China’s Military Faces the Future, ed. James R. Lilley and David Shambaugh (Washington, D.C.: American Enterprise Institute and M. E. Sharpe, 1999).

[102]

The Revival of the Defense Economy

In 1993, the PLA adopted a new national military strategy called the “Military Strategic Guidelines for the New Period” that acknowledged for the first time that high technology was crucial in the waging of modern war.6 The operational dimensions of this strategy pointed to the need for China to develop critical military capabilities such as air power, electronic and information warfare, and long-range precision weapons supplied by a technological and industrial base able to mobilize for a fast-paced and high-intensity conflict.7 Another high-technology military campaign waged by the United States and allied coalition forces in Kosovo in the late 1990s provided further evidence about the rapidly evolving pace and direction of the revolution in military affairs.8 This further reinforced Chinese military assessments of the central importance of technology and information for waging successful wars, but the poor state of the Chinese defense economy meant that it was unable to meet these new technological requirements put forward by the PLA. A second, more serious and immediate challenge to China’s security came in the mid-1990s when the leadership in Beijing decided that Taiwan under President Lee Teng-hui was seeking to establish a separate sovereign state.9 The Communist Party leadership had made clear since it took power in 1949 that it would use force to prevent any attempt by Taiwan to become independent. But the decline in the PLA’s capabilities during the reform era had meant that by the mid-1990s, this threat was little more than empty bluster. Without a viable stick to shake against Taiwan, the leadership in Beijing began ordering a rapid and extensive modernization of the country’s defense capabilities for use in a cross-strait war.10 This required the defense economy to urgently develop and produce new generations of weapons. In addition to emphasizing security issues, China during the mid-1990s was stepping up the pace and scale of its economic reforms.11 The first stage

6. See David M. Finklestein, “China’s National Military Strategy: An Overview of the Military Strategic Guidelines,” in Right Sizing the People’s Liberation Army, ed. Roy Kamphausen and Andrew Scobell (Carlisle, PA: Strategic Studies Institute, U.S. Army War College), chap. 3. 7. Gao Guozhen and Ye Zhen, “Operational Doctrine Must Change Over Time,” Zhongguo Junshi Kexue [China Military Science], 20 November 1996, 85–93, in FBIS, 20 November 1996. 8. See U.S. Defense Department, Annual Report to Congress, 11–13; and David M. Finkelstein, China Reconsiders Its National Security (Alexandria, Va.: CNA Corp., 2000), 19–20. 9. See Tai Ming Cheung, “Chinese Military Preparations Against Taiwan Over the Next Ten Years,” in Crisis in the Taiwan Strait, ed. James R. Lilley and Chuck Downs (Washington, D.C.: National Defense University Press, 1997); and Michael Swaine, “Chinese Decision-Making Regarding Taiwan, 1979–2000,” in The Making of Chinese Foreign and Security Policy in the Era of Reform, ed. David M. Lampton (Stanford: Stanford University Press, 2001). 10. Interviews with PLA analysts and Western military attaches, Beijing, 1996 and 1997. 11. Barry Naughton, The Chinese Economy: Transitions and Growth (Cambridge, Mass.: MIT Press, 2007).

[103]

Fortifying China

of the reforms initiated by Deng Xiaoping during the 1980s and early 1990s had resulted in the establishment of the so-called socialist market economy, which was in transition from central planning to a market-based system.12 In 1993, Zhu Rongji took charge of the stewardship of the economy and his principal responsibility was to finish this transition and establish a full-fledged market economy. A new economic management team of reform-minded technocrats, many of whom were Western-educated, was installed at the top of the state bureaucracy to carry out this ambitious reform program.13 At the heart of this economic transformation were the privatization of the state-owned sector, a reduced role for the state in economic management, and the nurturing of the non-state sector. These economic planners saw little merit in continued state support and protection of inefficient industries and were also keen to speed up China’s integration with the global economy.14 Consequently, they strongly opposed granting concessions or dispensations to specially protected sectors because they believed that this would seriously undermine the effectiveness of the reforms. This included the defense sector. Some of these reforms were implemented on an experimental basis, but the main package of measures had to wait until the Fifteenth Party Congress in 1997 for formal adoption.15 At the same time as this new crop of well-informed, reform-minded economic planners was consolidating its power, the influence of the network of conservative military and civilian defense industry leaders and patrons was in decline with the retirement of most of the leading figures. This included COSTIND director General Ding Henggao, CMC executive vice chairman General Liu Huaqing, and Vice Premier Zou Jiahua. They were replaced by a younger generation of less politically influential technocrats and professional military officers who were not closely connected with the conservative defense industrial leadership. These included General Cao Gangchuan, a specialist from the PLA’s armaments procurement system, and Wu Bangguo, Shanghai’s party secretary.16 This generational 12. Michael Bell et al., China at the Threshold of a Market Economy (Washington, D.C.: International Monetary Fund, 1993), 16–32. 13. See Tai Ming Cheung, “Can Zhu Reform China?” Institutional Investor, April 1998, int’l ed., 71–76; and Laurence J. Brahm, Zhu Rongji and the Transformation of Modern China (Singapore: Wiley, 2002). 14. East Asia Analytical Unit, Australian Department of Foreign Affairs and Trade, China Embraces the Market (Canberra: Australian Department of Foreign Affairs and Trade, 1997), chap. 10; and Yingyi Qian and Jinglian Wu, “China’s Transition to a Market Economy,” in How Far Across the River? Chinese Policy Reform at the Millennium, ed. Nicholas C. Hope, Dennis Tao Yong, and Ma Yong Li (Stanford: Stanford University Press, 2003), 31–63. 15. David Zweig, “China’s Stalled “Fifth Wave”: Zhu Rongji’s Reform Package of 1998–2000,” Asian Survey 41, no. 2 (March–April 2001): 231–47. 16. See Tai Ming Cheung, China’s Entrepreneurial Army (Oxford: Oxford University Press, 2001), 217–18.

[104]

The Revival of the Defense Economy

changeover of the defense industrial leadership was largely completed by the Fifteenth Party Congress and effectively removed one of the principal obstacles to the reform of the defense economy. The changed external, economic, and political realities in the late 1990s provided the opportunity for the central authorities to finally press ahead with a far-reaching overhaul of the defense economy. Zhu and his aides signaled their intention to move assertively to restructure the ailing defense economy by pointing out the importance of the reform of the defense S&T system during the Ninth Five-Year Plan from 1996 to 2000.17 Policymakers stated that the “current situation of national defense science research must be greatly changed with the research team of national defense science and technology to be simplified and optimized.”18 Reform measures included providing greater funding for research institutions, improving the management of research funds, introducing a competitive mechanism for defense research, adoption of a contract system for research projects, speeding up the application of research findings for production, and improving the integration of military and civilian technologies. Far-reaching organizational changes were also drawn up that called for a drastic restructuring of COSTIND, a revamping of the country’s loss-making defense conglomerates, and a more influential and direct role for the PLA in the management of the defense S&T process. An important principle guiding this reform was the leadership’s intention to dismantle the barriers that separated the defense and civilian economies so that they could function as an integrated system.19 Defense policymakers in particular wanted to readjust the relationship between these two sectors from a largely one-way military-to-civilian conversion process into a two-way process in which the defense establishment could harness the technological and economic prowess of the national economy for its own purposes.

The Relationship between the Defense and National Innovation Systems China’s efforts to build a modern national innovation system to support its transformation into a global technological power accelerated from the 17. Zhu was reported to have played a central role in pushing through the reform of the defense industrial apparatus. He was said to have personally met with fifty senior government officials and consulted with them before putting forward a plan for a radical shakeup in the defense industrial bureaucracy. Liu Xiaohua, “Zhu Rongji and the Military Hatch a Big Plan,” Kuang Chiao Ching (February 1998), 20–23. 18. “State Council Orders Reform of Defense Sci-Tech System,” Xinhua English Service, 3 October 1996, in FBIS, 3 October 1996. 19. Ibid.

[105]

Fortifying China

second half of the 1990s.20 Senior leaders increasingly recognized the pivotal role that science and technology, especially technological innovation, played in the country’s modernization and were willing to commit greater resources to this endeavor. Party General Secretary Jiang Zemin, a former electronics engineer who was an enthusiastic supporter of S&T, succinctly pointed out that innovation “is the soul of a nation and an ever-lasting driving force behind national prosperity.”21 Significant progress had been made to reform the NIS between the 1980s and the first half of the 1990s, but serious systemic problems remained until the end of the decade that continued to inhibit the creation and diffusion of technology throughout the economy.22 The main obstacles were: • A chronic inability to exploit scientific and technological discover-

ies by converting them to practical use. This problem, referred to as the “two layers of skin” (liang zhang pi) syndrome, occurred primarily because state-funded S&T research institutes remained isolated from the wider economy, and there was little incentive for them to take part in commercial activities because of their overwhelming dependence on government support.23 This residual central planning legacy extended to both public research institutes (PRI) and technology exploitation institutes (TEI). The basic and applied research output of PRIs was regarded as a free public good, while TEIs were more focused on commercial applications.24 • Underdevelopment and inadequate implementation of regulations, procedures, and norms to ensure the effective development of free and open markets and to raise industrial and technological standards across China’s economy. The lack of rules governing intellectual property protection and product quality had a particularly adverse impact on the technological innovation process.25

20. See Richard P. Suttmeier and Cong Cao, “China Faces the New Industrial Revolution,” Asian Perspective 23, no. 3 (1999): 153–200. 21. Lu Yongxiang, “Construction of Chinese National S&T Innovation System and Latest Advancements in Science and Technology in China,” Current Science 81, no. 8 (25 October 2001): 930. 22. Carl J. Dahlman and Jean-Eric Aubert, China and the Knowledge Economy: Seizing the 21st Century (Washington, D.C.: World Bank, 2001), 103–18. 23. Jia Xiping, “On Transformation of the Old System That Obstruct Conversion of Scientific Research Achievements,” Renmin Ribao, 7 August 2002, 6, in FBIS, 7 August 2002. 24. Kong Xinxin, “Corporate R&D in China: The Role of Research Institutes” (Working Paper No. 179 on the Project “Emergence of New Knowledge Systems in China and Their Global Interaction,” Stockholm School of Economics, October 2003). 25. Keith Maskus, Sean Dougherty, and Andrew Mertha, “Intellectual Property Rights and Economic Development in China,” in Intellectual Property and Development: Lessons from Recent

[106]

Table 4.1. Main components of the Chinese defense innovation system in the twenty-first century Institutionsa Defense Patents Law Technical Standards and Military Specifications Regime (includes rules, regulations, and military standards committees) Procurement regulations Industry regulations 5-year S&T development plan 15-year medium and long-term S&T development plan The Four Mechanisms (Competition, evaluation, supervision, and encouragement) Contract Responsibility System and Modern Enterprise System Independent evaluation committees 211, 985, and 2110 educational development projects 1-, 3-, 5-, and 10 year military equipment research, development, and production plans and programs

Organizationsb Government actors Commission for Science, Technology, and Industry for National Defense PLA General Armament Department Ministry of Science and Technology Ministry of Education State Defense Patent Agency Government S&T development programs administered by MOST (863 program, Torch, Spark, the Climbing Program, and Program of Key Technology Projects) Nongovernment Actors Defense industrial corporations (China National Nuclear Corp., China Nuclear Engineering and Construction Corp., Aviation Industry Corp. of China One, Aviation Industry Corp. of China Two, China Aerospace Science and Technology Corp., China Aerospace Science and Industry Corp., China State Shipbuilding Corp., China Shipbuilding Industry Corp., China Ordnance Industrial Group Corp., China Ordnance Equipment Group, China Electronics Technology Enterprise Corp.) Lower-tier subcontractors China Association of Peaceful Uses of Military Industrial Technology Research Center for the Transformation of Defense S&T Achievements PLA military representative bureaus Universities and academies (Chinese Academy of Sciences, Qinghua University, National Defense S&T University, PLA Information Engineering University, Harbin Institute of Technology, Beijing Institute of Technology, Beijing Aeronautics and Astronautics University, Northwestern Polytechnic University, Nanjing Aeronautics and Astronautics University, Nanjing Institute of Technology, and Northwestern Polytechnic University) Research institutes and design laboratories Productivity promotion centers Scientific and technological achievements promotion and popularization research centers

a b

Refers to rules, laws, norms, routines, and other rules of the game. Includes government agencies, firms, R&D institutes, academies, and universities.

Fortifying China • An environment nonconducive to technology and knowledge dis-

semination. Although the government had established a range of programs and networks of organizations to promote technology diffusion during the 1980s and 1990s, they were often ill suited and lacked sufficient resources to perform these tasks. During the 1990s, for example, MOST ran a nationwide network of eighty-four engineering technology research centers tasked to design and develop new technologies for demonstration and pilot testing that would be subsequently transferred to companies for commercialization. However, these centers were underfunded and thus were unable to carry out their mandates effectively.26 • Continued lack of success in government attempts to nurture an innovation culture among domestic enterprises. An important goal of economic reforms after the beginning of the 1990s was to build largesized conglomerates that could compete globally.27 While hundreds of large firms were created through mergers and the formation of networks of lower-tier firms, little attention had been invested in the promotion of innovation, such as through increasing investment in R&D or recruiting and training adequate numbers of qualified staff. • Serious underfunding of long-term basic research. China’s investment in R&D as a percentage of GDP in 1998, for example, was around 0.7 percent, which was much less than the 2.5–2.9 percent spent in advanced countries such as South Korea, Japan, and the United States.28 • Ineffective support for the development of R&D capabilities in the country’s universities and higher education sector. Available statistics show that universities received less than 15 percent of government R&D funds during the 1980s and 1990s, which was spread thinly over a pool of more than one thousand institutions.29 To underscore its commitment to boosting the development of the country’s S&T capabilities, the central leadership convened a national S&T conference in 1995 that laid out a new vision of “revitalizing the country through science, technology and education” (Kejiao Xingguo). This doctrine stressed “the importance of raising the nation’s indigenous innovation capability Economic Research, ed. Carsten Fink and Keith Maskus (Oxford: World Bank and Oxford University Press, 2005). 26. Dahlman and Aubert, China and the Knowledge Economy, 110. 27. See Peter Nolan, China and the Global Economy: National Champions, Industrial Policy and the Big Business Revolution (New York: Palgrave, 2001). 28. Dahlman and Aubert, China and the Knowledge Economy, 121. 29. Xielin Liu and Steven White, “Comparing Innovation Systems: A Framework and Application to China’s Transitional Context,” Research Policy 30 (2001): 1101.

[108]

The Revival of the Defense Economy

and the importance of technological development at the enterprise level.”30 Policymakers at the landmark conference pointed out that without an independent S&T capability, China would be doomed to remain a backward country. Jiang Zemin emphasized that “we must understand clearly that the world’s most advanced technology is not for sale.”31 A series of major initiatives was launched after the unveiling of this new doctrine to address perceived deficiencies of the existing NIS. A concerted effort was made to streamline and reorient the operations of governmentfunded R&D institutes so that they would be able to more effectively and directly contribute to the development of China’s economic competitiveness. A centerpiece of this reform effort was a far-reaching overhaul of CAS, the country’s premier S&T organization. The Knowledge Innovation Program (KIP) was launched in 1997 with the goal of turning CAS into a central pillar of China’s twenty-first-century innovation system by consolidating its 120 institutes into 80 organizations that would refocus work on a select number of priority fields, including defense-related work.32 Other key features of the KIP were its emphasis on forging close cooperative ties with foreign institutions and the cultivation of a select pool of elite, especially young, scientists. These areas were seen as important platforms to nurture home-grown innovation capabilities.33 Another key initiative was a program intended to convert government R&D institutes into enterprises to enable them to commercialize their research output as a source of revenue. Between 1999 and 2000, more than 370 TEIs affiliated with government ministries and other state organs were either registered as enterprises or handed over to other companies, and a few were transferred to universities.34 They were also required to adopt modern enterprise-based management systems to boost their entrepreneurialism and productivity. This included the establishment of sales, marketing, and product development departments. These reforms were initially successful, and the profits and revenue of the commercialized institutes registered strong growth.35 30. Cong Cao, “Strengthening China through Science and Education: China’s Development Strategy toward the Twenty-First Century,” Issues & Studies 38, no. 3 (September 2002): 122–49. See also Xi Qiaojuan, chief ed., Kejiao Xingguo Zhanlue [The Kejiao Xingguo Strategy] (Beijing: Beijing Kejiao Jishu Chuban She, 2002). 31. U.S. Embassy Beijing, “China’s Science and Technology Policy for the Twenty-First Century— A View from the Top,” November 1996, 2, http://www.fas.org/nuke/guide/china/doctrine. 32. Cao, “Strengthening China,” 127–29; and “Chinese Academy of Sciences’ 8 Objectives for Technological Innovation Strategic Plan,” Xinhua Domestic Service, 1 November 2001, in FBIS, 23 January 2002. 33. Cao, “Strengthening China,” 128–29. 34. Kong, “Corporate R&D in China,” 8–9. 35. Zhang Jingyong, “Xu Guanhua: China Has Basically Resolved the Problem of Separating S&T Work from Economic Work,” Xinhua Domestic Service, 20 February 2003, in FBIS, 26 February 2003.

[109]

Fortifying China

A more difficult task for the government was to turn PRIs into corporate entities. The rationale for this approach was to improve their efficiency and make them more commercially relevant. However, as many of these institutes were engaged in basic and applied research that had little direct or immediate commercial value, their ability to be financially self-supporting was doubtful. Undaunted, the government pushed ahead and transformed more than two hundred PRIs into commercial enterprises in 2001. Some important but commercially unviable entities were converted into public nonprofit research outfits.36 The government also implemented policies after 1995 to encourage enterprises and the private sector to assume a greater share of the costs of funding R&D activities. Increased financial incentives were offered through state subsidies and government-backed bank loans for enterprises to set up in-house technical centers and forge links with universities and outside R&D institutes to establish collaborative partnerships.37 These programs to shift primary responsibility for the funding of commercial R&D from the state to the corporate sector met with considerable success. By 2004, corporate spending on R&D accounted for 65 percent of total national spending, compared with 35 percent in the late 1980s.38 A further indicator of the impact these initiatives had on innovation activity was the increase in patent applications from 122,000 in 1998 to 204,000 in 2001 and 694,000 in 2007, although domestic applications accounted for only two-thirds of this number.39 The increased role of the corporate sector in commercial R&D allowed the central government to concentrate funding on basic and strategic R&D activities. This led to a major revamping and substantial expansion in the size and number of programs in these areas. The central leadership decided that China would increase its S&T budget from around 0.6 percent of GDP in 1995 to 1.5 percent by 2005, 2 percent by 2010, and 2.5 percent by 2020 to match the appropriations of other advanced economies.40 Projects such as the 863 Program, Torch, Spark, the Climbing Program, and the Program of Key Technology Projects received significant

36. Yuli Tang, “Review of the Reform of Research Institutes,” ed. Jon Sigurdson, Conference on China’s New Knowledge Systems and their Global Interaction (Lund: Stockholm School of Economics, September 2003), 29–30. 37. Liu and White, “Comparing Innovation Systems,” 1100–1102. 38. Organisation for Economic Cooperation and Development (OECD), Main Science and Technology Indicators, Vol. 2006/1 (Paris: OECD, 2006), 58. 39. “Xu Guanhua Says Companies Leading Technology Innovators,” Xinhua News Service, 20 February 2003, in FBIS, 21 February 2003; and “China Sees Sharp Increase in Domestic Patent Applications,” Renmin Ribao, 30 January 2008, online ed., http://english.peopledaily. com.cn. 40. “Xu Guanhua Says China to Invest Billions in Scientific Development,” Xinhua News Service, 20 February 2003, in FBIS, 21 February 2003.

[110]

The Revival of the Defense Economy

budget increases from the late 1990s.41 In addition, new programs were established to improve the commercialization of these R&D projects and also to strengthen basic research.

Reform and Consolidation Begin The defense industry replaced its hesitant and piecemeal attitude to reform in 1998 with a more forward-looking, dynamic, and coordinated approach. Its new leadership was committed to overturning the central planning legacy that continued to stymie technological innovation and the successful exploitation of research findings. At the helm of the new team was Liu Jibin, a civilian technocrat who had previously worked in the defense industry as an enterprise administrator but had been transferred to the Ministry of Finance in the early 1990s.42 With his experience in defense industrial and financial issues, Liu was considered an ideal choice to lead the makeover of the defense industry. He quickly identified key entrenched problems that were responsible for the woeful performance of the defense industry, which had by the late 1990s become one of the worse laggards in the economy. These included its excessive size (see table 4.2), production overcapacity, overstaffing, the scattered location of enterprises, lack of cooperation, separation of military and civilian production, construction of duplicate projects, and an incoherent enterprise system.43 Innovation and absorption were also severely hindered by a lack of access to advanced foreign technology and knowledge, a highly conservative, risk-averse institutional culture, and inadequate investment.44 The task of Liu and the defense industrial leadership was to establish a more streamlined, competitive, and open structure without the barriers that had led to the rigid compartmentalization of activities and restricted knowledge flows within the system. This required a substantial curtailing of the role and reach of the government; the adoption of market-based mechanisms to promote competition, evaluation, and initiative; and numerous

41. Cao, “Strengthening China,” 145–47. 42. “COSTIND Director Liu Jibin,” Remin Ribao, 30 March 1998, 10. 43. Zhang Yi, “Liu Jibin, Minister of the Commission of Science, Technology and Industry for National Defense, 27 October Says in a Meeting That China’s High-Technology Industry for National Defense Will Be Restructured on a Large Scale,” Xinhua Domestic Service, 27 October 1999, in FBIS, 27 October 1999. 44. See Cheung, China’s Entrepreneurial Army, 211–15; Shambaugh, Modernizing China’s Military, 243–50; Arthur S. Ding, “Is China a Threat? A Defense Industry Analysis,” Issues & Studies 36, no. 1 (January/February 2000): 49–75; and John Frankenstein, “China’s Defense Industries: A New Course?” in The People’s Liberation Army in the Information Age, ed. James Mulvenon and Richard Yang (Santa Monica: RAND Corp., 1999), 187–216.

[111]

Fortifying China Table 4.2. The size of the Chinese defense technological and industrial base, 1990–2000 1990

2000

Large and medium-sized defense industrial enterprises

1,000

400

R&D institutes

200–250

209

Workforce

3.15 million

2 million

Ratio of military to civilian output

26:74

20:80

Source: “Jiaqiang Guofang Jichu Yanjiu Gongzuo” [Strengthen Basic Defense Research Work], Zhongguo Jichu Kexue [China Basic Science], February 2000, 27.

other corporate, financial, and structural reforms that were being pursued in the civilian economy.

Reducing the Role and Military Ties of COSTIND One of the first reform measures was the separation of the military and civilian components of COSTIND. Under the state planning system, COSTIND’s role was to represent and balance the interests of both the defense industry and the PLA. But this had 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, met its specifications, and were cost-effective. 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 April 1998, the military portion of COSTIND was incorporated into a newly established General Armament Department (GAD), and the civilian component was retained and kept its COSTIND title. The new civilianized COSTIND’s responsibilities include the drafting and implementation of policies, regulations, and laws dealing with the defense industry; long-term strategic planning; foreign cooperation and acquisitions; regulation of the export of sensitive military technologies; educational training of defense S&T personnel; project coordination of weapons projects; and defense conversion.45 Control of the country’s conventional weapons testing grounds, research institutes, the Lop Nor nuclear test facility, and space launch bases such as the Xichang space center was transferred to the GAD. However, COSTIND took control 45. Interviews with PLA officials, Beijing, September 1998, COSTIND website, http:// www.costind.gov.cn; and Jiao Qiuguang, chief ed., Junshi Zhuangbei Guanli Xue [The Study of Military Armaments Management] (Beijing: Academy of Military Sciences Press, 2003), 133–34.

[112]

The Revival of the Defense Economy

of the State Aerospace Bureau and the State Nuclear Energy Administration, which had previously been affiliated with China Aerospace and Space Corp. and China National Nuclear Corp., respectively. These bureaus acquired responsibility to oversee the regulatory management of the space and nuclear sectors. (See figure 4.1.) A crucial change under this newly separated system was that the defense industry no longer enjoyed monopoly control in the production and supply of arms to the PLA. Although the GAD’s primary responsibility was to look after the weapons needs of the PLA and it was obligated to look to the domestic defense industry to fulfill its orders, if military procurers judged that local manufacturers were unable to meet requirements, they could look overseas to meet their needs. Indeed, the PLA was willing to do so throughout the 1990s and placed substantial orders for major weapons systems from Russia and other countries. Although these imports accounted for only a modest proportion of the PLA’s arsenal, they nonetheless represented a significant percentage of the military’s procurement budget.46 Senior military commanders began in the late 1990s to publicly suggest that the rules of the game governing the sourcing of weapons procurements had now changed. At a meeting on the development of naval weapons in June 1999, then GAD director General Cao Gangchuan pointed out that “the original mode of the planned management of armaments is no longer suited to the demands of the socialist market economy. We must change ideas, master and apply the characteristics and laws of the socialist market economy, establish as soon as possible an armament work operational mechanism compatible with these characteristics and laws, and raise the overall effect of weapons development.”47 Despite these assertive statements, the military leadership remained cautious in how far to open up the country’s weapons development, production, and procurement system to market competition. Although deeply frustrated by the defense industry’s poor record of accomplishment, military chiefs continued to reiterate that they would depend on domestic manufacturers to meet their weapons needs. At another armaments conference in 1999, Cao said that the PLA “should mainly adhere to self-reliance, constantly enhance our self-reliant innovation capability and ensure that all major weaponry and equipment will be developed at home.”48 46. Funds allocated for foreign arms purchases are believed to come from special State Council accounts and not from the PLA’s procurement budget. See U.S. Defense Department, Annual Report on Military Power of the People’s Republic of China: Fiscal Year 2007 Report to Congress on PRC Military Power, 25, http://www.defenselink.mil/pubs. 47. Si Yanwen and Chen Wanjun, “General Armaments Director on Developing Weapons,” Xinhua Domestic Service, 9 June 1999, in FBIS, 9 June 1999. 48. Xi Qixin, “All-Army Armament Work Conference in Beijing,” Xinhua Domestic Service, 2 November 1999, FBIS, 2 November 1999.

[113]

Figure 4.1. Organizational chart of the Commission for Science, Technology, and Industry for National Defense, 2007

Minister Zhang Qingwei

Vice Minister Sun Laiyan (Director CNSA)

China National Space Administration

Vice Minister Jin Zhuang Long (Deputy Director CNSA)

Vice Minister Chen Qiufa

Vice Minister Yu Liegui

Vice Minister Sun Qin (Chairman CAEA)

China Atomic Energy Administration

(CNSA)

Policies and Regulations Department

General Office

Shipbuilding Industry Management Office

Structural Reform Department

Comprehensive Planning Department

Finance Department

Production Safety Management Supervision Bureau

Civilian Production Development Department

International Cooperation Department

Support Services Center

Personnel and Education Department

Party Committee

Retired Cadre Bureau

Beijing Aeronautics and Astronautics University Beijing Institute of Technology Nanjing Institute of Technology

[114]

Nanjing Aeronautics and Astronautics University Nanjing Polytechnic University Harbin Institute of Technology Harbin Engineering University

28 Provincial COSTIND Offices

S&T and Quality Department

Secrecy and Security Bureau

The Revival of the Defense Economy Figure 4.2. COSTIND, 1998–2007

Central Military Commission Central Special Commission

PLA General Logistics Dept.

Military factories

PLA General Armament Dept.

Military factory representative office

GAD offices at service, military region, and lower command levels

COSTIND

11 defense conglomerates

Provincial COSTIND offices

Universities and higher education institutes

Another key goal in the restructuring of the defense industrial management system was to separate conflicting administrative and commercial duties of COSTIND and its subordinate defense industrial conglomerates. COSTIND’s role following the restructuring was the creation and administration of government policies toward the defense industry. A dearth of planning guidelines and detailed regulations had contributed to the woes and lack of direction for the defense industry during the 1980s and 1990s. In response, COSTIND rushed to implement an extensive range of rules, work procedures, and guidelines to fill this gap in the regulatory regime. Between 1998 and 2002, more than twenty regulations and documents on technological and quality control were issued.49 COSTIND was also given the task to draft a strategic blueprint to guide the long-term development of the defense industry. Following a lengthy wait, the “Outline of National Defense Science, Technology, and Industry Policy” was published in 2004. This document set out the development goals, priorities, and direction of the defense industry’s long-term transformation:50 • The need to establish a long-term investment mechanism to fund the

development of the defense industry, especially through the diversification of the main sources of investment by actively encouraging 49. COSTIND Technology and Quality Section. “Yifaxingzheng, Guifanguanli” [According to Law, Administration, Standard Management], Guofang Keji Gongye [Defense Science and Technology Industry] (September 2002), 15–16. 50. Zhang Yi, “China Issues First ‘Outline’ of National Defense Science, Technology and Industry Policy,” Xinhua Domestic Service, 1 June 2004, in FBIS, 1 June 2004.

[115]

Fortifying China

• • •

•

•

the use of private funds and allowing enterprises to be listed on stock markets. Boosting the information technology levels of the defense economy. Accelerating the pace of research, development, and production of high-technology weapons. Increasing support for the integration of the military and civilian economic sectors and significantly expanding the development of dual-use military-civilian technologies. Placing priority on the development of emerging high-technology industrial sectors, such as information technology, new materials, energy conservation, environmental protection, and life sciences. Allowing a “suitable” degree of competition in R&D and production.

While COSTIND lost significant influence and organizational capacity in the 1998 reforms, it did gain some limited compensation by taking over defense-related organizations in other parts of the State Council apparatus. The National Development and Planning Commission (NDRC), which was the successor of the State Planning Commission, transferred its National Defense Department, responsible for approving major weapons and defense infrastructure projects, to COSTIND. While these steps significantly reduced COSTIND’s involvement and influence in the operational management of defense R&D and production activities, some critics believed that the commission should have been abolished altogether because it was a legacy of the defense economy’s Soviet inheritance and hindered rather than promoted defense technological innovation and industrial efficiency. Most of this criticism came from PLA officers who argued that COSTIND’s defense-related work should be undertaken by the GAD, while its civilian responsibilities should be handed over to MOST. They pointed out that in the United States and Europe, the military work that COSTIND conducted was in the hands of the Pentagon or defense ministries.51 This debate appears to have been resolved in 2008 when the Chinese government decided to merge COSTIND, the Ministry of Information Industries, the State Council Informatization Office, portions of the NDRC responsible for industrial and trade issues, and the State Tobacco Monopoly Administration into a super-ministry called the Ministry of Industry and Informatization.52 This move was part of a broader consolidation of the government apparatus in which other government ministries were merged into so-called super-ministries. 51. Interviews with military officers from GAD and National Defense University, Beijing, December 2003. 52. “Xinhua Publishes Details of PRC State Council Institutional Reform Plan,” Xinhua Domestic Service, 15 March 2008, in FBIS, 15 March 2008.

[116]

The Revival of the Defense Economy

On the surface, this appears to herald the demise of COSTIND. The appointment of Li Yizhong, a petroleum expert with no background in defense industrial affairs, as head of the new ministry indicates that the organization’s main focus may not be on military-related matters. But bringing in outsiders with few pre-existing industry ties to take charge of insular organizations is a State Council tactic to ensure that these leaders are beholden and responsive to central rather than local orders. COSTIND has managed to survive largely intact, however, by reestablishing itself as the State Administration of Science, Technology and Industry for National Defense (SASTIND), a subordinate agency within the new ministry. But SASTIND has seen its administrative standing diminished and has lost some of its responsibilities and organizational power, most notably its control over nuclear power management, which has been handed over to a new National Energy Commission. It was also surprising that COSTIND director Zhang Qingwei did not become SASTIND director. The position was instead given to one of his deputies, Chen Qiufa, who also became one of seven deputy heads of the new ministry.53 Zhang had only been COSTIND director for six months before the restructuring. The stated primary goals of the Ministry of Industry and Informatization are to promote the coordinated development between traditional industrial sectors and high technology and ICT industries, play a leading role in the indigenous nurturing of key strategic industries, and support civil-military integration. Government officials say that the new ministry’s role is to focus on strategic planning and the drawing up of industry standards and administrative policies, not to directly intervene in the micromanagement of enterprises or the market.54 The establishment of the new ministry, along with several other super-ministries, is described as a trial experiment and some analysts believe that it may take at least five years before these new organizations are integrated and functioning properly.55 With its long experience of successful bureaucratic infighting and organizational survival, COSTIND may still be able to retain much of its autonomy and clout. In a revealing indicator of COSTIND’s attitude towards its subordination into the new ministry, the event went unreported on COSTIND’s website for several weeks.

53. “Chen Qiufa Becomes Head of Defense Science, Technology and Industry Bureau,” Hong Kong Ta Kung Pao, 22 March 2008, http://www.takungpao.com. 54. “Responsible Official from Central Organization Committee General Office Answers Questions From Renmin Ribao and Xinhua News Agency Reporters on Deepening Reforms of the Administrative System and Organizational Structure,” Xinhua Domestic Service, 11 March 2008, in FBIS, 11 March 2008. 55. “Prof. Wang Yukai at National School of Administration: With Regard to ‘SuperMinistry’ System, First Plan, Then Reform,” Guangzhou 21 Shiji Jingji Baodao [Guangzhou Twenty-First Century Economic Report], 22 February 2008, in FBIS, 22 February 2008.

[117]

Fortifying China Figure 4.3. Organizational chart of the Ministry of Industry and Informatization, 2008

Ministry of Industry and Informatization Minister: Li Yizhong

Former Ministry of Information Industries

Former State Council Informatization Office

Former Trade and Industry Offices of the National Development and Reform Commission

State Administration of Science, Technology,and Industry for National Defense (Former COSTIND) Head: Chen Qiufa

11 defense conglomerates

Universities and higher education institutes Provincial state defense science, technology and industry offices

The Reform of State-Owned Defense Enterprises A central cause of the plight of the defense economy during the 1990s was the faltering performance of its prized defense industrial conglomerates. The five line ministries that had overseen the running of the principal defense sectors had been turned into state-owned corporations during the 1980s and early 1990s, but this change had been cosmetic, and they continued to function as state bureaucracies rather than independent commercially minded corporations. With little competition to encourage efficiency or innovation and the continuation of soft budget constraints, these firms accumulated mounting losses.56

56. The defense industry reached its nadir in 1998, when 61 percent of all defense industrial enterprises bled red ink. Total net losses (after subtracting profits) of the entire defense industrial complex totaled Rmb 2.5 billion. Zhang Bin, “Woguo Guofang Keji Gongyede

[118]

The Revival of the Defense Economy Figure 4.4. Chinese defense S&T organizational structure, 2008

Central Military Commission

PLA General Logistics Dept.

Military factories

PLA General Armament Dept.

Military factory representative offices

GAD offices at service, military region and lower command levels

Ministry of Industry and Informatization

State Administration of Science, Technology and Industry for National Defense (SASTIND)

11 defense conglomerates

Provincial SASTIND offices

Universities and higher education institutes

The grim situation confronting the defense economy was shared by the rest of the state sector. In 1997, the performance of the country’s state-owned enterprises reached a new low when their total losses exceeded gross profits for the first time. Faced with a deepening spiral of losses, the central government decided to act. In 1997, Zhu Rongji promised to undertake a thorough overhaul of the state sector that would halt its deteriorating performance within three years. The defense economy was a prominent target, and the State Council in 1999 ordered the five dominant corporations to be broken up into ten entities, with an eleventh company, China Electronics Technology Group Co., added later in 2002 (see table 4.3). Each industrial sector would be allocated two of the new conglomerates in order to promote competition. Fazhan Zhanlue Yanjiu” [Research into Our Country’s Defense Technological Development Strategy], Zhongguo Keji Luntan [China Technology Forum], July 2003, 15.

[119]

Table 4.3. China’s eleven defense industrial conglomerates China National Nuclear Corp. (CNNC)

CNNC is China’s premier state-owned corporation responsible for the development of the country’s nuclear weapons and civilian nuclear power programs. CNNC operates more than half of the country’s nuclear power plants and all enrichment and nuclear weapons facilities. It is also responsible for uranium mining, nuclear waste treatment, storage, and nuclear safety matters. In 2005, CNNC had 118 affiliated entities with 100,000 workers. CNNC suffered from chronic losses between 1991 and 2004 but has since become profitable because of major downsizing and a sharp increase in business.

China Nuclear Engineering and Construction Corp. (CNECC)

CNECC was established in 1999. Its principal responsibility is the construction of nuclear power plants and defense infrastructure facilities. Its ten wholly owned subsidiaries, five majority stakeholding companies, and five minority-stake companies are involved in civil infrastructure construction, engineering surveying, manufacturing, foreign trade, real estate, and software development for nuclear engineering management. In 2005, CNECC had 34,000 employees, and 20% of its revenue came from military work. CNECC has been the prime contractor for all domestic nuclear power projects as well as the Chashma nuclear power plant in Pakistan.

Aviation Industry Corp. of China One (AVIC 1)

AVIC 1 has 47 large and medium-sized industrial enterprises, 31 R&D institutes, and 22 affiliated specialized companies with a workforce of 240,000 and total assets in 2005 in excess of Rmb 100 billion. AVIC 1 develops, manufactures, and markets military aircraft, commercial aircraft, aero-engines, airborne weaponry, and fire-control systems. Its military aircraft output includes the Chengdu F-10 fighter, Shenyang F-11B fighter, Xian FBC-1 fighter-bomber, and Xian B-6 bomber.

Aviation Industry Corp. of China Two (AVIC 2)

AVIC 2 is more commercially diversified than AVIC 1 and specializes in the production and export of medium sized aircraft and helicopters. AVIC 2 has 81 industrial enterprises and R&D institutes with a workforce of 210,000. It has more than half a dozen listed firms. Its key aviation products include the K8 trainer, EC-120 joint venture helicopter, Sino-Brazilian ERJ145 airliner, and Y8 and Y-12 transport aircraft.

China Aerospace Science and Technology Corp. (CASTC)

CASTC has more than 140 organizations. Its research apparatus consists of five entities: Academy of Launch Vehicle Technology, Academy of Space Chemical Propulsion Technology, Academy of Space Technology, Shanghai Academy of Space Flight Technology, and the Academy of Space Electronics Technology. CASTC has two large R&D and manufacturing enterprises: Sichuan Space Industry Corp., Xian Space S&T Industry Corp., and another four listed outfits. CASTC specializes in the development, manufacturing, and supply of spacecraft launch vehicles and strategic and tactical missiles. It also provides international commercial launch services for satellites. CASTC’s workforce numbers more than 100,000, of which 40% are scientists and engineers.

Table 4.3.—cont. China Aerospace Science and Industry Corp. (CASIC)

CASIC’s core business areas are in missile systems, including ground-to-ground, air defense, and cruise missiles; satellite R&D and delivery systems, such as minisatellites and components for solid launch vehicles; and information technologies for military and civil applications. CASIC is organized into four divisions that have over 180 enterprises, half a dozen of which are listed; 6 major R&D academies; and 100,000 employees, of which 40% are S&T personnel. CASIC’s financial performance has significantly improved since the end of the 1990s, when it was loss-making and struggling to find work. Its revenues and gross profits doubled between 2000 and 2005.

China State Shipbuilding Corp. (CSSC)

CSSC is the principal equipment supplier to the PLA Navy and also produces military and civilian ships for local use and export. Its naval shipbuilding operations cover the entire range of warships used by PLA Navy, including missile destroyers, frigates, submarines, missile corvettes, and auxiliary space instrumentation and replenishment vessels. CSSC has 31 major shipbuilding and repair enterprises, 10 R&D institutes, 14 shareholding outfits, and 3 listed firms. Its principal shipyards are Jiangnan and Hudong in Shanghai and Guangzhou. CNNC’s shipbuilding tonnage in 2005 was 5.13 million tons.

China Shipbuilding Industry Corp. (CSIC)

CSIC is primarily focused on civilian shipbuilding, although it does have a sizable military division. The company has 48 industrial enterprises, 28 research institutes, and 15 shareholding companies with 170,000 employees located in 20 provinces and cities, although many of these facilities are on the eastern seaboard. Its key subsidiaries include Dalian Shipyard, Dalian New Shipyard, Bohai Shipyard, Wuchang Shipyard, China Ship R&D Center, and China National Shipbuilding Equipment Co. These shipyards are among the largest shipbuilding and repair yards in China and are able to build civil vessels up to 300,000 DWT (deadweight tons). Naval vessels that CSIC produces include frigates and destroyers as well as submarines and support craft. CSIC’s business has accelerated rapidly since the beginning of this century. In 2005, it built 3.15 million tons of ships, equivalent to 25% of the total output of the Chinese shipbuilding industry.

China Ordnance Industrial Group. Corp (COIG)

COIG has 83 industrial factories and is involved in the production of tanks, armored vehicles. and ordnance supplies for the PLA and for export. It is also engaged in machinery, chemicals, construction, and other industrial sectors.

China Ordnance Equipment Group (COEG)

COEG has undergone a far-reaching reorganization and downsizing since its establishment in 1999. This has led to a remarkable turnabout in performance from a loss of Rmb 1.29 billion in 2000 to a Rmb 1 billion profit in 2005. Military production accounts for 10% of total annual output. Vehicle production is COEG’s core business with annual output capacity of one million. COEG’s workforce fell from 232,000 in 1999 to 131,000 at the end of 2005, but it is still overmanned. COEG has around 70 companies, of which 50 are industrial entities.

Fortifying China Table 4.3.—cont. China Electronics Technology Enterprise Corp. (CETC)

CETC was formed in 2002 through the merger of 47 former Ministry of Electronics Industry (MEI) research institutes and 26 enterprises that had been placed under direct control of the Ministry of Information Industries when MEI was abolished in 1998. Around 80% of output of these research institutes in 2000 was military-related. CETC has a workforce of 53,800, of which around 55% are said to be S&T professionals. The company has 14 national R&D laboratories, 3 national engineering centers, and 21 national testing and evaluation entities.

These corporate reforms sought to tackle a number of specific problems.57 An effort was made to distinguish and separate the responsibilities and functions between the conglomerates and COSTIND. The piecemeal and freewheeling nature of reforms during the 1990s in the defense sector and throughout the general economy had led to confusion and extensive overlapping of activities between enterprises and government agencies. While COSTIND was responsible for the regulatory administration of the defense sector, it was also deeply involved in supporting the business operations of enterprises that it owned. Moreover, the heads of the principal defense industrial conglomerates concurrently served as COSTIND vice ministers. This new separation of government-enterprise activities was part of a broader effort by the central leadership to make government agencies divest themselves of their business interests and concentrate solely on the formulation of policies, laws, and regulations to guide the long-term development of the defense economy. On their part, enterprises were required to embrace modern management techniques.58 The establishment of two conglomerates for each industrial sector was intended to promote what officials described as ”moderate” competition.59 Zhu was keen to break up stifling monopolies that pervaded the entire economy and cultivate new players to bolster market competition. In the case of the defense industry though, the introduction of competition was more of a long-term aspiration; the newly created industrial outfits were structured to be complementary rather than competitive with each other. One enterprise group in each of the industrial sectors was designated as the primary entity responsible for defense-related operations, while the second entity would concentrate on civilian activities. 57. “Zhu Rongji Talks at Defense Group Ceremony,” Beijing Central Television Program One Network, 1 July 1999, in FBIS, 1 July 1999. 58. State Council Information Office, China’s National Defense in 2004 (Beijing: State Council Information Office, 2004), 75. 59. Liu Zhenying and Sun Jie, “More on Zhu at Defense Group Ceremony,” Xinhua Domestic Service, 1 July 1999, in FBIS, 2 July 1999.

[122]

The Revival of the Defense Economy

In the aviation sector, Aviation Industry Corp. of China One (AVIC 1) took over the principal enterprises engaged in the R&D and production of fighter aircraft, missiles, and engines, while Aviation Industry Corp. of China Two (AVIC 2) was given enterprises involved in helicopter production, vehicle manufacturing, and the building of civilian aviation products. In 2006, the central authorities decided to build a new large-sized passenger jet to compete with commercial aircraft manufacturers such as Boeing of the United States and Airbus in Europe. However, there was concern about the complexity of the project because AVIC 1 and AVIC 2 only had experience in developing mid-sized passenger and transport aircraft, such as the ninety-seat ARJ21 regional airliner. A third aviation industrial outfit, China Commercial Aircraft Co. Ltd., was established in 2008 to oversee this task. The proposed new passenger aircraft would be able to carry between 150–200 passengers and a military transport version is also likely. The StateOwned Assets Supervision and Administration Commission is the largest stakeholder, with a 31.5 percent shareholding, followed by the Shanghai municipal government, which invested Rmb 5 billion in the venture to acquire 26 percent. AVIC 1 took a 21 percent share worth Rmb 4 billion, while AVIC 2 and several other major state-owned corporations each contributed Rmb 1 billion for smaller stakes.60 The appointment of COSTIND director Zhang Qingwei as the chairman of the new company and deputy COSTIND director Jin Zhuanglong as general manager is an indicator of the political importance of this project. The airliner is a priority mega-project aimed at propelling China into the top tier of the world’s advanced technological powers by 2020. The central government reiterated that the principal mission of defense industrial enterprises was to engage in weapons development and production to support the country’s defense modernization. This message had become obscured as defense enterprises switched their attention to serving the civilian market during the early reform period to compensate for dwindling military work. Defense-related work had fallen to around 20 percent of the defense industry’s annual industrial output value by the late 1990s, although it was less than 5 percent in the electronics sector. Many enterprises were reluctant to continue to undertake military production because it was considered unprofitable.61 To rectify this, the authorities insisted that particular attention should be devoted to R&D efforts.62

60. Shanghai Zhengquan Bao [Shanghai Securities News], 1 April 2008. See also Bradley Perret, “China Commercial Aircraft Eyes Boeing, Airbus Turf,” Aviation Week & Space Technology, 6 April 2008. 61. Interview with CAPUMIT official, Beijing, December 2003. 62. Guo Weiming et al., “Jiaqiang Guanli, Quebao Zhiliang” [Strengthen Management, Ensure Quality], Hangtian Gongye Guanli [Aerospace Industry Management], November 2001, 10–12.

[123]

Fortifying China

The pace of restructuring of enterprises would be sped up through the backing of “superior” institutions, while “inferior” organizations would be eliminated. This was an important policy breakthrough as it gave a green light for the closure or merger of chronically loss-making enterprises. Casting off their long-held reluctance to close down factories as this might spark social unrest from laid-off workers, the authorities ordered that around 20 percent of all the production plants within the defense industry should be “cast off, eliminated, transferred or closed” and the workforce cut by 25 percent within a two- to three-year period.63 In previous downsizing exercises in the 1980s and early 1990s, the official reduction in military production capability had mostly involved a recategorization of the activities of entities from defense to civilian work and the transfer of surplus workers and production facilities from existing enterprises to newly established subsidiaries.64 In this new initiative, the authorities came to the conclusion that the only way to help extract defense enterprises from their loss-making predicament was to undertake actual plant closures and make substantial job cuts. The goal was to establish a small nucleus of dedicated defense enterprises served by a large external network of secondary suppliers and contractors. It was assumed that this structural contraction would allow resources to be efficiently allocated and concentrated on surviving enterprises. The intention was that this would “lead to a big leap in the technological innovation capability of the defense industry’s enterprises.”65 The ordnance industry was selected as the pilot sector to conduct this downsizing exercise. Between 1999 and 2002, the number of ordnance enterprises was reduced by 50 percent and the number of workers employed in militaryrelated production work was cut by 47.5 percent, or more than double the original target.66 The main loss-making firms and those whose military work was deemed nonessential were either closed down or transferred to civilian authorities. This led to a swift turnaround in the financial performance of the ordnance industry’s two monopoly conglomerates. After nearly a decade of consecutive losses, China Ordnance Industry Group Corp. (COIG) and China 63. Sun Guangyun, Zhongguo Guofang Keji Gongyede Gaigehe Fazhan Wenti [The Reform and Development Problems of the Chinese Defense Technological Industry] (Beijing: Hangkong Gongye Chubanshe, 2003), 87–88. 64. Consolidations of the defense economy had taken place in 1988, 1990, and 1992. Another limited pruning had also taken place during the Ninth Five-Year Plan. By the end of the mid-1990s, the defense economy’s production capacity had been reduced to one-sixteenth and its R&D capacity had been reduced to one-third of its original size by these downsizing efforts. See State Planning Commission Defense Mobilization Research Development Center, “An Assessment of the Employment Problem Regarding the Restructuring of Defense Enterprises,” Guofang Keji Gongye, November 2002, 32–34. 65. COSTIND System Reform Section, “The Work of the Reform, Restructuring and Reduction of the Defense S&T Industry,” Guofang Keji Gongye, December 2002, 8–10. 66. Ibid., 9.

[124]

The Revival of the Defense Economy

Ordnance Equipment Group Corp. (COEG) both returned to profitability after the conclusion of this restructuring, posting strong sales growth and lower costs in 2003.67 The success of this restructuring led to its full-scale implementation in the nuclear, space, aviation, and shipbuilding industries in 2002, and they were required to complete their consolidation by the end of the Tenth Five-Year Plan in 2005.68 More financial support was made available to assist enterprises to reduce their debts and resolve other operating difficulties. Economic mismanagement and loss-making operations during the 1980s and 1990s had led to a sharp rise in debt levels across the defense sector. The average debt-to-asset ratio of defense enterprises by the end of the 1990s exceeded an estimated 70 percent.69 Initiatives to pare down this financial burden were pursued toward the close of the Ninth Five-Year Plan and throughout the Tenth FiveYear Plan. Government subsidies allowed firms to pay off some of their debts. In addition, the State Council instructed state-owned banks to write off debts, enter into debt-equity swaps, and provide cheap or interest-free loans to allow enterprises to restructure their debt and retire higher-interest borrowings.70 To further reduce dependence on the state for financial support, some of the better-managed enterprises were given the go-ahead to raise funds on the domestic and international capital markets through bond issues and, more important, stock market listings. By the beginning of 2008, sixty-two defense industrial enterprises had or were in the process of being listed on the country’s two local stock markets as well as on the Hong Kong Stock Exchange.71 One of the biggest initial public offerings was for the civilian operations of AVIC 2, which was listed in Hong Kong in 2003 under the name of AviChina and raised U.S. $248 million.72 A senior COSTIND official forecast that the Chinese defense industry would raise between Rmb 50 and 60 billion from the public listing of defense enterprises by the end of this decade.73

67. Jiefangjun Bao [Liberation Army Daily], 4 January 2004; and Guangming Ribao [Brightness Daily], 12 January 2004. 68. COSTIND Systems Reform Section, “The Work of the Reform, Restructuring and Reduction of the Defense Science and Technology Industry,” Defense Science and Technology Industry, December 2002, 9. 69. Sun, Zhongguo Guofang Keji, 68. 70. Christopher A. McNally, “China’s State-Owned Enterprises: Thriving or Crumbling,” Asia-Pacific Issues (East-West Center) no. 59 (March 2002): 5–6. 71. Yu Yangming, “Military Industrial Groups for the First Time Enter the Rmb 100 Billion Club,” Shanghai Zhengquan Bao, 8 January 2008. 72. “AviChina Debuts on Hong Kong Bourse,” Renmin Ribao, 31 October 2003, online ed. Only the civil aviation, automobile, and export units were included in the listed firm. 73. Interview of COSTIND systems reform section chief Wu Fenglai. “Actively and Steadily Push Forward the Reform of Property Rights System of Military Enterprises,” 26 December 2007, COSTIND website, http://www.costind.gov.cn.

[125]

Fortifying China

An expansion of this initiative to open up the defense industry to the domestic and overseas capital and investment markets took place in 2007 when COSTIND announced that it was drafting guidelines to allow private and foreign firms to invest in defense firms not engaged in key defense and sensitive strategic activities. Nearly one thousand firms will benefit from this policy relaxation, most of which are involved in the production of logistics and heavy-duty machine equipment, information technology products, and secondary components for weapons systems.74 Many of these firms will be wholly or partially privatized as part of this restructuring.75 In a further opening of the defense industry, China Securities Journal reported in February 2008 that a tightly enforced restriction that only allowed defense industrial firms to list their civilian operations on stock markets was being relaxed.76 Defense conglomerates were also mandated to reduce the draining social welfare obligations that they had maintained since the central planning era. It was estimated at the end of the 1990s that around 12 percent of the total workforce of the military conglomerates was auxiliary staff employed in schools, hospitals, logistics, and other service centers, which cost Rmb 1.4 billion annually to run.77 In addition, large numbers of retirees and family dependents received support. To alleviate this burden, enterprises were allowed to close down or spin off some of these welfare entities into independent, self-sufficient units. The central government also began to assume some of the responsibility for paying laid-off and retired workers with the establishment of a national social security system in the late 1990s, although its capacity to meet these enormous obligations was severely limited by a lack of funds.78 These cost-cutting measures, debt restructuring, and access to new sources of capital combined with an increase in equipment orders brought about by the rise in defense procurement budgets led to a turnaround in the business operations of the defense conglomerates from the end of the 1990s. After eight consecutive years of losses, COSTIND declared that the defense industry had technically broken even in 2002.79 Industrial output value and sales income 74. Lan Xinzhen and Ding Wenlei, “China to Unleash Market Forces in Arms Sector,” Beijing Review (July 2007), 19–25. 75. “COSTIND Guidelines on Introducing Shareholding System to China’s Defense Industry,” COSTIND website, http://www.costind.gov.cn, 17 May 2007, and “COSTIND Official Answers Questions on Stock Ownership of Defense Enterprises,” COSTIND website, 2 July 2007. 76. “Military Enterprises to Accelerate Pace of Restructuring: Listed Assets Will No Longer Be Limited to Civilian Products,” Zhongguo Zhengquan Bao [China Securities Journal] (25 February 2008). 77. Sun, Zhongguo Guofang Keji, 59. 78. Zheng Silin, “Social Security in the People’s Republic of China” (September 2004) http://www.issa.int. 79. The size of these past losses was enormous. In 1996, for example, the defense industry’s combined losses totaled more than Rmb 5 billion, which may have been equivalent to around 10 percent of the sector’s total production output value. See Liu Yichang, “Lifting

[126]

The Revival of the Defense Economy Figure 4.5. Financial performance of the Chinese defense industry, 2003–2007

90% 80% 70% 60% 50%

2003 2004 2005 2006 2007

40% 30% 20% 10% 0% Annual Annual percentage percentage increase in increase in sales volume of total revenues manufactured goods

Annual percentage increase in added industrial output value

Annual percentage increase in profits

Annual Civilian output percentage value as a increase in proportion of civilian total output production value

Sources: Lu Zhou, “Profits of Military Industrial Enterprises Last Year Was Rmb 43 billion, Double the Profit of Three Years Ago,” Zhongguo Zhengquan Bao [China Securities Journal], 8 January 2008; Zhang Yi, “China’s Science, Technology, and Industry for National Defense Opens Eleventh Five-Year Program With Noteworthy Achievements,” Xinhua Domestic Service, 8 January 2007, in FBIS, 8 January 2007; “China’s Defense Industry Reports Two-Digit Growth in Revenues, Profits Last Year,” Xinhua News Agency, 5 January 2006, in FBIS, 5 January 2006; Wang Yu, “China’s Military Industry Sector Realized Rapid Growth of Over 20 Percent in 2004,” Xinhua Domestic Service, 23 January 2005, in FBIS, 23 January 2005; “China’s Defense Sector Expands in 2003,” Xinhua News Agency, 5 January 2004.

for the defense conglomerates increased by 19 percent and 14 percent, respectively, in 2001, and their combined growth rate in 2002 was 6 percent higher than the national average in 2002. In 2007, total profits for the defense industry are estimated to have been around Rmb 43 billion, which was the highest in its history and a 78 percent jump over the previous year.80 (See figure 4.5.) While the output of civilian goods accounted for most of the defense industry’s expansion during the 1980s and 1990s, this robust across-the-board increase in revenues and production from the end of the 1990s reflected rising Defense Scientific and Technological Industries Out of Their Predicament,” Junshi Jingji Yanjiu, January 1998, 8. For an assessment of the defense industry’s revenues and production output, see Cheung, China’s Entrepreneurial Army, 205–8. 80. Lu Zhou, “Profits of Military Industrial Enterprises Last Year was Rmb 43 billion, Double the Profit of Three Years Ago,” Zhongguo Zhengquan Bao, 8 January 2008.

[127]

Fortifying China Table 4.4. Defense firms among China’s top-performing enterprises in 2005 Ranking

Company

Operating profits

32 35 38 54 64 85

China Ordnance Industrial Group Corp. (COIG) China Ordnance Equipment Group (COEG) Aviation Industries of China Corp. One (AVIC 1) China Shipbuilding Industry Corp. (CSIC) Aviation Industry Corp. of China Two (AVIC 2) China Aerospace Science & Technology Corp. (CASTC)

Rmb 79.4 million Rmb 75.2 million Rmb 70 million Rmb 49.6 million Rmb 41.1 million Rmb 34 million

Source: Name List of 500 Strongest Chinese Enterprises for 2006, http://info.cec-ceda.org.cn.

orders for both weapons and civilian products. Military sales of COIG in 2002, for example, increased 18.1 percent.81 A handful of the defense conglomerates spearheaded this rebound in performance. They included the space and aviation corporations, which had enjoyed strong demand for their military and civilian products.82 This economic turnaround continued to broaden and virtually all portions of the defense economy returned to profitability by the middle of this decade. Most remarkably, the ordnance sector, which was one of the worst-performing throughout the 1990s, leapfrogged to the top of the profitability table by 2005. (See table 4.4.) This remarkable improvement in the performance of the defense economy mirrored a similar turnaround in the rest of the state sector over the same period. Government officials announced in 2001 that a three-year enterprise reform plan had been successfully carried out and that a large majority of the country’s state-owned enterprises had returned to profitability.83 This claim was initially met with widespread skepticism, given the deep-seated structural problems that the state sector faced. Government officials later admitted that most of the improved performance was due to policy measures, such as a reduction in interest rates and debt-to-equity swaps, rather than to efficiency gains.84 This suggests that the success of the state reform program was temporary and that the underlying structural problems of chronic inefficiency, poor management, and state interference had not yet been adequately addressed. The predicament facing COIG in particular highlights the daunting scale of the problems that the defense economy still has to overcome in order to become globally competitive. COIG took over some of the oldest and most inefficient factories in the defense economy. As a consequence, its

81. Jiefangjun Bao, 20 January 2003. 82. “PRC Military Industry Reports 30 Percent Decrease in Losses for 2001,” Xinhua Hong Kong Service, 7 January 2002, in FBIS, 7 January 2002. 83. “Goal of SOE Reform Achieved,” Renmin Ribao, 29 December 2000, online ed. 84. McNally, “China’s State-Owned Enterprises,” 5–6.

[128]

The Revival of the Defense Economy

financial and social burdens are among the most severe of all the defense corporations. In 2002, for example, nearly 40 percent of its workforce, or 170,000 out of 415,000 employees, was considered surplus. Moreover, the company had to pay Rmb 1.5 billion annually to service its debt liabilities of Rmb 30 billion.85 The company was able to cut its workforce to less than 360,000 by 2004, but this still left an excess labor force of 115,000 employees, or one out of every three workers.86 The pace and extent to which defense enterprises will be allowed to shed their Maoist-era burdens, how rigorously they adopt modern management structures and business practices, and the changing nature of their financial and political ties with the government will determine whether the turnaround in their performance will be sustainable over the long term. Compared with reforms undertaken by their counterparts in other sectors, defense industrial conglomerates have a long way to go to fundamentally improve their efficiency and corporate governance. For example, few of the corporations have so far introduced boards of directors or supervisory committees, which are essential to improving management practices.87 In addition, only one of the enterprises had a marketing department to direct its sales and market promotion programs.88 This lack of basic modern management and business structures indicates that the economic performance of defense industrial enterprises is still measured by output and the value of assets rather than by profitability or returns on invested capital.89 This reflects the continued interference of government agencies in the running of these firms, which remains a deepseated problem for the entire state sector.90

The Introduction of the “Four Mechanisms” While organizational, corporate, and financial reforms were aimed at addressing structural problems inherent in the defense industrial system, 85. “Diligently Use the Cast-Off Policy to Solve the Twin Problems of Excess Workers and Liabilities,” Binggong Caihui [Ordnance Finance and Accounting] no. 4 (2002): 4. 86. Ai Min, “China Ordnance Moves toward High-Tech Internationalization,” Liaowang, 12 April 2004, in FBIS, 12 April 2004. 87. AVIC 2 did establish a corporate board of directors to oversee its listed subsidiary in 2002. See Cong Cao, “China Aviation Technological and Aviation Shareholding Co. Established,” Zhongguo Junzhuanmin (June 2002), 11. 88. This assessment is based on a review of the websites of ten defense corporations in 2005. Only AVIC 1 had a marketing and foreign management department. 89. Georges Desvaux, Michael Wang, and David Xu, “Spurring Performance in China’s State-Owned Enterprises,” McKinsey Quarterly (2004 special ed.), http://www.mckinsey quarterly.com. 90. See Lisa A. Keister and Jin Lu, “The Transformation Continues: The Status of Chinese State-Owned Enterprises at the Start of the Millennium,” NBR Analysis 12, no. 3 (June 2001): 31.

[129]

Fortifying China

civilian and military decision makers were equally concerned with the underlying problems of a highly conservative, uncompetitive, poorly motivated, inefficient, and corrupted institutional culture. These issues lay at the heart of the defense industry’s disappointing track record and were a legacy of the Maoist socialist planning era. In 1998, the concept of the “Four Mechanisms” (Sige Jizhi) was introduced in an effort to overcome the entrenched monopoly of the country’s defense industrial conglomerates. The Four Mechanisms embodied the following key concepts: • Competition (Jingzheng): The authorities became committed to intro-

ducing competition, albeit in a limited and regulated form, into the weapons procurement system to tackle the widespread structural problems and malpractices that were a key cause of its poor performance. The contract responsibility system was the primary mechanism used by the defense industry and the PLA in undertaking weapons and equipment projects. Although this system appeared to embrace competitive and legal practices that were being adopted in the civilian economy, the lack of penalties if enterprises did not adhere to their contracts was a serious problem that undermined the long-term performance of the system.91 By the late 1990s, it became increasingly evident that the CRS was outdated and affected by deep-seated systemic malpractices. For example, a widely practiced abuse was the submission of bids by defense enterprises for defense contracts that were unrealistically low in cost-performance terms and impossibly high in technological and engineering goals. As a result, budget overruns became a pervasive problem and few projects were able to meet their technological requirements. These contracts are commonly known as “fishing projects” (Diaoyu Gongcheng).92 In response, GAD and COSTIND have examined how other countries have sought to promote competition in their weapons development processes to evaluate their applicability for the Chinese system. Some initial steps have been taken that include imposing penalties to deter cost overruns, significantly reducing the number of projects offered for development, and promoting real competition by

91. For a critique of the contract responsibility system, see Chai Benliang, “Conversion and Restructuring of China’s Defense Industry,” in Mixed Motives, Uncertain Outcomes: Defense Conversion in China, ed. Jorn Brommelhorster and John Frankenstein, 73–76 (Boulder, Colo.: Lynne Rienner, 1997). 92. Sun, Zhongguo Guofang Keji, 119. See also Jiang Huacheng and Zheng Shaoyu, “Jianli Wanshen Zhuangbei Caigou Gongzuozhong ‘Sige Jizhi’ De Sikao” [Some Ideas to Build a Perfect Equipment Acquisition System], Zhuangbei Zhihui Jishu Xueyuan Xuebao [Journal of the Academy of Equipment Command and Technology] 14, no. 3 (June 2003): 5–8.

[130]

The Revival of the Defense Economy

inviting several enterprises to provide bids in a more transparent and fair process.93 • Evaluation (Pingjia): The lack of detailed, independent, and robust evaluations of the financial costs and technical and engineering specifications of major weapons projects has been a serious weakness of the Chinese defense economy. During the 1980s and 1990s, considerable effort was made to enhance the credibility of project evaluations by establishing specialist consultant groups, inviting outside specialists, and employing civilian consulting firms specializing in financial, technological and engineering evaluation to independently assess the viability of major defense projects. But serious loopholes continued to plague the system. The independence and professional expertise of these expert committees were questionable, assessments were often influenced by political and bureaucratic considerations, and the coverage of evaluations were sometimes limited.94 Efforts are now being made to establish a more robust evaluation system by improving the training of financial audit personnel and technical specialists, extending project evaluation requirements beyond major projects to include medium and small projects, and ensuring that evaluation assessments are written into contracts. • Supervision (Jiandu): Anecdotal evidence suggests that corruption and other forms of financial and business malpractices have been a major problem in the defense industry and weapons procurement system in the reform period.95 Although the extent of these abuses within the defense economy is difficult to gauge because of a lack of transparent reporting on this issue, it is likely to mirror the situation in the civilian industrial and procurement systems, where corruption is deep-seated and widespread.96 The authorities and enterprises have sought to address this problem through administrative and organizational initiatives. This includes establishing numerous organizations to prevent and investigate abuses: party disciplinary inspection committees that 93. For an example of how this new system is being implemented within the naval shipbuilding sector, see Chen Tao, Bai Haiwei and Bai Chengang, “Kaizhan Zhibiao Gongzuo Cujin Jianchuan Caigou Moushi De Zhuanbian” [Develop the Work of Inviting Bids and Promoting the Transformation of the Purchase Pattern of Naval Vessels], Zhuangbei Zhihui Jishu Xueyuan Xuebao 13, no. 1 (February 2002): 32–36. 94. Sun, Zhongguo Guofang Keji, 128–29. 95. There has been occasional reporting on this issue. See, for example, Shu Ping, Qiu Baoping and Li Yangbo, “Demonstration by 500 Workers of Military Enterprise Has Unspeakable Secret,” Wen Wei Po, 18 October 2002, in FBIS, 21 October 2002; and “PLA Launches Assault on Commercial Bribery,” Renmin Ribao, 3 August 2006, online ed., http://english. peopledaily.com.cn. 96. See X. L. Ding, “The Illicit Asset Stripping of Chinese State Firms,” China Journal, no. 43 (January 2000): 1–28.

[131]

Fortifying China

report to the Party Discipline Inspection Commission, administrative supervision units belonging to the Ministry of Supervision, military representative offices run by the PLA, and internal company financial audit and supervisory departments. A lack of coordination among these different organizations is a serious problem that has allowed loopholes and blind spots to develop.97 • Encouragement (Jili): The fostering of a motivated workforce is an important goal of the authorities. The policy is to develop mechanisms that will encourage the grooming of more innovative, committed, and hard-working employees. This includes the employment of traditional practices such as the promotion of ideological campaigns, improving labor and human relations management, and the selective adoption of more modern market-based concepts such as financial incentive and performance-related mechanisms.98

The Building of Institutions A glaring deficiency of the defense innovation system in the late 1990s was the absence of a comprehensive and coherent framework of regulations and technical standards that is essential in guiding technological development. The formulation and implementation of rules, procedures, and technical specifications during the 1980s and first half of the 1990s took place on a decentralized and often ad hoc basis because of the lack of strong centralized organizations to oversee this work. In an environment of conflicting standards and competing rules and practices, the diffusion of technological know-how and sharing of information was seriously impeded. One of the first priorities for GAD and COSTIND after the 1998 reorganization was to strengthen and expand the regulatory regime. GAD immediately began work on the drafting of detailed administrative regulations and laws governing armaments R&D, production, and management issues.99 The first fruit of this labor was the PLA Regulations on Armaments, which took two years to draw up and was promulgated by the CMC in 2000. Since then there has been a steady flow of new rules and regulations concerning defense technological and weapons-related matters (table 4.5). Despite the seemingly impressive list of reforms, a major difficulty encountered by the authorities has been the implementation of these laws and regulations. Military units and defense enterprises had previously enjoyed wide-ranging freedom in their activities and were unencumbered with the need to adhere to laws and regulations. Against that backdrop, 97. Sun, Zhongguo Guofang Keji, 131–33. 98. Ibid., 134–38. 99. Jiao, Junshi Zhuangbei Guanli Xue, 178.

[132]

Table 4.5. Key laws and regulations on defense technological and weaponry-related issues

Law/Regulation

Status

Date of promulgation

Promulgating organization (drafting agency)

PRC National Defense Law

Tier 1 national law

March 1997

National People’s Congress

Provisional Measures on Weaponry R&D and Production License Management

Tier 3 provisional measures

September 1999

COSTIND

Provisional Regulations on Defense S&T Measurement and Supervisory Management

Tier 3 provisional measures

February 2000

COSTIND

Provisional Regulations on Defense S&T Industrial Fixed Asset Investment Management

Tier 3 provisional measures

October 2000

COSTIND

Working Procedures on Defense S&T Industrial Standards Formulation

Tier 3 working procedures

November 2000

COSTIND

PLA Regulations on Weaponry

Tier 2 regulations

December 2000

CMC (GAD)

PLA Regulations on Command Automation

Tier 2 regulations

July 2001

CMC (GSD)

PLA Regulations on Military Scientific Research

Tier 2 regulations

2001

CMC (GAD)

Measures on Defense S&T Industry Basic R&D Management

Tier 3 provisions

January 2002

COSTIND

Document on Defense S&T Industrial Conversion Technology Development

Tier 3 working document

February 2002

COSTIND

PLA Regulations on Armament Maintenance

Tier 2 regulations

July 2002

CMC (GAD)

PLA Regulations on Armament Procurement

Tier 2 regulations

October 2002

CMC (GAD)

PLA Rules for Weaponry and Armament Administration

Tier 2 regulations

January 2003

CMC (GAD)

Measures on Defense Scientific and Technological Achievements Appraisal Management

Tier 3 provisions

February 2004

COSTIND

COSTIND Provisions on Weaponry R&D and Production Standardization Work

Tier 3 provisions

February 2004

COSTIND

Fortifying China Table 4.5.—cont.

Law/Regulation

Status

Date of promulgation

Promulgating organization (drafting agency)

PLA Regulations on Armaments Research and Development

Tier 2 regulations

February 2004

CMC (GAD)

Regulations on National Defense Patents

Tier 2 regulations

September 2004

State Council and CMC (COSTIND & CMC)

PLA Regulations on Preliminary Armaments Research

Tier 2 regulations

December 2004

CMC (GAD)

PLA Regulations on Science, Technology and Information Work in Weaponry and Equipment

Tier 2 regulations

July 2005

CMC

PLA Regulations on Rewarding Professional and Technical Personnel

Tier 3 provisions

March 2006

CMC (all four PLA general departments)

Sources: Jiao Qiuguang, chief ed., Junshi Zhuangbei Guanli Xue [The Study of Military Armaments Management] (Beijing: Junshi Kexue Chubanshe (Academy of Military Sciences Press), 2003), 172-91; Jiefangjun Bao, 9 July 2003; COSTIND’s policies and regulations website, http:// www.costind.gov.cn; State Council Information Office, China’s National Defense in 2004, http:// www.china.org.cn/english; and State Council Information Office, China’s National Defense in 2006, http://www.china.org.cn/english/China. Tier 1 laws are national-level laws passed by the National People’s Congress. Tier 2 regulations are national-level administrative fiats issued by the State Council and/or CMC and are tied to national laws. Tier 3 regulations are service-level rules that are issued by service arms such as the navy, air force, and Second Artillery.

the enforcement of this new, more tightly managed regulatory regime has been problematic. A commentary in the Jiefangjun Bao in January 2003 on the promulgation of a new set of regulations on weaponry management alluded to the extent and impact of this situation: “In strengthening weaponry and armament administration, some military units see various degrees of phenomena such as irregular efforts, defiance of ordinances and slack efforts in law enforcement. These phenomena have cut the percentage of weapons and armaments that are in an excellent condition and have hindered the improvement of military fighting strength.”100 Despite this resistance, indications are that the gradual adoption of a rulesbased institutional culture will eventually lead to the emergence of a more effective and regularized environment that will enhance competition, diffusion, 100. “Opening Up New Prospects for Managing Weaponry According to Regulations,” Jiefangjun Bao, 13 January 2003, 1, in FBIS, 13 January 2003.

[134]

The Revival of the Defense Economy

and other processes essential to the nurturing of innovation and absorption capabilities. A GAD-sponsored conference in April 2004 examined the implementation of regulations for standardized equipment procurement that were enacted in October 2002 and found that the new procedures had led to greater transparency and competition. This resulted in cost savings on equipment purchases of between 20 and 30 percent and boosted quality standards.101 The establishment of a common and comprehensive technical standards and military specifications regime has been another important mission for the PLA and defense economy since the beginning of the reform period.102 This task has taken on added urgency since the mid-1990s in the face of growing leadership calls to the military establishment to pursue leapfrogging.103 The development of complex weapons systems is dependent on thousands of standardized parts and components that must be of high quality and reliability. Moreover, if the defense industry is to effectively harness the rapidly advancing technological capabilities of the commercial industrial base, it needs to play an active role in working with civilian counterparts to set commercial technical standards that are acceptable for defense requirements. Under the post-1998 regime, the setting of technical standards and military specifications is jointly overseen by COSTIND and GAD, which coordinate and define the activities of several dozen specialized military committees that formulate standards in a wide range of technical areas. In 1998, there were thirty-eight of these military standards committees made up of several thousand members drawn from the uniformed ranks, the defense economy, and the civilian standards management bureaucracy.104 Beginning in 1983, when the first 15 national military standards were issued, an average of around 400 standards were passed annually over the next fifteen years, totaling around 5,400 by the end of 1998 (see table 4.6). By 2007, this number had soared to around 23,200 military standards.105 In addition, different industrial sectors had issued more than 17,000 military standards during this same period. The shipbuilding, ordnance, and materials sectors have established the most standards, while the aviation, space, and electronics sectors have lagged well behind.106 It is estimated that 101. Liu Jianjun and Zhao Bo, “Initial Successes Secured in Armaments Acquisition Reform,” Jiefangjun Bao, 28 April 2004. 102. For a detailed examination and history of the evolution of the Chinese military standardization system, see Kong Xianlun, chief ed., Junyong Biaozhunhua [Military Standardization] (Beijing: Guofang Gongye Chubanshe, 2003). 103. Fan Xizhong, “Grasp the Core of Informatization,” Jiefangjun Bao, 8 February 2004, 2, in FBIS, 8 February 2004. 104. Kong, Junyong Biaozhunhua, 223–26. 105. Sun Wei, “Innovation Results Will Be Significantly More In the Future—COSTIND S&T Quality Section Chief Wu Weiren Answers Reporter’s Questions,” Zhongguo Jungong Bao [China Military Industry News], 4 July 2007. 106. Kong, Junyong Biaozhunhua, 77–79.

[135]

Fortifying China Table 4.6. Military standards issued according to industrial sectors in 1998 Industry sector

Standards issued

Percentage of overall total

Aviation equipment

391

5.57%

Space (including satellites and rocket launchers)

449

8.43

Ordnance equipment (including armored vehicles, artillery, light arms and ammunition)

738

13.85

Naval equipment

808

15.16

Electronic equipment (including telecommunications, radar, computers and electronic countermeasures)

540

10.13

844

15.84

Other sectors

Materials

1560

68.98

Total

5330

100.00

Source: Kong Xianlun, chief ed., Junyong Biaozhunhua [Military Standardization] (Beijing; Guofang Gongye Chubanshe, 2003), 79–80.

around 80 percent of the R&D and production output of the shipbuilding, aviation, nuclear, shipbuilding, and ordnance industries adhered to these national military standards by the end of the 1990s.107 The Chinese military specifications and standards regime has a long way to go, however, before it can catch up with its more established counterparts in advanced industrial countries. Only a limited proportion of the Chinese military standards conform to internationally recognized levels. By the end of 2000, only 1,920, or 33 percent, of the Chinese national military specifications were considered to have reached international standards, according to COSTIND statistics.108 However, this is significantly better than in the civilian arena, where only 20 percent of local standards were identical with their international counterparts in 2002.109 In terms of the overall quantity of military standards though, China appears to have closed the gap with the West. The U.S. Defense Department had an active list of more than 26,000 military specifications and standards in 2001, which is comparable in size to the Chinese military standards regime in 2007.110 107. He Zhi, “Move Forward with Reform, Carry On with Development,” Guofang Keji Gongye, May 2001, 32–34. 108. Kong, Junyong Biaozhunhua, 183. 109. Ann Weeks and Dennis Chen, “Navigating China’s Standards Regime,” China Business Review (May–June 2003), 37. 110. U.S. Department of Defense, Office of the Undersecretary of Defense (Acquisition, Technology and Logistics) Logistics Plans and Programs, MilSpec Reform: A Final Report (Washington, D.C.: Defense Standardization Program Office, 2001), 11.

[136]

The Revival of the Defense Economy

Despite the relative youth of China’s military and civilian technical standards regimes, indications are that the Chinese government has sought to make a concerted effort since the beginning of the twenty-first century to develop a new technology policy based on the promotion of its own technical standards. Richard Suttmeier and Yao Xianghui have described this approach as neo-techno-nationalism, in which “technological development in support of national economic and security interests is pursued through leveraging the opportunities of globalization for national advantage.”111 This has been the case in the information technology and software sectors, areas in which the military and defense industrial establishments have played active and influential roles in shaping technological developments and requirements.

Access to Foreign Technology Transfers Expanding access to foreign technological knowledge, products, and practices, both in the military and civilian sectors, has had a far-reaching impact in promoting the technological development of the Chinese defense innovation system in the reform era. This trend has accelerated and deepened since the late 1990s. Although self-sufficiency remains a cornerstone of the country’s defense modernization goals, this is a long-term strategic aspiration. The policy focus for the next two decades is to pursue a strategy of acquiring and absorbing foreign technology that both complements and supports indigenous weapons R&D.112 Moreover, with increasing priority attached to leapfrogging and catching up with advanced military powers, the importation of foreign technology is crucial in meeting this objective. As the Jiefangjun Bao pointed out in a commentary in 2002, China must “be adept at seizing any opportunity that can be seized, introducing key foreign equipment and technology in a selective and prioritized manner, organically integrating independent innovation with what must be brought in from abroad, achieving leaps at a higher level.”113 Since the 1990s, the defense industry has employed several approaches in the pursuit of foreign technological products and processes: • Technical and advisory consultation: Chinese defense industrial and

PLA agencies such as COSTIND and the PLA General Staff Department invited hundreds of foreign defense scientists and engineers 111. Richard P. Suttmeier and Yao Xiangkui, “China’s Post-WTO Technology Policy: Standards, Software and the Changing Nature of Techno-Nationalism,” NBR Special Report, no. 7 (May 2004), 3. 112. See Evan A. Feigenbaum, China’s Techno-Warriors: National Security and Strategic Competition from the Nuclear to the Information Age (Stanford: Stanford University Press, 2003), chap. 7. 113. Liu Cheng, “Creating a New Situation in the Weapons and Equipment Modernization Effort,” Jiefangjun Bao, 14 October 2002, in FBIS, 21 October 2002.

[137]

Fortifying China

during the 1990s to provide technical and consulting advice for weapons development projects as well as for academic and professional exchanges and conferences. Many of these specialists came from Russia, Ukraine, and Belarus, including several hundred aviation and missile personnel who were recruited through nonofficial channels in the early and mid-1990s.114 According to Russian defense officials, this provided the Chinese defense economy with a useful source of external information and analysis. • Off-the-shelf purchases of complete systems: The predominant form of technology transfer during the 1990s was the large-scale acquisition of completed weapons systems for the PLA’s operational use. Supplies from Russia accounted for more than 90 percent of the monetary value of contracts signed. This is estimated to have been around $1.2 billion annually during the 1990s and to have doubled from 2001 to 2004.115 The defense economy reaped little direct benefit, however, because the amount of technology transfer was limited, although some of this equipment was taken apart and inspected for reverse engineering applications.116 • Supply of subsystems and components: In areas in which the Chinese defense economy is weak, foreign assistance has been urgently sought for subsystems and components to be incorporated into domestic designs. Among the most sought-after technologies are aircraft and warship propulsion systems and aircraft electronics, radar, and fire control systems. For example, the latest versions of the F-8II and F-10 fighters are fitted with Russian systems such as Phazatron slotted array radars and, in the case of the F-10, the AL-31FN turbofan jet engine.117 • Offset license assembly and production of complete systems: Beginning in the mid-1990s, the Chinese government signed a number of deals for the license production of fighter aircraft and missiles. This allowed the transfer of technological products and manufacturing 114. Interviews with Russian military and Defense Ministry officials, Moscow, June 1993. 115. U.S. Defense Department, 2004 Annual Report on Military Power of the People’s Republic of China, 30–31, http://www.defenselink.mil/pubs. See also Tai Ming Cheung, “Chinese Perspectives on Sino-Russian Arms Transfers: From Opportunism to an Emerging Cooperative Partnership,” (unpublished conference paper, Rand-CAPS conference, Oxford, June 1997). 116. One Russian military official involved in the management of the defense industrial and technological relationship with China during the 1990s said that a standard tactic that Chinese defense officials employed in their negotiations for Russian weapons systems was to seek to acquire one or two samples of equipment for “evaluation” (i.e., reverse engineering) rather than to purchase sizable numbers for operational deployment. Interview, Beijing, June 1999. See also “Russia Surprised by China’s Imitating Capability,” Kanwa Defense Review (1 December 2006). 117. Konstantin Makienko, Russia in the Combat Aircraft Market (Moscow: Centre for Analysis of Strategies and Technologies, 2002).

[138]

The Revival of the Defense Economy

processes that were at least a generation ahead of existing Chinese levels. One of the most important was a 1996 license assembly and production contract with Russia for two hundred Sukhoi Su-27 fighter aircraft, which gave the Chinese military aircraft industry access to third-generation technology and manufacturing processes.118 In 2004, Russian officials indicated that China had wanted to renegotiate this contract and switch to the production of an extensively modernized Su-27 model that is a generation more advanced than the existing version manufactured by China.119 • Joint design and development: This approach promises the most opportunities for the transfer of critical knowledge and technology to the Chinese defense economy through extensive R&D collaboration and sharing of information. Since 2000, the Chinese government has attempted to encourage the Russian government to undertake the joint development of new generations of weapons and supporting systems.120 Moscow had previously been lukewarm to such proposals because it was concerned that this would allow the Chinese defense economy to catch up with Russian defense technological levels.121 Since the beginning of the twenty-first century, though, the Russian government appears to have become more willing to enter into such cooperation because of China’s crucial importance as the largest importer of Russian military equipment.122 A senior Russian defense industry official said in 2004 that the previous pattern of off-the-shelf purchases “is increasingly giving way to a relationship of partners who are developing aircraft jointly.”123 Russian military officials indicated that likely areas for joint development include electronic systems, warships, and fighter aircraft.124 However, the discovery of illicit

118. “China to Build Su-27,” Jane’s Defence Weekly, 16 July 1997. 119. “The Russian Defense Industry Adapts to Changes on the Chinese Market of Aviation Equipment,” Moscow Izvestiya, 16 November 2004, Moscow ed., 7, in FBIS, 16 November 2004. 120. Interviews with Russian military officials, Beijing, 2001, 2002, and 2003. 121. See Paradorn Rangsimaporn, “Russia’s Debate on Military-Technological Cooperation with China,” Asian Survey 46, no. 3 (May–June 2006), 477–95; and interviews with Russian military officials, Moscow, and Beijing, 1992, 1993, and 1996. 122. U.S. Defense Department, 2006 Annual Report on Military Power of the People’s Republic of China, 20–21, http://www.defenselink.mil/pubs. See also Eugene Kogan, “Russia-China Aerospace Industries: From Cooperation to Disengagement,” China Brief (Jamestown Foundation) 4, no. 19 (September 2004), http://www.jamestown.org/publications. 123. Mikhail Kukushkin, “China Does Not Want Ready Aircraft,” Moscow Vremya Novostey, 5 November 2004, in FBIS, 5 November 2004. The comment came from Yuriy Koptev, the head of the Defense Industry Department of the Russian Ministry of Industry and Energy. 124. Interviews with Russian military officials, Beijing, June 2001, and December 2003. See also “Russian, Chinese Aircraft Designers to Jointly Develop Active Phased Array Radar,” Agentstvo Voyennykh Novostey, 22 November 2004, in FBIS, 22 November 2004; and Konstantin

[139]

Fortifying China

Chinese copying appears to have scuppered these initiatives in the past few years. • Espionage: Chinese military, defense industrial, and civilian intelligence agencies have aggressively sought access to nonpublic and classified technologies and knowledge from foreign countries, using a wide assortment of legal and clandestine means. Key targets of Chinese espionage efforts are leading military industrial powers such as the United States, Western Europe, and Russia. In 2005, the U.S. Federal Bureau of Investigation estimated that there were more than three thousand Chinese front companies operating in the United States to illegally acquire military and dual-use technologies.125 • Creative adaptation of Russian weapons platforms: Since the end of the 1990s, the Chinese defense industry has been furtively engaged in creatively adapting Russian weapons systems and indigenizing them through a combination of unauthorized reverse engineering and the widespread substitution of Russian components with Chinese and other foreign parts. Platforms such as the Su-27 fighter and advanced defense electronic systems such as the radar and datalink systems for the Sovremenny II 956E destroyer and the Fregat M2EM 3D and Mineral-ME radar systems have all been successfully copied by China, much to the consternation of Russian suppliers.126 The Chinese defense industry appears to have made this creative adaptation strategy a central tenet of its near-term development approach, and this has caused a major slowdown in Russian arms sales to China since the middle of this decade. The absorptive capacity of the Chinese defense economy has been severely tested by this influx of Russian defense technology transfers, especially advanced and highly complex systems such as fighter aircraft and Makienko, “The Russian-Chinese Arms Trade: An Attempt at Qualitative Analysis,” Moscow Defense Brief, no. 2 (October 2004), http://mdb.cast.ru. 125. Jay Solomon, “FBI Sees Big Threat from Chinese Spies; Businesses Wonder,” Wall Street Journal, 12 August 2005. See also U.S. Defense Security Service, Technology Collection Trends in the U.S. Defense Industry 2006 (Alexandria, Va.: Defense Security Service Counterintelligence Office, 2006), www.dss.smil.mil. This is an annual report by the agency within the Pentagon responsible for investigating foreign espionage activities against the U.S. defense industry. While the report does not specifically identify individual countries but groups them into regions (China is part of East Asia), it does point out that the biggest offending region by far is East Asia, and it implicitly points to China’s central role. The report also provides the key technologies being targeted, with information systems, lasers, and optics at the top of priorities for foreign intelligence collection. 126. Wu Xingchen and Andrei Chang, “Business Cultures and Russia-China Military Cooperation,” Kanwa Asian Defense Review, 15 August 2007, 29–30; and Reuben Johnson, “Sino-Russian Union Falters,” Jane’s Defence Weekly, 7 November 2007.

[140]

The Revival of the Defense Economy

naval vessels. The case of the Su-27 license production project provides a vivid insight into the difficulties encountered.127 When Shenyang Aircraft Corp. (SAC), one of the defense industry’s premier manufacturing facilities, began to build the Su-27 from self-assembly kits in the late 1990s, Chinese engineers struggled to implement the advanced technological and industrial management methods needed to construct the aircraft. The first two locally assembled aircraft had to be shipped back to Russia for reassembly because of substandard work. The terms of the license production deal, which was for a total of two hundred aircraft, specified that China would assemble the first fifty aircraft from kits supplied by Russia. Local production of components and subsystems would then gradually increase up to 70 percent of the total aircraft. However, Russia refused to sell the manufacturing rights to the aircraft’s power plant, although it did eventually agree to the construction of a repair and maintenance facility in China. Russian defense officials who had toured the SAC plant during the start of the assembly process had anticipated such problems and assessed that it would take the Chinese aircraft industry at least several years before it was able to successfully absorb the technology and production techniques for the Su-27. To provide training, management, and quality control support, more than one hundred Russian engineers were assigned to the Su-27 production plant. After initial teething problems, quality and productivity levels gradually improved, and by the end of 2003, the annual production rate of the Su-27s had reached the target figure of fifteen aircraft.128 This showed that SAC was able to learn, adapt, and absorb the technology transfers and thereby improve productivity and quality. The Su-27 deal represents the largest agreement for defense technology transfers so far between China and Russia. A Chinese defense industry publication estimated that by 2004, technology transfers and joint ventures constituted around 30 percent of the overall transfer and sale of Russian military equipment to China. Over the next few years, China planned to raise this ratio of technology transfers to 70 percent, according to the journal.129 While the Russian defense technology transfers have directly contributed to increases in productivity and quality levels in the case of SAC, the overall impact on indigenous technological innovation capabilities in the defense economy is more difficult to assess because secrecy surrounding this military cooperation has limited the release of information into the

127. This section is based on extensive interviews with Russian military officials closely involved in the Su-27 project, Beijing, 1997, 1998, and 1999. 128. Interview with Russian military official, Beijing, December 2003. 129. Wang Yifeng, “Zhongguo Cong Nali Mai Xianjin Wuqi—Zhongguo Jungou Shichang Fenxi” [Where Will China Buy Advanced Weapons—An Analysis of the Chinese Acquisition Market], Jianzai Wuqi [Shipborne Weapons], March 2004, 16.

[141]

Fortifying China

public domain. However, studies of foreign technology transfers into the Chinese civilian manufacturing sector suggest that these transfers alone are not sufficient to promote innovation within local firms. Correspondingly, they suggest that only when the importation of technological knowledge, products, and processes is supplemented with in-house R&D activities does this lead to increased returns for indigenous R&D.130 The development of the Shenyang J-11B fighter is a prime example of this process taking place through the exploitation of Russian technologies combined with extensive indigenous R&D. The J-11B is reportedly a generational improvement over the Su-27 that it was derived from with the addition of new capabilities such as a reduced radar cross-section, improved fire-control radar, wide use of composite materials, a new flight control system, a digital glass cockpit, and a Chinese-developed engine.131

A Broken Diffusion System Despite the relative success of policies and initiatives in promoting technological modernization in various sectors of the defense economy, a fundamental weakness of the defense S&T system has been its poor ability to diffuse technological achievements. At the end of the 1990s, it was estimated that fewer than 15 percent of the military inventions annually developed by defense R&D institutes were popularized and fewer than 3 percent were eventually adopted for large-scale serial production.132 In the case of the Chinese space industry, it was able to convert only about 10 percent of its research achievements into practical use (see table 4.7), although the popularization rate was better for the ordnance and aviation sectors. By comparison, the United States was able to commercialize as much as 80 percent of its research.133 This low utilization rate reflects inadequate transmission and incentive mechanisms and structural bottlenecks rather than the 130. Albert Guangzhou Hu et al., “R&D and Technology Transfer: Firm-Level Evidence from Chinese Industry” (William Davidson Institute Working Paper No. 582, June 2003), http://ssrn.com/abstract=578241. 131. Jonathon Weng, “Details Emerge of Chinese J-11B Heavy Air Superiority Fighter,” Jane’s Defence Weekly, 9 May 2007. 132. Zhu Qinglin and Meng Renzhong, chief eds. Zhongguo Caijun Yu Guofang Ziyuan Peizhi Yanjiu [China’s Disarmament and the Research of the Disposal of Defense Resources] (Beijing: Military Sciences Press, 1999) 152–53, and Xin Guoping, “Research on the Industrialization and Commercialization of Science and Technology Achievements from Military Industry,” Ranqi Wolun Shiyan Yu Yanjiu [Gas Turbine Experimentation and Research], 14, no. 2 (2001): 55–58. The commercialization rate for NDSTU was 3 percent. See Zeng Huafeng, ed. Zhujian Weili [Casting Swords into Ploughshares] (Beijing: Youdian Daxue Chubanshe, 2000), 172. 133. Tang Xiaowo et al., “Woguo Guofang Keji Chengguo Tuiguang Yinggongde Xianzhuang Ji Cunzaide Zhuyao Wenti” [The Current Situation and Existing Major Problems of the Popularization Application of Our Country’s Defense S&T Achievements] Ruan Kexue [Software S&T], no. 3 (1997): 35.

[142]

The Revival of the Defense Economy Table 4.7. Popularization rates of R&D output of key Chinese defense industrial sectors in the late 1990s Industry Ordnance Aviation Space Nuclear

Popularization rate for R&D output 35% 15 10 8

Source: Tang Xiaowo et al., “Woguo Guofang Keji Chengguo Tuiguang Yinggongde Xianzhuang Ji Cunzaide Zhuyao Wenti” [The Current Situation and Existing Major Problems of the Popularization Application of Our Country’s Defense S&T Achievements], Ruan Kexue [Software S&T], no. 3 (1997): 35–37.

poor quality of research.134 Consequently, the lack of effective channels of dissemination appears to have seriously hampered the innovation process and led to the costly squandering of limited funds. A principal reason behind the ineffectiveness of the diffusion process is the lack of incentives that research institutions have to pursue their activities to fruition in the marketplace or on the production line. Most important, the absence of an effective patents system and intellectual property rights culture has meant that researchers and their institutions have received little or no reward from the exploitation of their work.135 Without any benefits to provide encouragement, scientists and engineers have had little motivation to carry on with the development of their research output for commercial dissemination. The separation of the R&D and production sectors contributed to this disconnection between innovation and diffusion. The poor performance record of the military aircraft industry during the 1990s is a stark example of how this lack of intellectual property ownership rights and the compartmentalization of R&D and production functions have hindered aircraft development. For example, one 1999 study of the Chinese aircraft sector noted: Funding for aircraft development is currently provided by the state, and the property rights belong to the state. After the designers perform the highly difficult work of substantiating the technical concept, repeated design 134. Wang Feng, ed., Guofang Keji Chengguo Guanli [The Management of the Achievements of Defense Science and Technology] (Beijing: Guofang Gongye Chubanshe, 2005). See also Zhang Jingyong, “China Urgently Needs to Alter the ‘Individual Combat’ Situation in Scientific Data,” Xinhua Domestic Service, 6 February 2003, in FBIS, 10 February 2003. 135. See Du Ying, “Guofang Jishu Zhishi Chanquan Baohu Yanjiu” [Research into the Protection of Defense Technological Intellectual Property Rights], Zhishi Chanquan [Intellectual Property] (April 2002), 21–24.

[143]

Fortifying China modifications, large amounts of testing, meeting the deadlines for getting the planes into production and into the air, perfecting the blueprints and finalizing the design, they hand over the blueprints and design data (which often amount to several hundred thousand standard pages for an aircraft) to the manufacturing enterprise without compensation. Thereafter, they have no stake in how many aircraft are produced and sold. There is no respect for the design units’ protracted creative effort and no benefits are returned to them. . . . This dampens their motivation, unavoidably affects the quality and rapidity of design, prevents the design of new aircraft from entering a beneficial cycle and results in the loss of large numbers of talented people. This is another internal factor responsible for the lack of improvement of performance.136

The Chinese government and the defense economy finally began to pay serious attention to protection of intellectual property rights in the mid1990s.137 This was spurred by serious disputes with major trading partners, the country’s efforts to gain admission into the World Trade Organization, and a growing recognition that an effective patents regime was crucial in supporting S&T development.138 The result has been a gradual strengthening of the patent regime since the end of the 1990s. Special attention in particular has been paid to enhancing the protection of the intellectual property rights of scientists involved in both civilian and defense-related R&D.139 A new statute on defense patents was promulgated in November 2004 to supersede an outdated law. To improve the credibility and effectiveness of this new statute, a new State Defense Patent Agency was reportedly established to replace offices that had previously been affiliated with the State Intellectual Property Agency.140 These efforts have contributed to making the defense industry a front-runner within the country in applying for patents. During the Tenth Five-Year Plan, patents awarded to the defense industry grew by an annual rate of 46 percent.141 A survey of patent applications and

136. Huang Qiang, “Will China’s Aviation Industry Be Able to Get Out of the Doldrums Soon?” Keiji Ribao, 8 July 1999, 8, in FBIS. 137. See Wu Weiren, chief ed., Guofang Keji Gongye Zhishi Chanquan Shiwu [The Practice of Defense Science and Technology Industry Intellectual Property] (Beijing: Zhishi Chanquan Chubanshe, 2005). 138. See Andrew C. Mertha, The Politics of Piracy: Intellectual Property in Contemporary China (Ithaca: Cornell University Press, 2005). 139. “Protection of Patents to Be Strengthened in China,” China Daily, 23 April 2003. 140. “China Issues New Statue on Defense-Related Patents,” Xinhua Domestic Service, 10 October 2004. Even before the passing of this new defense patent law, all defense patent applications were handled by a defense patent bureau that operated under the GAD. See “Guofang Zhuanli Zhidu Jiqi Zuoyong” [The Functions of the Defense Patents System], Dianzi Zhishi Chanquan [Electronics Intellectual Property] (May 2002), 62–64. 141. Sun Wei, “Innovation Results,” Zhongguo Jungong Bao, 4 July 2007.

[144]

The Revival of the Defense Economy Table 4.8. Defense conglomerates among the top ten central government enterprises with the highest number of patents in 2004 Rank 3 6 10

Enterprise

Patent applications

Patents issued

China Ordnance Equipment Group (COEG) China Electronics Technology Enterprise Corp. (CETC) Aviation Industry Corp. of China One (AVIC 1)

480

594

202

98

180

132

Source: State Council State-Owned Assets Supervision and Administration Commission (SASAC), “Notable Achievements in the Technical Innovation Work of Central Government Enterprises,” SASAC website, August 2005, http://www.sasac.gov.cn.

approvals by central government enterprises in 2004 found that defense corporations accounted for 20 percent of all patent applications.142 Diffusion of defense R&D has also been obstructed by numerous other factors. The backward state of the military technical standards regime has been one bottleneck. Another obstacle has been the dominance of technology push in R&D projects, in which government requirements have determined priorities and goals and the demands of end users have been ignored.143 Yet another deficiency has been the lack of a comprehensive regulatory framework to guide the commercialization of defense S&T achievements.144 Concerns over the potential leaking of defense secrets have also been a powerful barrier to preventing dissemination flows. Since the late 1990s, steps have been taken to promote diffusion. One of these is the establishment of defense technology commercialization centers such as the Ordnance Industry’s Productivity Promotion Center (PPC).145 The role of the PPC, which opened in 1997, is similar to that of civilian productivity centers—to provide services such as information, consulting advice, training, and marketing support to assist defense enterprises in the commercialization of their research output. COSTIND established a Scientific and Technological Achievements Promotion and Popularization Research Center affiliated with the PPC in 2000.146 In addition, more regional, national, and

142. See Guoziwei [State-Owned Assets Supervision and Administration Commission], 2004 Nian Zhongyang Qiye Yongyu Jishu Chuangxin Defeiyong Zhichu Qian Shiming Danwei [Highest Spending on Technological Innovation by Central Government Enterprises in 2004], http:// www.sasac.gov.cn. By 2007, defense patents accounted for 21 percent of total domestic patents. 143. Dahlman and Aubert, China and the Knowledge Economy, 109. 144. Chen Lin and Chen Kai, “Tuiguang Zhuanhua Gongzuo” [Working to Transform Popularization], Guofang Keji Gongye (March 2003), 36–37. 145. For background on this entity, see http://www.cppc.gov.cn. 146. This research center has established an extensive website on defense technological commercialization and popularization activities at http://www.techinfo.gov.cn.

[145]

Fortifying China

international trade fairs and exhibitions have been organized to promote defense commercialization opportunities. Major events include an annual high-technology commercialization fair held in Chongqing and the annual Beijing International Technology Exhibition Fair.147 While these initiatives are a step in the right direction, they are modest efforts and are an indicator that the enhancement of dissemination mechanisms remains a low priority. These efforts are likely to lead to incremental improvement in technology dissemination over the long term, but the fundamental cultural and structural barriers that have impeded diffusion flows remain deeply ingrained in the defense innovation system. They include widespread ignorance and ambivalence toward the importance of safeguarding intellectual property rights, excessive secrecy, and a cavalier approach toward adherence to regulations and standards. On the basis of current trends, any improvement in the mechanisms and processes to enhance diffusion over the next couple of decades is likely to be limited and gradual, especially if there is a lack of high-level political attention and commitment.

Key Activities of the Rejuvenated Defense Innovation System Research and Development The Achilles heel of the defense innovation system during the 1980s and 1990s was the R&D apparatus. While a raft of measures had been taken to improve its performance, they failed to address adequately the root causes of the problems holding back the creation, nurturing, and diffusion of innovation that stemmed from the legacy of the socialist planning system. The first major structural impediment was the continuing separation of the R&D and production systems. Some efforts had been made to increase interactions across these two systems. In the development of major weapons systems projects, for example, a practice that became increasingly common was the assignment of personnel from research and design institutes to production enterprises to provide technical support for the implementation of blueprints that they had drafted. These arrangements occurred on an ad hoc basis, however, and were the exception rather than the norm. A second key obstacle was that the only source for the promotion of innovation came from secondary governmental agencies and not primary actors. 147. Zhang Zhiming, Wu Yuguang, and Ren Deliang, “Qiantan Keji Chengguo Zhanshi Jiaoyi Zai Guofang Keji Chengguo Tuiguang Zhuanhua Zhongde Zuoyong” [An Elementary Discussion of the Promotional Trade of the Achievements in the Work of Popularizing the Transformation of Defense S&T Achievements], Zhongguo Keji Luntan [China Science & Technology Forum], April 2003, 80–82.

[146]

The Revival of the Defense Economy

Because research institutes and production enterprises relied exclusively on the government and military establishment for funding and resources to undertake defense-related R&D, they had no independent capability or incentive to come up with or pursue their own initiatives. This pervasive and deep-rooted institutional passivity smothered any innovative creativity. Moreover, COSTIND lacked the ability and motivation to rigorously promote innovation because of the absence of competition within the defense economy. While the PLA was much more active and concerned with nurturing innovation, its ability to promote creativity and competition was seriously compromised because it had to go through COSTIND for decisionmaking and implementation. To tackle these serious shortcomings in the R&D apparatus, the new leaderships in the State Council, COSTIND, and PLA headquarters recognized that a bolder reform strategy was required to reduce crucial bottleneck problems that previous piecemeal approaches had failed to address. Initiatives were set in motion to reform the relationship between secondary government and military actors. COSTIND’s dual role of looking after the defense economy and at the same time being responsible for meeting the PLA’s equipment needs had created fundamental conflicts of interest and confusion. The decision in 1998 to sever COSTIND’s organizational ties with the PLA and establish a conventional supplier-user relationship that adhered to normal market principles was an important step forward in overcoming this structural contradiction. Breaking down the compartmentalization of the R&D and production systems was identified as another urgent priority, but policy planners were unsure how to carry out this task. General Zhang Wannian, executive CMC vice chairman during the late 1990s, pointed out that it was vital to reform the disjointed R&D and production systems. “Defense R&D entities are purely involved in research and development and they need to be switched to becoming involved in both research and production.”148 There was basic agreement among civilian, military, and defense industrial decision–makers, however, that the starting point for tackling this issue would be based on the reform model undertaken in the civilian S&T system. That model focused on the transformation of R&D institutes into commercial enterprises with their own independent legal and financial rights. But concerns were expressed by some military analysts that if defense R&D institutes were turned into commercial enterprises, they would put the pursuit of profits ahead of their duties of engaging in low-margin defense R&D activities. As one analyst asked, “[W]ould institutes accept military R&D work if it 148. Zhang Wannian, chief ed., Dangdai Shijie Junshi Yu Zhongguo Guofang [The Contemporary Military World and China’s National Defense] (Beijing: Junshi Kexue Chubanshe, 1999), 240.

[147]

Fortifying China

was not or only marginally profitable?”149 This reflected the deep-seated worries of certain decision makers that fundamental conflicts of interests might arise between the public/military and commercial responsibilities of R&D institutes. Policy analysts proposed different reform options to address the widely divergent situations facing the two hundred or so R&D institutes (table 4.9) within the defense innovation system.150 Institutes engaged in technology design and development could be taken over by the country’s major defense conglomerates. At the same time they would be restructured into commercial enterprises. A second option was for institutes to merge with other research outfits or enterprises to form new technology enterprises or stand-alone research organizations. In a third alternative, some analysts advocated that the two conglomerates that dominated each of the five defense industrial sectors could become joint owners of research institutes and allow these entities to provide services to the entire sector. Yet another idea was that the entire defense economy could establish research institutes specializing in niche areas such as radar, electronics, computer technology, and missiles that could meet the needs of all defense conglomerates regardless of their subsectoral focus.151 A fifth option was to transfer to local authorities or to close down the institutes that engaged in noncommercial but publicly useful research or were chronically loss-making. Another plan called for COSTIND to retain noncommercial research entities that performed important defense tasks, such as weapons testing centers.152 A favored approach for technology development R&D institutes was to allow major defense conglomerates to take them over. In the aviation sector, AVIC 1 acquired thirty-one independent research institutes, while AVIC 2 incorporated three institutes. In the shipbuilding industry, China State Shipbuilding Corp. took over twenty-eight research institutes.153 The electronics sector, however, chose a different model. As there were no major defense electronics enterprises, it was decided that the forty-seven research institutes in this sector engaged in defense-related R&D would join with a handful of production enterprises to form China Electronics Technology Group Co.154

149. Du Renhuai, “The Predicament and Countermeasures for the Reform of Military Industrial R&D Institutes into Enterprises,” Nanjing Zhenzhi Xueyuan Xuebao [Journal of the Nanjing Political Academy], no. 1 (2004): 47. 150. For estimates of the number of defense R&D institutes in operation in the late 1990s, see Yang Jieping and Wang Xiaoping, Jungong Gaige Zhilu [The Path of Reform of the Military Industry] (Beijing: Bingqi Gongye Chubanshe, 2000), 317. 151. Sun, Zhongguo Guofang Keji, 189. 152. Ibid., 191. 153. Xin Guoping, “Research on the Industrialization and Commercialization,” 55–58. 154. See Tongxun Shijie, 29 March 2002, 16–20.

[148]

The Revival of the Defense Economy Table 4.9. The Chinese defense research and development system, 2000 Type of institution

Number

Defense R&D institutes

209

National key-point laboratories

4

Defense key-point laboratories

42

Defense industry scientists and engineers

650,000

Total defense industrial workforce

2,000,000

Source: “Jiaqiang Guofang Jichu Yanjiu Gongzuo” [Strengthen Basic Defense Research Work], Zhongguo Jichu Kexue [China Basic Science], February 2000, 27. These figures do not include the PLA’s substantial R&D system, which has several hundred R&D institutes and laboratories.

To bolster this effort to place defense conglomerates at the heart of the defense innovation system, the establishment of in-house technology development centers in large-scale defense enterprises was encouraged.155 The goals were to increase the amount of investment that firms devoted to R&D, promote interaction with universities and research institutes, concentrate more resources on developing high-technology and dual-use products, and speed up the exploitation and commercialization of proprietary R&D output. The level of R&D spending by defense enterprises was historically low because they left this activity to government-funded R&D institutes and were either unwilling or unable to invest significant amounts of their own funds. In 1997, for example, China Aviation Industry Corp., the forerunner of AVIC 1 and AVIC 2, allocated just Rmb 12.6 million for R&D expenditures, while China Space Industry Group had a budget of only Rmb 5.4 million.156 These funds were minuscule compared with the revenues of these large conglomerates and considerably lower than the 2 to 3 percent that the specialist equipment and transportation equipment industries spent on R&D as a percentage of their gross sales during the same period. In response, the central government sought to raise corporate R&D spending in 1999 by setting a target for high-technology enterprises to spend at least 5 percent of their annual sales on R&D.157 As the financial fortunes of the defense conglomerates subsequently improved, they also began to increase spending on their R&D. During the Tenth Five-Year Plan, investment in science and technology R&D by the defense 155. Liu Jibin, “Actively Push Ahead with the Work of Reforming of Military Industrial Enterprises,” Guofang Keji Gongye (April 2002), 9. 156. Guojia Tongji Ju, Keji Bu [State Statistics Bureau, Ministry of Science and Technology], Zhongguo Keji Tongji Nianjian 1999 (Beijing: Zhong Tongji Chubanshe), 168. 157. U.S. Embassy Beijing Science and Technology Section, “China Holds High-Level Conference on Technological Innovation,” August 1999, http://www.usembassy-china.org.cn.

[149]

Fortifying China

industry grew at an annual rate of 16 percent.158 COIG, for example, claimed to have invested Rmb 600 million in technological development in 2003 and set a requirement that all of its enterprises must invest at least 2 percent of their annual sales revenues in R&D.159 In response to the faster pace of technological change in the electronics sector, China Electronics Technology Group Co. has pledged to invest at least 5 percent of its annual revenues in innovation-related R&D.160 By comparison, U.S. defense companies invest around 3 percent of their annual revenues in R&D.161 Moreover, a survey of spending on technological innovation by central government-owned corporations in 2004 found that four of the top ten firms were defense enterprises.162 Reform of the R&D management of major weapons projects was undertaken in response to intensifying high-level criticism over the defense economy’s dismal track record. In the late 1990s, the leadership ordered the defense industry to focus on the construction of high-technology “Assassin’s Mace” weapons systems such as next-generation fighter aircraft, missiles, warships, and other technologies crucial to raising the PLA’s warfighting capabilities.163 Efforts had been made during the 1980s and 1990s to concentrate limited funds on focal points and overcome S&T bottlenecks in a manner harking back to the development of strategic weapons in the Maoist era, but these initiatives were unsuccessful because of the deepseated structural problems within the R&D system.164 One of the principal drawbacks was the “chief designer system,” which had been restored in the late 1970s as the model for the management of key weapons R&D projects.165 While this system had worked well during the 158. Sun Wei, “Innovation Results,” Zhongguo Jungong Bao, 4 July 2007. 159. Ai Min, “China Ordnance Moves toward High-Tech Industrialization,” Liaowang, no. 15 (12 April 2004): 32–33, in FBIS, 12 April 2004. 160. “11 Military Industrial Groups Promote Major Independent Innovation Initiatives,” COSTIND website, 4 July 2007, http://www.costind.gov.cn. 161. “Corporate R&D Scoreboard 2004,” MIT Technology Review (December 2004), 46. Lockheed Martin, Boeing, and Raytheon, some of the largest U.S. defense contractors, each spent 3 percent of sales on R&D. European companies such as EADS (European Aeronautic Defence and Space Company), BAE (British Aerospace) Systems, and Rolls Royce, however, spent significantly more. BAE Systems, for example, spent the equivalent of 20 percent of its sales on R&D, while EADS spent 7 percent. 162. See Guoziwei, 2004 Nian Zhongyang Qiye Yongyu Jishu Chuangxin. 163. Study Group on “The Research of Jiang Zemin’s Theory of Weapons Construction,” “Jundui Zhuangbei Jianshi Lilun de Weida Chuangxin” [Remarkable Innovation in the Theory of Military Equipment Development], Zhongguo Junshi Kexue [Chinese Military Science], no. 2 (2003): 55. See also Jason E. Bruzdzinski, “Demystifying Shashoujian: China’s ‘Assassin’s Mace’ Concept,” in Civil-Military Change in China: Elites, Institutes and Ideas After the 16th Party Congress, ed. Andrew Scobell and Larry Wortzel (Carlisle, Pa.: U.S. Army War College, 2004), 309–70, http://www.carlisle.army.mil/SSI. 164. Feigenbaum, China’s Techno-Warriors, 138–39. 165. This refers to the organizational arrangement in which a chief designer is put in charge of overseeing all aspects of the R&D of a project. The chief designer coordinates the

[150]

The Revival of the Defense Economy

1950s and 1960s in the development of the country’s strategic weapons, it had become outdated and unable to cope with the handling of increasingly complex projects by the late 1990s.166 A particularly serious problem was cost overruns that plagued virtually all projects, ranging from 30 percent to several times the value of original budget estimates. This chaotic financial situation often resulted in the suspension, scaling back, or cancellation of programs that were already well advanced because of the lack of available funding.167 A new project management model was introduced in the late 1990s based on foreign and civilian practices that included a more centralized leadership structure and matrix management concepts designed to improve coordination, responsibility, and regularization among different entities participating in project design and R&D.168 Overall project control was placed in the hands of directors who oversaw management from a central office and coordinated the activities of departments responsible for activities such as planning, technology management, engineering management, production management, contracts management, and equipment testing.169 A key difference between the project management model and the chief designer system was that the new approach used financial and legal mechanisms to ensure effective management, while the previous system had relied on administrative measures. The implementation of the project management system was initially limited to major and complex weapons projects and appears to have had a positive impact on the performance of the defense R&D system. Since the late 1990s, a number of long-delayed weapons R&D programs have been successfully completed.170 Correspondingly, this emphasis on concentrating limited funds on high-priority programs meant that other, less important R&D projects were canceled. An example of the impact of the new project management model in promoting innovation was the experience of the Fourth Academy of the China Aerospace Science and Industry Corp. (CASIC), which is the country’s largest development and production base for solid rocket motors.171 Since activities of all the institutions involved in the project, such as research institutes and industrial enterprises. This person is the equivalent of the chief technology officer of a corporation. See Mark Stokes, China’s Strategic Modernization: Implications for the United States (Carlisle Barracks, PA: Strategic Studies Institute, Army War College, 1999), 23; and Feigenbaum, China’s Techno-Warriors, 105–7. 166. Sun, Zhongguo Guofang Keji, 250–52. 167. Yang Huizhong, Chen Yan, and Lin Kaocheng, chief eds., Guofang Jingji Zonghe Junhengfa [The Laws of Equilibrium in the Comprehensive Development of the Defense Economy] (Beijing: Haichao Chubanshe, 1999). 168. Sun, Zhongguo Guofang Keji, 250–52. 169. Guo and Zeng, Zhuangbei Jingji, 182–89. 170. Ibid. 171. Li Wei, “Fourth Department Steps Up Aerospace Preliminary Research Work,” Zhongguo Hangtian Bao [China Space News] 10 December 2003, 1.

[151]

Fortifying China

the end of the 1990s, the Fourth Academy has restructured its preliminary R&D system by adopting the project management model. Under this new framework, projects are assigned to managers who are chosen from a transparent competitive process and are then entrusted with full responsibility for planning, funding, daily management, research, implementation, and the selection of project staff. These managers are, in theory at least, able to offer rewards and administer punishments in order to create an effective incentive system to motivate employees. The progress and performance of projects are separately monitored and evaluated by appraisal committees at both the institute and academy level. This new management system is said to have contributed to several of the academy’s achievements in solid-fuel rocket motor technology. These include the development of novel-thrust vector-control nozzles, material shells, and hydraulic press engine technology.172 The defense-related R&D work undertaken by the Fourth Academy has played a major role in improving the financial and technological performance of its parent company. In a review of its activities in 2002, CASIC pointed out that the “sustainable and high-speed increase of its military-use products had become the major driving force behind its economic development.” The company further pointed out that the quality and pace of its economic and industrial output outstripped that in the rest of the defense economy.173 Basic R&D assumed even greater importance and priority in funding allocations, especially since defense planners focused on information-based warfare as a central tenet of the PLA’s future war-fighting doctrine and force modernization. Although there had been efforts to enhance basic R&D activities during the 1980s and 1990s, much of the focus was on traditional defense technology such as mechanical systems. The fixed assets and workforce of the ordnance industry accounted for between a quarter and a third of the overall size of the defense industry in the late 1990s compared with around 15 percent in the United States.174 Since the late 1990s, funding in high-technology and information technologyrelated R&D has increased substantially, and this has led to a major expansion in the number of R&D institutions and personnel in both the defense economy and PLA working in these areas. A new PLA Information Engineering University was set up in 1999 through the merger of several military academies specializing in information technology and electronics engineering. The goal was to create a national center to lead R&D in defense and security-related information technology. The university’s Information 172. Ibid. 173. Hu Qunfang, “CASIC’s High-Speed Economic Advancements,” Zhongguo Hangtian Bao, 31 January 2003. 174. Yang et al., Guofang Jingji Zonghe Junhengfa, 63.

[152]

The Revival of the Defense Economy

Security Research Institute, for example, is among the principal military organizations involved in the development of security software and systems to protect the PLA’s online training network.175 Moreover, an important new development has been the requirement that the defense S&T system collaborate with civilian high-technology organizations to pursue joint projects. In the Tenth Five-Year Plan, funding for high-technology and information technology defense-related research projects in the 863 program was increased significantly to Rmb 7 billion, or equivalent to nearly one-third of the total allocation for the whole 863 program.176 COSTIND is also forging R&D ties with the country’s university system through the establishment of national-level defense R&D laboratories jointly run by COSTIND and leading universities. COSTIND vice minister Sun Laiyan said in 2007 that several laboratories focusing on defense-related basic R&D, strategic, and dual-use high-technology projects, and systems integration technologies, had already been set up with top-tier universities in Sichuan, Hebei, Liaoning, and other provinces and cities, and that more would be built during the Eleventh Five-Year Plan.177 These reforms have led to a significant improvement in the performance of the defense R&D system. A conference to review the progress in preliminary weapons R&D during the Ninth Five- Year Plan concluded that a string of major research breakthroughs had taken place in critical basic technologies that had previously held back the development of key weapons projects. The structure of the preliminary research management system had also been readjusted “steadily and in an orderly manner” and this had contributed to raising the overall innovation capability of the defense S&T system, which in some areas had “reached international advanced standards.”178 The Jiefangjun Bao championed the achievements of the defense R&D system by noting that during a military parade to celebrate the country’s fiftieth anniversary in 1999, new generations of world-class weapons, such as artillery systems, tanks, armored fighting vehicles, fighter aircraft, and air-refueling tankers were displayed. The newspaper claimed

175. Miao Baojin, “Account of Scientific Research Work at the Information Security Research Institute of the Electronic Technology Faculty at the Information Engineering University,” Jiefangjun Bao, 18 February 2002, in FBIS, 18 February 2002. 176. Dahlman and Aubert, China and the Knowledge Economy, 128. 177. “COSTIND Launches Defense S&T Laboratory Construction,” Chinese central government website, 16 September 2007, http://www.gov.cn. Administrative regulations detailing the management of these defense R&D laboratories were announced at the end of 2007. See “The Management Approach of Key Defense Discipline Laboratories,” Xinhua News Service, 26 December 2007, http://news.xinhuanet.com/politics. 178. Fu Mingyi and Xi Qixin, “Army Reports Progress in Preliminary Weapons Research,” Xinhua Domestic Service, 9 December 2001, in FBIS, 13 December 2001.

[153]

Fortifying China

that the “level of weapons R&D has made an historical leap and this has elevated and ensured our army’s modernization and construction.”179 Nonetheless, Cao Gangchuan pointed out that much more work was needed to promote the central principle of “vigorous cooperation in weaponry development.” This meant that “the army and localities [civilian sector] must unite further, communicate regularly, support and coordinate with each other, and truly integrate the guidance provided by supply and demand into technological promotion.”180 In order to achieve this goal of establishing an integrated, market-based civilian-military R&D system, Cao said more attention needed to be paid to several areas. First, more effort was required to implement the “Four Mechanisms.” Second, more rules and procedures were required to better “define duties” and improve discipline in the running of the R&D system. Third, improvements needed to be made in the contract system. Fourth, the recruitment and retention of experienced S&T research staff were a top priority and required the adoption of new policies to “select, nurture, manage, use, stabilize and retain talented personnel.” Cao’s remarks underlined that despite the progress achieved by the end of the 1990s, the Chinese defense industrial R&D system was still riddled with deep-seated systemic problems, and the reform effort was still in its infancy.

Competence Building The aging and thinning of the defense S&T workforce became a pressing concern in the 1980s and 1990s as large numbers of scientists and engineers, some of whom were trained in the Soviet bloc during the 1950s, began to retire. While some measures were taken to stem the depletion in the talent pool, the allure of higher salaries, better career advancement, and improved working conditions in the civilian arena proved irresistible for many experienced defense researchers. Moreover, the sharp consolidation of the defense economy and the economic plight of many loss-making enterprises meant that job security was uncertain, and this was a further disincentive for college graduates to enter the defense S&T system. Beginning in the early 1980s, newly graduated students were unable to find employment in the defense sector. The result was a gap in the ranks of young and middle-ranking scientists and engineers in their thirties and forties in the late 1990s.181 In response, defense policymakers called for the grooming of a new generation of scientists and engineers to replace the aging pioneers of the Liangdan 179. Wang Shilin, “The Brilliant Achievements of the Defense S&T Industry in the Ninth Five Year Plan,” Jiefangjun Bao, 28 December 2000. 180. Fu and Xi, “Army Reports.” 181. See Huang, “Will China’s Aviation Industry,” 8.

[154]

The Revival of the Defense Economy

Yixing era. However, the concrete steps required to reverse the chronic underinvestment, reform the ossified personnel system, improve the working and living conditions, and stem the widespread waste in resources that had dampened morale, creativity, and productivity were lacking. The central government was also grappling with how to address the plight of the run-down higher education sector. A decision was taken in the mid-1990s to significantly boost investment in the top 10 percent of the country’s more than one thousand universities.182 In 1995 the State Education Commission launched the “211 project,” which allocated special funds to raise teaching and research standards in one hundred universities. Among those selected were COSTIND’s seven universities and the National Defense Science and Technology University (NDSTU).183 These universities received total funding of Rmb 18 billion between 1996 and 2002.184 In 1998, under a new “985 project,” the Chinese authorities decided to concentrate their efforts even further by picking nine elite universities that would receive substantial investment with the goal of turning them into world-class educational establishments. Harbin Institute of Technology (HIT) was the only defense S&T entity that made this list, but in a second phase of the 985 project in 2004, the number of universities was expanded to thirty-eight, which included HIT, Beijing Institute of Technology, Beijing Aeronautics and Astronautics University, Northwestern Polytechnic University, and NDSTU. On top of the funds from the 211 and 985 projects, the COSTINDaffiliated universities also benefited at the end of the 1990s from increased allocations from their parent organizations and the PLA intended to attract younger blood to join the ranks of the country’s defense S&T workforce (see table 4.9). In 2002, COSTIND, the Ministry of Education, and provincial governments in Jiangsu and Shaanxi agreed to invest more than Rmb 500 million to expand and upgrade the Nanjing Aeronautics and Astronautics University (NAAU), Nanjing Institute of Technology, and Northwestern Polytechnic University (NPU) to significantly bolster the number of undergraduate and postgraduate students they produced annually, increase the range of specialties, and promote the development of advanced research laboratories.185 NAAU, NPU, and Beijing Aeronautics and Astronautics

182. World Bank, China: Higher Education Reform (Washington, D.C.: World Bank, 1997). 183. The COSTIND-affiliated universities were Nanjing Aeronautics and Astronautics University, Nanjing Institute of Technology, Beijing Aeronautics and Astronautics University, Beijing Institute of Technology, Harbin Institute of Technology, Northwestern Polytechnic University, and Harbin Engineering University. See http://www.moe.edu.cn/edoas/ website18. 184. “Six Billion Yuan to Be Put into Higher Education,” Xinhua News Service, 16 September 2002. 185. “COSTIND, MOE, Shaanxi Province and Xian Municipality Make Large Investment for the Joint Construction of the NPU Major Project,” COSTIND News Propaganda Centre,

[155]

Fortifying China

University are the country’s three principal universities engaged in aerospace and space-related research and training186 and are the principal source of highly qualified graduates for the country’s four major defense conglomerates and numerous lower-tier subcontractors in the aviation and space industries. These investments have led to a sharp increase in the volume of graduates from the COSTIND educational establishment since the late 1990s. Between 1999 and 2005, the number of students graduating annually from the seven COSTIND universities jumped 86 percent. In 2003, the number of students graduating from these seven universities totaled more than thirty-four thousand, of which around 72 percent were undergraduates and 15 percent were postgraduates with master’s or doctoral degrees. COSTIND has also set out a long-term target of increasing the graduation rate to sixty thousand students annually by the end of the Eleventh Five-Year Plan in 2010 and sending five hundred key defense S&T personnel overseas to study.187 Around one-third of the top graduates are allocated jobs in the defense economy. Besides boosting the numbers of graduates available for the defense economy, COSTIND launched several programs to cultivate select midcareer and senior defense scientists and engineers for future top posts.188 The “511 project,” for example, is aimed at cultivating a backbone of skilled S&T personnel to work at the heart of the defense S&T system.189 Attracting and retaining the brightest, best, and most experienced defense scientists and engineers has been an enormously difficult task, however, especially when the economic benefits offered by the civilian sector far outstrip those in the defense economy. It was estimated in 2002 that backbone S&T research staff in defense R&D institutes earned between one-third and one-half as much as their civilian colleagues. The gap was even wider when earnings were compared with those of scientists and engineers employed

22 January 2002 www.costind.gov/cn/htm/xwen_brow.asp?xh=20; “COSTIND and Jiangsu Provincial People’s Government Jointly Construct NAAU and NIT,” COSTIND News Propaganda Centre, 26 August 2002www.costind.gov.cn/htm/xwen/xwen_brow.asp?xh=27. 186. China Academic Degrees and Graduate Education Development Center, an entity under the Ministry of Education, published a ranking in 2004 of the top civilian and military universities and higher education establishments engaged in research in eighty leading science, technology, and engineering disciplines, including defense-related subjects such as nuclear S&T, ship and marine engineering, aviation and space technology, weapons S&T, and information technology. COSTIND and military universities ranked highly in many of these topics. See http://www.cdgdc.edu.cn. 187. “Speech of the COSTIND Deputy Director Chen Qiufa at the Education Work Conference,” Guofang Keji Gongye, January/February 2006, 34–35. 188. “Program Starts to Develop National Defense Specialists,” Xinhua News Service, 1 May 1997, in FBIS, 1 May 1997. 189. This refers to the grooming of five hundred senior management-level cadres, one thousand technological team leaders, and ten thousand high-quality technical specialists.

[156]

Aeronautics engineering, astronautics, marine engineering

1,400 (1,000 prof., assoc. prof)

2,652 (586 prof.)

3,230 (970 prof.)

20,000 (10,000 undergrad, 3,000 master’s, 700 doctoral)

18,122 (2,870 grad)

41,440

22,600 (13,570 undergrad, 2,850 postgrad)

10,700

Nanjing Polytechnic University

Beijing Institute of Technology

Harbin Institute of Technology

Nanjing Institute of Technology

Harbin Engineering University

2,100 (620 prof., assoc. prof.)

Science and engineering

Mechanical, chemical, electronic, manufacturing and power engineering

Aeronautics, mechanical engineering, materials sciences, electrical engineering, automation, civil engineering, astronautics engineering, information security

Engineering

Engineering and technology

3000 (1,300 prof., assoc. prof.)

36,000 (15,000 undergrad, 7,000 postgrad, 2,000 doctoral, 5,000 part-time adult, 6,000 web-based)

Beijing Aeronautics and Astronautics University

3,500 (331 prof., 800 assoc. prof.)

Aeronautics, civil aviation, astronautics

Specialties

2,450 (160 prof., 540 assoc. prof.)

Faculty size

13,100 (11,100 undergrad, 2,000 postgrad)

Student size

Nanjing Aeronautics and Astronautics University

Institution

Table 4.10. Universities affiliated with COSTIND

52 labs (2 national-level labs), 23 R&D institutes, 3 national-level technology research centers

3 defense S&T key labs, 13 ministerial-level labs, Rmb 270 million in annual R&D spending

8 national-level labs, 9 ministerial-level labs and engineering research centers, unmanned light aircraft research institute

5 national-level labs, 15 provincial and ministerial-level labs; 300 state and 863 projects; Rmb 550 million in annual R&D spending in 2003

50 R&D institutes, 58 Labs (1 national-level, 2 provincial-level, 5 ministerial-level)

Research capabilities

Fortifying China

in foreign-owned enterprises.190 This suggests that the brain drain from the private and foreign-owned technology sectors is likely to remain a long-term problem for the defense economy and will be a major bottleneck in its future modernization. The PLA’s top tier of technological and engineering schools and academies also underwent a major reorganization as part of the streamlining of the defense R&D sector and the downsizing of the military establishment toward the end of the 1990s.191 Jiang Zemin pointed out that the military authorities regarded the PLA academic apparatus to be at the forefront of the drive to “develop a military force that could win in the era of information technology.”192 In 2000, the PLA established the “2110 project,” its version of the 211 project, focusing on the development of military academies and curriculum over the next ten years that are directly related to preparing the PLA’s war-fighting needs.193 At the pinnacle of this effort to establish a high-quality and high-technology military S&T educational apparatus (see table 4.11) is the NDSTU in Changsha. Established in the early 1950s, the NDSTU was reorganized in 1999 when it merged with three other military academies to form a new combined defense S&T teaching and research powerhouse.194 NDSTU has been especially active in the development of supercomputers, such as the Galaxy series; backbone communications systems; robotics; and high-speed rail transportation systems. At the same time, a new PLA Information Engineering University (IEU) was established in Zhengzhou by combining the Information Engineering Academy, the Survey and Mapping Academy, and the Electronic Technology Academy. IEU has three research institutes and a national-level engineering center. The information security institute developed the country’s

190. Li Bin, “Thoughts on Establishing a System to Industrialize Achievements Made by Defense R&D Institutes,” Jianchuan Kexue Jishu [Ship Science & Technology] 24, no. 6 (December 2002): 4. 191. For an overview of the restructuring of the PLA educational system at the end of the 1990s, see State Council Economic System Reform Office, Zhongguo Jingji Tizhi Gaige Nianjian 2000–2001 [China Economic System Reform Yearbook, 2000–2001] (Beijing: Zhongguo Caizheng Jingji Chubanshe, 2001), 360–62. Besides the establishment of the NDSTU and the IEU, three other top-tier technological and engineering universities were formed: the PLA Science and Technology University, the Naval Engineering University, and the Air Force Engineering University. 192. “Development of Military Institutes a Priority,” Renmin Ribao, 2 September 2003. 193. See Yang Lilu, Shen Yuejin, and Huang Huamin, “Blueprint for Reform of Military Academies 2000–2010,” Jiefangjun Bao, 25 April 2003, in FBIS, 25 April 2003; and Yang Renyu, “Jundui Yuanxiao Chuangzaoxing Junshi Rencai Peiyangde Guanli Yanjiu” [Management Research on Fostering the Creativity of Talent in Military Academies and Colleges] (master’s thesis, Guofang Kexue Jishu Daxue Yanjiusheng Yuan [Graduate School of National Defense S&T University], 2004). 194. “Jiang Creates a New Defense University,” Xinhua Domestic Service, 18 June 1999, in FBIS, 18 June 1999.

[158]

1,049 (260 prof., 789 assoc. prof.)

1,700 (500 prof. and assoc. prof.)

8,300

PLA Information Engineering University

Faculty size

12,390

Student size

National Defense Science and Technology University

Institution

Research capabilities Three national-level defense key-point labs, one 863 project high-technology lab, one army-level key lab

Three research institutes (Information Technology Institute, Survey Engineering Institute, Electronic Technology Institute), two army-level key-point labs, one national-level engineering center (State Digital Exchange System Engineering Technology Research Center)

Specialties Super computers, backbone communications systems, robotics, rail transportation, systems engineering, information systems engineering, mechanical and electronics engineering, automation, laser engineering, space engineering, aerospace engineering Information security, network engineering, communications engineering, automation, information engineering, digital wireless engineering, infantry computer technology, infantry command technology, photographic surveying, mapping and geographic information engineering, aerial photographic surveying, remote image information engineering, satellite navigation and positioning engineering

Table 4.11. Key PLA S&T teaching and research universities

Fortifying China

first high-performance digital-stored program control switch, the first advanced intelligence network system, and the first models of integral optical fiber transmission equipment, which have been extensively used in the PLA’s secure communications networks.195 In addition to the training of PLA scientists and engineers at NDSTU, IEU, and the PLA’s four other toptier S&T universities and academies, the Ministry of Education and the PLA General Political Department established a program in 2001 to send around sixteen hundred military students to study S&T-related degree courses at more than two dozen civilian and COSTIND universities.196 This upgrading and modernization of the defense industrial and military education systems will require careful and long-term nurturing to overcome their neglect and underinvestment during the Maoist and early reform periods. A review of the reform of the PLA education system at the end of 2003 found that progress had been mixed and more efforts needed to be made, not only in improving training and research facilities but also in providing more material support to poorly paid S&T personnel who faced “poverty.” This assessment noted that the military still does not have enough senior scientists and engineers, is still weak in scientific and technological innovation, and still needs young people for reserves of scientists and engineers. This makes it impossible for the military to meet the requirements for accelerating institutional changes of the military with Chinese characteristics and the requirements of military modernization construction. In light of this situation, we should adopt extraordinary measures to accelerate the cultivation of young scientists and engineers.197

To address these concerns, the PLA announced in 2002 that it would sharply increase investment by five-fold in the development of key academies, science laboratories, and new teaching courses over the next four years compared to the Ninth Five-Year Plan.198 Nonetheless, some initial results show that a new generation of defense scientists and engineers that were trained in the early to mid-1990s have begun to rise through the ranks and assume important positions in the defense innovation system. In the development of the Shenzhou spacecraft 195. Zou Hong, “New Leap for China’s Landline Communications Technology,” Jiefangjun Bao, 3 October 2002, 1, in FBIS, 3 October 2002. 196. “Ministry of Education, PLA to Train Cadres through Universities,” Zhongguo Tongxun She, 13 November 2001, in FBIS, 13 November 2001. 197. “Strive to Develop, Expand Contingent of Scientists in the Army,” Jiefangjun Bao, 19 December 2003, 1, in FBIS, 19 December 2003. 198. Shen Yuejin and Huang Huamin, “With the Approval of CMC Chairman Jiang Zemin, the Priority Construction Project for Military Colleges and Universities Has Been Officially Launched,” Jiefangjun Bao, 17 May 2002, 1, in FBIS, 17 May 2002.

[160]

The Revival of the Defense Economy

program, for example, around 80 percent of technical staff in the Beijing Space Command and Control Center was under the age of thirty.199 However, whether the defense S&T educational system can adequately meet the surging demand for highly skilled technological specialists from the PLA and defense economy is a major question. Many of these universities are still in their infancy and will take time to establish themselves as centers of research and training excellence. At the same time that the elite universities have enjoyed access to increased funding, a major pruning of the lower tiers of the defense industrial and military educational apparatus has occurred, since the defense industry and PLA no longer need large numbers of less qualified personnel. During the Ninth Five-Year Plan, eighteen defense industrial-affiliated research institutes and academic institutions were transferred out of the defense S&T system and handed over to the civilian authorities.200 A key goal of the makeover in the defense and military competencebuilding systems has been to readjust the focus on the development of core skills from traditional science, technology, and engineering pursuits to a new technological trajectory that emphasizes information technology, biotechnology, microelectronics, and space-related technology. These new fields reflect the change of course the PLA wants to make from an industrial-era outfit to a force geared to fighting both mechanized and information-style operations. The PLA educational establishment, especially the NDSTU and IEU, appears to have embraced this reorientation better than the COSTIND universities, which remain geared to training personnel engaged in developing conventional weapons systems. The ability of these universities to adapt to the changing technological environment will be a significant variable in determining how well and quickly the defense innovation system and the defense economy can succeed in adjusting to the revolution in military affairs.

Implementation/Manufacturing The defense manufacturing apparatus has been among the most conservative and insular pillars of the defense economy. It had grown bloated and inefficient during the central planning era, and despite several efforts to curb its size and improve its output during the 1980s and early 1990s, the production apparatus remained an enormous drag on the performance of the rest of the defense economy. The mounting losses that the defense conglomerates suffered throughout the 1990s was in large part due to 199. Xi Qixin and Tang Wenjun, “Young Scientists, Engineers Become the Main Force of China’s Manned Space Project,” Xinhua Domestic Service, 3 May 2003, in FBIS, 5 May 2003. 200. Sun, Zhongguo Guofang Keji, 88.

[161]

Fortifying China

the chronic mismatch between their excessive and outdated manufacturing capacity and the increasingly high-technology demands of the marketplace. Moreover, much of the technology and manufacturing equipment found in Chinese defense enterprises dates back to the 1950s and 1960s and was either acquired or copied from the Soviet Union. A severe lack of investment during the 1980s and 1990s meant that many enterprises were unable to upgrade or replace this hardware. Even when funding was made available, the acquisition of upgraded hardware and software was often partial and haphazard, and this impeded absorption. One study of the spread of computer-aided design (CAD) technology among Chinese enterprises during the 1980s and 1990s found that corporate managements were reluctant to use CAD tools because they had abundant human resources that needed to be employed. Enterprises consequently preferred to rely on slower and less efficient manual drafting and ignored the productivity benefits of CAD systems.201 As a consequence, the impact on improving performance was often marginal. For example, there was little noticeable improvement in the amount of time that it took for the defense economy to design, develop, and produce weapons systems during the 1990s.202 Indeed, projects routinely faced lengthy delays because of the lack of sophisticated tools available to promote design and engineering work. To overcome this serious bottleneck in the design and manufacturing processes, the defense economy became a leading participant in the R&D of computer-integrated manufacturing systems (CIMS). A CIMS project was launched under the auspices of the 863 program in 1989 with the goal of developing and popularizing indigenous CIMS capabilities, especially CAD and computer-aided manufacturing (CAM) hardware and software, in the country’s large and medium-sized industrial enterprises. A handful of major state-owned enterprises were selected to participate in the project, and they gradually replaced and augmented existing manufacturing equipment with CIMS processes. Chengdu Aircraft Corp. (CAC), one of the pilot entities, began to introduce CIMS manufacturing technology in the mid-1990s with considerable success. The average time for the serial production of fighter aircraft was cut from twenty-four months to eighteen months.203 In the late 1990s, CAC decided to use CAD and CAM processes for the first time to design and produce the 201. Jiang Wen and Shinichi Kobayashi, “Impact of Government High-Tech Policy: A Case Study of CAD Technology in China,” Journal of Engineering and Technology Management, no. 19 (2002): 336. 202. The most prominent example is the long-delayed Chengdu F-10 fighter aircraft, which took more than twenty years of R&D before it entered into operational service. 203. Chinese Academy of Social Sciences Industrial Economy Research Institute, Zhongguo Gongye Fazhan Baogao 2002 [China Industrial Development Report, 2002] (Beijing: Jingji Guanli Chubanshe, 2002), 426.

[162]

The Revival of the Defense Economy

FC-1, a third-generation fighter aircraft. The company claimed that these computer-aided processes were able to shorten development of the aircraft by as much as 50 percent in some areas.204 The success of CAC and other civilian firms in the employment of CIMS to enhance productivity has led to its accelerating diffusion throughout the defense and civilian economies since the late 1990s. Surveys of the civilian industrial economy suggest as many as two-thirds of the country’s leading manufacturing firms were using CAD software by 2004.205 Within the defense sector, the aviation and space industries have led the way in the adoption of CIMS. Shenyang Aircraft Corp. and Xian Aircraft Corp. are other major military aircraft design and manufacturing enterprises that have begun to acquire CIMS technology.206 CASIC held a CIMS conference in 2002 and declared that it would closely study the adoption of CIMS and would introduce pilot projects to assess its feasibility for the company during the Tenth Five-Year Plan.207 In addition to CIMS, defense industry policymakers have urged the adoption of other high-technology manufacturing and management hardware and software systems to improve productivity, coordination, and discipline. This includes Management Information Systems (MIS), Materials Requirement Planning (MRP), Manufacturing Resource Planning (MRPII), Enterprise Resource Planning (ERP), Supply Chain Management (SCM), and Lean Production (LP). Defense industrial planners see these systems as essential in promoting innovation and paving the transition of the defense industry into the information era by allowing defense enterprises and the R&D system to digitize and automate many of their activities, become connected to information networks, and fully integrate disparate operations.208 The Chinese government has actively encouraged the growth of an indigenous capability to develop and produce CIMS and other high-technology industrial management hardware and software systems. In the CAD sector,

204. Yang Xinggen, “Yu Jixie Jungong Xiang Shuzi Junlong Zhuanbian” [Transformation from Mechanical Military Factory into a Digital Military Factory], Hangkong Kexue Jishu [Aviation Science and Technology], January 2004, 39–40. 205. A 2004 survey for the U.S. Census of Manufacturers of around four hundred Chinese factories that were or in the process of being certified as ISO 9001 (an internationally recognized quality management standard) found that 64 percent employed CAD software. See David Drickhamer, “Manufacturers Like Us,” IndustryWeek, 1 November 2004. 206. Zhongguo Gongye Fazhan Baogao 2002, 426. See also Wang Shuyun, “Discussing How to Implement Advanced Production Modes in China’s Aeronautical Industrial Enterprises,” Hangkong Kexue Jishu, January 2003. 207. “CASIC Puts Forward Its Thinking on the Goals for the CIMS Project,” Zhongguo Hangtian Bao, 10 May 2002, www.china-spacenews.com. 208. Luan Enjie, “Promote the Development of the Defense Manufacturing Industry through the Strengthening of Manufacturing Technology Innovation,” Guofang Keji Gongye, August 2003, 10–12.

[163]

Fortifying China

local firms captured around 70 percent of the sales of legal CAD software in China in the late 1990s. While these domestic products were often inferior to foreign counterparts, they were cheaper and better tailored to meeting the requirements of Chinese enterprises.209 Foreign firms, though, have made major inroads in the Chinese market since the end of the 1990s and have established local firms and joint ventures to develop and sell products adapted for local demand. This access to global state-of-the-art manufacturing technology and know-how allows defense enterprises to significantly improve their operational performance in terms of both quality and productivity. The country’s leading ranks of civilian manufacturers have taken advantage of this opportunity to acquire cutting-edge manufacturing technology since the mid1990s, and some surveys suggest that they have significantly narrowed the gap in industrial performance with foreign competitors.210 The defense industry though has a long way to go to narrow the wide gulf in manufacturing capability with top tier industrial powers. The shipbuilding industry, for example, is one of the most successful and internationally competitive of the defense industry’s sectors and has recorded major improvements in its manufacturing record since the beginning of the 1990s, but it still lags far behind foreign rivals in performance. A 2003 assessment of leading shipbuilders in China, Japan, and South Korea found that the latter two were between five and twenty times more efficient and profitable than their Chinese counterparts. While Chinese enterprises took an average of 410 days to design a major vessel, Japanese and Korean firms required only 100 days.211 A significant rebound in military production activity since the late 1990s brought about by uncertainty in China’s security environment has contributed to the revival in the performance of the defense manufacturing sector. The sharp cutbacks in defense spending during the 1980s starved production enterprises of military work and resulted in the layoff and redeployment of workers to civilian activities. Even when defense expenditures did pick up at the beginning of the 1990s, the bulk of the spending went toward foreign purchases, R&D, salary increases, and other welfare-related issues. Reluctant to continue procuring obsolete equipment that did not meet its needs, the military ordered small quantities of arms that were barely 209. Jiang and Kobayashi, “Impact of Government High-Tech Policy,” 329. 210. Drickhamer, “Manufacturers Like Us.” 211. Zheng Xinli and Zhou Xian, Zhongguo: 21 Shijide Gongyehua [China: Industrialization in the 21st Century] (Beijing: Jingji Kexue Chubanshe, 2003), 409–14. The leading Chinese shipbuilders were Dalian Shipbuilding Factory, Guangzhou International Shipbuilding Corp., Jiangnan Shipbuilding Factory, and Hudong Shipbuilding Factory, while the top Japanese and South Korean firms were Mitsubishi Heavy Industries, Kawasaki Heavy Industries, and Hyundai Heavy Industries.

[164]

The Revival of the Defense Economy

enough to keep production lines open. In this subdued environment, production enterprises had little incentive or resources to improve their operations. Survival, not innovation, was the primary objective for most of the defense manufacturing sector. This situation improved in the late 1990s as long-awaited advanced weapons finally began to emerge from the R&D pipeline and into the production system. The volume of orders, especially for missiles, aircraft, and naval equipment, accelerated at the end of the 1990s as the PLA undertook a concerted buildup of military capabilities to prepare for potential contingencies in the Taiwan Strait. PLA rearmament, now a central priority, has allowed the defense production apparatus to shake off its lethargy and begin to devote more attention and resources to upgrading its performance.

Linkages A key principle in the forging of a leaner, more efficient, and more capable defense industrial establishment is the promotion of linkages and integration both within and outside the defense sector. This approach represents a significant departure from the compartmentalized and closed nature of the system in the central planning era. It reflects the ascendancy of reform-minded policymakers who argue that innovation can be successfully nurtured only in an environment that encourages networking and sharing of complementary knowledge and capabilities among different organizations. Concerted efforts are being made to overcome formidable and entrenched bureaucratic barriers. The past dominance of government entities in managing the linkages between primary actors and in controlling the allocation of output resources has been significantly reduced. The post-1998 COSTIND has diminished responsibilities for the coordination of linkage activities among primary actors in the innovation processes. With the retitling of COSTIND as SASTIND, its primary role will be as a facilitator to provide support for enterprises. Organizations affiliated with COSTIND/ SASTIND organize domestic and international exhibitions that provide a forum for enterprises to interact with one another. Quasi-governmental entities spun off from COSTIND such as CAPUMIT and the Research Centre for the Transformation of Defense S&T Achievements act as intermediaries to assist research institutes to find ways to commercialize their research output or help enterprises to search for R&D support.212 COSTIND also serves 212. For an outline of the role of these organizations, see their websites. CAPUMIT’s website is www.capumit.org.cn and the Research Centre for the Transformation of Defense S&T Achievements’ website is www.techinfo.gov.cn.

[165]

Fortifying China

as an employment clearinghouse for defense enterprises seeking to recruit graduates from its universities.213 The PLA has also assumed the role as the principal organization responsible for linking the activities of defense industrial and army-owned R&D institutes and production enterprises. It also plays an influential role in channeling resources needed to foster innovation, such as funding, personnel, and technology. The GAD is now the main agency within the PLA’s general headquarters command in charge of these linkage activities, although the General Staff Department, General Logistics Department, and service headquarters are also active in this area.214 The military representative office (MRO) system is the primary institution engaged in linkage activities and has bureaus and offices located in many of the key defense research institutes and production enterprises throughout the country. A chief responsibility of the MRO system is to coordinate and bring together organizations with complementary knowledge and technology to help solve problems and promote innovation. The Xian Military Representative Bureau has been lauded by military chiefs as a prime example of a highly successful MRO. This bureau has reportedly established cooperative ties with more than 360 R&D institutes in eighteen provinces, and it forms special ad hoc technical work teams drawn from across the defense industry to tackle specific problems.215 While MRO units primarily coordinate activities among entities within the military industrial apparatus, they have also been willing in recent years to forge linkages with civilian enterprises.216 In addition, special project management offices directly under the GAD and service headquarters that oversee the development of weapon systems perform a role similar to the MROs’ in undertaking coordination and linkage functions. With the diminishing role of COSTIND and its successor SASTIND in the management of the defense industry, enterprises have been granted substantial autonomy for developing linkages with other organizations and for acquiring resource inputs for their operations, such as S&T personnel and technology. The major defense conglomerates now play a prominent role 213. In 2003, for example, COSTIND helped to arrange job assignments for one-third of all graduates from its universities within the defense economy. See COSTIND Personnel Education Section, “Convey Defense Talent to Bring About the Raising of the Employment Rate,” Guofang Keji Gongye, September 2003, 33. 214. See Jiao, Junshi Zhuangbei Guanli Xue, 134–35; and Harlan Jencks, “The General Armament Department,” in The People’s Liberation Army as Organization, ed. James C. Mulvenon and Andrew N. D. Yang, 273–308 (Santa Monica: RAND Corp., 2002). 215. “Xian Military Representative Bureau Manufactures System to Resolve Heavy-Duty Weaponry-Related Problems,” Jiefangjun Bao, 25 February 2004, in FBIS, 28 April 2004. 216. “Article Urging Military Units to Intensify Cooperation with Civilian-Run HighTech Enterprises to Develop Military Equipment,” Jiefangjun Bao, 20 March 2004, in FBIS, 28 April 2004.

[166]

The Revival of the Defense Economy

in the coordination of activities and the allocation of resources among enterprises, which are chiefly confined to entities within their corporate umbrellas.217 Moreover, they rely on legal contract arrangements based upon commercial imperatives to carry out these linkage activities. In contrast, their quasi-governmental predecessors had depended heavily on administrative instruments to manage these interactions. The nature of linkage activities within the defense innovation system is likely to undergo further evolution as the roles and relationship between the PLA and the defense conglomerates continue to change, and this will have a significant impact on technological innovation activities. One key area is in the management of weapons procurement projects. For major projects in which components are acquired separately and then integrated, the GAD handles these tasks through its project management offices. As countries such as the United Kingdom have discovered, however, the levels of performance of these complex duties by defense administrative organizations have been mixed. As a consequence, the United Kingdom has sought to reduce the role of the defense procurement apparatus since the early 1990s and placed the burden for managing the disparate activities of contractors and subcontractors in the hands of prime contractors.218 Within the Chinese defense procurement system, since the late 1990s the PLA has turned over responsibility for the fulfillment of many of its regular logistics needs to civilian contractors. However, in the area of complex weapons systems, the PLA is unlikely to cede control of the management process to defense enterprises anytime soon, although keen interest exists in learning from and selectively adopting the practices of the West.219 The maintenance of the existing weapons procurement system with perhaps limited reforms does not augur well, though, for the long-term prospects for the modernization of China’s indigenous weapons development capabilities. Many of the structural problems that have long plagued the procurement system such as bureaucratic infighting, poor coordination, and excessive administrative interference will continue to result in delays, technological shortcomings, and cost overruns.

End Use The ascendancy of the PLA in guiding defense S&T research and production activities since the late 1990s has been an important factor in raising the performance of the defense economy. The emergence of demand-pull 217. See Sun, Zhongguo Guofang Keji, 139–66. 218. Ron Matthews and Judith Parker, “Prime Contracting in Major Defense Contracts,” Defense Analysis 15, no. 1 (1999): 27–42. 219. Guo and Zeng, Zhuangbei Jingji, 183.

[167]

Fortifying China

factors has helped to reinvigorate a system that had lost momentum, direction, and purpose under a central planning bureaucracy that had become more preoccupied with preserving its own survival than with promoting technological innovation and serving the needs of its end users. Until the beginning of the 1990s, the technology push policies of the central leadership drove weapons development and innovation. Demand-pull requirements from military end users were secondary. This arrangement had worked well during the cold war as senior policymakers were intimately involved in providing guidance, especially for the nuclear and missile programs. But as national priorities shifted to economic development in the 1980s, leadership attention to defense S&T activities dwindled along with resource allocations. In the absence of strong push or pull factors to provide guidance, the defense innovation system stagnated. COSTIND director General Ding Henggao alluded to this predicament in the early 1990s when he pointed out that in order to program weapons development we have to adhere to the principle of linking demand requirements with the push of technology. On the one hand we should make thorough studies of the requirements of local war under the circumstances of modern technology, especially high technology. On the other hand, we should lay stress on discoveries in the development of new and high technology, which will raise the effectiveness of weaponry. A new concept and a new system of weaponry should be formed and the structure of weaponry renewed and optimized constantly.220

While Ding and his COSTIND colleagues paid lip service to the importance of demand-pull considerations, their skepticism toward embracing market reforms stymied any major efforts towards addressing this issue. Since the 1998 reforms, the PLA has sought to reorient the defense economy to focus more on meeting end-user needs. Through the implementation of the “Four Mechanisms” system, this has imposed tougher competitive and evaluation procedures in the development and procurement of weapons systems. In principle at least, defense enterprises have been required to improve their performance to meet these more stringent demands or face losing work. In practice, though, the still highly regulated nature of the Chinese weapons market has impeded the effective application of these procedures. As only limited competition is permitted within the defense sector, enterprises have not yet had to face the rigors of full-fledged market competition.221

220. Ding Henggao, “Reforming Defense, Science and Technology,” in Michael Pillsbury, Chinese Views of Future Warfare (Washington D.C.: National Defense University, 1997,), rev. ed., 159. 221. Liu and Sun, “More on Zhu at Defense Group Ceremony.”

[168]

The Revival of the Defense Economy

One of the main ways that the PLA has been able to implement demandpull mechanisms is by withholding or postponing orders for equipment that does not meet its requirements. The military had no option but to accept the output of the defense industry during the Maoist era, but it was able to become more selective in the reform period, a fact that led to major declines in procurement orders in the 1980s and early 1990s. As the quality of indigenous equipment steadily declined, the PLA became increasingly reticent to procure these arms and looked overseas for weapons that met its needs in the 1990s. It turned to Russia and other countries to procure urgently needed weapons. Although military chiefs continued to reaffirm the importance of self-reliance, the new realities of this demand-pull pressure forced the defense industry to reexamine how it could improve its performance or risk losing valuable contracts that could lead to further contractions in the defense manufacturing base. Increased efforts are now being made to link military strategy and doctrinal planning with weapons and technology development. The separation between the military and defense industrial bureaucracies during the central planning era had led to a gap in joint planning over their long-term development strategies. While consultation and coordination did regularly take place, this was primarily concentrated on short- to medium-term mechanisms such as annual, three-, and five-year economic and administrative plans. Little attention was paid to long-range strategic planning efforts that often played a crucial role in shaping the evolution of force doctrines and weapons requirements.222 One of the few occasions when such an exercise took place was the “China in 2000” development strategy plan that was ordered by the State Council in 1986 to examine the strategic needs and set out targets for the development of the military and defense S&T systems over the next fifteen years. More than two thousand PLA and defense industrial personnel jointly worked on this project to establish coordinated strategies and policies.223 This long-term planning process was repeated between 2003 and 2006 when civilian and military S&T experts were brought together to draft the latest fifteen-year medium- and long-term S&T development plan, in which national security and defense concerns were highlighted

222. Even within the PLA headquarters command, budgeting and weapons planning was compartmentalized with little coordination. The General Logistics Department was responsible for dealing with budgetary matters, while the General Staff Department was in charge of equipment planning. The GAD took over these functions after its establishment in 1998. Liu Yang and Wang Cong, “Military Preparations and Possible Models for Defense Budget Increases,” Junshi Jingji Yanjiu, November 2001, translated at http://www.uscc.gov/ researchpapers/2000_2003. 223. Xie Guang, chief ed. Dangdai Guofang Keji Shiye [The Contemporary Chinese Defense Science and Technology Sector] (Beijing: Contemporary China Press, 1992), 150–51.

[169]

Fortifying China

as top concerns.224 In addition to the comprehensive national blueprint, a parallel medium- and long-term development plan for defense S&T was drawn up.225 An assessment in the Jiefangjun Bao in 2002 of the improvements in the weapons development process over the previous few years pointed out that “the successful practice of equipment development in our military shows that only by focusing intently on the military strategies and policies for the new era, with the development of weapons and equipment being driven by combat needs, will we be able to do a better job of serving the needs of modernized development and preparations for military struggles on the part of our military.” Consequently, “we must insist on the scientific planning and promotion of weapons and equipment development being guided by military strategies and policies.”226 While this joint coordination in strategic planning and operational requirements between the military and defense industrial apparatuses is still in its infancy, the long-term prospects for its institutionalization appear encouraging. This is in large part because of the role of the GAD, which has been instrumental in ensuring that the requirements of military end users have become a core consideration in the weapons development planning and development process. The GAD has steadily gained in stature and institutional clout and has become an essential channel of liaison and interaction between the PLA and defense industry.

The Prospects for Catching Up and Leapfrogging The post-1998 reforms have led to a significant enhancement in the performance of the defense innovation system. While both the quality and quantity of defense industry output have improved markedly since the beginning of the twenty-first century, how far-reaching and sustainable have these reforms been? In particular, to what extent are the key drivers in the underlying innovation process (the invention cycle, absorptive capacity, and integration) now able to further raise the performance of the system to meet leadership demands for technological catching up and leapfrogging?

224. People’s Republic of China State Council, Guidelines for the Medium- and Long-Term National Science and Technology Development Program (2006–2020) (Beijing: PRC State Council, 2006) Xinhua Domestic Service, 16 June 2006, in FBIS, 16 June 2006 225. “China Unveils Plan for Developing Defense Technologies,” Xinhua Domestic Service, 25 May 2006, in FBIS, 25 May 2006. 226. Liu Cheng, “Creating a New Situation in the Weapons and Equipment Modernisation Effort,” Jiefangjun Bao, 14 October 2002, in FBIS, 21 October 2002.

[170]

The Revival of the Defense Economy

From duplicative imitation during the Maoist era, the defense economy graduated to the creative imitation stage in the reform era. The focus during the 1980s was on the development of design-copy products that combined aspects of innovation and imitation, although with an emphasis on the latter. Products mimicked the design characteristics of Soviet-derived equipment but possessed their own unique engineering specifications. From the mid1980s, the emphasis turned to the process of creative adaptation in which weapons systems were based on an already existing product but improved upon through incremental upgrades. With access to U.S. and Western European defense technology during this period, the defense industry began to rely on select Western models as the basis for creative adaptations.227 But after the severing of defense industrial ties with the West in 1989, China turned once again to Russia for innovative imitations.228 The defense industry, though, has struggled to master this creative adaptation process because of the heavy burden of its Maoist legacy. Only with the implementation of reforms in the late 1990s did it begin to fix critical components of an innovation process that had virtually broken down by this time: • The invention cycle: This has involved a far-reaching overhaul of the

basic and applied R&D systems through a significant increase in resource allocations, restructuring of how these resources are managed, and improving the diffusion of R&D results to enable better military and commercial utilization. • Absorptive capacity: The ability of the defense innovation system to learn and absorb already existing technologies and techniques is being significantly enhanced by the acquisition of civilian and foreign, especially Russian, defense technological and industrial hardware and knowledge. The defense industry and the PLA are seeking to actively learn and master this technology by gaining access to the underlying designs and production processes to allow for local adaptation and upgrading, such as license production and joint design and development of new projects. To improve this absorptive capacity, significant investment is being made to train a more capable workforce of designers, scientists, and engineers, primarily through the upgrading of the defense educational apparatus. In addition, outdated manufacturing processes are being replaced

227. See Richard A. Bitzinger, “Arms to Go: Chinese Arms Sales to the Third World,” International Security 17, no. 2 (Autumn 1992): 84–111. 228. See Tai Ming Cheung, “Ties of Convenience: Sino-Soviet/Russian Military Relations in the 1990s,” in China’s Military: The PLA in 1992–93, ed. Richard H. Yang (Taipei: Chinese Council of Advanced Policy Studies, 1994).

[171]

Fortifying China

with the introduction of digital-era computer-aided techniques and equipment and modern management systems. • Integration and interaction: Efforts to integrate the R&D and manufacturing systems represent an important step forward in promoting innovation within the defense economy because compartmentalization between these two systems has been responsible for the breakdown in the R&D process. Moreover, the forging of close links between suppliers and end users without the disruptive interference of government ministries has led to the establishment of more effective coordination and the introduction of a more demand-pull process in shaping development activities. The PLA has been instrumental in promoting this initiative. These reform efforts have enabled the defense industry to make major advances in the development and production of weapons systems. A growing proportion of the output of the defense economy since the late 1990s has shifted from outdated second- and early-third-generation (mid-1950s to mid-1960s) technological standards to those of the late third generation (second half of the 1960s and early 1970s) (see table 4.12). In a select number of high-priority areas, such as missiles, progress has been even more pronounced, with technological capabilities reaching early-fourth-generation levels (1990s). While this progress is significant, the Chinese defense economy still lags as much as two generations behind the latest global standards in most areas. Important questions remain concerning whether the defense economy can maintain this reform momentum and continue to advance up the ladder of technological innovation. The Chinese leadership has set an ambitious target of catching up with the world’s leading science and technology powers in both the civilian and military spheres by 2020. This goal has been specifically defined by one COSTIND official as attaining eighth place in the global ranking for “comprehensive science and technology competitive strength” (Zonghe Keji Jingzhengli) by 2010 and then climbing to fifth by 2020.229 As of 2004, China was only ranked twenty-four in global S&T competitiveness, according to the World Competitiveness Index published

229. “The Interpretation of COSTIND S&T Section Head Wu Weiren of the ‘Outline of the State Medium and Long-Term Science and Technology Development Plan,’ ” COSTIND website, 2 July 2007, http://www.costind.gov.cn. Wu pointed out that by 2020, China should be among the world’s leaders in the space and nuclear fields, while its information and biotechnology sectors should have made major progress to narrow the gap with top tier competitors. Moreover, China should also have developed a batch of world class S&T research institutes and research universities, and a number of Chinese corporations should be in the world’s top 500 enterprises in terms of innovation capabilities.

[172]

Table 4.12. Generational levels of major Chinese weapons systems Weapons system

R&D/Production status

Generational category a

F-8II fighter aircraft

Design began in 1980, and serial production commenced in early 1990s. Progressively updated in 1990s.

Early third generation

F-10 fighter aircraft

Design began in early 1980s and was updated in early 1990s. Serial production commenced in 2005.

Early fourth generation

Su-27/J-11 fighter aircraft

Development began in late 1970s and serial production began in Soviet Union in late 1980s.

Late third generation

FH-7 fighter-bomber

Development began in the early 1980s and limited serial production began at the end of the 1990s. Updated variant developed in late 1990s.

Late third generation

Type 051 Luzhou-class destroyer

Developed since the end of the 1990s and went into operational service in 2006

Late third generation

Type 054 Ma’anshan class frigate

Designed and developed in the late 1990s. The first vessel was launched in 2003.

Late third generation

Type 053 Jiangwei II class frigate

Designed and developed in the mid-1990s. The first vessel was launched in 1996.

Late third generation

Song-class conventional submarine

Development began in the early 1990s. The first vessel was launched in 1998. An improved model was developed at the end of the 1990s.

Late third generation

Shang Class (Type 093) nuclear attack submarine

Design and development took place from the late 1980s, and first model was launched in 2004 and reportedly went into service in 2006

Early third generation

Jin Class (Type 094) ballistic nuclear missile submarine

Development began in late 1980s, and the launch of the first vessel took place in 2004 and is expected to enter service in 2008 or 2009.

Late third generation

T-98 main battle tank

Development took place in late 1990s, and limited production has begun.

Early fourth generation

DF-21 intermediate range ballistic missile

Development began in 1980, and serial production commenced in the late 1980s.

Late third generation

DF-15 (M-9) theater ballistic missile

Development began in 1985, and serial production commenced in the mid-1990s.

Late third generation

a The generational definition of a weapons system varies among countries and types of technologies. For jet fighter aircraft, the United States and Russia have similar time frames in defining generations of weapons. Jet fighters produced in 1945-1955 are considered to constitute the first generation. The second generation spans 1955-1960, while the third extends from 1960 to 1970. This period can also be subdivided into early third generation from 1960 to 1965 and late third generation from 1966 to 1970. Fourth-generation technology covers 1970-1990, while aircraft emerging between 1990 and 2000 are defined as either 4.5 or 4+ generation. Since the Chinese military aircraft industry did not get established and begin production until the mid-1950s, it skipped the first generation of indigenous jet aircraft technology development. Consequently, Chinese definitions of the generational levels of its aircraft lag U.S. and Russian definitions by one generation. While the Chinese define the F-10 fighter as third generation, it is considered by U.S. and Russian analysts as a fourth-generation product. See “Genealogy of Fifth Generation Fighters,” MosNews. com, 22 June 2006, http://www.mosnews.com/feature; and Walter Boyne, “Generation Gap,” Code One Magazine 20, no. 4 (2005), http://www.codeonemagazine.com/archives. This table uses the U.S. and Russian definitions.

Fortifying China

by the Institute for Management Development.230 To meet the military target, defense planners point out that the defense economy “must not follow the conventional path of development” but must instead “act with daring to skip certain stages” of the modernization process231 and focus on the adoption of transformational information technology-related capabilities in place of conventional mechanized systems. This alternative pathway to modernization entails considerable risks, however. It involves the development of unproven technologies, the diversion of substantial resources from other parts of the defense economy, and the unpredictable nature of the technological development process. The risks are even higher if the focus is on the development of frontier technologies rather than the adaptation and imitation of already existing designs and products. Moreover, much of the information technology-related knowledge and technology lies outside the boundaries of the defense economy and within the civilian economy. A PLA analyst estimated in the late 1990s that 93 percent of the country’s defense industrial enterprises were “traditional,” which meant they were geared to producing conventional non-high-technology mechanized equipment.232 The Chinese defense economy will also need to devote significantly more capital investment and other resources if it is to realistically pursue the goal of catching up with the world’s advanced military industrial powers. In the late 1990s, China’s defense S&T budget was equivalent to just 5 percent of the amount that the United States spends.233 This huge funding gap suggests that any Chinese broad-based leapfrogging efforts would fall far short of reaching the technological standards enjoyed by the United States. A more attainable strategy would be the concentration of limited resources in a select number of areas where chances of success in narrowing technological gaps are greatest. In other words, this would be an asymmetric approach to development. Serious institutional barriers exist that could undermine the success of this technological leapfrogging strategy. There are major gaps in the reform process that have allowed residual remnants of the central planning system to remain in place. Competitive mechanisms are underdeveloped, the pricing system has yet to be reformed and remains tightly regulated, and major bottlenecks exist in the diffusion of innovation, especially the application 230. Lu Wei, “The Current Status and Problems of China’s Technology Innovation Support System,” State Council Development Research Center website, 7 March 2006, 3. http://www. drc.gov.cn. The IMD’s world competitiveness index can be found at http://www.imd.ch. 231. Fan Xizhong, “Grasp the Core of Informatization,” Jiefangjun Bao, 8 February 2004, 2, in FBIS, 8 February 2004. 232. Zhu and Meng, Zhongguo Caijun, 186. 233. Liu Jingshu, “New Military Changes in the World and Research on the Distribution of China’s Defense Economic Resources,” Junshi Jingji Yanjiu, March 2004, 6.

[174]

The Revival of the Defense Economy

of basic and applied R&D output from research institutes for operational development. These issues need to be resolved if the defense economy is to move from incremental imitation to become a truly innovative institution that can develop breakthrough technologies. Several essential prerequisites for successful technological leapfrogging, especially in the information and communications technology sectors, have been identified.234 First, significant absorptive capacity is required. A second condition is access to the equipment and underlying know-how for later use in the technological development process. Indigenous development of equipment and knowledge, such as patents and intellectual property rights, is critical because reliance on foreign sources might lead to potential difficulties in the longer term over continuing access to essential information and equipment. A third qualification is the need for complementary technological capabilities from other sectors of the economy. Technological leapfrogging, especially in the defense sector, is a systemic and linked process that requires extensive input from supporting industries. The Chinese defense economy at present falls short of satisfying these requirements. But pockets of technological excellence exist that may contribute to successful leapfrogging. These include select portions of the information and communications technology dual-use sectors and aspects of the missile and shipbuilding industries.235 Overall, though, the restructuring of the defense economy since 1998 has resulted in a major improvement in its performance and innovation capability. Key deficiencies that have held back the ability to absorb and diffuse technological innovation are being addressed, such as the forging of closer links between the R&D and production sectors and the promotion of joint coordination between defense industrial suppliers and military end users. These reforms have allowed the defense industry to make generational advances in the development and production of weapons systems. But although this technological progress is significant, China still lags well behind the world’s leading military industrial powers. To narrow this gap, the defense industry since the late 1990s has turned to the civilian economy to harness its rapidly improving technological capabilities. 234. W. Edward Steinmueller, “ICTs and the Possibilities for Leapfrogging by Developing Countries,” International Labour Review 140, no. 2 (2001): 193–210; and Jan Fagerberg and Martin Srholec, “Catching Up: What Are the Critical Factors for Success?” (Working Papers on Innovation Studies from the Centre for Technology, Innovation and Culture, University of Oslo, 2005), http://folk.uio.no. 235. See Evan Medeiros et al., A New Direction for China’s Defense Industry (Santa Monica: RAND Corp, 2005), chaps. 2 and 3.

[175]

[5] Building a Dual-Use Economy

As reform and growth transformed China’s economic and technological landscape in the 1990s, the relationship between the defense and civilian technological and industrial bases also underwent major realignment. In the first half of the decade, the overwhelming focus remained on militaryto-civilian conversion, but this gradually gave way to a two-way flow of knowledge and products that would advance both the development of the civilian economy and defense modernization. Attention and debate among defense decision makers turned to the building of a dual-use economy. Moreover, as the technological prowess of the civilian economy began to catch up with, and in many instances surpass, comparable military capabilities, attention turned to the harnessing of civilian technology and processes for military use. This interest in spin-on was further piqued by civil-military integration (CMI) initiatives undertaken in the United States and other Western countries at around the same time, especially the use of commercial off-the-shelf technologies and manufacturing processes to fulfill military requirements. This chapter examines how the Chinese defense economy is embracing dual-use and spin-on strategies and the benefits and obstacles for the country’s long-term defense modernization and technological development. It focuses on seven key questions. What were the rationales that led to the emergence of leadership interest and attention in the dual-use and spin-on paradigms? What is the Chinese thinking on dual-use and spin-on? What concepts, policy initiatives, and doctrines have been developed? What types of dual-use activities are being pursued? In which sectors is the adoption of dual-use and CMI being most vigorously pursued? Will the building of a dual-use economy promote innovation and allow China to successfully [176]

Building a Dual-Use Economy

narrow the gap with the world’s advanced defense technological and industrial powers? And last, how does the Chinese approach to the forging of a dual-use economy compare and contrast with policies being undertaken by the United States and Japan, which are among the most experienced and advanced participants in this area?

From Defense Conversion to Dual Use and Spin-On Ever since the founding of the People’s Republic, Chinese policymakers have voiced their aspirations for the integration of the civilian and military halves of the economy. In the 1950s and 1960s, Mao Zedong and Zhou Enlai urged greater civil-military-industrial coordination and cooperation, but these statements were directed at encouraging the dominant defense economy to engage in civilian production.1 Little effort was made to pursue civilian-to-military transfers as the national economy was already heavily geared toward serving military needs. Leadership interest in civil-military integration issues ended with the rise in cold war tensions and the onset of domestic political upheavals during the 1960s and 1970s that led to increased demand for military production. Attention turned to civil-military integration again when Deng Xiaoping assumed power in the late 1970s. He adopted the Junmin Jiehe sixteencharacter slogan as state policy to guide the implementation of an aggressive military to civilian conversion program. With priority on harnessing the defense industry to support the development of the civilian economy, leadership interest was initially scant in promoting spin-on initiatives. The overriding focus of the Junmin Jiehe policy during the 1980s and much of the 1990s was on the conversion of the defense sector to civilian use. But an important exception to this one-way flow in resources and knowledge was the establishment of the 863 program in 1986. This initiative was the first significant effort by the authorities to pursue genuinely coordinated civil-military R&D. With its primary focus on raising China’s long-term technological competitiveness and national security, the 863 program became an important pioneering mechanism by which the defense economy was able to harness the capabilities of the civilian economy directly for military applications. Despite the high-level leadership attention and backing that the 863 program received, its initial access to funding was modest. Between 1987 and 1. See Wu Jianeng, “My Opinion on the ‘Combining Military and Civilian, Combining Peacetime and Wartime’ Guiding Principles of New China’s Defense Technology and Industry,” Junshi Jingji Yanjiu, [Military Economic Research] ( July 2002), 34–36.

[177]

Fortifying China

2000, state investment in the civilian portions of the 863 program totaled around Rmb 5 billion. This covered nearly seven thousand research projects in more than 230 subjects.2 Outside the 863 program, however, the overwhelming focus was on defense conversion; little attention was paid to spin-on activities. Although the near-myopic concentration on military-to-civilian conversion during the 1980s continued well into the next decade, in the early 1990s there was a growing interest in civilian-to-military technology transfers and the broader issue of how the defense economy could effectively harness the capabilities of the civilian economy. Several developments piqued this nascent interest among decision makers and policy researchers. In the economic domain, Chinese policymakers in the early 1990s began to turn their attention to transforming the centrally planned economy to a marketoriented model. At the Third Plenum of the Communist Party’s Fourteenth Congress in 1993, the leadership relabeled the economy a hybrid socialist market system.3 One crucial aspect of this potential model was the two-way relationship between the civilian and defense technological and industrial sectors. While defense conversion was the dominant paradigm, policymakers began to ask whether this would continue to be the case in the next century. They began to tentatively consider how the country’s buoyant economic development could be harnessed for military use. This gradual change in thinking was reflected in the Third Plenum’s communiqué, which pointed out that it was important to “strengthen the research of dual-use technology” but added that the priority for the time being was to “actively advance the transfer of military-industrial technology for civilian use.”4 In the military domain, during the early 1990s senior PLA and COSTIND officials did begin to discuss the war-fighting benefits that might arise from the convergence between military and civilian technologies. In 1993, Huai Guomo, a COSTIND deputy director in charge of defense conversion, noted that “the trend toward the interchangeability of military and civilian technology is increasing, and this provides a solid technological basis for the rapid modernization of national defense and the constant upgrading of weaponry.”5 Similarly, General Liu Huaqing, CMC executive vice chairman,

2. Ministry of Science and Technology, Review of 15 Years for the National High Technology and Research Development Program (Beijing: Kexue Chubanshe, 2001), 22–24. 3. Communist Party of China Central Committee, “Decision on Issues Concerning the Establishment of a Socialist Market Economic Structure,” China Daily Supplement, 17 November 1993. 4. Zeng Huafeng, ed. Zhujian Weili, [Casting Swords into Ploughshares] (Beijing: Beijing Posts and Telecommunications University Press, 2000), 31–32. 5. Xiang Wang, “Development of Modern Technology and Defense Conversion: Interview with Huai Guomo, Vice Minister of COSTIND,” Xiandai Junshi [Contemporary Military Affairs], no. 296 (May 1993): 4.

[178]

Building a Dual-Use Economy

advocated that China “should pay attention to turning advanced technology for civilian use into technology for military use.”6 Organizationally, the defense conversion program had played an important role in breaking down the formidable barriers that insulated the defense economy from the rest of the national economy. This allowed for increasing interaction between defense enterprises and civilian counterparts. While the overwhelming focus was on military-to-civilian transfers, the establishment of channels of communications and cooperation would eventually lead to the opportunity to explore and develop dual-use and spin-on initiatives from the late 1990s. Politically, a crucial breakthrough in the development of a dual-use economy was the willingness of decision makers in the mid-1990s to accept the premise not only that the building of an integrated civilian-military economy should be a strategic goal of the country’s twenty-first century economy but that this goal should also be vigorously implemented. While this Dengist notion of a seamless civilian-military economic structure had been codified as a state guiding principle at the beginning of the reform era, there had been little serious effort to carry it out in the face of entrenched opposition from the conservative and insular defense industrial bureaucracy. The generational changeover that took place throughout the top ranks of the party, government, military, and defense economy in the 1990s saw the promotion of a younger crop of ”Third Generation” decision makers who were willing to embrace new ideas and policies that included the establishment of a dual-use economy. Chief among the new brand of more technologically savvy leaders was CMC chairman and Communist Party general secretary Jiang Zemin, who played a leading role in putting dual-use integration on the policy agenda. As an electrical engineer by training and electronics minister during the 1980s, Jiang had firsthand experience dealing with civil-military technological and industrial issues, especially military-to-civilian conversion.7 From the beginning of the 1990s, when he became CMC chairman, until his retirement in 2004, Jiang paid frequent visits to defense R&D facilities and military S&T units and personally identified himself with key defense-related and high-technology projects such as the country’s Shenzhou space program. Jiang was a prominent advocate of the building of the dual-use economy. On a visit to a defense industry exhibition in Beijing in 2000, the CMC chairman urged military and government ministries engaged in defense-related

6. “Liu Huaqing Urges Development of Defense Technology,” Xinhua Domestic Service, 30 January 1995, in Foreign Broadcast Information Service (FBIS), 30 January 1995. 7. Yu Bencheng and Su Kuoshan, “An Account of How Jiang Zemin Shows Concern for the Building of Units under the State Commission of Science, Technology and Industry for National Defense,” Liaowang [Outlook], 28 July 1997, 4–6 in FBIS, 4 September 1997.

[179]

Fortifying China

activities to vigorously implement guidelines that promoted civil-military technological and industrial integration, as this “was an important measure to organically integrate” the two strategic tasks of “undertaking national economic construction and the strengthening of defense science and technology that are taking place concurrently.”8 To achieve this goal, Jiang advocated the need to “form a complete set of effective mechanisms for competition, appraisal, and supervision; optimize the distribution of the science, technology, and productive forces of the whole of society; promote ties, integration, and cooperation between the military and civilian scientific research structures; and enable the achievements in technological innovation to be turned faster and better into productive forces for national defense and economic development.”9 Jiang consolidated his personal influence on the dual-use policy process by appointing his eldest son, Jiang Mianheng, to assume a prominent role in coordinating the activities of the civilian and defense technological sectors in the late 1990s. The younger Jiang had carved out a reputation during the 1990s as one of the leading entrepreneurs in the country’s fledging information technology industry through his company, Shanghai Alliance Investment Ltd., which specialized in investing in key technology companies and projects in Shanghai and other parts of China.10 At the same time, he continued to pursue a scientific career by becoming the head of the Chinese Academy of Sciences’ Shanghai Institute of Metallurgy and conducting research on semiconductor technology. In 1999, Jiang Mianheng was made a vice president of CAS and was subsequently given the post as a deputy chief commander of the country’s military-led first manned space mission.11 At around the same time, he was also appointed an adviser to the GAD on science and technology and civil-military technology issues.12 With these positions, the younger Jiang was a central figure connecting the civilian, commercial, and military technological establishments. Although his father retired from all his official posts, including the chairmanship of 8. Hu Lihua and Liu Zhihong, Jiang Zemin Guofang Keji Gongye Jianshe Sixiang Yanjiu [Research into the Thinking of Jiang Zemin on the Building of the Defense Science and Technology Industry] (Beijing: Dianzi Gongye Chubanshe, 2005), 191–227. 9. “Jiang Zemin Inspects Defense Industry Exhibition,” Guangming Ribao [Brightness Daily], 15 July 2000. 10. Allen T. Cheng, “’Shanghai’s King of ‘I.T.,’ ” Asiaweek, 9 February 2001, http://www. asiaweek.com/asiaweek/technology/article. 11. Verna Yu, “Jiang’s Eldest Son Played Key Role in Space,” South China Morning Post, 23 October 2003. 12. Interviews with PLA officials, Beijing, December 2003. See also Ching Cheong, “Son Tipped for Key Military Position,” Straits Times, 14 November 2003. The article said that Jiang Mianheng, the GAD, and the Shanghai government had agreed to establish a research center to develop microsatellites for the PLA. On Jiang’s involvement in microsatellites, see Huadong Keji [Eastern Technology] (November 1999), 13.

[180]

Building a Dual-Use Economy

the CMC, in 2004, the younger Jiang continued to retain his official post as a CAS vice president and was promoted to head of the Shanghai Academy of Sciences in 2005.13 However, he failed to get elected to the Central Committee of the Communist Party at the Seventeenth Party Congress in 2007, which effectively put an end to his political career and called into question his future role in dealing with civil-military integration issues.14 Chinese researchers began to analyze initiatives undertaken by the United States during the 1990s to promote the development of dual-use technologies and processes such as the Technology Reinvestment Project (TRP) and the Dual-Use Applications Program (DUAP).15 Discussions of the U.S. efforts began to appear in Chinese defense technology journals such as Junmin Liangyong Keji Yu Chanpin (Dual-Use Technology and Products), Junzhuanmin (Defense Conversion), and Hangtian Gongye Yu Guanli (Aerospace Industry and Management) in the mid-1990s, although this attention picked up noticeably toward the end of the 1990s.16 Chinese defense policymakers and analysts have learned useful lessons from the U.S. programs that have informed their own policy debates. These include the need to reform the procurement system to enable more flexibility in the acquisition of commercially available goods, the strengthening of standardization levels, and the gradual opening up of the military technology market to allow the participation of civilian firms.17 High-level leadership interest in dual-use-related issues intensified in the mid-1990s and led to growing efforts to examine and formulate initiatives, not only at the national but also at the sectoral and local levels. COSTIND, for example, set up a working group on the promotion of civil-military

13. Bill Savadore, “Jiang’s Son Takes Top Academy Post,” South China Morning Post, 24 August 2005. 14. “China’s Ex-President Jiang Suffers Political Blow,” Reuters, 13 August 2007. 15. Jay Stowsky, “The History and Politics of the Pentagon’s Dual-Use Strategy” and Ann R. Markusen and Sean S. Costigan, “The Military Industrial Challenge,” in Arming the Future: A Defense Industry for the 21st Century, ed. Ann R. Markusen and Sean S. Costigan (New York: Council on Foreign Relations Press, 1999), 106–57. 16. Some of the early assessments include Chai Benliang, “Meiguo Diaozhen Keji Zengce: Junmin Jiehe, Jiasu Keji Zhuanran, Kaifa Liangyong Jishu” [The Restructuring of U.S. Technology Policy: Civil-Military Coordination, Speeding Up Technology Conversion, Developing Dual-Use Technology], Zhongguo Gaoxin Jishu Qiye [China’s New and High Technology Enterprises] ( January 1995), 46–51; and Wang Zibin, “Zou Fazhan Junmin Liangyong Jishu Zilu” [Go Along the Road of Developing Civil-Military Dual-Use Technology], Zhongguo Junzhuanmin [China Defense Conversion] (May 1997), 32–34. Later assessments include Cao Wei, Wang Ke, and Zhu Jianye, “Lun Meiguo Junyong Yu Minyong Gongye Jichude Yitihua Fazhan Quxiang Jiqi Neiyin” [A Discussion of the Development Trends and Internal Causes of the Integration of the U.S. Military and Civilian Industrial Foundations], Zhongguo Keji Luntan [China Science and Technology Forum], April 2002, 64–68. 17. Jiao Qiuguang, chief ed. Junshi Zhuangbei Guanli Xue, [The Study of Military Armaments Management] (Beijing: Academy of Military Sciences Press, 2003), 50–75.

[181]

Fortifying China

dual-use technology.18 In 1999, MOST published a study proposing a dualuse development strategy.19 References to the imperative to develop dualuse capabilities began to appear in leadership S&T initiatives from the late 1990s. In August 1999, the State Council held a conference on technological innovation and adopted a new high-level S&T policy statement that called for greater effort to promote the development, application, and commercialization of high technology.20 The statement included a call to “vigorously develop civil-military dual-use technology . . . [and] pay attention to bringing into play the vital role of high technology in strengthening military capabilities.”21 This intensifying discussion of dual-use strategy influenced policymakers as they prepared the country’s Tenth Five-Year Economic Development Plan for the 2000–2005 period. The policy outcome was a new set of guiding principles that replaced Deng’s original sixteen-character policy.22 These new principles are the following:23 • Junmin Jiehe (Combining Civil and Military Needs): This principle

is interpreted by COSTIND officials as dealing specifically with the defense conversion process. From their bureaucratic perspective, this guidance calls for accelerating and expanding the pace of military-to-civilian technology transfers. However, other researchers and officials outside COSTIND have interpreted this principle more broadly to include both spin-off and spin-on processes.24 • Yujun Yumin (Locating Military Potential in Civilian Capabilities): This concept was first coined in the mid-1950s but was excluded

18. Zhang Haifeng, “Guofang Keji Junmin Liangyong Fazhan Sixing De Bianhua” [Changes in the Thinking on the Development of Dual-Use Defense Science and Technology], Junmin Liangyong Keji Yu Chanpin [Dual-Use Technology and Products] ( July 2001), 4–7. 19. Ministry of Science and Technology, Zhongguo Gaoxin Jixu Changye Fazhan Baogao [Development Report on China’s New and High-Technology Industry] (Beijing: Kexue Chubanshe, 1999), 280–87. 20. Environment, Science and Technology Section, U.S. Embassy, Beijing, “China Holds High-Level Conference on Technological Innovation,” August 1999, http://www.usembassychina.org.cn. 21. “Decision of the Central Committee of the Communist Party of China and the State Council on Strengthening Technological Innovation, Developing High Technology and Realizing Industrialization,” 20 August 1999, http://www.cas.ac.cn. 22. Zhang Nanzheng and Zhang Shengwang, eds., Dangdai Guofang Jingji Lilun Qianyan Wenti Yanjiu [Research into the Forward Problems of Contemporary Defense Economic Theory] (Beijing: Guofang Daxue Chubanshe, 2003), 145–49. 23. “Outline of the 10th People’s Republic of China Economic and Social Development Five Year Plan,” Guangming Ribao, 18 March 2001, chap. 24. These principles were formally announced at the Communist Party’s Fifth Plenum in 1999. See Hu and Liu, Jiang Zemin Guofang Keji Gongye Jianshe Sixiang Yanjiu, 145–50. These principles will henceforth be referred to as the Yujun Yumin guidelines. 24. Zhang and Zhang, Dangdai Guofang Jingji Lilun, 146–48.

[182]

Building a Dual-Use Economy

by Deng in his sixteen-character guidance.25 It refers most directly to the forging of an integrated civil-military dual-use system, especially the establishment of a civilian apparatus that has the technological and industrial capabilities to meet the needs of the military and defense economy. • Dali Xietong (Vigorously Promoting Coordination and Cooperation): This guidance seeks to uphold the organizational model of close cooperation between differing bureaucracies that led to the successful accomplishment of the country’s nuclear, missile, and satellite programs. • Zizhu Chuangxin (Conducting Independent Innovation): Self-reliance in the development of military equipment continues to be a central principle for the defense economy. To achieve this, greater emphasis is to be placed on cultivating a well-trained cadre of scientists and engineers, strengthening the R&D apparatus, and developing a robust intellectual property and patent system. One reason behind this championing of an autonomous development capability is the goal of building Shashoujian, or Assassin’s Mace weapons, which are highly prestigious and complex systems that can significantly add to the PLA’s war-fighting capabilities.26 In COSTIND’s Tenth Five-Year Plan outline, a key policy objective was to actively encourage the development of “two-way civil-military technology cooperation, transfers, promotions, and joint development. The transfer of military-industrial technology for civilian use and the transfer of advanced civil high technology for military use are of great importance” as a means to “establish a capable civil-military-industrial foundation.”27

Defining the Yujun Yumin Dual-Use Economy While spin-on has become the principal approach that defines Chinese thinking and priorities in the building of a new dual-use economy, this phrase or its translated equivalent, Minzhuanjun, is not widely used by Chinese decision makers. They prefer to use their own terminology, especially at the paradigmatic level, which may not correspond with Western concepts. This reflects the still evolving Chinese thinking and debate on dual-use and especially spin-on issues as well as a desire among Chinese policymakers 25. Wang Qinzheng, “Yujun Yumin,” Guofang Keji Gongye [Defense Science and Technology Industry] (February 2000), 25–26. 26. Hu and Liu, Dangdai Guofang Jingji Lilun Qianyan Wenti Yanjiu, 146. 27. Hangtian Gongye Guanli [Aerospace Industry and Management] ( June 2001), 1.

[183]

Fortifying China

to define their own distinct identity and path in the forging of linkages between the civilian and military spheres of the economy. Moreover, some of the Chinese terms are ideologically derived slogans rather than precisely defined policy or academic concepts, and their meanings change according to the prevailing political climate. The interpretation of Deng’s sixteencharacter guiding principles, for example, evolved substantially during the 1980s and 1990s as the country’s social, economic, and strategic conditions underwent far-reaching transformation.28 The Chinese concept that most closely matches the meaning of the spin-on paradigm is the Yujun Yumin strategic guideline. As already pointed out, this principle focuses on identifying and exploiting the inherent military attributes of the civilian economy and society. The 2004 Chinese Defense White Paper defined Yujun Yumin as the “reserving [of ] military potential in civilian capability.”29 This suggests that Yujun Yumin has a broader scope than spin-on, which is primarily concerned with the transfer or adaptation of civilian technology for military application. Yujun Yumin encompasses the full range of capabilities and resources available in the general economy and society, especially technology, which can be harnessed for military requirements. At the policy and operational levels, in contrast, Chinese policymakers have been more willing to embrace and adopt Western ideas. Concepts such as defense conversion, dual use, and CMI have all entered into the mainstream of Chinese usage.30 Chinese interest in dual-use and spin-on programs during the 1990s, especially at the operational level, was directed to the development and acquisition of specific technological products. Little serious attention was devoted to the building of an institutional system that would systematically promote dual-use innovation. This piecemeal approach meant that progress in the development of civilian products with spin-on potential was slow and limited.31 Structural and regulatory barriers in the defense and civilian economies were also serious impediments to dual-use technological 28. John Frankenstein, “China’s Defense Industry Conversion: A Strategic Overview,” in Mixed Motives, Uncertain Outcomes: Defense Conversion in China, ed. Jorn Brommelhorster and John Frankenstein, 21–22 (Boulder, Colo., Lynne Rienner). 29. State Council Information Office, China’s National Defense in 2004 (Beijing: State Council Information Office, 2004), 74. Another version of the translation of Yujun Yumin can be found in FBIS, whose rendition is the combination of “military and civilian” that “embodies the concept of the Army being part of the people.” “CPC Decision on Perfecting the Socialist Market Economic System,” Xinhua Domestic Service, 21 October 2003, in FBIS, 21 October 2003. 30. See Gan Zhizhen and Liu Xisong, “’Junmin Liangyong’ Fanglue Yu ‘Junzhuanmin’ Fanglue De Qubie Yu Lianxi” [The Distinction and Relationship between the “Civil-Military Dual Use” Plan and the “Defense Conversion” Plan], Guofang Keji Gongye (February 2003), 27–28. 31. Du Renhuai, “The Transfer of Military-Oriented Enterprises in China’s Defense Industry,” Junshi Jingji Yanjiu ( July 2002), 22–23.

[184]

Building a Dual-Use Economy

exploitation. This was especially the case for the non-state-owned sector, which had emerged in the 1990s as one of the most dynamic and innovative parts of the economy. Nonpublic enterprises were explicitly prohibited by laws and regulations from taking part in defense industrial operations. The 1993 Companies Law, for example, allowed state-owned enterprises to engage only in the production of “special” items, which included military products. Regulations published in 1998 dealing with nongovernmental enterprises also expressly forbade them from undertaking military-industrial production and commercial activities.32 Special dispensations bypassing these restrictions were occasionally granted to nongovernmental entities with close government or military ties that produced technologies sought by the PLA. Huawei Technologies, for example, became an important supplier of telecommunications hardware to the PLA during the 1990s, even though it was a nongovernment owned enterprise. However, this was the exception rather than the rule because of the deep-seated misgivings that the defense industrial authorities had about the technological competence of the non-state-owned sector. In an effort to overcome these institutional barriers, the Third Plenum of the Sixteenth Party Congress in 2003 gave the go-ahead for the construction of a new civilian technological and industrial base with embedded military capabilities. “The Decision of the Chinese Communist Party Central Committee on Several Issues in Perfecting the Socialist Market Economy” called for the building of an innovative Junmin Jiehe, Yujun Yumin-based system that focused on the “mutual promotion and coordinated development of the defense and civilian technological sectors.”33 This elevated the Yujun Yumin guiding principle into the strategic outline for the future dual-use economy. This decision was described by MOST Minister Xu Guanhua as of far-reaching strategic significance for protecting the country’s national security and strengthening its innovation system.34 Another senior MOST official said that the decision would have important ramifications for the coordinated development of the technological capabilities of the civilian and defense sectors over the next couple of decades.35

32. Wu Yuguang, “Mingong Gaoxin Jishu Zhuan Mingong Wenti Pouxi” [Dissecting the Problem of the Transfer of Civilian Use High and New Technology for Military Use], Keji Chengguo Zongheng [Technological Achievement] ( June 2004), 24. 33. “ ‘Decision’ on the Direction of the Science and Technology Industry,” Zhongguo Gaoxin Jishu Changye Daobao, 29 October 2003, http://www.cutech.edu.cn. 34. “Goujian Junmin Ronghe De Chuangxin Tixi” [The Construction of a Merged CivilMilitary Innovation System], Liaowang, 24 November 2003, 24. 35. “Sanzhong Quanhui Shi Zhongguo Keji Tizhi Gaige De Desange Lichengbei” [The Third Plenum Is the Third Milestone in the Reform of China’s Science and Technology System], Zhongxinwang [China News Network], 22 October 2003.

[185]

Fortifying China

The establishment of the Yujun Yumin system was made possible by two crucial developments in the reform process in both the wider national economy and the defense industry. On the one hand, the authorities increasingly recognized the central role played by nongovernmental enterprises in the country’s economic development. This led to the gradual lifting of restrictions on their involvement in the economy. In an important step at the 2003 party plenum, nongovernmental firms were granted many of the same rights as state-owned enterprises.36 This was followed by the amendment of the state constitution by the National People’s Congress in 2004 to cover the protection of private property for the first time since 1949.37 These moves were a clear signal that the central leadership had decided to end the discriminatory second-class status of nonstate entities. Sectors that had once been off-limits to nonstate firms because of their strategic sensitivity, such as civil aviation, public utilities, and satellite and aircraft production, began to open up. On the other hand, the structural reform and downsizing of the defense industry since the late 1990s have created a strategic opportunity for the involvement of civilian enterprises with no prior participation in defense industrial operations. A central goal of the overhaul of the defense economy is to establish a small inner core of dedicated defense prime contractors that is complimented by a large supporting base of secondary subcontractors (Xiao Hexin, Da Xiezuo).38 The defense industrial bureaucracy is keen to attract not only existing military and former military entities into this outer pool but also mainstream civilian companies with advanced expertise and technology in areas of high military demand.39 COSTIND and the defense economy, which had been cautiously examining the dual-use paradigm, were pushed into action by the Third Plenum’s decision and rapidly devised an implementation strategy. Many policy analysts saw an ideal fit between the proposed new Yujun Yumin system and the reconfiguration of the defense economy. Liang Qingwen, executive deputy director of COSTIND’s Defense Industry Development Research Center, argued that the defense economy would be able to concentrate its activities in research, development, final assembly, testing, marketing, and

36. “Party Vows to Further Improve Market Economy,” Renmin Ribao, 15 October 2003, English edition, http://english.people.com.cn/200310/15/eng20031015_126021.shtml. 37. Zhang Le and Zhang Yong, “Non-Public Economy Is Granted ‘Full Access,’ ” Xinhua Domestic Service, 12 March 2003, in FBIS, 12 March 2003. 38. See Sun Guangyun, Zhongguo Guofang Keji Gongyede Gaigehe Fazhan Wenti [The Reform and Development Problems of the Chinese Defense Technological Industry] (Beijing: Hangkong Gongye Chubanshe, 2003), 82–106. 39. See Wu Yuanping, Zhao Xinli, and Zhao Junjie, Xin Zhongguo Guofang Keji Tixi De Xingcheng Yu Fazhan Yanjiu [Research into the Formation and Development of New China’s Defense Science and Technology System] (Beijing: Guofang Chubanshe, 2006), 389–400.

[186]

Building a Dual-Use Economy

sales, especially of high-technology and combat equipment. These functions were located at two opposing ends of the defense industrial system (Liangtou Jinggan). The middle portion of the apparatus, which was engaged in manufacturing of general parts, components, and other subcontractor work, provided fertile ground to be opened up and outsourced to civilian firms (Zhongjian Fangkai).40 This proposed structure, known as the “dumbbell-shaped” model (Yaling Moshi), has increasingly been adopted in the organization of Chinese defense and machine manufacturing enterprises since the mid- to late 1990s.41 The dumbbell framework is the opposite of the traditional structural composition of the defense economy, described as the “olive-shaped” model (Ganlan Moshi). In this model the two ends of the system involved with R&D and sales and marketing are small and the central portion of the apparatus encompassing production capability is bloated. As this arrangement was the direct result of the Soviet-influenced compartmentalized system, it placed serious structural limitations on civil-military interaction.42 Instead, the dumbbell model offers a more efficient organizational layout by concentrating resources and capabilities in R&D and commercialization (the two ends of the dumbbell) and a leaner production centre. To attract civilian participation in this scheme, COSTIND organized exhibitions and conferences that targeted the participation of nongovernmental enterprises. One of the first events, an exhibition on “Civilian Industrial Enterprises and Technological Products Participating in Defense Construction,” took place in the spring of 2004 and was attended by nearly 150 firms, many of whom were nonstate entities.43 Business executives, however, complained that a lack of transparency, the absence of an organizational structure to vet the suitability of civilian firms, inadequate financial incentives, and numerous other barriers prevented them from taking part in defense-related work.44

40. Liang Qingwen, “Dui Junmin Jiehe Youguan Wenti De Renshi He Jianyi” [The Understanding and Recommendation of Issues Concerning Civil-Military Cooperation], Hangtian Gongye Guanli (February 2004), 7–10. 41. For example, see Xu Yiruo, “Quanmian Guanche ‘Yaling’ Xing Jianshe Fangzhen Tihao Hangkong Qiye Jishu Gaizao” [Comprehensively Carrying Out the “Dumbbell” Model to Improve the Technological Reform and Building of Aviation Enterprises], Hangkong Gongcheng Yu Weixiu [Aviation Engineering and Maintenance] (April 2004), 37–39. 42. Hu and Liu, Jiang Zemin Guofang Keji Gongye Jianshe Sixiang Yanjiu, 228–52. 43. “Tuozhan ‘Minpin Junyong’ De Guofang Jianshe Xin Luzi” [Expand the New Road of the “Military Use of Civilian Products” in Defense Construction], Guofang Keji Gongye (May 2004), 22–24. 44. “Minqi, Zhuangjia, Junfang, Jungong Qiye: Gonghua Guofang Jianshe” [Civilian Enterprises, Experts, Military Officials, Military-Industrial Enterprises Speak Publicly about Defense Building] Guofang Keji Gongye (April 2004), 14–15.

[187]

Fortifying China

In response to these criticisms, COSTIND deputy minister Yu Zonglin replied that his organization would take steps to address these and other problems to ensure that the new dual-use system would be inclusive and open:45 • Devise incentives, such as tax perks, to assist civilian firms to take

part in defense-related R&D and production. • Establish a license permit system that would prequalify civilian

firms to apply for defense contracts. • Improve market transparency by publishing information that would

allow civilian firms to place bids for tenders. • Strengthen market supervision and standardize the issuance of de-

fense work contracts. One of the first concrete measures was a set of regulations by the State Council in February 2005 on the development of the private and nonstate economy.46 COSTIND followed in May 2005 by granting formal permission for the first time to nonstate and foreign-funded enterprises to participate in the development and production of military equipment. The ordinance on “Measures to Implement Permission for Weapons Equipment Research, Development, and Production” allows nongovernmental and overseasbacked firms to apply for licenses that will enable them to bid for defense work. They will, however, be allowed to participate only in contracts involving subsystems and special auxiliary products defined as Category 2 items. Systems integration, final assembly, and work on advanced weapons systems and high technology are separated into a Category 1 designation that is tightly controlled and available only to established state-owned defense enterprises.47 As of 2005, only 540 mostly defense firms had been awarded these special licenses to undertake either Category 1 or 2 work. An indicator of the urgency surrounding the establishment of the Yujun Yumin system was a parallel announcement by COSTIND in May 2005 that it was preparing to issue around three hundred Category 2 license permits 45. Kao Ming, “Lishi Xingde Jiyu” [A Historic Opportunity], Hangkong Qingmi Zhizao Jishu [Aviation Precision Manufacturing Technology] 40, no. 2 (December 2004). See also Yu Zonglin, “Minyong Qiye Canyu Guofang Jianshe She Jianli Yujun Yumin Chuangxin Tixi De Zhongyao Neirong” [Important Contents of the Participation of Civilian Enterprises in Defense Construction through the Establishment of the Yujun Yumin Innovation System]. Speech published on the Defense Conversion Magazine website, 8 September 2004, http://www.chinajzm.com/wenzhang. 46. “Some Opinions Regarding the State Council’s Encouragement, Support and Guidance of the Development of the Individual, Private and Non-Publicly Owned Economy,” 25 February 2005, http://www.xinhuanet.com. 47. “China Opens Weapons Production to Private, Foreign-Funded Businesses,” Xinhua Domestic Service, 27 May 2005, in FBIS, 27 May 2005.

[188]

Building a Dual-Use Economy

in the second half of 2005. While nongovernmental enterprises could apply for a license for the first time, they had to meet strict technological, financial, and secrecy criteria in order to qualify.48 But in a welcoming sign that the defense industrial authorities were sincere in opening up to the civilian sector, between sixty and seventy private enterprises were granted these coveted licenses.49 In addition to COSTIND, the Ministry of Information Industries issued a regulation in February 2005 that allowed private and nonstate firms to take part in defense electronics and information technology projects.50 While the notoriously slow-moving COSTIND acted with atypical speed and efficiency in drafting and implementing the procurement regulations and protocols of the new dual-use system, there was still deep-seated skepticism that the organization was not fully committed to the reforms because they conflicted with COSTIND’s fundamental institutional interests.51 The new composite structure of the defense economy under development threatened to erode the near-monopoly control that COSTIND and the top-level prime contractors had long enjoyed over the defense economy. One concern was that this initial flurry of reformist momentum would be temporary and that COSTIND would revert to its old practice of delay and foot-dragging when leadership attention turned elsewhere. An indicator of the conservative mind-set of the COSTIND bureaucracy was the statement by retired COSTIND vice minister Huai Guomo that the building of the Yujun Yumin system would be a long-term endeavor that could not be completed in “three or even five years.”52 In the face of high-level leadership scrutiny, COSTIND 48. One analyst pointed out that civilian firms would need to qualify for three licensing permits: one would be for R&D and production work; a second would be a secrecy clearance; and a third would be a quality-control license. Zhang Kan and Liu Yi, “On the Strategy of Opening Up the Military Products Market to Privately Owned Enterprises,” Junshi Jingji Yanjiu, December 2004, 18. See also Hang Kaoning, “Guofang Kewei Jiang Shexing ‘Wuqi Zhuangbei Keyan Shengchang Xuke Shishi Banfa’ ” [COSTIND Issues, “Methods to Implement Permission for Weapons Equipment Research, Development, and Production”], Zhongguo Hangkong Bao [China Aviation News], 1 June 2005, 1. See also Wu Yuguang, “Jiaqiang Keji Zhongjie Fuwu, Tuijin Minji Junyong” [Strengthening Technological Assistance, Promoting the Military Use of Civilian Technology], Guofang Keji Gongye ( January/February 2005), 54–55. 49. Li Jiayi, Bai Fengkai, and Xiao Ya, “Mingying Canyu Wuqi Zhuangbei Jianshede Xikao” [Thoughts about the Participation of Civilian Enterprises in Weapons Construction], Zhuangbei Zhihui Jishu Xueyuan Xuebao [Journal of the Academy of Equipment Communications and Technology], 18, no. 5 (October 2007), 49. 50. “Interim Measures on Allowing Civilian Enterprises to Apply to Participate in the Military Electronics Industry Management Plan.” See Zhang Sumei and Song Bin, “Yingjie Tiaozhan Bawo Jiyu: Jiakuai Tuijin Minyong Jishu Zai Junshi Lingyu De Yingyong” [To Meet the Challenges and Grasp the Opportunities: Accelerate the Application of Civilian Technologies in the Military Field], Junmin Liangyong Keji Yu Chanpin (April 2006), 3–4. 51. Interviews with GAD officers, Beijing, December 2003. 52. Huai Guomo, “Minying Keji Qiye Yaowei Guofang Jianshe Fuwu” [Nongovernmental Technology Enterprises Want to Provide Services for Defense Construction], Keji Ribao [Science and Technology Daily], 18 June 2005, http://www.stdaily.com/big5/stdaily.

[189]

Fortifying China

minister Zhang Yunchuan, an outside provincial official who took over the organization in 2003, called for greater urgency in the establishment of the Yujun Yumin system. At the defense industry’s 2005 annual work conference, Zhang complained that “the development of the dual-use industry was occurring too slowly.”53 This concern about COSTIND’s commitment to building an integrated civil-military industrial base may have been one factor behind the decision in 2008 to subordinate the commission into the new Ministry of Industry and Informatization. A central tenet of the 2003 decision on building the Yujun Yumin system was to “achieve the mutual advancement and coordinated development between defense and civilian technology.”54 While this ostensibly called for the fostering of a balanced approach that would serve both military and civilian needs, in reality the primary intention was to harness civilian technological and industrial capabilities for military purposes. Spin-off activities were considered a secondary priority because they had already enjoyed more than two decades of robust growth and government support. While the principal method of technology and knowledge flow in the Yujun Yumin system is the spin-on conversion of civilian products and processes for military application, there are other forms of civilian-to-military transfer mechanisms.55 They include the simultaneous development of commercial and military technology that is typified by the 863 program and, more broadly, the building of a mobilization system that can rapidly transform the peacetime economy for wartime use.

The Expansion of the 863 Program The concurrent development of new technologies for both military and civilian application has become increasingly widespread among advanced defense industrial powers, and China is keen to jump on the bandwagon.56

53. “Guofang Kegongwei Zhuren Zhang Yunchuan Zai Gongguo Huiyi Shangde Baogao” [The Work Report of COSTIND Minister Zhang Yunchuan at the Work Conference], Guofang Keji Gongye ( January/February 2005), 8. 54. “ ‘Decision’ on the Direction of the Science and Technology Industry,” Zhongguo Gaoxin Jishu Changye Daobao [China New and High Technology Industry News], 29 October 2003. 55. See John Alic, Lewis M. Branscomb, Harvey Brooks, Aston B. Carter, and Gerald L. Epstein, Beyond Spinoff: Military and Commercial Technologies in a Changing World (Boston, Mass: Harvard Business School Press, 1992), 64–75; and Jordi Molas-Gallart, “Which Way to Go? Defense Technology and the Diversity of “Dual-Use” Technology Transfer,” Research Policy, no. 26 (1997), 367–85. 56. William J. Barattino, Making Dual-Use Work: Revising Government/Industry Relationships (Washington, D.C.: Industrial College of the Armed Forces, National Defense University, 1994), 24–25; and Haico te Kulve and Wim A. Smit, “Civilian-Military Co-Operation Strategies in Developing New Technologies,” Research Policy 32 (2003): 955–70.

[190]

Building a Dual-Use Economy

Numerous benefits can be gained from this approach, not least of which is the sharing of R&D and production costs and risks among commercial firms, the government, and the defense industry.57 According to Chinese government statistics, the capital costs for building coproduction facilities for joint civil-military output are as much as 40 percent lower than for the installation of separate military or civilian production lines.58 Much of the joint civilian-military R&D work that has taken place in China has so far been under the 863 program.59 This program was directly modeled on the organizational structure and operational procedures of the Maoist strategic weapons program. With its primary focus on raising China’s long-term technological competitiveness and national security, the defense economy was an important participant in the eight strategic areas highlighted for development: laser technology, space, biotechnology, information technology, automation and manufacturing technology, energy, and advanced materials. Two of these topics, space and laser, were placed directly under the control of COSTIND, while the SSTC, and its successor, MOST, were in charge of the other six areas. As all these topics were of direct relevance for the defense sector because of their dual-use applications (see table 5.1), defense personnel were closely involved in many of the program’s R&D projects. The 863 programs that are of most value for military application include the space, laser, optoelectronics, super-large-scale integrated circuits, turbofan engines, and new materials programs. Space technology was regarded as the second most important priority among the eight subject areas, and the initial focus in this field was in two areas. The first project was for a heavy launch rocket and manned space ship, code-named 863-204, and the second was for a manned space station, code-named 863-205.60 In 1987, COSTIND established a “Project 863 57. For a detailed discussion of these issues, see Mark Lorell, Julia Lowell, Michael Kennedy, and Hugh P. Levaux, Cheaper, Faster, Better? Commercial Approaches to Weapons Acquisition (Santa Monica: RAND Corp., 2000) chap. 2. 58. Quoted in Shi Jinwu, “Tongchou Yunyong Guojia Keji Ziyuan Wei Keji Qiangjun He Jingji Jianshe Fuwu” [Plan and Utilize the State’s Technological Resources to Assist in the Building of a Technologically Powerful Military and Economy], Junmin Liangyong Jishu Yu Changpin [Dual-Use Technology and Products] (March 2002). 59. For a history and assessment of the 863 program, see Evan Feigenbaum, “The Military Transforms China: The Politics of Strategic Technology from the Nuclear to the Information Age,” PhD diss., Stanford University, 1997. See also the journal High Technology and Industrialization (Gao Kejiyu Changyehua), which is a monthly publication of the Ministry of Science and Technology’s 863 office that reports on developments of the 863 program and other high-technology projects. The 863 program also has an extensive website at http://www.863. org.cn/863. 60. Shi Lei, ed., Fangfei Shenzhou: Zhongguo Shouci Zairen Hangtian Gongcheng Jishi [The Flight of Shenzhou: The Record of China’s First Manned Space Program] (Beijing: Jijie Gongye Chubanshe, 2003).

[191]

Fortifying China Table 5.1. The dual-use nature of the 863 program (for projects undertaken between 1986 and 2001) Total number of projects

Number of projects with dual-use applications

Ratio between dual use and civilian use

40

40

100

Information electronic technology

8

8

100

Electronics equipment

24

19

79

New materials products

63

60

97

Mechanical and electric equipment

35

28

77

Category Communications equipment

Sources: Zhou Jianping, “Cuijin Minyong Gao Keji Ziyuan Wei Jundui Jianshe Fuwu” [Applying Civilian High-Technology to Military Construction], Beijing Ligong Daxue Xuebao (Shehui Kexue Ban) [ Journal of Beijing Institute of Technology (Social Sciences Edition)] 7, no. 1 (February 2005): 15.

Space Technology Specialist Committee,” that oversaw the initial planning stages of the manned space program, especially defining the technological requirements and general development strategy and reviewing half a dozen proposals for vehicle designs.61 After more than four years of feasibility studies, recommendations were submitted to the national leadership, which decided to embark on a full-scale development program. Allocations for military-related projects in the space and laser areas have not been publicly disclosed but are likely to have been substantial. Outlays for the manned space program are estimated to have been around Rmb 18 billion between 1992 and 2003, although most of the budgets came directly from special state funds.62 Through the establishment of expert leading groups and specialized research centers, the 863 program helped to introduce, nurture, and diffuse cutting-edge technological products and processes in leading economic sectors. According to official accounts, nearly ten thousand defense scientists and engineers have been involved in the 863 program, working on more than fifteen hundred research projects and making more than one hundred important technological breakthroughs by 2002 in areas such as space technology, computers, and information technology.63 By comparison, the civilian

61. “Zhongguo Zairen Hangtian Gongcheng: Juezheng Shilu” [The Chinese Manned Space Program: The Decision-Making Record], Juecheng Yu Xinxi [Decision Making and Information], nos. 1–2 (2005): 76–80. 62. Chen Lan, “China’s Manned Program,” Spaceflight (April 2005), 137–44. 63. Liu Cheng, “Creating a New Situation in the Weapons and Equipment Modernisation Effort,” Jiefangjun Bao, 14 October 2002, in FBIS, 14 October 2002.

[192]

Building a Dual-Use Economy

programs overseen by MOST have involved more than forty thousand scientists, engineers, and managerial staff.64 With the elevation of S&T research in state priorities since the late 1990s, the 863 program has received a substantial increase in funding. In the Tenth Five-Year Plan, the central government allocated Rmb 22 billion to the 863 program, more than four times the level for the previous fifteen years. Onethird of this amount, or Rmb 7 billion, was reportedly earmarked for defenserelated projects.65 This enlargement of the 863 program, especially its military component, has meant that its role in defense and dual-use-related activities has grown significantly. During the Eighth Five-Year Plan (1991–95), twenty-three major 863 projects were defense-related; this number increased to twenty-seven in the Ninth Five-Year Plan.66 While COSTIND and GAD continue to oversee the space and laser programs, the reach of the defense establishment has spread into other areas, most noticeably information technology, automation technology, and advanced materials. The military and defense industry appear to have chosen the 863 program as the vanguard of their efforts to build up an extensive capability in information warfare. Defense scientists and engineers have assumed prominent roles in the management of key information technology-related 863 projects to ensure that defense requirements are taken into consideration and to identify and gain access to technologies that may be useful for military application. The head of the 863 telecommunications expert group, for example, is Guo Yunfei, a professor at the PLA Information Engineering University.67 One complaint leveled against the 863 program during the 1990s was that it was too preoccupied with basic and esoteric R&D projects and devoted little effort to applying its output to the country’s development.68 This led to a major strategic readjustment of the program at the beginning of the Tenth Five-Year Plan, which made the industrialization of key R&D findings an important priority.69 This readjustment also reflected the efforts of 64. 863 program 2000 annual report, http://www.863.org.cn/863_105. 65. Carl J. Dahlman and Jean-Eric Aubert, China and the Knowledge Economy: Seizing the 21st Century (Washington, D.C.: World Bank, 2001), 128. 66. Liu Dajun and Jin Xinliang, “Some Ideas on Economic Globalization and Countermeasures in China’s Defense Construction,” Junshi Jingji Yanjiu (February 2004), 12. 67. Sun Xiaosheng, “Our Country Finalizes Strategy for Future Telecommunications Hi-Tech Research and Development,” Xinhua Domestic Service, 15 December 2002, in FBIS, 22 January 2003. 68. See Evan A. Feigenbaum, China’s Techno-Warriors: National Security and Strategic Competition from the Nuclear to the Information Age (Stanford: Stanford University Press, 2003), 192–200. 69. See “’10–5’ 863 Qude Yipi Zizhu Chuangxin Chengguo” [The 863 Program in the 10th Five-Year Plan Gains a Batch of Self-Developed Innovative Commercializations], Keji Ribao, 30 April 2006, http://www.most.gov.cn; and 863 Jihua Lianhe Bangongshi [863 Planning

[193]

Fortifying China

the government to promote commercialization throughout the S&T community. Other government programs that have contributed to the development of dual-use civil-military technologies include the Torch program, which is intended to commercialize high-tech R&D inventions, and the 973 national basic research program.70 Some of the leading dual-use and CMI products that have been developed by the 863 program include the following: • The Yinhe Yuheng core router: China’s first indigenously developed

core network router was developed by NDSTU in cooperation with Datang Telecom Technology Co.71 This router provides high-speed network switching, high-speed data transfer, distributed systems architecture, and improved security mechanisms and is used for military communications networks and also offered for commercial sale. • The HJD-04 commercial telephone switch: This telephone switch was developed for military and civil use by Wu Jiangxing, the president of Great Dragon Telecommunications Co., a company that has close ties to the PLA. Wu is also the director of the PLA Information Engineering Institute in Luoyang.72 • Reconnaissance satellites: The space industry has been developing a growing range of dual-use reconnaissance satellites, which the Chinese define as remote sensing satellites.73 They include the Haiyang series of maritime survey satellites and Ziyuan series of remote sensing satellites. After more than two decades of development, the 863 program has become a central pillar of the dual-use approach, especially in its focus on long-term high-technology R&D. It appears almost certain that the program will continue to thrive under the Yujun Yumin system and receive increasing allocations of funds to spearhead basic and advanced research in the

and Liaison Office], “Guojia Gaojishu Yanjiu Fazhan Jihua (863 Jihua) 2004 Nian Niandu Baogao” [2004 Annual Report of the State High Technology Research and Development Plan (863 Plan)], 2005, http://www.863.org.cn/863_105/annals. 70. Zhonghua Renmin Gongheguo Kexue Jishu Bu Fazhan Jihua Si [Chinese Ministry of Science and Technology Development and Planning Section], “2005 Guojia Keji Jihua Niandu Baogao” [2005 Annual Report of State Science and Technology] 2005), http://www.most.gov. cn/ndgb. 71. Li Wei and Wang Wowen, “Birth of China’s First Core Router,” Jiefangjun Bao [Liberation Army Daily], 7 May 2001, 2, in FBIS, 7 May 2001. 72. See Zeng, Zhujian Weili, 109–17. 73. See Mark Stokes, China’s Strategic Modernization: Implications for the United States (Carlisle Barracks, Pa.: Strategic Studies Institute, Army War College, 1999), 35–40.

[194]

Building a Dual-Use Economy

development of cutting-edge technologies. This research has been highlighted as a top priority in the country’s 2006–20 medium and long-term S&T development plan.74

Building a Mobilization System While the 863 program is narrowly focused on high-technology R&D, the civilian and military authorities have sought since the mid-1990s to establish a more broad-based civil-military mobilization system that can enable the national economy to be converted to meet military requirements in the event of war or a national crisis. Some Chinese defense analysts argue that the spin-on paradigm also encompasses the mobilization of civilian assets for military application. One study of the Chinese defense economy asserted that the concept of civilian-to-military conversion, or Minzhuanjun, “is in reality national economic mobilization.”75 Other military analysts have pointed out that the mobilization of the country’s S&T capabilities would also be essential in supporting a future conflict, which would likely be a technology-intensive encounter.76 In Deng’s original sixteen-character guidance, the phrase Pingzhan Jiehe (combine peace and war) addressed the relationship between the military and the civilian economies and society during peace and wartime. This issue was considered a low priority during the 1980s and the early 1990s as the country enjoyed what was assessed to be a benign external environment with little perceived threat of military conflict. However, the importance of preparing for wartime mobilization has emerged as an increasingly pressing priority since the mid- 1990s because of rising tensions in the Taiwan Strait.77 This has prompted efforts by civilian and military authorities to establish a mobilization system to ensure that civilian capabilities, especially infrastructure and industrial and transportation services, are able to support

74. State Council, “Guidelines for the Medium- and Long-Term National Science and Technology Development Program 2006–2020,” Xinhua Domestic Service, 16 June 2006, in FBIS, 16 June 2006. 75. Yu Liankun and Tang Hongxin, eds., Guofang Jingjixue Gailun [An Introduction to the Study of Defense Economics] (Beijing: Guofang Daxue Chubanshe, 1999), 86. 76. Yi Jinwu et al., “Luelun Gao Jishu Jubu Zhanzheng Zhongde Guofang Keji Dongyuan” [A Discussion of the Role of Science and Technology in Defense Mobilization in High-Technology Local Wars”], Nanjing Zhengzhi Xueyuan Xuebao [PLA Nanjing Political Institute Journal] 18, no. 4 (2002): 85–89. See also Ye Weiping, “Feizhanshi Zhuangtaixia De Minzhuanjun Yanjiu” [Research into Civilian-to-Military Conversion under the Conditions of Nonwarfare], Junshi Jingji Yanjiu ( January 2004), 31–36. 77. For a detailed discussion of the Chinese efforts to build up its military, industrial, and infrastructure mobilization apparatus, see Tai Ming Cheung, “Industrial, Technological, Economic and Infrastructure Capacity,” in If China Attacks Taiwan, ed. Steve Tsang (London: Routledge, 2006), 159–76.

[195]

Fortifying China

military operations in a crisis.78 This means, for example, that the country’s civilian airlines and shipping fleets can be pressed into military service at short notice, and the national road and rail systems are built to allow for the rapid transportation of military forces around the country. In 1994, a State National Defense Mobilization Committee (SNDMC) was established to oversee the building of the national mobilization apparatus.79 While the SNDMC acts primarily as a body that coordinates with other government, party, and military organizations, it oversees an extensive network of provincial and local defense mobilization committees that coordinate, draw up, and implement defense mobilization plans and preparations. In addition, a growing number of regulations and laws that define the workings, administrative and legal obligations, and responsibilities of the defense mobilization system have been promulgated since the mid-1990s.80 There are also five-year and longer-term development plans that guide the construction of the mobilization system, which incorporates civilian and defense emergency management components.81 Budgetary outlays for mobilization work are relatively low, however, which reflects its secondary status in overall defense modernization priorities. This construction of a civil-military economic mobilization system is intended to complement the forging of the Yujun Yumin system and ensure that the country’s economic development also serves military needs when called upon. The present-day approach to economic mobilization, though, is very different from the Maoist-era model of the near-permanent militarization of the national economy. As with the Yujun Yumin system, the focus is on configuring the civilian economy for dual-use functions without disrupting economic growth.

78. Ren Min, “Wanshan Guofang Dongyuan Tizhide Jiben Silu” [Perfect the Basic Thinking of the Defense Mobilization System], Guofang [National Defense] (April 2004), 23–25; and Liu Jianshe, “Tuijin Junmin Gongye Yitihua Jinchengde Jidian Sikao” [Reflecting on a Number of Issues in the Advancement of the Integration of the Civil-Military Industry], Guofang (August 2002), 20–22. 79. See Zhu Qinglin, chief ed., Guomin Jingji Dongyuan Xue Jiaocheng [Study Course of National Economic Mobilization] (Beijing: Junshi Kexue Chubanshe, 2002). 80. They include the National Defense Law, which has some sections related to defense mobilization, and administrative regulations concerning the “Methods in the Construction and Management of Economic Mobilization Centers.” See Guofang Bao [National Defense News], 16 February 2001, 3. The National Reform and Development Commission, the country’s top government agency for economic planning, provides annual assessments of the development of the mobilization system. For the 2004 version, see http://www.sdpc. gov.cn/fzbps. In addition, a comprehensive Defense Mobilization Law is currently under preparation. 81. Ren Zhenfu and Li Benyu, “Sheng (Shi, Qu) Guomin Jingji Dongyuan Zhongxin Jianshede Gouxiang” [The Concepts behind the Construction of Provincial (Municipal, District) National Economic Defense Mobilization Centers], Guofang ( July 2003), 56–57.

[196]

Building a Dual-Use Economy

Chinese Approaches to Civil-Military Integration and Spin-On The concept of CMI, or Junmin Yitihua, has received growing attention since the late 1990s in Chinese publications on defense S&T issues.82 CMI encompasses a diverse range of activities based on the notion of harnessing the technological and industrial capabilities of the civilian economy to advance defense capabilities. Instead of relying on its own resources, the defense economy seeks to make use of commercially available technologies and manufacturing processes as a suitable substitute. One of the first detailed examinations of CMI was an article by Du Renhuai in the July 2002 edition of Junshi Jingji Yanjiu (Military Economic Research). Du pointed out that in the wake of the development of military technologies, “the boundaries between the defense and civil sectors have become blurred.” As a result, significant structural changes to these two industries were required to overcome the strict separation that had historically divided them and “switch to an integrated model able to manufacture both defense and civil products.”83 Du offered a number of CMI-related initiatives to overcome obstacles in the integration of the civil and military sectors, including the overhaul of the defense procurement process through the introduction of commercial business practices. He argued that many of the special specifications and technical and engineering standards contained in military procurement requirements are no longer relevant because commercial products and processes are increasingly on a par or better than their military counterparts. An important issue that Du raised is that the adoption of CMI not only is a technological or industrial undertaking but also entails a major change in organizational and management culture.84 Du argued that the implementation of modern corporate management arrangements is crucial to the success of CMI because many defense industrial enterprises continue to retain outdated socialist-era ownership and management structures. Firms that are involved in dual-use activities should be transformed into limited liability or shareholding entities rather than continue to be wholly state-owned

82. Du Renhuai, “The Transfer of Military-Oriented Enterprises in China’s Defense Industry,” Junshi Jingji Yanjiu ( July 2002), 22–23. Other discussions of CMI include Sun Fei and Chen Houzi, “Guofang Gongye Yao Zao ‘Junmin Yitihua’ De Luzi” [The Defense Industry Should Proceed along the Road of CMI], Jingji Luntan [Economic Forum], December 2003, 9–10. An interesting journal covering this issue is Junmin Liangyou Jishu Yu Chanpin. CMI is also occasionally referred to as commercial-military integration. 83. Du Renhuai, “The Transfer of Military-Oriented Enterprises,” 22–23. 84. This is a crucial issue that is highlighted in Western studies of spin-on and CMI. See Barattino, Making Dual-Use Work, 18–19.

[197]

Fortifying China

enterprises, as this would allow for the “transplant of the commercial business culture” into the defense economy. While Chinese defense analysts may have lagged behind their Western counterparts in recognizing the importance of CMI, they have finally embraced the concept and are actively promoting its adoption in the transformation of the Chinese defense industry. CMI advocates argue that most of the technological needs of the military can be met through commercially available channels. One GAD analyst states that as much as 80 percent of the military’s technological requirements can be satisfied by commercial products and know-how, a claim that has become widely accepted by decision makers and other analysts.85 The reality, however, is more complex. The applicability of CMI varies across the spectrum of defense technological and industrial activities and can be organized into three general categories.86 The first, and most accessible, group for CMI includes pure commercial items such as minor subcomponents, spare parts (nuts, bolts, and low-level microchips, for example), and commodities that require no modification. During the planning era, the defense economy and PLA were wholly self-sufficient in meeting their own basic needs, but this has gradually changed since the 1980s and especially the 1990s as these institutions have been increasingly willing to outsource their demands to the commercial market.87 In 2002, for example, the PLA issued regulations requiring military units to procure more of their basic noncombat equipment and other needs through open competitive tendering.88 The second, and most important, category for CMI comprises modified commercial goods. This includes an extensive list of dual-use items such as computers, transport vehicles, general-purpose communications equipment, and transport helicopters and aircraft. Military demand for commercial offthe-shelf (COTS) products and components is likely to grow substantially, especially as the prices for these products are increasingly competitive, and the goods are of a higher quality than those produced by the defense economy.89 Modifications of commercial products to meet military requirements

85. Gui Lan, “Guanyu Junmin Liangyong Jishu Fazhan Wenti” [Concerning the Issue of Civil-Military Dual-Use Technology Development], Junmin Liangyong Jishu Yu Changpin (September 2004), 3. 86. Adapted from Lorell et al., Cheaper, Faster, Better? 23–24. 87. For example, see “Military Uses Cost-Saving Tactics in First Public Tender Procurement Event,” China News Service, 25 September 2000. 88. “Military Promotes Bidding System in Materiel Procurement,” Xinhua Domestic Service, 13 January 2002, in FBIS, 13 January 2002; and Tseng Shu-wan: “PLA Begins Socializing Logistic Support,” Hong Kong Wen Wei Po, 21 April 2002, in FBIS, 21 April 2002. 89. A study by a civil-to-military application committee in the MII found that commercial microelectronics standards were two to three generations (equivalent to about seven years) ahead of comparable military microelectronics technology. Zhang Sumei and Song Bin,

[198]

Building a Dual-Use Economy

usually focus on improving their ruggedness to survive combat environments rather than on any substantial technological upgrading. The third, and most challenging, category for CMI is weapons systems. This involves highly demanding and costly requirements unique to the military that go beyond what the commercial market normally develops and produces. This sector is likely to remain segregated from the dual-use base, as is evident from the May 2005 procurement reforms regulations issued by COSTIND, which expressly forbid non-state-owned firms from taking part in the development or production of weapon systems.90 However, there is a growing array of military combat systems that incorporate commercially available subsystems and components, such as information warfare-related products, avionics equipment, and critical electronics systems. The key areas of current and future focus in the military utilization of civil capabilities are in microelectronics, space, new materials, information technologies, communications, targeting, tracking, and strategic and tactical intelligence capabilities, propulsion, missiles, and computeraided manufacturing processes.91 Chinese defense technological and industrial experts expect to reap similar benefits that other countries such as the United States and the United Kingdom have apparently enjoyed from their implementation of dual-use and CMI policies. But these rewards, which are long-term in nature, require the implementation of systemic and institutional cultural changes that are time-consuming, disruptive, and costly.92 Moreover, the opening up of the defense economy to greater transparency, competition, and acceptance of market forces goes against the ingrained interests and values of this conservative behemoth. Nonetheless, the defense economy faces intense political pressure and scrutiny to rigorously carry out these reforms. The potential advantages that may flow from the adoption of dual-use initiatives, especially CMI policies, are numerous and varied. First, the capacity for the nurturing and dissemination of innovation within the defense economy is likely to be significantly enhanced. The civilian economy has become the dominant force for technological innovation in the Chinese

“Yinjie Tiaozhan, Bawo Jiyu” [Meet the Challenge, Grasp the Favorable Circumstances], Junmin Liangyong Jishu Yu Chanpin (April 2006), 3. 90. “China Opens Weapons Production to Private, Foreign-Funded Businesses,” Xinhua Domestic Service, 27 May 2005, in FBIS, 27 May 2005. 91. See Shi Jinwu, “Plan and Utilize the State’s Technological Resources,” and Li Chengruo, “Junmin Jiehe, Gongjian 21 Shiji Junshi Xinxi Xitong” [Combine Military with Civilian Capability to Build a 21st Century Military Information System], Yidong Tongxun [Mobile Communications], February 1999, http://www.mc21st.com/magazine/1999–2. 92. See Committee on Integration of Commercial and Military Manufacturing in 2010 and Beyond, Equipping Tomorrow’s Military Force: Integration of Commercial and Military Manufacturing in 2010 and Beyond (Washington, D.C.: National Academy Press, 2002).

[199]

Fortifying China

national innovation system, and the defense economy can most effectively gain access to this dynamism, creativity, and knowledge through dualuse and CMI mechanisms. The principal areas of interest for the defense economy are the forging of close working relationships with nonstate firms in the information and high-technology sectors, academic research institutions, Chinese-foreign joint ventures, and China-based foreign firms. Another area of benefit is in R&D. The design, development, and testing of indigenous Chinese weapons systems, especially complex equipment such as combat aircraft and warships, often take as long as fifteen to twenty years. Consequently, the systems are prone to being overtaken by technological advances before they even enter into service. The use of already developed commercially available technologies and advanced manufacturing processes could offer substantial time savings and reduce the risk of lengthy delays.93 A third area is project management. The development of CAC’s FC-1 fighter is an unprecedented example of design and project management innovation that has resulted from the growing impact of commercial practices on the defense industrial sector. CAC was able to shorten the time period for the research and design of the FC-1 by as much as 50 percent in some areas through the use of CAD and CAM design and manufacturing processes developed in the 863 program.94 Moreover, unlike other Chinese military aircraft projects that were shrouded in secrecy and intended only for domestic procurement, the FC-1 program was cofunded by the Pakistani government and the progress of its development was openly reported, as CAC was keen to sell the aircraft on the international market. This mixture of foreign financing, the adoption of newly developed commercial technology, and the focus on the commercial marketplace led to the successful development of an aircraft that had almost been written off after nearly a decade of underfunded and poorly coordinated R&D. Substantial cost savings could be gained through the employment of commercial manufacturing processes and the joint sharing of R&D expenses. One of the principal reasons for the high cost of military equipment is its limited output and expensive R&D costs. Mass commercial production allows for savings through economies of scale that translate into lower unit costs. Studies of the procurement of COTS products by the U.S. military 93. Some analysts point out that generational changes in the commercial computer and electronic equipment technology sectors take place every three to four years, which is three to four times faster than the development of military equipment. Zhang Simei and Song Lin, “Yinjie Tiaozhang, Bawo Jilei,” [Meet the Challenge, Grasp the Favorable Circumstances] Junmin Liangyong Jishu Yu Chanpin (April 2006), 3. 94. Yang Xinggen, “Yu Jixie Jungong Xiang Shuzi Junlong Zhuanbian” [Transformation from “Mechanical Military Factory” into a “Digital Military Factory”], Hangkong Kexue Jishu [Aviation Science and Technology] ( January 2004), 39–40.

[200]

Building a Dual-Use Economy

indicate savings of as much as 20 to 50 percent.95 Chinese estimates also suggest that joint development of civil-military projects could lead to investment savings of as much as 40 percent.96 Rapid advances in civilian technology have led to the production of commercially available equipment that is comparable to or exceeds the performance of equivalent military products. This is especially the case in electronics and in information and communications technology, where commercial technological innovation has been making rapid progress since the 1990s.97 Moreover, commercial systems are upgraded on a frequent basis to ensure their competitiveness, unlike military equipment that may be updated only once a generation because of the complexity and heavy costs involved. Consequently, the use of COTS products can help to enhance the performance of military products not only during their initial development but also throughout the life cycle of the equipment.98 A dual-use and CMI base will allow the Chinese defense economy to have the ability to source more of its critical and sensitive technologies domestically.99 Self-sufficiency has been a major priority for the country’s defense industrial and military establishments, especially after their access to foreign arms and technology was cut off on numerous occasions.100 Another area of concern is that the reliance on foreign hardware and software could allow leakages of information or foreign penetration of government and military networks. Military officials have been especially vocal in lobbying the government to strengthen information security management by reducing dependence on foreign imports and using domestic sources to fill their requirements.101 The positive assessments of CMI are likely to lead to its widespread adoption throughout the Chinese defense economy in the coming years. But whether CMI can lead to the development and production of defense technology and systems that are significantly faster, cheaper, and better—as Chinese policymakers expect—is far from clear. Even in the United States, 95. Lorell et al., Cheaper, Faster, Better? 26–27. 96. Hu and Liu, Jiang Zemin Guofang Keji Gongye Jianshe Sixiang Yanjiu, 226. 97. Committee on Integration of Commercial and Military Manufacturing: Equipping Tomorrow’s Military Force, chap. 3. 98. Lorell et al., Cheaper, Faster, Better? chap. 8. 99. See Roger Cliff, The Military Potential of China’s Commercial Technology (Santa Monica: RAND Corp., 2001). 100. The Soviet Union abruptly terminated its military assistance and arms sales to China in 1960, Western countries imposed an arms embargo after the Tiananmen Square crackdown, and Israel stopped sensitive arms sales to China in 2001 and 2005 after coming under pressure from the United States. 101. Yu Chunguang and Jiang Yuanliu, “Military NPC Deputies and CPPCC Members Discuss State and Military Information Security,” Jiefangjun Bao, 11 March 2002, 3, in FBIS, 11 March 2002.

[201]

Fortifying China

which has pioneered the introduction of CMI into its defense industry, the track record of achievements remains thin. Successfully adopting CMI practices presents a daunting challenge for the Chinese defense economy because it will require major changes in how the system is structured and operates. The defense economy will need to be more transparent, competitive, and market-oriented, which is at odds with its institutional nature as a closed, secretive, and state-dominated system. Consequently, the introduction of CMI practices needs to take place alongside other key structural reforms, of which the forging of close linkages between the civilian and defense technological and industrial systems is of paramount importance.

Building Linkages between the Civilian and Defense Economies A central goal in the establishment of the dual-use economy is to overcome the deep-rooted compartmentalization and parochialism that have isolated the defense sector from the rest of the civilian economy and crippled its performance and innovative capacity. This will require a far-reaching effort to replace the vertical defense industrial apparatus with a more decentralized horizontal structure that is able to operate effectively across different functional systems and geographical jurisdictions. COSTIND was put in charge of this effort to develop a more integrated civil-military dual use structure in the late 1990s. However, doubts were raised as to whether it was the most appropriate agency to carry out this task, especially with its checkered reform track record and past resistance to opening up to the outside world. There were calls for other government and civilian institutions to be handed a greater role in shaping this crucial restructuring. Suggestions included the formation of a new ministerial-level civilmilitary-industrial agency, a joint working group comprising COSTIND and MOST representatives, or even an enhanced role for the Central Special Commission.102 In the end, COSTIND was merged into a superministry that incorporated other government agencies dealing with ICT and

102. Sha Nansheng, Liang Qingwei, and Liu Ganzhuo, “Woguo Junmin Liangyong Jishu Fazhan De Xianzhuang He Zhengce Jianyi” [Policy Suggestions and the Current Situation of the Development of Our Country’s Civilian-Military Dual-Use Technology], Guofang Keji Gongye (September 2001), 34; and Liu Daxiang, “Dui Jiakuai Fazhan Woguo Hangkong Dongli De Xikao,” [Thoughts on Speeding Up the Development of Our Country’s Aviation Strength”], Hangkong Shi Yanjiu [Aviation History Research] no. 2 (2001): 39.

[202]

Building a Dual-Use Economy Figure 5.1. Organizational chart of Chinese civilian organizations involved in S&T research and development and state coordination and management, 2008

State Council Leading Group on Science, Technology, and Education National Development and Reform Commission Research institutes

Ministry of Science and Technology

Commission on Science, Technology, and Industry for National Defense Universities and research institutes

Ministry of Education

Chinese Academy of Sciences

Universities and institutes of higher education

Chinese Academy of Engineering

National Natural Science Foundation

Research institutes

industrial matters. But the establishment of the blended civil-military Yujun Yumin system offers the possibility of a greater role in decision making and policy implementation for other civilian entities such as MOST, provincial governments, and R&D organs such as CAS and the university system.

The Ministry of Science and Technology and the Civilian High-Technology System The civilian S&T system and its high-technology component will be an integral element of the Yujun Yumin system. MOST oversees the development of the country’s civilian S&T capabilities. Its duties include the formulation of the country’s S&T policies and longer-term strategies; the administration and implementation of key national plans dealing with basic, applied, and high-technology R&D; conducting policy research on major S&T issues; coordinating the development of the country’s NIS; and encouraging the commercialization of S&T output through R&D programs and the development of high-technology industrial development zones.103 103. MOST website, http://www.most.gov.cn.

[203]

Fortifying China

While S&T development has become a pressing national priority since the mid-1990s, MOST has not benefited bureaucratically. Indeed, the ministry is a weakened successor of the SSTC, which wielded wide-ranging influence during the central planning era. When MOST was created, its manpower levels were cut, and it lost responsibility for a number of portfolios.104 Its oversight role of R&D institutes affiliated with government ministries was also curtailed as efforts were undertaken to commercialize many of them. However, MOST has been given more responsibility for project evaluations and the promotion and marketing of S&T industrialization. Despite these limitations, MOST has amassed growing expertise in the management of dual-use activities. Much of this has been through its administration of the 863 program, where it has had responsibility for six key areas that are ostensibly civilian in nature but have significant dual-use content. In addition, MOST has participated in discussions that have taken place since the mid- to late 1990s on the formulation of dual-use policies. This involvement has included the drafting of research reports and policy outlines. It has also taken part in coordinating the development of specific dual-use technology projects, such as high-speed optical multiplexer systems with the PLA Information Engineering University.105 As the civilian technological and industrial apparatus assumes a more direct and prominent role in the building of the Yujun Yumin system, MOST is likely to find that its participation and influence in dual-use policymaking and implementation will grow in tandem. Senior MOST officials have expressed a desire to play a more central role in the management of dual-use activities, especially in areas involving the promotion of technological innovation and commercialization. Following the 2003 Third Plenum’s decision on the Yujun Yumin system, Xu Guanhua pointed out that overcoming the separation between the civilian and defense industrial systems and establishing an integrated civil-military NIS, especially through close cooperation at the R&D level, were key strategic priorities.106

Participation of the Civilian Academic Apparatus If the mandarins at MOST are the administrative custodians of the civilian side of the dual-use system, the scientists and engineers in the country’s

104. Environment, Science, and Technology Section, U.S. Embassy, Beijing, “An Evaluation of China’s Science and Technology System and Its Impact on the Research Community,” 2002, 19–21, http://www.usembassy-china.org.cn/sandt/ST-Report. 105. Jiefangjun Bao, 23 July 2001. 106. “Goujian Junmin Ronghe De Chuangxin Tixi” [The Construction of a Merged CivilMilitary Innovation System], Liaowang, 24 November 2003, 25.

[204]

Building a Dual-Use Economy

universities and civilian S&T research think tanks and academies are the intellectual innovators. The defense industry and PLA are eager to harness the research capabilities of leading civilian S&T universities and academies by deepening preexisting partnerships with established organizations such as CAS and the Chinese Academy of Engineering (CAE) and forging new relationships with institutions that are involved in activities with defense or dual-use potential. At the center of this burgeoning web of civil-military academic linkages is CAS, which has an extensive history of involvement in the development of the country’s most advanced civilian and military technologies since its inception in the 1950s.107 Two-thirds of the academy’s scientific and engineering personnel were assigned to the development of the country’s satellite, missile, and nuclear weapons programs during the 1950s and 1960s. The academy’s institute on atomic energy was turned into the Second Ministry of Machine Building, which was responsible for the development of the nuclear weapons program.108 In the reform era, the involvement of CAS in defense-related activities has been sharply reduced as it has focused on pursuing civilian projects to support economic development. Nonetheless, CAS and many of its institutes continue to participate in an extensive assortment of defense-related R&D activities (see table 5.2). In 1999, CAS-affiliated research outfits were involved in 640 defense-related projects, or around 6.5 percent of the academy’s total number of projects.109 Moreover, many PLA and defense industry researchers are senior members of CAS and CAE.110 The PLA Air Force signed agreements with CAS and CAE in 2000 to hire some of its leading members as technical advisers to assist on technology development projects in a wide range of areas, including missiles, radar, communications, and information technology.111

107. Zhang Jingfu, “Recollections of the Chinese Academy of Sciences and the Development of the Atomic Bombs, Guided Missiles and Artificial Satellites,” Xinhua News Service, 5 May 1999, in FBIS, 5 May 1999; and Dangdai Zhongguo Congshu Bianji Weiyuanhui [Contemporary China Series Editorial Committee], Zhongguo Kexueyuan (Xia) [Chinese Academy of Sciences (Lower Volume)] (Beijing: Dangdai Zhongguo Chubanshe, 1994), 18–20. 108. Wu Yuanping et al., Xin Zhongguo Guofang Keji Tixi De Xingcheng Yu Fazhan Yanjiu, 427. 109. Chinese Academy of Sciences Comprehensive Planning Section, Zhongguo Kexueyuan Tongji Nianjian 2000 [Statistical Yearbook of the Chinese Academy of Sciences 2000] (Beijing: Kexue Chubanshe, 2000), 144. 110. The 2002 edition of the Chinese Defense White Paper pointed out that there were more than 140 defense and PLA scientists and engineers who were elected to be members of CAS and CAE. See China’s National Defense in 2002, http://www.xinhuanet.com. 111. Qiao Songbo et al., “Fruitful Cooperation in the Field of S&T: Investigation Report on Air Force Appointment of Academicians of the Chinese Academy of Sciences and Chinese Academy of Engineering as Consultants for Development in S&T and for Building

[205]

Fortifying China Table 5.2. The involvement of CAS in defense R&D, 1995–1999 Year

Number of projects

Size of expenditure (in million Rmb)

As a percentage of total CAS R&D projects

1995 1996 1997 1998 1999

577 551 589 644 640

134.4 139.1 197.9 240.8 259.9

6 6.25 6.27 6.28 6.47

Sources: Chinese Academy of Sciences Comprehensive Planning Section, Zhongguo Kexueyuan Tongji Nianjian [Statistical Yearbook of the Chinese Academy of Sciences] (Beijing: Kexue Chubanshe, 1996 to 2000 eds.).

CAE is the country’s premier institution responsible for engineering S&T projects. More than a dozen prominent PLA scientists and engineers are members of CAE. Its personnel are regularly involved in R&D projects with defense applications, especially those in the fields of electronic engineering, material engineering, health and medical engineering, and machinery engineering. CAS has approximately thirty institutes specializing in high-technologyrelated research, many of which are engaged in dual-use and military activities. The academy’s high-technology R&D bureau is in charge of coordinating defense industrial projects:112 • Xian Institute of Optics and Precision Mechanics: Does optics-related

research that has civilian and military applications, including space optics, optoelectronic engineering, and information optics. Several other CAS institutes also specialize in optics and laser-related research, such as the Institute of Optics and Electronics, Shanghai Institute of Optics and Fine Mechanics, Anhui Institute of Optics and Fine

of Qualified Personnel,” pts. 1 and 2, Jiefangjun Bao, 13 and 14 October 2003, 1, in FBIS, 2 December 2003. 112. See http://www.cas.cn for a full listing of its institutes, a short description of their activities, and annual reports on the academy’s activities since the late 1990s. In its 2003 report on the Chinese military establishment, the Pentagon said that CAS institutes located in cities such as Shanghai, Guangzhou, Xian, Lanzhou, Wuhan, Nanjing, Hefei, Changchun, Shenyang, Kunming, Chengdu, and Xinjiang often worked closely with the PLA and defense industry in applied research. U.S. Department of Defense, “2003 Annual Report on the Military Power of the People’s Republic of China,” 41, http//www.defenselink.mil/pubs. The high-technology research and development bureau has two military-industrial sections. See Zhongguo Kexueyuan Bangongting, ed. [Chinese Academy of Sciences General Office], Zhongguo Kexueyuan Nianjian 2000 [Chinese Academy of Sciences 2000 Yearbook] (Beijing: Kexue Chubanshe, 2001), 24.

[206]

Building a Dual-Use Economy

•

•

•

•

•

Mechanics, and Changchun Institute of Optics, Fine Mechanics and Physics. Institute of Metals Research: Researches new metallic materials, including advanced composite materials and new inorganic, nonmetallic materials. Shanghai Institute of Technical Physics: Performs research on infrared physics and optoelectronics, with particular focus on space remote sensing and small satellite infrared imaging. It has participated in the development of the Shenzhou spacecraft and developed remote sensing capabilities for the country’s meteorological and maritime satellites. Another important CAS institute undertaking space-based research is the Center for Space Science and Applied Research. Institute of Automation: Focuses on automation control and information processing. The Shenyang Institute of Automation is also engaged in automation research, especially focusing on robotics and industrial automation. Institute of Computing Technology: Developed the country’s first computer and is a key R&D base for the country’s efforts to build highperformance computers. Institute of Electronics: Leader in research on microwave imaging, radar technology, high-power gas laser technology, and the development of microsensors and systems.

As part of a major restructuring project to improve its knowledge innovation capabilities, CAS unveiled a “strategic action plan for technology innovation” in 2001 that outlined eight critical goals for the academy over the next twenty years.113 The plan called for CAS to place more attention on meeting the country’s strategic needs, especially in the development of “frontier” capabilities. One of these core targets was to tackle critical defense technological and industrial problems.114 Projects in this plan that have dual-use applications include basic research on nanodevices and fuelcell engine technology. Further strategic projects were added in 2006 as part of the academy’s participation in the Eleventh Five-Year Plan, including the development of high-performance microchips and supercomputers and

113. For an assessment of the efforts of CAS to establish itself at the center of China’s innovation and knowledge systems, see Richard Suttmeier, Cong Cao, and Denis Fred Simon, “China’s Innovation Challenge and the Remaking of the Chinese Academy of Sciences,” Innovations, 1, no. 3 (Summer 2006), 78 –97. 114. “Chinese Academy of Sciences’ 8 Objectives for Technological Innovation Strategic Plan,” Xinhua Domestic Service, 1 November 2001, in FBIS, 23 January 2002.

[207]

Fortifying China

servers that perform one trillion mathematical calculations a second.115 Premier Wen Jiabao reiterated the central importance of CAS in the forging of the strategic economy during a visit to the academy’s headquarters in 2004 when he pointed out that CAS is “our national team for strategic hightechnology research.”116 In another noteworthy departure from the traditional compartmentalized approach to R&D, the defense economy had been actively tapping into the scientific and technological expertise of the country’s university system since the mid- to late 1990s. Not only are government agencies such as COSTIND and GAD sponsoring R&D projects, but defense enterprises are also establishing industry-university relationships by entering into jointventure R&D partnerships with universities and civilian S&T research institutes.117 Analysts argue that the close relationship between the U.S. Defense Department and the American research university apparatus offers a successful model for China to emulate. They point out that the Pentagon and leading universities such as the Massachusetts Institute of Technology and Stanford University have benefited enormously through cooperative associations that stretch back to the Second World War.118 This has helped to convince military and defense industrial authorities to step up the development of cooperative ties with the country’s top tier of research universities.119 But while the synergies in the development of ties between the Chinese defense industry and the civilian university system are considerable, defense 115. MOST, “CAS Goals for Next 5 Years,” China Science and Technology Newsletter, March 2006, 2, http://www.most.gov.cn/eng/newsletters. The Institute of Computer Technology at CAS in cooperation with the Dawning Corp. has already developed a supercomputer, the Dawning 4000A, that can operate at speeds of 11 trillion calculations per second, but the goal of the Eleventh Five-Year Plan is to commercialize this capability. See “Supercomputer Advances to New Level in China,” Renmin Ribao, 16 November 2004, online edition, http://english.people.com.cn. 116. Wang Leiming, “During Inspection of Chinese Academy of Sciences, Wen Jiabao Stresses the Need to Give Greater Prominence to Scientific and Technological Innovation,” Xinhua Domestic Service, 17 January 2004, in FBIS, 17 January 2004. 117. See Evan Medeiros et al., A New Direction for China’s Defense Industry (Santa Monica: RAND Corp., 2005), 222. For a broader examination of the deepening working relationships between Chinese universities and the industrial sector, see Hong Liu and Yunzhong Jiang, “Technology Transfer from Higher Education Institutions to Industry in China: Nature and Implications,” Technovation, no. 21 (2001): 175–88. 118. Gao Yunfeng and Chen Xi, “Meiguo Yanjiuxing Daxue Yu Junshi Kexue De Hudong Fazhan” [The Mutual Benefits between Military R&D and Research Universities in the United States], Qinghua Daxue Jiaoyu Yanjiu [Qinghua Journal of Education] 25, no. 5 (October 2004): 39–45. 119. This is spelled out in the medium- and long-term S&T development plan, which said that the defense S&T sector must “open defense-related S&T work to civilian science research institutes and enterprises.” State Council, Guidelines for the Medium- and Long-Term National Science and Technology Development Program.

[208]

Building a Dual-Use Economy

industry decision makers may be hesitant to devote significant funds to carry out this task because they are already committed to building up the research, development, and training capabilities of their own base of universities and research academies. Defense enterprises are likely to be more willing to support the development of ties with universities because they are keen to outsource their R&D work and have less resistance than their colleagues in COSTIND to going outside the defense economy to recruit partners. In this more permissive environment, a growing number of university-industry agreements and partnerships have been cemented since the late 1990s. One typical example is the signing of a cooperation agreement between Qinghua University and AVIC 1 in 2003 in which the university agreed to provide scientific training for company employees and undertake scientific R&D for various projects.120 At the provincial level, Hunan University entered into cooperation agreements in 2003 with several defense industrial enterprises, including Jiangnan Machinery Group, to conduct military and dual-use R&D in areas such as automobile engineering, electric automation, and chemical engineering. Hunan’s COSTIND office also established an advanced materials R&D laboratory with the university.121 The PLA’s handful of S&T universities have also been actively cultivating relationships with civilian research counterparts and commercial firms to develop both defense and dual-use technologies. NDSTU has played a leading role in the development of supercomputers, backbone communications systems, robotics, and high-speed rail transportation systems. The university has established commercial entities and entered into business relationships with civilian high-technology companies to pursue commercial and CMI ventures. For example, a NDSTU joint venture subsidiary was established in Dongguan, Guangdong Province, in 2001 to produce commercial high-performance computer servers developed by the university.122 The electronic technology and information security institutes of the PLA’s Information Engineering University are involved in a range of CMI-related projects. Among these are the development of China’s first highperformance rural-use digital stored program control switch, the country’s first advanced intelligent network system, and the country’s first models of integral optical fiber transmission equipment.123 120. Keji Ribao, 20 September 2003, 1. 121. Hunan Ribao [Hunan Daily], 22 September 2003, 1. 122. Zhongguo Jisuanji Shijie [China Computerworld], 30 April 2001. 123. Miao Baojin, “An Account of Scientific Research Work at the Information Security Research Institute of the Electronic Technology Facility at the Information Engineering University,” Jiefangjun Bao, 18 February 2002, in FBIS, 18 February 2002, and Zou Hong, “New Leap for China’s Landline Communications Technology,” Jiefangjun Bao, 3 October 2002, 1, in FBIS, 3 October 2002.

[209]

Fortifying China

This deepening embrace of the civilian academic S&T sector by the defense industry marks an important shift in attitudes and policies. With the exception of CAS and a few other select institutions, the defense industry had previously not reached out to cooperate with civilian universities and other academic research institutes. In the building of the dual-use economy, the civilian academic S&T research community will be a linchpin, especially in areas, such as electronics and information technology, where the military and defense industrial R&D bases are inferior to their civilian counterparts in skills and research capacity.

The Electronics and Information Technology Sectors Until its merger into a new Ministry of Industry and Informatization in 2008, the Ministry of Information Industries (MII) was in charge of several sectors that are regarded as the foundation for the country’s strategic goal of becoming an advanced information-based military power. The electronics and information and communications technology (ICT) industries are involved in the research, development, and production of critical dual-use and spin-on technologies that range from aircraft avionics systems to telecommunications networks. But the criticality of these sectors to the country’s defense needs was not fully recognized until the mid-1990s, when the PLA replaced its technologically obsolete military strategy of “People’s War Under Modern Conditions” with one designed to fight local wars under high-technology conditions.124 This earlier focus on a low-technology, manpower-based military strategy meant that the defense electronics and ICT sectors had to switch almost exclusively to civilian production to survive. By the early 1990s, only 3 percent of the total annual production of the defense electronics sector was military output, compared with more than 70 percent in the early 1980s.125

124. See Gao Guozhen and Ye Zhen, “Operational Doctrine Must Change Over Time,” Zhongguo Junshi Kexue [China Military Science], 20 November 1996, 85–93, in FBIS, 20 November 1996. 125. Cong Cao, “China Aviation Technological and Aviation Shareholding Co. Established,” Zhongguo Junzhuanmin ( June 2002), 22. In the first four years of the Ninth Five-Year Plan from 1996 to 1999, the MEI’s fifty-odd military research institutes produced around Rmb 4 billion of industrial output value, or around Rmb 1 billion annually. Zhongguo Jungong Bao [China Military Industry News], 26 May 1995, 1. See also Luo Huangan, “Woguo Jungong Dianzi Qiye Gaige Chutan” [Exploration of the Reform of My Country’s Military-Industrial Electronics Enterprises], Master’s thesis, Dianzi Keji Daxue [Electronics Science and Technology University], 2001; and Zhongguo Dianzi Gongye 50 Nian Bianweihui [China Electronics Industry 50th Year Editorial Committee], Zhongguo Dianzi Gongye 50 Nian [50 Years of the Chinese Electronics Industry] (Beijing: Dianzi Gongye Chubanshe, 1999), 11.

[210]

Building a Dual-Use Economy

Orders for defense-related electronics and ICT products and technology grew rapidly from the mid- to late 1990s with this switch in military development priorities. Between 1999 and 2001, annual increases in the output value of the defense electronics sector have been between 35 and 50 percent. (See table 5.3.) The annual industrial output value of military goods produced by the electronics and ICT sectors in 2001 grew to nearly Rmb 10 billion (see table 5.4) but fell to below 1 percent of total civilianmilitary production value as the pace of civilian output expanded at a much faster rate. An important step in encouraging the integration of civil-military activities in the electronics and ICT industries took place in 2002 when the country’s eleventh defense industrial conglomerate was established. China Electronics Technology Group Co. (CETC) was formed through the merger of forty-seven former MEI state-owned research institutes and twenty-six enterprises that had been placed under the direct control of MII when MEI was abolished in 1998.126 Around 80 percent of the output of these research Table 5.3. The decline and reemergence of the defense electronics sector, 1985–2001

Year

Output of defense electronics equipment sector (in billion Rmb)

Investment into defense electronics equipment sector (in billion Rmb)

Defense electronics output as percentage of total output of electronics industry

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

1.34 0.79 0.9 0.93 1.18 1.41 2.04 2.55 3.35 4.56 6.18 7.91 10.6 14.8 31.91 45.6 61.07

0.32 0.4 0.486 0.56 0.716 0.789 0.803 0.958 1.192 1.635 2.098 2.395 2.717 3.156 3.583 4.026 4.808

7.6 4 3 2 1.9 2.1 2.3 2.35 2.4 2.45 2.5 2.6 2.65 2.7 4.1 4.3 4.5

Sources: Gu Mingyu, “Guofang Gaoxin Dianzi Zhuangbei Gongcheng Touzi Xiaoyi Pingjia Yanjiu [Evaluation of Investment Returns on Defense Advanced Electronic Equipment Projects]” (master’s thesis, Dianzi Keji Daxue [Electronics Science and Technology University], 2004).

126. See Tongxun Shijie [Communications World], 29 March 2002, 16–20. See also Michael Pillsbury, “China’s Progress in Technological Competitiveness: The Need for a New Assessment,” (report prepared for the USCC, April 2005), http://www.uscc.gov/hearings.

[211]

7.075 2.536

0.019

286 334.6

742.4

Share of domestic output by state-owned enterprises

Share of domestic output by non-state-owned enterprises

Foreign enterprises (including Hong Kong, Macau, and Taiwan)

0.162

Total exports of military products (in billion Rmb)

0.003

0.76

2.47

1.55

0.7%

Military output as percentage of total annual industrial output

Sources: Zeng Peiyan, chief ed.), Zhongguo Gao Jishu Changye Fazhan Nianjian 2002 [China High-Technology Industry Development Almanac 2002] (Beijing; Beijing Ligong Daxue Chubanshe, 2002), 646– 47.

9.611

9.630

1,357 620.6

Share by domestic enterprises

Total annual military industrial output (in billion Rmb)

Total

Total annual industrial output (in billion Rmb)

Table 5.4. Military output of the electronics and information technology industry in 2001

Building a Dual-Use Economy

institutes in 2000 was military-related. In the five years since its establishment, CETC claims that its annual growth in revenue and profits has been 27.8 percent and 28 percent respectively. Its civilian revenue in 2006 was reported to be Rmb 11.5 billion.127 CETC has a workforce of 53,800, of which around 55 percent are said to be S&T professionals.128 The company has fourteen national R&D laboratories, three national engineering centers and twenty-one national testing and evaluation entities. CETC has also set up a number of information industry parks around the country to act as technological innovation incubator centers. The inclusion of CETC in the elite circle of defense conglomerates was a formal acknowledgment by the defense industry that electronics and ICT were now at the center of its priorities and that it had to take direct administrative control over these sectors from MII and other civilian agencies. The central importance of these high-technology sectors was further boosted in 2004 when the PLA readjusted its military strategy to focus on fighting local wars under “informationized” conditions.129 One of CETC’s first projects was the establishment of four information industry parks in Shijiazhuang, Beijing, Zhejiang, and Wuhan to house R&D centers and companies involved in microelectronics, satellite navigation systems, and laser equipment.130 In a move that underlined the extensive cobweb of ties between the defense establishment and the country’s electronics and ICT community, an industry alliance between fifty leading foreign and domestic IT firms and the PLA and defense industry was founded in July 2003 with the goal of supporting the development of defense and dual-use information technology capabilities.131 Computer manufacturers, systems integrators, and security software specialists such as Legend Group Ltd. and Founder Holdings Ltd., Digital China Holdings Ltd. Network Associates Inc., and Symantec Corp. all signed up as members of this alliance, which donated information technology (IT) products worth Rmb 3.15 million to the PLA, including servers, personal computers, and network routers.132 127. Li Jinxiang, “CETC Changye Youhua He Changye Pingtai Zhongzu,” [The Industrial Optimization and Platform of Industrial Restructuring of CETC], Master’s thesis, Beijing Communications University, 2007. 128. “China Electronics Technology Group Corp.,” COSTIND Website, http://www.costind. gov.cn, n.d. 129. China’s National Defense in 2004, 5. 130. “Large Info Industry Park to Be Built in Shijiazhuang,” Xinhua Economic Information Service, 12 January 2003. 131. “Li Jinnai Attends Ceremony of Launch of IT Firm Alliance for Military Procurement,” Xinhua News Agency, 30 July 2003, in FBIS, 31 July 2003. 132. Ma Hua and Yang Xueqing, “Keji Yongjun Puhua Zhang IT-Lian Shouxiu Junqi” [A Chapter in the Military Chronicle of Technology Leading the Army: The IT Alliance Embroiders the Military Flag], Jisuanji Shijie [Computer World], 4 August 2003, A19.

[213]

Fortifying China

Voracious military demand for high-technology products has been the driving force behind this forging of increasingly deep ties among the PLA, defense industry, and civilian ICT enterprises. In a survey published in 2005 of more than one hundred civilian high-technology firms, research institutes, and university faculties in six regions of the country, more than 90 percent of firms said they were keen to enter into the military market. Additionally, more than 90 percent of IT enterprises in the survey indicated that they had already established ties with the military, and some were already selling their products to the PLA.133 The information security industry is another rapidly growing sector that is under the oversight of MII and the 863 program and is attracting considerable interest from the defense industry and PLA.134 The development of the domestic information security industry has been a top S&T priority since the beginning of the Tenth Five-Year Plan, and this has led to major investment and the nurturing of hundreds of nongovernmental and statefunded information security firms, specializing in areas such as antivirus protection and Internet security. A handful of information security development bases have been set up since 2000 in Chengdu, Shanghai, and Hubei with the goal of turning them into regional centers of innovation.135 This forging of civilian-military linkages in the ICT and electronics sectors is still in its infancy. But if the pace of progress made in overcoming the separation of the military and civilian spheres in these sectors since the end of the 1990s can be maintained, the long-term prospects for the establishment of integrated electronics and information technology dual-use bases

133. Ding Feng, “Minji Junyong” [Military Use of Civilian Technology], Junmin Liangyong Keji Yu Changpin (May 2005), 3. Among leading name-brand commercial enterprises that supply technology and products to the PLA are the Lenovo Group, Founder Group, and consumer electronics producer Panda Electronics Group. Lenovo is one of China’s leading personal computer manufacturers and has provided computers and supporting equipment. Lenovo’s cofounder and president, Liu Chuanzhi, was trained as a military engineer in the PLA’s Xian Communications Engineering College. Founder is China’s second largest personal computer producer. The company has a cooperation agreement with NDSTU to jointly develop defense-related systems and is also providing financial support to the university. This arrangement is detailed on Founder’s website, www.ordercomputer.com. Nanjing-based Panda is one of the country’s oldest and most recognized consumer electronics and communications enterprises. It supplies a wide range of communications products to the PLA. See Zeng, Zhujian Weili, 85–91. 134. With the merger of MII into the Ministry of Industry and Informatization, the new super-ministry will now be responsible for administrative oversight of this sector. 135. Li Xue, “Xinxi Anquan Jidi Jianshe Chengju Feiran” [The Excellent Record of the Construction of Information Security Bases], Xinxi Anquan Yu Tongxun Baomi [Information Security and Communications Secrecy] (February 2003), 15–16; and Liu Zuren, “Xinxi Anquan Changye Shi Shuzi Xinxi Shehui Kechixu Fazhan De Baozhang” [The Information Security Industry Will Help to Secure the Continuous Development of the Digital Information Society], Zhongguo Xinxi Anquan [China Information Security] ( July 2002), 15–18.

[214]

Building a Dual-Use Economy

appear rosy. At the very heart of this civil-military convergence in the hightechnology and ICT sectors are the high-technology companies that are leading the information technology revolution taking place in China.

Harnessing Civilian High Technology Companies for Military Purposes A critical driver of China’s rapid technological advancement since the 1990s has been the role of entrepreneurial high-technology companies that are independent of state control. In the computer and ICT sectors, a handful of firms that were started in the late 1980s and early 1990s by enterprising scientists or well-connected former military officers have emerged to become the commercial standard-bearers of the country’s high-technology rise and an important source of dual-use technology for the country’s defense establishment. Four companies in particular are viewed as central players in the rise of the dual-use IT “digital triangle”: Huawei Technologies Ltd. (Huawei), Great Dragon Telecommunications Equipment Co. Ltd. (GDT), Zhongxing Telecommunications Equipment Co. Ltd. (ZTE), and Datang Telecom Technology Co. Ltd. (Datang).136 Many of these entities owe their genesis to the defense industry or the PLA.

Huawei Technologies Huawei is one of China’s most prominent, controversial, and successful information technology companies and enjoys a close relationship with the government, defense industry, and PLA.137 It was founded 1988 as a nongovernmental company by Ren Zhengfei, a former director of the PLA GSD’s Information Engineering Academy, and several colleagues from the GSD’s communications subdepartment. Huawei took advantage of the gradual opening up of the country’s telecommunications equipment market during the 1990s to establish itself as a leading supplier of low-cost switching equipment. With limited technical, human, and financial resources at the outset, Huawei sought access to the technology required to develop and produce the equipment through reverse engineering of the products of foreign rivals.138 However, the company recognized that it needed to 136. Medeiros et al., A New Direction, chap. 5. 137. Cheng Dongsheng and Liu Lili, Huawei Zhengxiang [The Truth of Huawei] (Beijing: Dangdai Zhongguo Chubanshe, 2004); and Huawei Technologies, Huawei Technologies in China (Shenzhen: Huawei Technologies, n.d.). 138. Interview with Western technology analyst, Hong Kong, June 2001. See also Chris Buckley, “Rapid Growth of China’s Huawei Has Its High-Tech Rivals on Guard,” New York Times, 6 October 2003.

[215]

Fortifying China

develop its own R&D capabilities to be competitive over the long term, and it subsequently began to invest around 10 percent of annual revenues in R&D. This has allowed Huawei to develop an extensive range of advanced products and services—including fixed and mobile communications networks such as high-speed packet switching and optical access networks—and data communications services, such as access servers and routers.139 Although PLA procurement regulations prohibit the acquisition of sensitive equipment from nongovernment companies, Huawei was able to circumvent these rules. It offered critical equipment that the PLA needed and that was not available elsewhere domestically. The company was also able to meet stringent military requirements over secrecy and other regulatory matters because of the former military backgrounds of its management. In addition, the company enjoyed the strong backing of senior civilian and military leaders who regularly visited Huawei’s headquarters in Shenzhen. This was subsequently translated into strong financial backing for the firm from the country’s state banking system. The company reportedly enjoys a $10 billion line of credit from one of the country’s leading state banks.140 The PLA became a customer of Huawei in the early 1990s when it gave a contract to the company to supply key equipment for a nationwide military telecommunications project. The PLA has subsequently relied on Huawei for key communications equipment and systems.141 According to a senior Huawei executive, approximately 5–6 percent of the company’s annual output in 2000 and 2001 went to the PLA.142 The PLA and COSTIND are also said to provide substantial R&D funding to Huawei to develop specialized and tailored products for military use.143 But as Huawei’s commercial and foreign business operations have surged, the importance of sales to Chinese military and state agencies has diminished. Huawei said that contracts with the Chinese government amounted to only 0.5 percent of its total sales contracts in 2007.144

139. Company brochures and interviews with current and former Huawei employees, April 2002. See also Bruce Gilley, “Huawei’s Fixed Line to Beijing,” Far Eastern Economic Review, 4 January 2001, 94. 140. “Huawei Tech Reportedly Pursues Marconi,” Associated Press, 8 August 2005. 141. For a technical overview of the PLA’s telecommunications network development, see Wang Haishou, “An Examination of the Inter-Related Problems of the Military Communications Network,” Tongxun Shijie, 8 August 2002, 39–40. 142. Interview, Beijing, April 2002. Other reports suggest that the figure may be as low as 1 percent. See Medeiros et al., A New Direction, 219. 143. Interview, Beijing, April 2002. 144. Ariana Eunjung Cha, “Telecom Firm in China Sets Sights on U.S. Market,” Washington Post, 6 January 2008.

[216]

Building a Dual-Use Economy

Huawei’s dealings with the PLA and its involvement in dual-use activities with the defense establishment have sown suspicion among foreign governments that the company is becoming an important player in supporting China’s military modernization efforts as well as supplying dual-use equipment to outlaw states.145 However, these concerns do not appear to have had any discernible impact on Huawei’s rapid expansion into overseas markets and the forging of joint partnerships with other leading foreign technology firms.146 Huawei’s gradual evolution from a Chinese telecommunications equipment manufacturer with a predominately local R&D apparatus into a global player with R&D facilities in advanced countries would signify a landmark development in the country’s longterm goal of joining the ranks of the world’s leading technological powers. This would also further consolidate Huawei’s role as an important conduit for the flow of foreign technology and knowledge into the Chinese defense economy.

Great Dragon Telecommunications Equipment Co. Ltd. The story of GDT’s rapid ascent and decline offers insights into the benefits and perils of civil-military technological cooperation. The company originated from a joint-venture project during the 1980s to develop an indigenous digital telephone switching system. The partners were a military scientist, Wu Jiangxing, and the China Posts and Telecommunications Industrial Corp. (CPTIC), which was an affiliate of the powerful Ministry of Posts and Telecommunications (MPT) bureaucracy.147 Wu was affiliated with the Center for Information Technology (CIT) at the PLA Institute for Information Engineering (IIE) in Zhengzhou and led a military research team on this project that took a decade to develop the HJD-04.148 As China’s first domestically developed digital switchboard, the HJD-04 was hailed as an important breakthrough for the country’s telecommunications equipment industry and quickly attracted commercial orders. The 145. News reports have indicated that Huawei supplied dual-use equipment to Saddam Hussein’s Iraq and Afghanistan’s Taliban regime. See “Indian State Government Puts Chinese Firm under Microscope,” Agence France Presse, 10 December 2001; and Jennifer Lee, “U.S. Officials Complain That Chinese Companies Supply Rogue Nations,” New York Times, 12 November 2001, 2. 146. “Huawei Chuhai” [Huawei Goes into the Sea], Jingji Daokan [Economic Herald], May 2004, 23–37. 147. For a detailed case study of the development of the HJD-04 and the bureaucratic battles between the military and civilian partners, see Shen Xiaobai, The Chinese Road to High Technology (London: Macmillan, 1999). 148. Ma Xiaochun and Zhang Dongwen, “Army Academy Technology Assists State Enterprises,” Xinhua Domestic Service, 9 February 1998, in FBIS, 10 February 1998.

[217]

Fortifying China

success of the project, however, caught the partnership by surprise and sparked acrimony between CIT and CPTIC over intellectual property ownership and production rights.149 These differences were initially set aside, and the various entities involved in the project formed GDT in 1995 to produce and sell the HJD-04. Wu became the president of GDT. The PLA was eager to support one of its own homegrown technology champions and became a major customer. The HJD-04 was the main switchboard used by the military’s communications networks at the end of the 1990s.150 At the height of its commercial success in the late 1990s, the HJD-04 captured more than 15 percent of the Chinese switching market and was also exported to Russia, Cuba, Bangladesh, North Korea, and Columbia. However, the infighting between the civilian and military parties led to court battles and distracted the GDT management from following up on the success of the HJD-04. While domestic and foreign competitors moved quickly and boldly to develop new generations of equipment and expand their product lines, GDT adopted a more cautious strategy that focused on incrementally upgrading the HJD-04. Like its major domestic competitors, the company also invested around 10 percent of its annual revenues on R&D but failed to develop products as successful as the HJD-04.151 By the late 1990s, GDT’s once dominant position in the telephone switching market began steadily to erode, and the company subsequently underwent several bouts of internal restructuring and ownership changes in an attempt to recapture its past competitiveness and technological edge.152 It also sought to shift its R&D focus to data communications equipment and the design and production of integrated circuits.153 These efforts appear to have been too little too late, and GDT has fallen well behind Huawei, Datang, and other domestic and foreign firms in the Chinese telecommunications equipment market.154 The PLA, through the IIE, continues to have a small stake in GDT, but it appears that it is no longer closely involved in its management. Wu is no longer actively involved in

149. Shen, The Chinese Road to High Technology, chap. 4. 150. Guangming Ribao, 15 April 2000. 151. Zeng, Zhujian Weili, 109–17. 152. Liu Qicheng, “Julong Niepan” [The Nirvana of Great Dragon], Tongxin Shijie, 12 August 2002, 10–12. 153. Pyramid Research, Telecommunications Markets in China (Cambridge: The Economist Intelligence Unit, October 1999), 185. 154. Interview with an executive from a Chinese information technology company with close connections to GDT, Hong Kong, 2002. See also Medeiros et al., A New Direction, 223–24.

[218]

Building a Dual-Use Economy

GDT, although the company’s new management is reported to regularly consult with him.155 A telling lesson from the experience of GDT is that without the establishment of a well-defined set of institutional mechanisms that clearly address issues such as intellectual property and ownership rights, standard operating procedures, and other legal, operational, and commercial matters, civilmilitary cooperation in dual-use ventures could be seriously undermined. The problems that GDT has encountered are by no means unique but are common structural deficiencies that have plagued the development of the overall economy.

Zhongxing Corp. ZTE is one of the success stories of China’s defense conversion drive. The firm was originally a research institute based in Shaanxi Province and belonged to the No. 691 Factory, which was affiliated with the now defunct Ministry of Space Industry. In 1985, ZTE decided to move its operations to the Shenzhen Special Economic Zone next to Hong Kong, and was granted wide-ranging autonomy. In a prescient move, the company decided to become involved in telecommunications equipment manufacturing and over the next decade rose to become one of China’s premier telecommunications equipment providers. ZTE provides a diverse range of products, many of which have CMI potential, such as telecommunications switching systems, microchips, mobile network equipment, and power supplies. Since the late 1990s, the company has focused heavily on developing mobile network systems, especially GSM- (Global System Mobile) and CDMA-based (Code Division Multiple Access) technology, and has won major domestic and international contracts to supply leading telecommunications companies such as China Unicom and Qualcomm of the United States.156 Equipment that the company supplies to the military includes high-side and trunk-line optical network systems.157 There are two reasons for ZTE’s growth. First, the company has invested heavily in the development of in-house R&D capabilities. This includes the building of a large and well-qualified cadre of technical specialists

155. Pyramid Research, Telecommunications Markets in China, 11. Wu was named the honorary chairman of GDT’s board of directors in 2001. He continued to be affiliated with IIE and is currently a director of the China National Digital Switching System Engineering and Technology Research Center attached to the institute. 156. Lester Gesteland and Alysha Webb, “Why Zhongxing Telecom is the CDMA Leader in China,” 22 June 2001, www.chinaonline.com. See also Medeiros et al., A New Direction, 221–22. 157. Renmin Ribao, 28 February 2002.

[219]

Fortifying China

and researchers, which reportedly accounted for around 40 percent of its workforce of twenty thousand at the end of 2004 and the reinvestment of around 10 percent of its annual revenues in R&D activities.158 Second, the company has also set up joint venture R&D labs in China with leading Western companies such as Motorola and Texas Instruments. It has more than ten R&D facilities in China, the United States, Sweden, and the Republic of Korea.159 ZTE continues to maintain close corporate and personal ties with the defense industry. The parent company is majority owned by entities affiliated with CASTC. In addition, many of ZTE’s senior managers either have been seconded or concurrently work for CASTC-related companies.160 Defense industry leaders regard ZTE like a parent that is proud of the success of one of its offspring and along with CASTC continues to “vigorously support” the company in its endeavors.161

Datang Telecom Technology & Industry Group Xian-based Datang Telecom Technology & Industry Group is another of China’s top-tier telecommunications equipment and infrastructure providers. The company was originally established in 1993 as a commercial spinoff from the MPT’s Chinese Academy of Telecommunications Technology and initially focused on the development of switching equipment. It subsequently expanded its range of products to include data and optical communications, full-service access network equipment, telecommunications software, microelectronic chips, communication cables, and third-generation wireless communications. While Datang lags well behind Huawei and ZTE in size and commercial success, one feature that distinguishes the firm from its competitors is its prominent role in advancing homegrown technical standards through indigenous innovation. This is most visibly demonstrated in its involvement in the development of TD-SCDMA (time division–synchronous code division multiple access) technology, which is the alternative Chinese third-

158. “Zhongxing Tongxun 20 Zhounian” [Zhongxing Telecommunication’s 20th Anniversary], Tongxin Shijie, 31 January 2005, 11–15. 159. Chun Jiang, “Zhongxing—Zhongguo Tongxin Changye De Xiwang Zhi Xing” [Zhongxing—The Hope and Star of China’s Telecommunications Industry], Zhiliang Yu Kekao Xing [Quality and Reliability] (April 2002), 17–20. 160. ZTE Corporation 2004 Annual Report (Shenzhen: ZTE Corporation, 2005), 24–26, 33–36, and 63; and “Cong 300 Wan Dao 100 Yi” [From 3 Million to 10 Billion], Tongxin Shijie, 28 November 2001, 11–12. 161. “Cong 330 Wan Dao 36 Yi” [From 3.3 Million to 3.6 Billion], Guofang Keji Gongye (August 2001), 15.

[220]

Building a Dual-Use Economy

generation wireless telecom standard to European and U.S. designs.162 Datang Microelectronic Technology Co., a subsidiary, has also been involved in a joint project with Zhejiang University to develop the country’s own versions of system microchips that can be used in communications equipment and computer terminals.163 To pursue this challenging strategy of indigenous innovation, Datang has devoted extensive resources and priority to R&D, although it has been supported in this effort by generous government-backed financial assistance. Many of Datang’s R&D projects are funded by MOST through its 863 program, and the company has access to lucrative lines of credit from leading state-owned banks.164 Datang has also forged research cooperation relationships with civilian and military research institutes and universities as well as foreign firms. Datang has signed agreements, for example, with a number of domestic universities such as Dongnan, Qinghua, and Xian Jiaotong universities.165 Its joint R&D relationships with foreign firms include Siemens, one of Germany’s leading technology outfits, and French telecommunications equipment manufacturer Alcatel to build TD-SCDMA networks.166 The company’s principal contribution to dual-use collaboration has been in the joint development with NDSTU of the country’s first indigenous core network router in 2001. The router, known as the Yinhe Yuheng, was touted as a critical breakthrough for the country’s commercial and military information infrastructure by providing high-speed network switching, high-speed data transfer, distributed systems architecture, and improved security mechanisms.167 The success of the Yinhe Yuheng is said to be comparable to that of the country’s digital controlled switching technology in the early 1990s and would allow “China to autonomously establish a new generation Internet and effectively ensure information security, which has major importance for national defense.”168

162. “Chinese 3G Standard Heralds the Year of the Rooster,” Renmin Ribao, 8 February 2005, online ed., in FBIS, 8 February 2005; and Bruce Einhorn, “Masters of Innovation?” Businessweek, 14 April 2003. 163. “China Develops Powerful Chips for Communications Equipment, Terminals,” Renmin Ribao, 24 September 2004, online English version, http://english.people.com.cn. 164. “8 Billion Yuan Credit Line to Telecom Firm Granted,” Xinhua Domestic Service, 30 November 1998, in FBIS, 1 December 1998. 165. See Medeiros et al., A New Direction, 222. 166. “Alcatel to Invest in Datang for Part of TD-SCDMA Pie,” RCR Wireless News, 15 November 2004. For detailed information on Datang’s foreign and domestic business ventures, see the company’s website, http://www.datang.com. 167. Li and Wang, “Birth of China’s First Core Router.” 168. Li Shufeng, “China’s Core Router Technology Achieves a Huge Breakthrough: China’s New Generation Internet Has Its Own ‘Heart,’ ” Xinhua Domestic Service, 9 August 2001, in FBIS, 20 September 2001.

[221]

Fortifying China

Assessing the Achievements of the High-Technology Companies The four profiled firms owe their success to a combination of factors. First, they were led by competent managers who were able to make and implement their own business decisions without having to seek approval from state supervisors. This allowed these firms to identify and move into a market niche that had appeared in the early 1990s as domestic demand for ICT products and services began to grow rapidly. Second, these companies were able to develop good-quality equipment quickly and at a significantly lower cost than that offered by foreign competitors, although this was initially achieved through illegal copying and reverse engineering of foreign products. Third, these firms were selected as national champions by the central government as well as the military and defense industrial authorities in some cases, which opened the way to a wide range of privileges and incentives, including access to bank loans and state contracts. The PLA and defense industry also identified many of these firms early in their development and began to forge close ties with them. They offered an excellent opportunity for the fledging dual-use base to learn and gain access to commercial innovation, competitive market-based pricing, and state-of-the-art global technological standards.169 These companies have a number of major advantages over their defense industrial counterparts, especially their access to foreign technology through joint ventures and investment overseas, substantial spending on R&D, and the ability to recruit and retain high-caliber scientists and engineers. Consequently, their products, especially ICT-related hardware, have been technologically more advanced, innovative, and capable than comparable output from the defense industry. While these companies are predominantly focused on competing in the commercial marketplace, they have also forged close ties with the defense establishment because of the dual-use nature of their output and activities. Huawei, Datang, ZTE, and GDT have become important equipment suppliers to the PLA and have also participated in joint technology projects with the defense industry. These companies are likely to assume even greater importance as the dual-use economy takes shape because of the priority placed on transforming the PLA into an information-based establishment.

169. Medeiros et al., A New Direction, chap. 5.

[222]

Building a Dual-Use Economy

The Geographical Landscape of Dual Use and CMI A distinguishing feature of the economic transformation of the Chinese economy in the reform era has been the decentralization of decision-making authority from the center to the provinces. In the S&T arena, local governments have been allowed to implement technology policies based on local conditions. This has led to widely divergent patterns in the development of S&T capabilities across the country, especially in the establishment of hightechnology companies and high-technology zones.170 In the forging of the dual-use economy, while the central leadership and COSTIND drew up the blueprint for its strategic development, successful implementation will require active support from local authorities at the provincial and municipal levels. This is because local authorities enjoy considerable power and autonomy in the making and implementation of economic and industrial policies, including within the technology sector.171 In recognition of this imperative, COSTIND and its regional branches since the end of the 1990s have sought to establish working partnerships with local governments to coordinate the development of dual-use capabilities.172 In 1999, COSTIND signed its first cooperation agreement with the Beijing municipal government to establish a high-technology development park and draft policy measures to encourage such activities.173 In 2000 a similar accord was reached with the Hubei provincial government, which called for the opening of a dual-use development zone in Wuhan.174 AVIC 1 signed an agreement with Guizhou Province in 2007 to expand R&D cooperation.175 170. Adam Segal, Digital Dragons: High-Technology Enterprises in China (Ithaca: Cornell University Press, 2003). Segal looked at how local authorities in Beijing, Shanghai, Guangzhou, and Xian supported the development of nongovernmental high-technology companies and found sharp differences. Beijing successfully nurtured a number of competitive entities while the other cities lagged well behind. In addition, high-technology parks have proliferated across the country since the late 1980s as local authorities have sought to emulate the success of Silicon Valley in the United States. See Cong Cao, “Zhongguancun and China’s High-Tech Parks in Transition,” Asian Survey 44, no. 5 (September/October 2004): 647–68. 171. Segal, Digital Dragons, 7–22. 172. COSTIND has offices in nearly all of the country’s provinces and autonomous regions with the exception of Tibet. For a listing of these twenty-nine branch offices and website links to many of them, see COSTIND’s website http://www.costind.gov.cn. 173. Fan Baoyuan, “Jiaqiang Junmin Keji Hezuo Cuijin Shoudu Jingji Fazhan” [Strengthen Civil-Military Technological Cooperation, Promote the Economic Development of the Capital], Junmin Liangyong Jishu Yu Changpin (September 2001), 4–5. 174. Zhang, “Guofang Keji Junmin Liangyong Fazhan Sixing De Bianhua,” 7. 175. Xu Feng, “Guizhou and AVIC I Sign a Strategic Cooperation Framework Agreement,” COSTIND News and Propaganda Center, 15 August 2007, http://www.costind.gov.cn.

[223]

Fortifying China

The commitment of local authorities to take part in the building of the dual-use system varies widely. In areas of the country where defense industrial activity is limited, local official support for fostering dual-use work has generally been lukewarm.176 This has been the case for many coastal provinces in eastern and southern China. By contrast, localities that have heavy concentrations of defense industrial facilities within their jurisdictions have been more willing to participate in the dual-use process. Local authorities in western China have been especially eager to embrace the rise of the dual-use economy because so many of the country’s defense research, development, testing, and production facilities are located in this part of the country.177 This stems from the legacy of the Third Line policy in the 1960s and 1970s in which defense industrialization was concentrated in the interior provinces to reduce the threat from external attack. Large portions of the defense electronics apparatus, for example, are based in Sichuan and Shanxi and more than two-thirds of the aviation industry’s production output is located in Sichuan, Shaanxi, Guizhou, Hunan, and Hubei.178 In 2001, the ratio of military-industrial output as a percentage of gross provincial industrial production value was as high as 40 percent in Guizhou, 28 percent in Sichuan, and 25 percent in Chongqing.179 A number of provincial and municipal governments have taken the initiative to exploit this clustering of defense industrial capabilities within their local economies and have promoted themselves as centers of dual-use innovation in order to attract government, military, and commercial investment and technology transfers. Mianyang in Sichuan has been at the forefront of this effort to become the country’s preeminent city for dual use and technological innovation. In the reform era, Mianyang has successfully transformed itself from a secretive military-industrial city into a high-technology

176. Interviews with defense industry officials in Guangzhou, May 1994. See also David Bachman, “Defense Industralization in Guangdong,” China Quarterly 166 ( June 2001): 273–304. 177. For example, there are twenty-four major bases for military-industrial R&D. Wang Sui, “New China: The Growing Giant Dragon of the Orient,” Xinhua Hong Kong Service, 25 August 1999, in FBIS, 25 August 1999. See also Zhu Songshan and Sun Donghao, “Xibu Dakaifa Yu Junshi Jingji Jianshe De Xietiao Fazhan” [Coordination of the Development of Western China and Military Economic Construction], Xian Zhengzhi Xueyuan Xuebao [Journal of the Xian Politics Institute] (December 2000), 81–84. 178. See “’Sige Jianchi’ Zai Jiceng: Laizi Shanxi Sheng Guofang Keji Gongye Xitong De Baodao” [The Basic Level of “The Four Persists”: Reporting on the Defense S&T System in Shanxi Province], Guofang Keji Gongye (October 2005), 16–35; and Liu Lei, Wan Difang, and Liang Lingli, “Junshi Gongye De Jishu Waiyi Yu Zhongxibu Dichu Jishu Jinran” [Technology Spillovers and Technological Progress of the Military Industry in China’s Central and Western Regions], Zhongguo Ruan Kexue [China Soft Sciences], ( July 2004), 124. 179. Zeng Peiyan, chief ed., 2003 Guojia Xibu Kaifa Baogao [2003 Report of the Opening Up of the West] (Beijing: Zhongguo Shuili Shuidian Chubanshe, 2004), 163–64.

[224]

Building a Dual-Use Economy

hub that is able to undertake civil, military, and dual-use technological activities.180 To promote Mianyang’s involvement in dual-use activities, COSTIND and MOST approved the establishment of the country’s first national-level military-to-civil S&T development zone in the city in 2002.181 While the principal focus of the zone is on the commercial exploitation of spin-off activities, there is also considerable interest in promoting civil-to-military spin-on benefits, especially in areas such as defense electronics, optical technology, composite materials and space, and aviation-related technology.182 Moreover, some of the country’s largest domestic electronics companies, including former defense enterprises like Sichuan Changhong Corp. and Sichuan Jiuzhou Corp., are headquartered in Mianyang. There are also eighteen key defense R&D institutes involved in engineering physics, aerodynamic research, and gas turbine development, and an assortment of universities and research academies involved in high-technology R&D. The city claimed in 2003 that it had more than one hundred thousand scientists and engineers.183 Another important dual-use center in western China is Chongqing, which has been an important traditional manufacturing center for the defense industry, especially in the ordnance sector. Chongqing has been seeking to capitalize on these attributes to become a hub for dual-use R&D and production.184 The municipal government and COSTIND host a dual-use high-technology exhibition annually to showcase the civil-

180. See Wu Yingjian, “Cuijin Jishu Chuangxin, Jianshe Mianyang Kejicheng” [Promote Technological Innovation, Build Mianyang Science and Technology City], Zhongguo Keji Changye [Science and Technology Industry of China] (May 2003), 55–56; and Zhongguo Keji Fazhan Zhanlue Yanjiu Xiaozu [Research Group on Chinese Science & Technology Development and Strategy], Zhongguo Keji Fazhan Yanjiu Baogao 2004–2005: Junmin Ronghe Yu Guojia Chuangxin Tixi Jianshe [Annual Report of Science & Technology Development of China 2004–2005: The Construction of Civil-Military Integration and National Innovation System] (Beijing: Zhishi Changquan Chubanshe, 2005), 140–48. 181. Liu Xirong and Gan Zhiyu, “Junmin Liangyong Gao Jishu Yuanchu De Gainian He Tedian” [Introduction and Special Features of the Civil-Military Dual-Use High-Technology Park], Guofang Keji Gongye (April 2003), 31–33. 182. There have been calls to establish other defense S&T industrial parks besides the one in Mianyang to facilitate both defense and dual-use technological innovation. See Zhao Jiangeng, Chen Guang, and Wang Yongjie, “Guanyu Chuanjian Guofang Keji Gongyeyuan De Sikao” [Thinking about the Establishment of Defense Industrial S&T Parks], Keji Cuijin Jinbu Duice [Science and Technology Progress and Policy] ( January 2004), 23–25. 183. Wu, “Cuijin Jishu Chuangxin, Jianshe Mianyang Kejicheng,” 55–56. 184. Liu Mingming, “Chongqing Shi Yu Shida Jungong Jituan Jiang Dazao ‘Junzhuanmin’ Jidi” [Chongqing and the Ten Major Defense Conglomerates Create a “Defense Conversion Base], Guangming Ribao, 10 March 2003; and Dai Zhenlong, chief ed., Chongqing Junzhuanmin Yu Diqu Jingji Fazhan [Chongqing’s Defense Conversion and the Development of the Regional Economy] (Chongqing: Chongqing Chubanshe, 1995).

[225]

Fortifying China

military output of local and foreign firms in Chongqing and other parts of western China.185 Other regional clusters of civil-military-industrial and technological innovation have also emerged elsewhere. Beijing has been an important hub for defense technology R&D, and it is seeking to marry these activities with its dynamic high-technology sector. The capital is estimated to have approximately eighty-six defense R&D institutes as well as two technological and aerospace universities belonging to COSTIND.186 These research institutions and other defense industrial entities have been actively seeking to develop joint ventures and other partnerships with civilian technology companies concentrated in the city’s high-technology zones, such as the Zhongguancun “Silicon Valley.”187 Shenzhen in Guangdong Province is another emerging dual-use ICT center as the headquarters for both Huawei Technologies and ZTE. In central China, Xian has been an important center for the country’s defense electronics, aerospace, and space programs and is the location for dozens of defense R&D outfits and manufacturing enterprises, including Xian Aircraft Corp. These entities employ more than 50 percent of Shaanxi’s workforce of middle- and senior-level scientists and engineers.188 In Changsha, the capital of Hunan province, NDSTU acts as a catalyst for civil-military technological activity. The university had reportedly entered into cooperative relationships with more than 130 local companies by the end of the 1990s.189 While China’s economic development has strongly favored the coastal provinces to the detriment of land-locked central and western regions, the building of the dual-use economy is more evenly balanced across the country. Indeed, many areas that have been left behind economically because of their geographical isolation or heavy burden of supporting lossmaking state-owned enterprises have looked to the defense industrial and dual-use bases as a source of economic renewal. This has especially been the case for provinces in the northeastern rust belt such as Heilongjiang, Liaoning, and Jilin, as well as their southwestern counterparts like Sichuan and Guizhou.190

185. Details of the exhibition can be found on the website of China Telecomworld News at http://www.21ctn.com. 186. Fan, “Jiaqiang Junmin Keji Hezuo Cuijin Shoudu Jingji Fazhan,” 4. 187. “Shida Jungong Jituan Jiameng ‘Zhongguo Guigu’ ” [Ten Major Military-Industrial Conglomerates Establish a “China Silicon Valley” Alliance], Jiefangjun Bao, 8 February 2002. 188. Sha Nansheng et al., “Woguo Junmin Liangyong Jishu.” 189. “NDSTU and Changsha New High-Technology Enterprises Cooperate,” Tongxin Changyebao [Communications Weekly], 3 May 2000, 15. 190. See “Yu Zonglin Zai Dongbei Jungong Xitong Guanche Luoshi Dongbei Lao Gongye Jidi Zhenxing Zhanlue Zuotanhui Jianghua Tiyao” [Summary of Yu Zonglin’s Speech at a Discussion Meeting of the Northeast Military-Industrial System on the Strategy for Practically

[226]

Building a Dual-Use Economy

By promoting a regional approach to the development of the dual-use economy, the defense industrial bureaucracy in Beijing has been able to win crucial political and economic backing of local authorities in many parts of the country, and this has helped to build a strong national base of leadership support for the dual-use strategy. Such support is essential in ensuring continued high-level leadership attention and priority for dualuse programs. Moreover, for the first time in its post-1949 history, the defense economy is able to fully harness the technological and industrial benefits of the civilian economy without the geographical limitations that it suffered during the Maoist and Dengist eras, when thousands of defense factories and research institutes were moved to inaccessible locations. By overcoming the geographical and functional compartmentalization that seriously impeded the development of the defense economy in the prereform era, the dual-use economy in China is in an advantageous position to develop into a leading technological and industrial powerhouse. But a critical question is whether the Chinese dual-use economy can narrow the gap and catch up with its more advanced industrial counterparts in the West.

The Chinese Approach in Comparative Perspective China is a relative latecomer to the building of a dual-use economy and is carefully scrutinizing how other countries have tackled this complex challenge to help inform its own policymaking in this area. The United States and Japan have among the most extensive track records and the most relevant insights to offer. The United States has been engaged in civil-military technological and industrial initiatives since the early 1990s, while Japan has forged a highly successful and competitive dual-use economy since the 1950s. At issue is how China’s intended technological trajectory compares with the dual-use paths taken by these two countries, and whether their experiences offer insights as to the likely success and shape of the future Chinese Yujun Yumin system. Since the end of the Second World War, the United States and Japan have taken fundamentally different approaches in managing the relationship between their civilian and defense economies. This stems primarily from the sharply different premises and economic and strategic circumstances on which their technological and industrial bases were built during

Carrying Out the Rejuvenation of the Northeast’s Old Industrial Bases], 16 December 2003, http://www.costind.gov.cn.

[227]

Fortifying China

the cold war.191 The U.S. military-industrial complex rivaled the civilian economy in strategic importance, access to resources, and technological sophistication. In science and technology R&D, the overwhelming focus was on serving military needs.192 In contrast, Japan subordinated its once world-class defense economy to the civilian economy as part of an effort to expunge its wartime militarist legacy. In the early 1990s, defense-related activity was estimated to account for less than 1 percent of total annual industrial output, on a par with the output of the country’s sushi industry. As Richard Samuels has succinctly pointed out, in the United States, “science and technology became stepchildren to the military. In Japan they became godparents.”193 The U.S. approach to pursuing dual-use and CMI initiatives had to take into account a number of distinctive features of the relationship between the civil and military technological and industrial sectors. The defense establishment was a major source of R&D funding for the country’s S&T community. At the height of the Reagan-era defense buildup in the mid1980s, for example, defense-related spending on R&D accounted for around two-thirds of the country’s total annual R&D expenditures. While this figure steadily declined from the early 1990s, defense R&D was still around 50 percent of total federal R&D spending at the beginning of the twentyfirst century.194 The U.S. defense industrial and civilian economic spheres were segregated from each other, with only limited overlap of their activities. The barriers to cooperation and interaction between these two sectors were principally in the form of the Department of Defense’s (DoD) highly complex and formidable weapons acquisition system, a tough military specifications and standards regime, and the implementation of a rigid secrecy

191. For the Japanese case, see Richard J. Samuels, Rich Nation, Strong Army: National Security and the Technological Transformation of Japan (Ithaca: Cornell University Press, 1994) and Steven Vogel, “The Power behind “Spin-Ons”: The Military Implications of Japan’s Commercial Technology,” in Wayne Sandholtz, Michael Borrus, John Zysman, Ken Conca, Jay Stowsky, Steven Vogel, and Steve Weber, The Highest Stakes: The Economic Foundations of the Next Security System (New York: Oxford University Press, 1992). For the United States, see Alic et al., Beyond Spinoff; and United States Congress, Office of Technology Assessment, Assessing the Potential for Civil-Military Integration: Technologies, Processes and Practices (Washington D.C.: United States Government Printing Office, 1994). 192. See John Tirman, ed., The Militarization of High Technology (Cambridge: Ballinger, 1984); Herbert Foerstel, Secret Science: Federal Control of American Science and Technology (Westport, Conn.: Praeger, 1993); and Jeffrey K. Stine, A History of Science Policy in the United States, 1940–1985: Science Policy Background Report No. 1 (Washington, D.C.: U.S. GPO, 1986). 193. Samuels, Rich Nation, Strong Army, 319. 194. Elisa Eiseman, Kei Koizumi, and Donna Fossum, Federal Investment in R&D (Santa Monica: RAND Corp., 2002), 1–15.

[228]

Building a Dual-Use Economy

culture that severely curtailed information and technology flows and diffusion.195 The Pentagon assumed a dominant role in micromanaging virtually all aspects of the defense industry, from being the industry’s regulator to acting as its banker and buyer.196 Defense contractors and military end users had no alternative but to go through the Pentagon in their business transactions. Throughout the cold war, the Pentagon had scant interest in dual use or spin-on as its overriding mission was to prepare against all-out nuclear and conventional war against the Soviet Union.197 Since the early 1990s, the U.S. government has sought to tackle these barriers against dual use and spin-on by implementing a combination of initiatives ranging from structural reform of the defense industry to the setting up of programs to fund spin-on projects. Key initiatives have included the TRP and DUAP, which specifically sponsored dual-use projects in areas such as flat panel displays, high-density data storage devices, and military medical equipment.198 Acquisition reform and changes to the military specification regime have also been important priorities, with the focus on the introduction of commercial-like business practices.199 This adoption of market-based mechanisms is also intended to reduce the role of the government bureaucracy. Moreover, the U.S. government has allowed a far-reaching consolidation of leading defense contractors since the 1990s.200 In the first stage of this mergers and acquisition cycle, the focus was on domestic companies, with the number of leading defense conglomerates shrinking from around fifteen in 1993 to just four by the late 1990s.201 In the next stage, from the late 1990s, attention switched to the international arena with the consolidation of major U.S., UK, and European defense firms. These remaining defense contractors, such as Boeing, Northrop Grumman, and Honeywell, also have

195. OTA, Assessing the Potential for Civil-Military Integration, 144–47. 196. Jacques Gansler, Defense Conversion: Transforming the Arsenal of Democracy (Cambridge: MIT Press, 1995), 24–25. 197. See Ann Markusen and Joel Yudkin, Dismantling the Cold War Economy (New York: Basic Books, 1992); and Seymour Melman, ed., The War Economy of the United States (New York: St. Martin’s, 1971). 198. Stowsky, “The History and Politics of the Pentagon’s Dual-Use Strategy,” 139–51. 199. Lorell et al., Cheaper, Faster, Better? 13–44. 200. Ann R. Markusen and Sean S. Costigan, “The Military Industrial Challenge,” in Markusen and Costigan, Arming the Future, 6–12; John Battilega et al., “Transformation in Global Defense Markets and Industries: Implications for the Future of Warfare,” 2002, http:// www.cia.gov/nic/pubs/research; and Eugene Gholz and Harvey M. Sapolsky, “Restructuring the U.S. Defense Industry,” International Security 24, no. 3 (Winter 1999/2000): 5–51. 201. See Michael Oden, “Cashing In, Cashing Out, and Converting: Restructuring of the Defense Industrial Base in the 1990s,” in Markusen and Costigan, Arming the Future, chap. 3.

[229]

Fortifying China

extensive civilian operations that provide ample opportunity for joint civilmilitary cooperation.202 The U.S. experience has been instructive for Chinese defense industrial policymakers who share similar predicaments such as the rigid segregation of the civilian and military sectors and the overreaching presence of the government bureaucracy. Chinese analysts have picked up important lessons from studying the U.S. process about how to tackle the obstacles to civil military integration. One of the most revealing insights is the need to overhaul the acquisition and military specifications systems to allow greater participation by civilian firms. One of the first areas that COSTIND has addressed in establishing the regulatory framework for the Yujun Yumin system is the reform of the acquisitions regime. While the U.S. case provides some specific policy prescriptions, some Chinese analysts argue that Japan offers a more relevant model. Chinese studies of the Japanese defense economy point out that since the end of the Second World War, Japan has systematically pursued a policy to forge a Yujun Yumin-style dual-use base in which the country’s defense technological and industrial capabilities have been deeply embedded in the country’s civilian economy.203 The Japanese approach to the relationship between the civilian and military economies is derived from its thinking on technology and national security. According to Samuels, this is based on a coherent set of beliefs that revolve around three concepts. The first is the importance of autonomy, which has been a constant theme throughout the course of the country’s industrialization. The indigenization of defense production, or Kokusanka, has been at the heart of Japan’s defense industrial policies in the post–World War II era.204 The second notion is of diffusion, in which technology is regarded as a “quasi-public good to be developed and distributed through

202. In 2004, nondefense revenues accounted for 42 percent of Boeing’s total revenues, 26 percent of Northrop Grumman’s revenues, 22 percent of General Dynamics’ revenues, and 60 percent of Honeywell’s revenues. These firms were, respectively, the second, third, fifth, and sixth largest U.S. defense contractors. See “Defense News Top 100 2005,” Defense News (2005), http://www.defensenews.com. 203. Wang Hongwei, “’Yujun Yumin’: Riben Jungongye Fazhan Moshi” [“Yujun Yumin”: The Development Model of Japan’s Military Industry], Kexue Juece [Decision-Making Magazine], May 2004, 24–29; Zhang Qiong, “Zhanhou Riben Guofang Keji Fazhan Zhonyue Yanjin Fenxi” [An Analysis of the Evolutionary Strategy of Japan’s Defense Science and Technology Since World War II], Harbin Gongye Daxue Xuebao (Shehui Kexue Ban) [Journal of Harbin Institute of Technology (Social Sciences ed.)] ( June 2000), 92–96; and Kong Xiangfu, “Riben De Guofang Changye” [Japan’s Defense Industry], Xiandai Riben Jingji [Contemporary Economy of Japan] (March 2003), 41–45. 204. See Michael J. Green, Arming Japan (New York: Columbia University Press, 1995).

[230]

Building a Dual-Use Economy

elaborate networks of producers and bureaucracies.”205 This diffusion occurs “horizontally between and among prime contractors; vertically, among primes, subcontractors and suppliers; and across military and commercial applications, internally within highly diversified firms at the prime contractor level, and within highly flexible firms at the supplier level.”206 The third belief is in nurturing, which is the effort to support and sustain companies so that they can indigenize and diffuse technology.207 Under state direction, companies are provided the necessary resources and work so they can become stable pillars of the industrial base. Competition is restrained, and government contracts are shared among a small group of carefully selected firms. This Japanese techno-nationalist ideology has helped to shape an understated but effective dual-use economy. Chinese analysts argue that the apparently seamless integration between the civilian and military-industrial sectors allows the Japanese economy to be easily harnessed for defense mobilization if required. This is because military-industrial production capacity lies almost entirely within the civilian sphere. More than two thousand Japanese civilian companies are estimated to be involved in military-related work, of which only a few dozen are dedicated defense outfits.208 At the enterprise level, Japanese companies pursue an integrated approach to civilian and defense R&D and production. There is an extensive two-way flow of knowledge, business practices, and technology between civilian and defense units, which is in sharp contrast to the rigid separation that is the norm elsewhere. Companies undertake defense-related R&D with the intention of using the results obtained for both military and civilian commercial applications. This practice is encouraged by the Japanese Defense Agency’s ( JDA) Technical Research and Development Institute (TRDI), which is the government’s principal arm overseeing defense R&D.209 As Michael Chinworth points out, “a consistent criterion for the selection and nurturing of technologies [by the TDRI] has been the impact of any given technology on the commercial sector.”210 As a quid pro quo, the JDA has relied heavily on the advanced technological capabilities of the private sector to support defense R&D. The 1996 Defense White Paper pointed out that “the Defense Agency has long conducted R&D by positively making use of this private sector technological 205. Richard Samuels, “Japan as a Technological Superpower,” ( JPRI Working Paper No. 15, January 1996), 2, http://www.jpri.org/publications/workingpapers. 206. Samuels, Rich Nation, Strong Army, 279. 207. Ibid., 301–9. 208. Wang Shanyuan, “Dui Yujun Yumin Moshi De Sikao” [Thinking on the Yujun Yumin Model], Hangtian Gongye Guanli ( January 2005), 16–17. 209. The Japanese Defense Agency was upgraded into a ministry in 2007. 210. Michael W. Chinworth, Inside Japan’s Defense (Washington, D.C.: Brassey’s, 1992), 43.

[231]

Fortifying China

capability. Given the growing share of advanced dual-use technologies in defense equipment, such superior private-sector technologies constitute a strong base in conducting the Defense Agency’s equipment R&D.”211 This underscores the argument that the “Japanese have little interest in militarily unique technologies” and their central focus in R&D has been in the dual-use realm.212 This interweaving of spin-on and spin-off interests and activities between the Japanese civilian and defense sectors has meant that the principal barriers segregating the defense industry from the rest of the economy that exist in other countries, such as the acquisitions and military specifications regimes, are ineffective and porous in Japan.213 A feature of this cozy relationship between the JDA and commercial firms is that the vast majority of procurement contracts are awarded without competition. Moreover, the JDA and other government agencies rarely monitor how contracts are carried out and how funds are spent, allowing firms to divert spending into commercial activities.214 This lax oversight has led to serious financial fraud and other abuses of the system. The emerging Chinese approach to the forging of a dual-use economy has many important similarities with the path that Japan has followed. Many of the techno-nationalist principles behind Chinese leadership thinking on civil-military technological development and innovation are the same as those embedded in the Japanese ideology of “Rich Nation, Strong Army,” such as the emphasis on indigenization, diffusion, and nurturing. However, the current Chinese focus is more on the military dimensions—harnessing the country’s capabilities for defense modernization—than on the commercial aspects of contemporary Japanese techno-nationalism. The Japanese civil-military system has some serious drawbacks, such as the high costs and prolonged time periods required to develop and produce military equipment. But the Chinese regard the strengths derived from integrated civil-military technological and industrial coordination and cooperation as outweighing these limitations. Chinese analysts are especially interested in learning how Japan has forged dual-use synergies in areas that are of high priority for the Chinese Yujun Yumin system, such as the ICT sector.215 211. Japanese Defense Agency, Defense of Japan 1996 (Tokyo: Japanese Defense Agency, 1996), chap. 5, sec. 3, http://www.jda.go.jp. 212. U.S. Congress, Office of Technology Assessment, Other Approaches to Civil-Military Integration: The Chinese and Japanese Arms Industries (Washington, D.C.: U.S. Government Printing Office, 1995), 31–32. 213. Ibid., 27–29. 214. Chinworth, Inside Japan’s Defense, 30 – 66. 215. Li Zhongkao and Jiang Shaoe, “Riben Minjian Qiye Fazhan Junyong Gao Jishu De Qianli Pingjie” [An Assessment of the Potential of Japanese Private Enterprises to Develop

[232]

Building a Dual-Use Economy

The long-term goal for China is to create an economy with the civilmilitary technological synergies modeled on Japan but with a defenseindustrial base on a scale comparable to that of the United States. This is a highly complex task, but if China is able to successfully meet this objective, its dual-use economy will become a formidable global strategic competitor. A report by the U.S. National Intelligence Council on the global defense market and defense industries in 2001 concluded that nations that are most effective in linking their commercial and defense industries are more likely to remain militarily powerful over the long term.216 China’s defense industrial policymakers and enterprises firmly concur with this assessment. The building of the Chinese dual-use economy is in its infancy, and the task of laying the foundation stones of this ambitious new system will require the full attention and active support of the country’s leadership over the course of the next couple of decades. A key task of the medium and longterm S&T development (2006–20) plan is the forging of the Yujun Yumin system.217 This future dual-use economy will consist of two distinct but connected parts. One is a new high-technology-focused base that is embedded within the civilian economy. The bulk of the entities that will be linked into this new apparatus will be nongovernmental civilian companies engaged in industries such as ICT, nanotechnology, and electronics. They will include R&D-intensive enterprises that are leaders in product innovation as well as component subcontractors. The other half of the dual-use economy will be made up of legacy state-owned defense industrial entities that are seeking to transform themselves into more nimble, new technology outfits able to meet the information warfare needs of the military. The performance and shape of the dual-use economy will depend to a large extent on how two critical tasks are implemented. The first is the formulation of rules, routines, practices, and laws that will define the operating framework and guide the activities of the actors involved in this system. Will the focus be, for example, on transparent, market-based rather than administrative regulations, rules that seek to promote interaction and openness, and the adoption of commercially accepted business practices and standards? Many of these concepts and practices are alien to the Chinese

Military-Use High Technology], Zhongguo Gaoxin Jishu Qiye [China High-Technology Enterprises] (January 1996), 54–59. 216. Transformation in Global Defense Markets and Industries: Implications for the Future of Warfare, ed. John Battilega, et al., http://www.cia.gov/nic, 2002. 217. “Wen Zongli Shitiao Zhidao Fangzhen, Yunniang Zhongde Zhongchangqi Keji Jihua” [Premier Wen Holds Deliberations on the Ten Guiding Principles of the Medium- and LongTerm Science and Technology Plan], Liaowang, 27 March 2004.

[233]

Fortifying China

defense economy, and its willingness to adapt and conform to a more open system will significantly determine how well the Yujun Yumin system will be able to initiate and diffuse innovation. Because major portions of the dual-use economy will be built on the existing defense industrial apparatus, the second crucial issue is how far and how fast the restructuring of the current defense economy will take place. This restructuring will include the overhaul of key institutional arrangements such as the acquisition and standards systems as well as organizational reforms to the management and enterprise system.

[234]

[6] Can the Chinese Defense Economy Catch Up?

After decades in the doldrums, the Chinese defense economy is on the rebound. Years of painful restructuring, intensive state investment, infusions of Russian know-how and arms, and renewed leadership support for a robust homegrown defense technology and industrial base have contributed to the development of an expanding arsenal of modern weapons, advanced technology, and an influx of new scientific talent. Some of the accomplishments represent major technological breakthroughs that could allow China, within the next two decades, to begin to challenge the military preponderance enjoyed by the United States from the high seas to outer space. A vivid demonstration of China’s technological potential took place in January 2007 when the PLA carried out a successful antisatellite (ASAT) test in which a ground-based ballistic missile blew up an aging navigation satellite orbiting more than five hundred miles in space.1 The strategic impact was immediate and profound. Several senior U.S. defense officials, led by the air force top brass, warned that the Chinese move posed a direct challenge to the U.S. dominance of outer space. Air Force Chief of Staff General Michael Moseley called the test “a strategically dislocating event” that was “on a par with the October 1957 Sputnik launch,” which ignited an intense and prolonged military technological and space race between the United

1. Ashley J. Tellis, “China’s Military Space Strategy,” Survival 49, no. 3 (Autumn 2007): 41–72; and Craig Covault, “Space Control,” Aviation Week and Space Technology, 21 January 2007, 24–25.

[235]

Fortifying China

States and the Soviet Union.2 Air Force Secretary Michael Wynne argued that “in that one single act, China demonstrated the vulnerability of our nation’s space assets. We can no longer think the same way about how wars will be fought in the future.”3 A few voices have though urged caution and sought to downplay the significance of the Chinese test. General James Cartwright, head of the U.S. Strategic Command, said that the test “is not in my mind the defining moment for our relationship.”4 Overall, however, the U.S. military establishment appears to be preparing the policy and threat justifications to gear up for a costly arms race in space against a rising China. While the ASAT test was an uncharacteristically bold display of China’s growing defense technological maturity, to what extent does it represent a genuine and sustainable leap forward in the development of the Chinese defense economy? Does it mark China’s coming out as a world-class military technological power, or is it, like the nuclear and space programs during the 1960s, simply a onetime achievement of a privileged sector that far exceeds the competence of the rest of the defense economy? This chapter examines the key issues arising from the concerted efforts to transform the Chinese defense economy. What is the ideological underpinning for the Chinese approach to technological catching up, and how do the country’s S&T development plans reflect this? What is the nature of the debate over China’s strategies for catching up with the top tier of militaryindustrial states within two decades? What are the possible paths of development that China will take in this quest to become a defense technological champion? What important conditions are paving the way for technological catching up, especially at the sectoral level? An investigation of the Chinese space industry will address this question. What are the strategic implications for the United States of the transformation of China’s defense economy, and how sustainable is its current policy of seeking to contain China’s defense military and technological modernization through a rigid embargo regime?

2. “China Poses Risk to Key U.S. Satellites: Top General,” Reuters, 11 April 2007, http:// www.reuters.com/article/scienceNews. One of the early consequences of the Sputnik launch was the establishment of the U.S. Defense Advanced Research Projects Agency (DARPA), which has played a central role in the development of the U.S. defense technological innovation system. See David Talbot, “DARPA’s Disruptive Technologies,” MIT Technology Review (October 2001). 3. Michael Wynne, “Space: The Ultimate High Ground Creating Strategic and Tactical Conditions for Victory,” High Frontier, August 2007, 4, http://www.afspc.af.mil/shared/ media/document. 4. David Fulghum and Amy Butler, “Reassessing Space: U.S. Analysts Sort through the Fallout from China’s Satellite Shoot-Down,” Aviation Week and Space Technology, 30 April 2007, 27.

[236]

Can the Chinese Defense Economy Catch Up?

The Techno-Nationalist Underpinning of the Catch-Up Approach A techno-nationalist perspective that views technological development as central to the country’s national security and economic prosperity shapes the Chinese approach to technological catching up in the defense and strategic sectors of its economy. While interpretations of this ideology vary widely and this doctrine has also undergone significant evolution as the country integrates into the global economy, the defense industrial establishment has long advocated the overriding importance of autonomy, the role of the state, and the need to catch up technologically with the world’s front-runners.5 The roots of this techno-nationalist ideology go back to the second half of the nineteenth century, when the survival of the Late Qing Dynasty came under acute threat from domestic rebellion and external encroachment from advanced foreign military powers. China’s defeat at the hands of the British and French in the First and Second Opium Wars between 1839 and 1860, coupled with domestic revolts, seriously weakened the authority of the imperial court and was a serious humiliation for the military establishment. This led to the emergence of reformers like Li Hongzhang, Zeng Guofan, and Zuo Zongtang, who advocated turning to the West for access to military technology, advanced industrial capabilities, and knowledge of modern army building.6 Modern regional arsenals were established that were able to manufacture arms—first small arms and munitions but subsequently larger equipment such as warships. This represented a revolution in military affairs for the Qing state as it sought to transform the ramshackle agrarian-era military establishment into an industrial-age war-fighting outfit.7 This wellintentioned effort ultimately floundered because of dwindling financial and political support for these costly modernization initiatives, military defeats at the hands of the Japanese, as well as entrenched opposition from conservative neo-Confucian bureaucrats deeply suspicious of the importation of foreign knowledge into China.

5. See Barry Naughton and Adam Segal, “China in Search of a Workable Model: Technology Development in the New Millennium,” in Crisis and Innovation in Asian Technology, ed. William W. Keller and Richard Samuels, 160–86 (Cambridge: Cambridge University Press, 2002). 6. See Benjamin A. Elman, A Cultural History of Modern Science in China (Cambridge, Mass.: Harvard University Press, 2006), chap. 6; and Thomas Kennedy, The Arms of Kiangnan: Modernization in the Chinese Ordnance Industry, 1860–1895 (Boulder, Colo.: Westview Press, 1978), 149–60. 7. Richard Horowitz, “Beyond the Marble Boat: The Transformation of the Chinese Military, 1850–1911,” in A Military History of China, ed. David A. Graff and Robin Higham (Boulder, Colo.: Westview Press, 2002), 153–75.

[237]

Fortifying China

An even more powerful and contemporary source of influence in shaping current Chinese techno-nationalist impulses derives from the “Two Bombs, One Satellite,” or Liangdan Yixing ideology.8 The phrase refers to the defense economy’s crowning success in the development of nuclear weapons and space capabilities in the 1960s and 1970s. This accomplishment helped inspire not only the long-term evolution of the defense economy but also the development of strategic sectors of the country’s economy that are critical for its national security. Evan Feigenbaum points out the key features of the Liangdan Yixing doctrine, which he terms “technonationalism with Chinese characteristics”:9 • Technological development is strategic and plays a major role in de-

• • • •

termining the competitiveness and standing of China in the global military and economic balance, or what Chinese strategists term “comprehensive national strength.”10 The state must invest in critical technological sectors because of the high risks and long time cycles involved in high-technology R&D. The state should pursue import-substituting indigenization. The state must nurture an indigenous capacity to innovate. Technology diffusion, whether through spin-offs or spin-ons, should be a central long-term goal.

Another important characteristic of Liangdan Yixing is its overwhelming emphasis on big science, especially the undertaking of large-scale and highly complex projects. The nuclear weapons, missile, space, and nuclear submarine projects in the 1960s and 1970s required a massive and sustained mobilization effort by the state to provide the necessary technological, financial, and engineering resources.

8. See Liu Yanqiong, “Liangdan Yixing Gongcheng De Chenggong Jingyan Yu Qishi” [The Experience and Enlightenment from the Success of the Two Bombs and One Satellite Project] Master’s thesis, Guofang Keji Daxue [National Defense Science and Technology University], 2002; and Dong Sheng, Tiandi Song: Liangdan Yixing Neimu [The Eulogy of Heaven and Earth: The Inside Story of “Two Bombs, One Satellite”] (Beijing: Xinhua Chubanshe, 2000). 9. Evan Feigenbaum, “Soldiers, Weapons and Chinese Development Strategy: The Mao Era Military in China’s Economic and Institutional Debate,” China Quarterly, no. 158 ( June 1999): 285–313. Feigenbaum further points out that closely related to this integrative economic-security developmental approach is the importance of organizational flexibility. 10. Comprehensive national strength is used by Chinese strategists to measure the overall conditions and strengths of the country and includes economic, military, social, S&T, and resource factors. A country’s military technological prowess and its overall level of S&T development are considered essential factors in determining its national comprehensive strength. See Michael Pillsbury, China Debates the Future Security Environment (Washington, D.C.: National Defense University Press, 2000), chap. 5.

[238]

Can the Chinese Defense Economy Catch Up?

Another notable feature of this military techno-nationalist ideology is its pragmatic nature. Chinese decisionmakers tend to be instrumentalist in how they view and make use of nationalism, which is an imported concept.11 Consequently, the country’s technological backwardness has forced the defense economy to pursue a highly opportunistic strategy focused on seeking technology imports to fill gaps that the domestic base cannot meet. While the long-term commitment to self-reliance remains, the need to acquire foreign technology and know-how in the near to medium term is likely to intensify in order to close the technology gap. As Barry Naughton and Adam Segal have argued, this type of techno-nationalist thinking represents “purely adaptive, opportunistic policies of ‘muddling through.’ ”12 At the end of the 1990s, the Chinese authorities sought to revive the Liangdan Yixing ideology as a role model and source of inspiration to help guide the embarkation of the new great leap forward in science and technology. At a conference in 1999 to laud the Liangdan Yixing “spirit,” Jiang Zemin said that the core elements that defined this ideology could be summed up in a twenty-four-character statement: Reai Zuguo (warmly love your country), Wushi Fengxian (give selflessly), Zili Gengsheng (renewal through self-reliance), Jianku Fendou (hard and arduous struggle), Dali Xietong (vigorously promote coordination and cooperation), and Yongyu Dengpan (courageously climb up).13 The key principles outlined in this slogan were nationalism, indigenization, diffusion, and catching up. The Liangdan Yixing ideology returned to center stage as the scientific and policymaking communities began to discuss the future long-term direction of China’s S&T development. These deliberations assumed official importance in 2003 when the central authorities began to seek the input of thousands of scientists, engineers, corporate executives, and a small number of Chinese-born foreign scholars in order to draft the country’s latest Medium- and Long-Term Science and Technology Development Plan (MLP).14 This drafting and consultative process stretched over three years to 2006, and the invited experts examined twenty areas deemed vital to China’s S&T competitiveness. They included agricultural S&T, basic science,

11. As Suisheng Zhao has pointed out, Chinese leaders use nationalism as a means to pursue their own interests. See Suisheng Zhao, “Chinese Nationalism and its International Orientations,” Political Science Quarterly 115, no. 1 (2000): 1–33. 12. Naughton and Segal, “China in Search of a Workable Model,” 186. 13. Hu Lihua and Liu Zhihong, Jiang Zemin Guofang Keji Gongye Jianshe Sixiang Yanjiu [Research into the Thinking of Jiang Zemin on the Building of the Defense Science and Technology Industry] (Beijing: Dianzi Gongye Chubanshe, 2005), 363–88. 14. State Council, “Guidelines for the Medium- and Long-Term National Science and Technology Development Program,” Xinhua Domestic Service, 16 June 2006, in Foreign Broadcast Information Service (FBIS), 16 June 2006.

[239]

Fortifying China

S&T popularization, energy and resource S&T, national security, the national innovation system, and manufacturing.15 Major debates took place over the fundamental orientation of the MLP. One concerned the relationship between indigenous innovation and technology imports. Leading economists argued that China should retain its existing technological development model of attracting foreign multinationals and encouraging technology transfers to boost the country’s science and technology competence. Many scientists, however, opposed this view and insisted that China could not depend on getting core technology from other countries. The scientific community eventually prevailed, and the MLP reflects the changed focus in the Chinese S&T development model toward indigenous development. A second polarizing issue was whether the focus should be on the implementation of megaprojects in which the state played a central organizing role or on a more decentralized bottom-up market-driven process. Those who advocated the adoption of the “small science” approach said that pursuit of large-scale projects diverted resources from more original and innovative investigator-driven projects. Some of these scientists, especially United States-based Chinese scholars, were critical of programs like 863 that they said were biased, inefficient, and nontransparent and were awarded on the basis of insider connections.16 But those in favor of the Liangdan Yixinginspired “big science” model could count on high-level political support, and they eventually won out. The MLP was finally promulgated in 2006, and the document appears to be avowedly techno-nationalistic in nature. In viewing the fundamental relationship between national security and technological development, the MLP defines this linkage in stridently realist, almost zero-term terms: “Facts tell us that we cannot buy true core technologies in key fields that affect the lifeblood of the national economy and national security.” The plan concludes that the only way that China can advance against “fierce international competition” is to “improve its independent innovative capabilities and master a number of core technologies, own a number of proprietary intellectual property rights and groom internationally competitive enterprises in important fields.”17 One of the central concepts in the MLP 15. For background on the drafting of the MLP, see Cong Cao, Richard P. Suttmeier and Denis Fred Simon, “China’s 15-Year Science and Technology Plan,” Physics Today (December 2006), 38–43; Hao Xin and Gong Yidong, “China Bets Big on Big Science,” Science, 16 March 2006, 1548–49; and Sylvia Schwaag Serger and Magnus Breidne, “China’s Fifteen-Year Plan for Science and Technology: An Assessment,” Asia Policy, no. 4 ( July 2007): 135–64. See also Hao Xin and Jia Hepeng, “China Supersizes Its Science,” Science, 9 March 2007, 1354–56. 16. Hao and Gong, “China Bets,” 1548. 17. “Guidelines for the Medium- and Long-Term National Science and Technology Development Program (2006–2020),” Chap. 2, Section 1.

[240]

Can the Chinese Defense Economy Catch Up?

is the notion of indigenous or independent innovation (zizhu chuangxin).18 This term is viewed “by some as a regression to the self-defeating technonationalist notions of self-reliance from the Maoist era,” although the MLP seeks to define this concept from a functional as well as ideological perspective.19 Specifically, indigenous innovation is seen as a way to promote original innovation by reassembling existing technologies in different ways to produce new breakthroughs and absorbing and upgrading imported technologies. Another fundamental principle of the MLP is the centrality of national security in the development of a world-class independent S&T capability. Consequently, defense priorities are of paramount importance. In the published version of the MLP, however, there are few details of defense-related S&T projects, which are contained in a parallel but separate medium- and long-term development plan for defense science and technology.20 The outline of the defense plan states that the defense economy will focus on the development of new and high-tech weaponry, dual-use high-technology industries, manufacturing technologies for military industries, basic and frontier defense technologies, and ensuring defense technological innovation. The national MLP, though, seeks to blur the classical distinction between civilian and military technologies and points out that S&T development should benefit both civilian and defense needs at the same time. The Liangdan Yixing’s forward-thinking and state-led approach to industrial and high-technology development is tailored to the defense economy’s large-scale, vertically integrated, and long-term weapons and strategic technology programs. It is less appropriate for the dual-use arena, where the focus is on more market-driven and globally connected innovation by commercial companies. Although the state has a role to play in this ICT-dominated dual-use landscape, it is likely to be far more selective in its backing of firms and projects and more concerned with setting the overall parameters of the standards regime than with intervening directly in the running of the market. In this case, a more interdependent technoglobalist perspective may be a better guiding principle.21

18. Other translations of Zizhu Chuangxin describe it as “endogenous innovation,” “homegrown innovation,” or “sovereign innovation.” See Shulin Gu and Bengt-Åke Lundvall, “China’s Innovation System and the Move Toward Harmonious Growth and Endogenous Innovation,” DRUID Working Paper No. 06-7, Danish Research Unit for Industrial Dynamics, http://www.druid.dk, 25. 19. Cong Cao et al., “China’s 15-Year Science and Technology Plan,” 40. 20. “China Unveils Plan for Developing Defense Technologies,” Xinhua News Agency, 25 May 2006, in FBIS, 25 May 2006. 21. Richard P. Suttmeier, “A New Techno-nationalism? China and the Development of Technical Standards,” Communications of the ACM 48, no. 4 (April 2005): 35–37.

[241]

Fortifying China

The Debate over China’s Military Technological Catching Up The arrival of the information age has forced the Chinese military and defense industrial establishments to critically reexamine their development strategies. Mechanization was the central goal of modernization efforts in the industrial era through the development and acquisition of conventional weapons systems such as tanks, warships, and aircraft. But with the emergence of a new information-based techno-military paradigm, there has been considerable debate about how to adapt to these far-reaching changes.22 Military chiefs and defense industry leaders have been urged to come up with new approaches to meet this paradigm shift. At the Sixteenth Communist Party Congress in 2002, the country’s senior leadership proclaimed that the first twenty years of the twenty-first century would be a period of “important strategic opportunities” that would allow China to make rapid advances in its goal of building a prosperous society.23 The PLA and defense economy were required to “firmly seize this period of strategic opportunities” and leapfrog ahead in their military modernization efforts.24 Specifically, Jiang Zemin called for the fulfillment of the “dual task of building mechanization and informatization” of the country’s armed forces.25 This meant that the building of information systems and systems integration technology would be accorded the same priority as the development of conventional weapons systems. The 2004 Chinese Defense White Paper explicitly highlighted the central importance of information technology, or what the Chinese call informatization (Xinxihua), in defining the new development model. For the first time, the guiding concept of “local wars under conditions of informationization” was publicly introduced.26 This new term, according to a Pentagon analysis, sums up “China’s experiences and assessments of the implications of the revolution in military affairs—primarily the impact of information

22. See You Ji, “Learning and Catching Up: China’s Revolution in Military Affairs Initiative,” in The Information Revolution in Military Affairs in Asia, ed. Emily Goldman and Thomas Mahnken (New York: Palgrave Macmillan, 2004), 97–123; and State Council Information Office, China’s National Defense in 2004. 23. See Robert L. Suettinger, “China’s Foreign Policy Leadership: Testing Time,” China Leadership Monitor, no. 9 (Winter 2004). 24. Zhang Zhaoyin, “Firmly Seize the Period of Important Strategic Opportunities to Promote Leap-Type Development,” Jiefangjun Bao [Liberation Army Daily], 25 February 2003, in FBIS, 7 April 2003. 25. See Xu Xiaoyan and Zhai Tongzheng, “Hasten Informatization Building within Our Forces,” Jiefangjun Bao, 10 December 2002, 6, in FBIS, 22 January 2003. 26. State Council Information Office, China’s National Defense in 2004, 14.

[242]

Can the Chinese Defense Economy Catch Up?

technology and knowledge-based warfare on the battlefield.”27 This new outline supersedes the “local wars under high-technology conditions” concept that had been the PLA’s guidance on force structure development since the early 1990s. Finding ways to catch up and leapfrog has become a central tenet in this search for a new development model. This is because a key assumption framing this debate is that the new information paradigm offers a unique chance to leap ahead and significantly narrow the military technological gap with the world’s advanced military powers.28 However, if this window of opportunity is not decisively grasped, some military strategists warn, “the gap between China and military powers may widen . . . and we may find ourselves in a passive position in future military struggles.”29 In their discussions of the benefits and drawbacks of catching up, PLA strategists firmly subscribe to the arguments put forward by leading scholars on catching up such as Alexander Gerschenkron, that latecomers have important advantages over pioneers and that a highly selective approach is required in targeting only the most technologically advanced areas for development.30 An assessment by a Chinese military analyst of the conditions for the implementation of a leapfrog strategy by the PLA pointed out that latecomers can “avoid many of the tortuous paths pioneers went through.” He added that it was also important not simply to follow and imitate the development experiences of advanced military powers as this could lead to the familiar pattern of “introduce, lag behind, introduce again, lag behind again.”31 Some strategists favor skipping stages as the most effective route to narrowing the technology gap. With its latecomer advantage, they argue, the PLA could bypass the latter stages of the mechanization process that more advanced armed forces have undergone and directly embark on information age transformation.32 This is a controversial argument as it directly challenges the PLA’s conservative and risk-averse institutional culture, especially within the dominant ground forces that are a legacy 27. U.S. Defense Department, Annual Report on Military Power of the People’s Republic of China: Fiscal Year 2006 Report to Congress on PRC Military Power, http://www. defenselink.mil/pubs, 17. 28. You, “Learning and Catching Up,” 104–6. 29. “Chinese Generals on Opportunities and Challenges,” Liaowang [Outlook], 14 July 2003, 21–24, in FBIS, 14 July 2003. 30. Alexander Gerschenkron, Economic Backwardness in Historical Perspective (Cambridge, Mass.: Harvard University Press, 1962), 5–30. 31. Zhang Zhaoyin, “Firmly Seize the Period of Important Strategic Opportunities.” 32. See Huang Guozhu, Cao Zhi, and Xu Zhuangzhi, “Speed Up the Revolution in Military Affairs with Chinese Characteristics—PLA Deputies Discuss National Defense and Armed Forces Modernization” Xinhua Domestic Service, 12 March 2004, in FBIS, 15 March 2004.

[243]

Fortifying China

of the industrial age. It would also mean the axing of cherished weapons programs and the downsizing of force levels.33 While important steps have been taken since the late 1990s to eliminate outdated weapons systems and pare down the size of the military and defense industrial establishments, the overall trajectory of defense modernization remains essentially unchanged.34 While Chinese leaders urge the PLA and defense economy to catch up with the world’s technological leaders as quickly as possible, defense planners are more cautious and do not envisage developing the mix of capabilities required to be a state-of-the-art military power for at least the next few decades.35 The 2006 Chinese Defense White Paper outlines a three-stage defense development strategy that extends to the middle of this century. The goal of the first near-term phase is to “lay a solid foundation by 2010” through an incremental strategy in which the PLA will selectively replace only a limited proportion of its existing arsenal with new generations of naval, aviation, and missile hardware. The remaining inventory would be upgraded on the cheap through the addition of sensors, navigational positioning systems, infrared detectors, computers, and other devices that would allow these weapons, in theory at least, to conduct network-enabled operations.36 The goal of the second stage, 2011–20, is to make major progress in catching up. The guidelines for this phase are contained in the mediumand long-term defense S&T development plan, which is largely devoted to basic and early-stage applied R&D activities.37 Key R&D priorities include command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR) systems, information technology, lasers, space-based platforms, high-speed computer technology, sophisticated electronic warfare systems, and integrated command automation networks. The third phase of the defense development strategy is an aspirational statement of intent in which the basic goal is to “build informationized

33. See You Ji, “Learning and Catching Up,” 114–16; and Richard A. Bitzinger, “Come the Revolution,” Naval War College Review 58 (Autumn 2005), 39–60, http://www.usnwc.edu/ press/Review/2005/autumn. 34. See the annual assessments of China’s military establishment by the U.S. Defense Department since the end of the 1990s for detailed trends. For a Chinese assessment, see Xu Zhuangzhi, “Rapid and Smooth Progress in National Defense Construction and Army Building Makes the Armed Forces Superior, Stronger and More Coordinated,” Xinhua Domestic Service, 8 February 2006, FBIS, 8 February 2006. 35. Hong Kong Wen Wei Po, 14 March 2005, in FBIS, 14 April 2005. 36. Wu Yujin, “Explore Effective Ways of Securing Leap Forward in Armaments Development,” Jiefangjun Bao, 30 September 2003, 6, in FBIS, 30 September 2003. 37. “China Unveils Plan for Developing Defense Technologies,” Xinhua News Agency, 25 May 2006, in FBIS, 25 May 2006.

[244]

Can the Chinese Defense Economy Catch Up?

armed forces capable of winning informationized wars by the mid-twentyfirst century.”

The Developmental Models for Catching Up These military requirements represent an unprecedented technological challenge for the defense and dual-use economies. Their ability to adequately fulfill these needs will depend crucially on the nature of the developmental catch-up models they adopt. The evidence from the structural and organizational reforms that have taken place since the late 1990s indicates that the defense economy will follow a path similar to that taken by Japan and Korea with the building of a closed developmental model spearheaded by an elite of vertically integrated companies. The hopes of the defense economy will predominantly rest on the eleven defense industrial conglomerates that have been formed since 1999. These corporations are huge, vertically integrated behemoths that have a nearmonopoly control of the domestic defense market and possess several strengths. First, they have amassed extensive experience and expertise in conducting defense work, especially of complex projects. Second, these conglomerates have cultivated deep ties with the military that will be vital in ensuring that client needs and expectations are understood and managed. Third, they have built up a well-equipped manufacturing and R&D base. However, reliance on these conglomerates has risks. Their track record of technological success is checkered, and their institutional cultures are deeply rooted in the legacy of the central planning system. Moreover, their overwhelming focus is on industrial-era practices and processes, and many of their plants and industrial equipment are not suited to developing or manufacturing the military products of the information age, such as electronic components, software, and precision-guided munitions. The authorities have sought to introduce a modicum of competition and outsourcing into this closed apparatus, especially through the establishment of the Yujun Yumin dual-use system. However, these measures apply only to noncritical products and technologies and will not include technological projects intended for frontline combat use. A crucial success factor for Japanese and Korean firms in their catch-up efforts was their early importation of foreign technologies and knowledge that they were able to copy and improve upon.38 This channel is not readily accessible to the Chinese defense economy because of foreign restrictions, 38. See Michael Hobday, Innovation in East Asia: The Challenge to Japan (Aldershot, UK: Edward Elgar, 1995), and “Competitiveness in Developing Asia,” in Asian Development Outlook 2003, Asian Development Bank (Oxford: Oxford University Press, 2003), 237–45 and 257–63.

[245]

Fortifying China

especially from Western countries, on defense-related technology transfers. The Chinese defense economy has had some success in overcoming these barriers through the forging of close defense technological ties with Russia, but this lack of access to Western technologies and knowledge remains a serious structural obstacle.39 Moreover, the Chinese defense economy has been traditionally reluctant to open up its doors to foreign investment or joint-venture projects. Under this closed, vertically integrated model, the prospects for achieving major gains in technological catching up by the defense economy may be limited. The general pattern of innovation under this model, as shown by the Japanese and Korean experiences, is incremental in nature, which suggests that any technological advancement would be gradual and deliberate in nature. The more open catch-up model favored by the fledging dual-use economy may offer a better recipe for success in narrowing the technology gap. The ICT sector, which is a central player in the building of military informationtechnology capabilities, has embraced this alternative approach that allows for greater market-oriented innovation and the ability of firms to learn and absorb from global technology outsourcing, in both manufacturing and R&D work. Chinese firms such as Huawei, ZTE, and Datang have emerged to become market leaders in the ICT sector in China while at the same time making inroads into global markets. The potential benefits from the establishment of an effective and capable dual-use economy are numerous and wide-ranging. A dual-use economy will produce an environment that is more encouraging and supportive of the kinds of innovation and leapfrogging activities that the Chinese authorities are actively seeking to promote. This includes marrying commercial entrepreneurship and risk taking with the support of substantial state resources and R&D capabilities. The results should be the development of technology and equipment that are cheaper, better, and faster. China’s success in the building of a new dual-use economy is by no means guaranteed, however, especially as there are numerous structural, bureaucratic, technological, and cultural barriers to overcome. The track record so far has also been less than stellar. The haphazard civil-military integration efforts that took place in the 1980s and 1990s under the country’s defense

39. This was demonstrated in 2004–5 when Chinese efforts to get the European Union to lift the arms embargo it had imposed following the 1989 Tiananmen Square crackdown was thwarted by the U.S. government because of concerns that this would aid China’s military modernization and directly threaten U.S. national security. For an assessment, see Eugene Kogan, The European Union Defense Industry and the Appeal of the Chinese Market, Studien und Berichte zur Sicherheitspolitik, January 2005, http://www.bmlv.gv.at/pdf_pool/ publikationen.

[246]

Can the Chinese Defense Economy Catch Up?

conversion program led to the creation of a poorly structured and uncoordinated apparatus in which civilian production was emphasized and military requirements were largely neglected. The formulation of a more sophisticated and integrated approach under the Yujun Yumin banner coupled with sustained high-level political backing will significantly improve the chances for success over the next couple of decades. While these alternative catch-up models operate along separate trajectories, growing interaction and convergence between the defense and dual-use economies are gradually leading to the emergence of yet another development path. This is a semi-open model in which the defense economy selectively opens up to the domestic civilian economy for investment and joint partnerships and makes use of the dual-use economy as an intermediate conduit for cooperation with foreign firms. Although this model will apply primarily to Chinese firms, it could also extend to foreign companies under carefully controlled conditions.40 The establishment of the Yujun Yumin system is intended to facilitate greater cooperation and coordination in this area and to promote spin-on and civil-military integration. This semi-open approach has already begun to take root since the end of the 1990s. The defense economy has been eager to tap into the domestic and foreign capital markets to raise funds and form strategic partnerships with leading foreign defense companies, and it has sought to pursue this strategy by listing the converted civilian portions of its major defense conglomerates on the stock market. In 2003, for example, AviChina, the civilian subsidiary of AVIC 2, was listed on the Hong Kong stock market and formed a strategic partnership with EADS (European Aeronautic Defence and Space Company), one of Europe’s largest defense and aviation firms. EADS acquired a 5 percent stake in AviChina and agreed to codevelop projects such as civilian and military helicopters and training aircraft.41

Conditions for Technological Catching Up and the Case of the Space Industry Research on technological catching up by latecomer countries offers a number of pertinent insights into the prospects that the Chinese defense economy and the dual-use economy can overcome their backwardness and

40. The regulatory groundwork for this approach is set out in the “Interim Measures for the Implementation of Shareholding Reform in Military Industrial Enterprises,” which COSTIND introduced in late 2007. See Wu Fenglai, “Actively and Steadily Pushing Forward the Property Rights System Reform of Military Industrial Enterprises,” Zhongguo Zhengquan Bao, 25 December 2007. 41. Su Bei, “Firms Eye Aviation Industry,” China Daily, 9 October 2004.

[247]

Fortifying China

narrow the technology gap with the world’s advanced military-industrial powers. Of particular relevance are factors that have had an important impact on catching-up activities at the sectoral level:42 • The general innovation dynamics of the industrial sector, especially the

•

•

•

•

frequency of innovation and the predictability of its technological trajectory: If the pace of innovation within an industry occurs at a high and sustained pace, this requires firms to invest heavily in R&D efforts to keep up with the advances. If the technological trajectory of an industry is fluid and unpredictable, latecomers may find it difficult to determine which R&D strategies and targets to prioritize and follow in their catching-up efforts. For example, they may decide to pursue a specific technological trajectory but after embarking on this course may discover that new innovative breakthroughs have emerged that may significantly alter the technological trajectory of the industry. Determining the extent and quality of the sector’s technological capabilities: Technological capability encompasses the wide range of knowledge, experience, resources, and skills that are needed to acquire, assimilate, adapt, and create technology. It includes financial resources, R&D facilities, and human capital. Extent of access to the internal and external knowledge base: A firm or industry’s access to outside knowledge, especially from overseas, is crucial to its catch-up efforts. This knowledge comes primarily in the form of technology transfers but also from information flows. Access to domestic and external knowledge bases can take place through informal learning, licensing, foreign direct investment, alliances and codevelopment. The role of institutional instruments: This examines the level and nature of intervention, support, and coordination among government entities, principal enterprises, and other institutions such as banks in assisting the industry’s catch-up drive. Technological congruence: The technological products and processes that are being introduced should match the characteristics of the domestic industry and marketplace. If the technology is overly sophisticated, demand is likely to be limited. Additionally, if the technology relies on input from supporting industries, such as components

42. See Keun Lee and Chaisung Lim, “Technological Regimes, Catching-up and Leapfrogging: Findings from the Korean Industries,” Research Policy, no. 30 (2001): 459–83. See also Marcela Miozzo and Vivien Walsh, International Competitiveness and Technological Change (Oxford: Oxford University Press, 2006), chap. 7.

[248]

Can the Chinese Defense Economy Catch Up?

and special materials, the requirements should not be beyond the technological capabilities of these other areas to produce. • The security and threat environment: While markets drive competition and technological innovation in civilian technologies, the equivalent counterpart to markets in the defense economy is the nature of the security and threat environment. The higher the level of threat or insecurity, especially if it involves a potential adversary that is technologically more advanced, the greater the demand for technological upgrading and catching up. The Chinese space industry’s indigenous development is proudly lauded as a role model for the country’s technological catching up.43 The Liangdan Yixing strategy emphasized the extensive mobilization of the country’s limited S&T capabilities to achieve critical strategic breakthroughs. This approach is the template for China’s aspirational goal of turning itself from a middle-ranking space power into a world-class innovator able to compete with the United States, which is the dominant global leader.

Innovation Dynamics of the Space Industry While China’s overall space technology levels were about two generations behind those of the United States at the beginning of the twenty-first century, the country’s long-term prospects for narrowing this technology gap are positive. An important reason is that the development of China’s space capabilities in select areas is occurring at a slightly faster rate than technological innovation in the global space industry. The mounting costs, increasing technological complexities, and lessening of national rivalries— notwithstanding the recent flare-up in space tensions between the United States and China—have contributed to a slowdown in technological innovation in the international space sector in the post–cold war era. The estimated average current development cycle for military and intelligence satellites from the initiation of basic research to field deployment is approximately twenty years, and eight to ten years for launch vehicles.44 With 43. The space industry is divided into three categories: spacecraft (satellites and manned capsules), launch vehicles, and ground infrastructure, such as tracking systems and launching platforms. This section will focus on satellites, the manned space program, and launch vehicles. 44. The development periods for the U.S. Atlas V and the Delta IV launch vehicles were approximately eight years each, while the European Ariane 5 rocket took ten years to develop. The average development time for the Chinese Changcheng series of launch vehicles is seven to eight years. Loren B. Thompson, Can the Space Sector Meet Military Goals for Space? (Arlington, Va.: Lexington Institute, 2005), 16; and U.S. Government Accountability Office, “Military Space Operations: Common Problems and Their Effects on Satellite and Related Acquisitions,” GAO-03–825R, June 2003, http://www.gao.gov.

[249]

Fortifying China

such lengthy development times and heavy investment costs, considerable effort is placed on incremental upgrades to maximize existing technological capabilities. Moreover, the technological trajectory of the global industry has been predictable, with evolutionary rather than revolutionary developments in each succeeding generation of launch vehicles and spacecraft designs.45 In this environment of a low frequency of innovation and a predictable technological path, the Chinese space industry has been able to clearly define its long-term technological development and catch-up strategy. Among the top civilian priorities laid out in these plans are the construction of an extensive earth observation system consisting of meteorological, remote sensing, and oceanic and disaster monitoring satellites; an independent satellite broadcasting and telecommunications system; an independent satellite navigation and position system; a manned spaceflight program; a lunar exploration program; and the development of next-generation launch vehicles.46 In the military sphere, China is conducting extensive R&D on an expansive array of space and counterspace assets as well as building a robust set of actual capabilities. They include the following: • Advanced space-based C4ISR and targeting capabilities that in-

clude imagery reconnaissance, electronic intelligence, and signals intelligence reconnaissance satellites. Examples of projects include the Ziyuan/Jianbing series of military remote sensing satellites and Huanjing series of disaster/environmental monitoring satellites that are capable of visible, infrared, multispectral, and synthetic aperture radar imaging.47 • Navigation and timing satellites, which include the Beidou series of regional positioning satellites that are far less accurate and capable

45. Since the late 1990s, however, the United States has undertaken a far-reaching transformation in its military space capabilities, especially in areas such as military communications, imagery collection, and infrared missile-detection satellites as part of an overall effort to build up its network-centric war-fighting capabilities. But many of these R&D programs have run into serious technical and cost difficulties that calls into question whether the U.S. can continue to make major technological advances in its military space capabilities. If these problems are eventually overcome, the United States will be able to sustain its two-generation technological lead. 46. State Council Information Office, White Paper on China’s Space Activities (Beijing: State Council Information Office, 2000). 47. Theresa Hitchens, “Military Satellites, 2006: International Satellite Innovation and Cooperation,” Center for Defense Information, 16 April 2006, 27–28, http://www.cdi.org; and U.S. Department of Defense, “Annual Report on Military Power of the People’s Republic of China: Fiscal Year 2007 Report to Congress on PRC Military Power,” http://www.defenselink. mil/pubs, 20.

[250]

Can the Chinese Defense Economy Catch Up?

than the U.S. GPS and Russian GLONASS navigation satellite systems. • Small and micro-sized satellites for imagery, navigation, and communications roles. China has been actively developing and launching microsatellites that weigh less than one hundred kilograms since the end of the 1990s. The U.S. Defense Department sees this microsatellite force as an effort to “allow for a rapid reconstitution or expansion of China’s satellite force in the event of any disruption in coverage.”48 • A multidimensional program of antisatellite weapons, including the direct-ascent ASAT missile used in the January 2007 test, UHF-band satellite communications jammers, kinetic (hit to kill) weapons, and directed-energy weapons such as lasers and radio frequency equipment.49 China is also said to be working on co-orbital antisatellite interceptor systems that can maneuver to attack specific targets.50

Technological Capability and Access to Knowledge China has built up a sprawling space industrial base since the 1960s, and this has contributed to the cultivation of a solid technological capability.51 The strengths of this technological system include its comprehensive breadth of coverage and the ability to mobilize considerable resources to tackle priority projects. Areas in which the space industry has made major technological inroads include satellite recovery, multisatellite launches on a single rocket, and space measuring and control. But the sprawling size of this industrial base and its centralized state planning legacy have also held back innovation. The problems have ranged

48. Ibid., 20. 49. Ibid., 21, and also Col. David Thompson and Lt. Col. William Morris, “China in Space: Civilian and Military Developments” (Maxwell Paper No. 24, Maxwell Air Force Base, Alabama, August 2001). 50. “China Has Gained and Tested Array of Space Weapons,” Washington Times, 30 March 2007, A08. The article quotes the congressional testimony of General James Cartwright, Commander of U.S. Strategic Command. See also Michael Pillsbury, “An Assessment of China’s Anti-Satellite and Space Warfare Programs, Policies and Doctrines” (report for the U.S.-China Economic and Security Review Commission, 19 January 2007), http://www.uscc.gov/research papers. 51. For a general overview, see Brian Harvey, The Chinese Space Program: From Conception to Future Capabilities (Chichester, UK: Wiley, 1998). For a more up-to-date assessment of the development of China’s space industry between 2001 and 2005, see Kevin Pollpeter, Building for the Future: China’s Progress in Space Technology During the Tenth 5-Year Plan and the U.S. Response (Carlisle, PA: U.S. Army War College, March 2008).

[251]

Fortifying China

from low productivity and overemployment to the compartmentalization of functions, inadequate diffusion, and the inefficient use of limited financial resources.52 A People’s Daily commentary in October 2003 on China’s place in the global space order pointed out that one of the domestic industry’s major weaknesses was its inadequate innovation capacity, which stemmed from “insufficient input and lack of a batch of world influential master scientists.”53 Underfunding of R&D activities has been a long-running problem for the space sector, especially since the beginning of the reform era, when its place in national priorities fell. Foreign estimates of China’s overall annual space budget during the 1990s, which includes military and civilian activities, were between $1 billion and $3 billion.54 Chinese sources claim that annual state investment in the space industry is equivalent to just 1 percent of U.S. spending on space or 10 percent of Japanese spending.55 Actual funding, though, is likely to be significantly higher because of extra budgetary state allocations, such as from the 863 program and the military budget, as well as contributions from the space industry’s commercial earnings.56 Spending on space R&D began to pick up significantly from the late 1990s. In the Tenth Five-Year Plan, allocations for civilian-related space R&D projects nearly trebled to more than Rmb 5 billion from Rmb 1.7 billion for the Ninth Five-Year Plan.57 Unlike the rest of the defense economy, the space industry has been able to benefit from extensive access to internal and external sources of technology transfer and knowledge. This is one of the legacies of the Liangdan Yixing strategy, which emphasized close and unimpeded interaction among all parts of the domestic military and civilian S&T establishments engaged in space-related R&D. This has allowed the space industry to leverage the 52. Sun Hongjin and Sun Zifa, “Research and Manufacturing System of China’s Space Technology Has Realized a Major Change,” Beijing Zhongguo Xinwen She [China News Service], 28 December 2001, in FBIS, 28 December 2001. 53. Renmin Ribao [People’s Daily] 24 October 2003, English version, http://english.people. com.cn. 54. James A. Lewis, “China as a Military Space Competitor,” January 2004, 11, http://www. gwu.edu/~spi/spaceforum/China; and Marcia S. Smith, China’s Space Program: An Overview (Washington, D.C.: Congressional Research Service, 2003). An independent European space consultancy in 1996 estimated the military portion of the annual Chinese space budget was $800 million out of total funding of $1.3 billion. Pierre Sparaco, “Commercial Programs Spur Space Growth,” Aviation Week and Space Technology, 5 August 1996, 20. 55. Du Zongchao, Yanshen De Changcheng: Zhongguo Hangtian Jishu Chanyehua Zhilu [Extending the Great Wall: The Road to the Industrialization of Chinese Space Technology] (Beijing: Beijing Youdian Daxue Chubanshe, 2000), 232. 56. CASC’s profits in 2003, for example, were nearly Rmb 1 billion. See Zhongguo Hangtian [Aerospace China] (December 2004), 5. 57. Zuo Saichun, “Zhongguo Hangtian ‘Shiwu’ Fazhan Gangyao” [Development Outline of China’s Space Ten-Year Plan], Jiefangjun Bao, 3 December 2001.

[252]

Can the Chinese Defense Economy Catch Up?

considerable resources and talent of the academic and scientific research communities, especially CAS and a score of leading S&T universities. In the development of the manned space program, more than 110 research institutes, universities, and factories were given prominent roles, and they were supported by another three thousand subcontractors across the entire country.58 The civilian components of the Chinese space industry and R&D community have been able to establish a wide array of linkages with foreign countries and international agencies since the late 1970s, and this has been an important channel for information sharing, technology transfers, and the development of joint projects. Foreign assistance has been especially valuable in areas such as the manned space program and the development of launch vehicles and satellites. Russia, for example, provided extensive technological assistance to China in the design and building of its Shenzhou manned spacecraft, life-support systems, and the training of Chinese astronauts. This cooperation was instrumental in significantly shortening the development cycle of the program and allowing the Chinese to make a generational skip. It has been argued that the Shenzhou 5 manned capsule is comparable to a second-generation U.S. or Soviet spacecraft such as the Gemini or Voskhod.59 Other areas of Sino-Russian joint cooperation have been in remote sensing, satellite communications, navigation, and launch vehicle rocket engines.60 Close working relations have also been forged with Brazil ( joint remote sensing satellites) and the European Community (satellites and navigation). The military space sector, however, is a closed system with limited foreign interaction, although some of its efforts to acquire technology and knowledge are conducted under the guise of civilian activities.61

Institutional Support High-level state support has played a vital role in ensuring that the space industry has been able to mobilize and gain access to the resources required in its catching-up efforts. This has especially been the case for the development of the manned space program, which took more than fifteen years of 58. Li Jinai, “Nanwang De Lishi Shike” [An Unforgettable Historical Moment], Shenjian [Magic Sword] ( June 2003), 10. 59. Joan Johnson-Freese, “Space Wei Qi: The Launch of Shenzhou V,” Naval War College Review (Spring 2004), 129–31. 60. Mark Stokes, China’s Strategic Modernization: Implications for the United States (Carlisle Barracks, Pa.: Strategic Studies Institute, Army War College, 1999), 183–85. 61. Select Committee of the U.S. House of Representatives, U.S. National Security and Military/Commercial Concerns with the People’s Republic of China, 105th Cong., 1998, H. Rep. 105–851, chaps. 4 and 5, http://www.house.gov/coxreport.

[253]

Fortifying China

extensive R&D work before the country’s first astronaut was successfully launched into space in 2003. In an institutional strategy that mirrored the success of the Liangdan Yixing program, the country’s senior political leadership assigned supervision of the project to the CSC, an ad hoc high-level leadership coordinating and decision-making body that is responsible for overseeing the implementation of the country’s most important strategic technology development projects. The CSC is composed of high-ranking civilian and military leaders, such as the premier and defense minister, along with some of the country’s most senior scientists and engineers. It has the necessary political authority to overcome bureaucratic obstacles and make sure that projects are carried out.62 Without the CSC, the manned space program could easily have become a victim of the country’s Byzantine bureaucratic rivalries.63 Another program that the CSC would likely oversee is the ASAT program. In the aftermath of the 2007 Chinese ASAT test, there was widespread speculation that the PLA and the defense S&T community were rogue actors that conducted the launch without civilian authorization or coordination.64 One reason for this assessment was the apparent surprise of the Chinese government to the strong international reaction to the test. But the existence of civil-military S&T coordination bodies such as the CSC would ensure that top civilian leaders are kept informed of the technological development of such key projects. The state has assigned the task of carrying out the development of the manned space program and virtually all other space-related work to China Aerospace Science and Industry Corp. (CASIC) and China Aerospace

62. For a history of the CSC in the 1960s and early 1970s, see Yang Mingwei, “Zhou Enlai Yu Zhongyang Zhuanmen Weiyuanhui” [Zhou Enlai and the Central Special Commission], Zongheng [Length and Breadth] (December 1997), 4–11. During Zhou’s tenure, the CSC was composed of fifteen senior decision-makers, who included the premier, seven deputy premiers, and seven heads of military-industrial ministries. The makeup of the CSC since the 1990s is unclear, although some reports suggest that the membership may have expanded to as many as twenty members. See also Stokes, China’s Strategic Modernization, 5–6. CSC may assume a more prominent role in defense. S&T decision-making following COSTIND’s merge and demotion into the Ministry of Industry and Informatization. CSC is now affiliated with the State Central Military Commission, and SASTIND acts as its secretariat. See “Current State of the Defense S&T and Industrial System,” 22 August 2007, http:// www.costind.gov.cn. 63. Chen Xiaodong, “Jueci Shenzhou” [The Decision on the Shenzhou], Shenjian ( June 2003), 38–51. 64. For discussion on this issue, see Bates Gill and Martin Kleiber, “China’s Space Odyssey: What the Anti-Satellite Test Reveals about Decision-Making in Beijing,” Foreign Affairs (May 2007); and James Mulvenon, “Rogue Warriors: A Puzzled Look at the Chinese ASAT Test,” China Leadership Monitor, no. 20 (Winter 2007), 1–7. http://media.hoover.org/ documents. One senior PLA officer explained that defense scientists working on the ASAT project were primarily responsible for pushing for the test. Interview, November 2007.

[254]

Can the Chinese Defense Economy Catch Up?

Science and Technology Corp. (CASTC). These two conglomerates are vertically integrated institutions with extensive R&D and industrial production capabilities. They have a combined workforce of more than two hundred thousand personnel with as many as eighty thousand in-house scientists and engineers engaged in advanced research, design, and engineering activities. These two corporations originally belonged to a single entity but were separated in 1999 in order to promote greater competition within the space industry. They have also undergone streamlining and reorganization to improve internal integration, cut excessive waste, and spin off peripheral operations. But these two organizations, especially CASIC, will remain the exclusive institutions responsible for carrying out the development of the country’s space capabilities. The manned space program has played a crucial role in reenergizing highlevel state interest and investment in the space industry after a slump in the 1980s. Zhang Qingwei, the president of CASIC, pointed out in an interview in October 2003 that “implementation of the technical upgrading of the manned space flight project constituted a new ‘accelerator’ for the advancement” of his company. Much of the infrastructure used to develop and test equipment for the Shenzhou spacecraft, launch vehicles, and ground facilities, for example, had to be upgraded, and this led to considerable capital investment in the sector.65 In recognition of the central importance of the space industry to China’s S&T development, Zhang was promoted to become the head of COSTIND in 2007. Moreover, the manned space program has allowed the space industry to train and provide operational experience to a new generation of technical specialists who otherwise would have been either laid off or sidelined into nonspace pursuits. CASIC, for example, recruited and assigned more than ten thousand scientists and engineers to work on the Shenzhou project, many of them young and middle-ranking personnel in their thirties and forties.66 With many of the scientific and technical staff that worked on the earlygeneration space projects near or already in retirement, this injection of younger blood has helped to preserve critical skills and know-how within the space industry. As priority and resources shift from the Shenzhou program to the development of the country’s ambitious Chang’e deep-space 65. Jiefangjun Bao, 22 October 2003, http://english.pladaily.com.cn. See also Zhang Qingwei, “Zhongguo Zairen Hangtian De Huihuang Chengjiu Jike Chixu Fazhan” [The Brilliant Achievements of China’s Manned Space Will Sustain Development], Hangtian Gongye Guanli [Aerospace Industry and Management] (November 2003), 4–8; and Craig Covault, “Manned Program Advances Chinese Space Technology,” Aviation Week and Space Technology, 29 November 1999, 28. 66. Jiefangjun Bao, 22 October 2003; and “Tuijin Hangtian Shiye Panshang Xingaofeng” [Promote China’s Space Industry to a New Height], Zhongguo Hangtian (December 2004), 4.

[255]

Fortifying China

lunar exploration project from the Eleventh Five-Year Plan onward, the bulk of this workforce will continue to be fully engaged in conducting pathbreaking R&D that will support the space industry’s overall efforts to catch up.67 Technological products and capabilities that are expected to be developed and spun off from the project for broader application include space-system integration, deep-space communications, and nextgeneration launch vehicles.68

Technological Congruence Another important rationale behind the resurgence of the space industry since the 1990s has been the growing congruence between the technological capabilities that it is developing and the needs of the domestic economy. The country’s rapid economic development in the reform era has led to an explosion in demand for a wide range of civilian and military services that only the space industry can meet through its satellite capabilities. These include comprehensive nationwide communications coverage, accurate weather and oceanic forecasting, precise navigational aids, and strategic reconnaissance and surveillance monitoring. The country’s dependence on foreign sources for many of these services during the 1980s eventually forced the Chinese authorities to conclude that the development of their own space capabilities was an urgent undertaking. The dual-use capabilities of many of these satellite systems have further enhanced their utility to both the civilian and military authorities. It is estimated that China may have a requirement for as many as two hundred satellites in the first two decades of the twenty-first century; to meet these diverse needs, the space industry is developing approximately fifteen different types of satellites.69

Security Concerns Rising national security tensions around China’s periphery and the broadening of its security interests in the surrounding region have been another important catalyst in driving demand for enhanced space and counterspace capabilities. The Chinese military establishment has a pressing requirement

67. Ping Shu, “Shenyue Weixing Jiqi Yanzhi” [Research and Development of the Chang’e-1 Lunar Exploration Satellite], Zhongguo Hangtian (February 2005), 6–11. The Chang’e program is slated to run until the end of the next decade. 68. This is according to Sun Jiadong, general designer of the Chang’e program. “From the Earth to the Moon,” Renmin Ribao, 23 March 2004, in FBIS, 23 March 2004. 69. Yi Yao, “China Emphatically Sketches Giant Space Plan,” Liaowang, 21 October 2002, in FBIS, 21 October 2002.

[256]

Can the Chinese Defense Economy Catch Up?

to build up its strategic intelligence, surveillance, and reconnaissance assets to provide advanced warning, monitoring, and improved targeting information, and this has led to intensive R&D efforts to speed up the development cycles of next-generation space systems. The development of reconnaissance capabilities, for example, initially got off to a slow start in the 1970s and 1980s. The first-generation FSW-1/ Jianbing satellite took nearly twenty years to develop and did not go into operation until 1987. Moreover, its technical capabilities were rudimentary. The second-generation FSW-2 was produced in much less time and went into service in 1992. The technical capabilities of the FSW-2 are significantly better than its predecessor: it has longer endurance and provides substantially enhanced photographic resolution. The third-generation FSW-3 entered service around 2003 and its technological capabilities also represent a major leapfrog over the second-generation technology.70 In addition, the PLA’s emphasis in the twenty-first century is on building up its networkcentric and information-based capabilities, and this will rely heavily on the exploitation of space resources. In short, the Chinese space industry is facing intensifying demand from the civilian and military sectors to provide the technological capabilities necessary to meet their ever-growing needs. The only effective way for the industry to satisfy these requirements is to engage in an aggressive catch-up effort to acquire and develop state-of-the-art technological products and processes. Through its accomplishments over the past couple of decades, the domestic space industry has shown that it can learn, absorb, and produce incremental innovations that can steadily narrow the technological gap. It has achieved this through a combination of stage-skipping approaches, such as with the implementation of the Shenzhou program, and fast following through the shortening of development cycles. The prospects appear strong that the industry can maintain and even accelerate this technological momentum because it enjoys strong leadership and institutional support, has expanding access to foreign technology transfers and knowledge, and has built up and preserved a robust technological R&D capability. For the near future the Chinese space sector may find it difficult to overcome the wide technological gulf that separates it from the United States, but within the next two decades it may significantly narrow the technological gap with Europe and Russia and become a true international peer competitor in space technology.

70. Stokes, China’s Strategic Modernization, 23. There has been a significant increase in the frequency of launches of FSW satellites. See “Chinese in Midst of Twin-Spacecraft Recon Operation,” Aviation Week and Space Technology, 5 September 2005, 20.

[257]

Fortifying China

Policy Challenges for the United States The revitalization of the Chinese defense economy and the emergence of the dual-use economy pose a host of complex policy and security challenges for the United States that go to the very heart of the broader issue: What should be the long-term nature of the U.S. relationship with China? A fundamental question for U.S. policymakers as they seek to encourage China to be an economic partner and global stakeholder but not to support its military modernization is whether it is feasible to separate the civilian and defense elements of the Chinese economy even as the Chinese authorities push hard to integrate these two sectors. Moreover, can the United States effectively prosecute its embargo against the transfer to China of defense and dual-use technologies and knowledge in a globalized economy where other states are willing to provide such goods and services to Beijing? The present U.S. approach was laid down in the aftermath of the 1989 Tiananmen Square crackdown. The main objectives were to ban the export to China of all items on the Munitions List and prevent the leakage of goods and services with dual-use applications, freeze military cooperation between the U.S. and Chinese defense industrial complexes, and persuade foreign allies not to sell arms and dual-use technology and know-how to China. This embargo regime not only has endured for nearly two decades but also has been progressively strengthened. In recent years, Washington has successfully forced Israel and convinced the European Union to halt any military assistance—actual or proposed—to the Chinese defense industrial complex and the PLA. The strong-arm tactics employed by the United States led to the abrupt cancellation of several important defense projects between Israel and China that outraged Beijing, which saw what it perceived to be hostile acts as evidence of a U.S. containment strategy against China’s strategic rise. Can the United States sustain this zero-sum embargo policy against China over the long term? During the 1990s and the first half of this decade, U.S. efforts to deny China access to state-of-the-art defense technology, products, and know-how did impede China’s military modernization efforts. But the Chinese defense economy and the PLA have been able to gradually overcome many of these obstacles and are now making rapid and sustainable progress. This calls into question whether the military and security benefits of the U.S. defense technological and industrial embargo program will eventually be outweighed by the political and strategic drawbacks of continuing to antagonize China and sowing distrust and competition while only marginally slowing down its military technological transformation. The ramifications of the U.S. defense economic containment strategy can clearly be discerned in the Chinese MLP, which points out that the only [258]

Can the Chinese Defense Economy Catch Up?

reliable way to get access to core national security technologies is through indigenous development. The United States has been taking some limited steps to adjust its embargo regime in the face of China’s rapidly changing economic and technological profile. The U.S. Commerce Department revamped its export control regulations on China in 2007 by strengthening scrutiny on items deemed to be of an avowedly dual-use nature while streamlining and relaxing controls on high-technology goods for civilian application. In the revised rules, thirty-one dual-use items such as chemicals, avionics, aircraft engines, inertial navigation systems, lasers, radar antennas, optical fibers, sophisticated electronic equipment, and some composite materials have been identified as being subject to military end-use control.71 The new rules also seek to distinguish “trusted” civilian customers and reward them with easier access to U.S. exports while subjecting entities affiliated with the military-industrial complex and the PLA to tougher restrictions. But with the steady enlargement of the Chinese dual-use economy, a growing amount of U.S.-China trade is likely to run afoul of these export control regulations.72 The revised measures are a short-term response, but a more fundamental strategic rethinking will be required over the long term. This is because the value and usefulness of the containment doctrine is likely to diminish as the United States struggles to prevent other states from lifting their arms bans in the face of China’s growing clout. Moreover, the boundaries between military and dual-use technologies will become increasingly blurred, calling into question the effectiveness of existing export control regimes. The general debate about the nature of U.S.-China relations has tended to be polarized between positive sum engagement advocates and zero-sum containment proponents. But analysts such as Tom Christensen argue that a moderate U.S. posture that synthesizes these dueling paradigms is achievable and “would help to reduce the likelihood of dangerous miscalculations and unnecessary spirals of tensions in Sino-American relations.”73 In the defense economic arena, such a strategy would call for the adoption of a more accommodating posture through the establishment of a dialogue and limited cooperation between the U.S. and Chinese defense industrial

71. Mario Mancuso, “Enhancing Secure Trade with China” (speech to the U.S.-China Business Council, 18 June 2007, Washington, D.C.), http://www.bis.doc.gov./News/2007; and “U.S. Tightens High-Tech Export Controls for China,” Agence France Presse, 18 June 2007. 72. Only a few months after they were issued, the new program was criticized for approving firms that appeared to be tied to the Chinese defense industry or had been already punished by the United States government for proliferation or other improper export behavior. See Wisconsin Project on Nuclear Arms Control, In China We Trust, January 2008, http:// www.wisconsinproject.org/pubs/reports/2008. 73. Thomas J. Christensen, “Fostering Stability or Creating a Monster,” International Security 31, no. 1 (Summer 2006): 83.

[259]

Fortifying China

complexes without undermining U.S. national interests or the security of its allies in the Asia-Pacific region. Some possible options that could be considered include the following: • Reestablishing a joint commission on defense conversion that oper-

•

• •

•

•

•

ated briefly in the mid-1990s before it was shut down after the U.S. Congress passed a law forbidding such exchanges.74 The focus of the commission could be expanded to cover dual-use issues. Incorporating high-level leadership and working-level exchange visits between the U.S. and Chinese defense complexes and major defense corporations into the existing bilateral military-to-military relationship. Permitting the sale of purely defensive weapons and noncombat equipment, such as tactical transport helicopters. Encouraging greater cooperation between U.S. and Chinese defense firms in civilian technological and industrial projects. While companies such as Boeing have forged industrial partnerships with Chinese counterparts, security concerns and stringent export controls have limited and constrained these interactions. Selling equipment and technologies that are less capable than what the United States uses or exports to its regional allies but are of a better quality than what China could obtain from Russia and other arms suppliers. Allowing the sale of advanced weapons systems to allies in the AsiaPacific region that would offset any advantages China would gain from U.S. arms procurements. The United States already follows this practice in the Middle East by ensuring that any arms sold to Saudi Arabia or Egypt are counterbalanced by the transfer of similar or better weapons to Israel.75 Entering into dialogues on the possible establishment of arms control agreements in areas prone to spiraling arms races, such as the militarization of outer space, submarine warfare, and ballistic missiles. This could be done through official government-to-government Track One negotiations or informally through nonofficial Track Two forums.

Some of these measures featured prominently in the U.S.-China defense technology relationship during the 1980s, including leadership and working74. Kevin Pollpeter, U.S.-China Security Management: Assessing the Military-to-Military Relationship (Santa Monica: RAND Corp., 2004), 27. 75. See Robin Wright, “U.S. Plans New Arms Sales to Gulf Allies,” Washington Post, 28 July 2007.

[260]

Can the Chinese Defense Economy Catch Up?

level exchanges and transfers of defensive equipment. But these ties were severed after the 1989 Tiananmen Square crackdown. The most important advantage of a limited engagement would be to promote communications and information gathering in order to improve understanding and prevent misperceptions that could fuel a spiraling security dilemma. This might help to prevent a repeat of the dynamics of the cold war, when exaggerated U.S. estimations of Soviet military capabilities led to warnings about bomber and missile gaps and contributed to the intensification of the arms race. This dialogue could be done through high-level leadership visits and working-level exchanges to defense factories, technical conferences between scientific and engineering personnel, and access gained through equipment sales. While skepticism abounds about the value of insights obtained by the United States in these military-to-military exchanges, an assessment by the RAND Corp. in 2004 noted that “the U.S. military has benefited to some extent from its relationship with the PLA.”76 The necessity of strategic dialogue between the U.S. and Chinese military establishments, including their defense industrial complexes, will become increasingly pressing as they find themselves in direct competition with each other and even eyeball-to-eyeball in regional hot spots such as the Taiwan Strait. The absence of any meaningful dialogue between the United States and China over military space or indeed other space issues is a key reason behind the mistrust and concern that followed the Chinese ASAT test as well as a subsequent U.S. shootdown of one of its errant satellites in February 2008.77 As the U.S. reaction to the ASAT demonstration showed, however, sentiment is also growing in Washington’s corridors of power to view China as a newly arriving military rival. The 2006 U.S. Quadrennial Defense Review puts forward this pessimistic view by pointing out that “of the major and emerging powers, China has the greatest potential to compete militarily with the United States and field disruptive military technologies that could over time offset traditional U.S. military advantages absent U.S. counter strategies.”78 This lays down the gauntlet of competition between 76. Ibid., 47. United States military officials who participated in the sale of weapons and defense technologies to China during the 1980s stated in interviews that they were able to acquire firsthand information about the state of the Chinese defense industry and the PLA’s equipment process that was otherwise unobtainable. 77. Joan Johnson-Freese, “Strategic Communication with China: What Message about Space,” China Security, no. 2 (2006). On the United States shooting down its own satellite, see Marc Kaufman and Walter Pincus, “Effort to Shoot down Satellite Could Inform Military Strategy,” Washington Post, 20 February 2008. 78. U.S. Department of Defense, 2006 Quadrennial Defense Review Report (Washington, D.C.: Department of Defense, 2006), 29, http://www.defenselink.mil/pubs. The QDR is a comprehensive review of U.S. national defense strategy, force structure, force modernization plans, infrastructure, and budget plans for the next twenty years.

[261]

Fortifying China

the world’s biggest and fastest-improving defense economy and the most advanced military-industrial complex. While the United States is well ahead, China appears to be ready, able, and willing to make major inroads in narrowing this gap. The next two decades may well mark China’s coming of age as a top-tier military technological power.

[262]

Chinese Terms

Aerospace Industry and Management Journal: Hangtian Gongye Yu Guanli 航天工 业与管理 Annual state plan for military equipment orders: Niandu Zhuangbei Dinghuo Jihua 年度装备订货计划 “Assassin’s mace” weapons: Shashoujian 杀手间 Basic and applied research: Yuxian Yanjiu 预先研究 Civil-military integration: Junmin Yitihua 军民一体化 Combining the military and civilian sectors: Junmin Jiehe 军民结合 Combining peacetime and wartime preparations: Pingzhan Jiehe 平战结合 Competition: Jingzheng 竞争 Comprehensive science and technology competitive strength: Zonghe Keji Jingzhengli 综合科技竞争力 Indigenous innovation: Zizhu Chuangxin 自主创新 Defense conversion: Junzhuanmin 军转民 Dual-Use Technology and Products Journal: Junmin Liangyong Keji Yu Chanpin 军民两用科技与产品 Dumbbell-shaped model: Yaling Moshi 哑铃模式 Encouragement: Jili 激励 Evaluation: Pingjia 评价 Fishing projects: Diaoyu Gongcheng 钓鱼工程 “Four Mechanisms”: Sige Jizhi -四个机制 Functional system of bureaucratic administration: Xitong (系统)

[263]

Chinese Terms Giving priority to military products: Junpin Youxian 军品优先 Horizontal lines of authority: Kuai Kuai 块块 Informatization: Xinxihua 信息化 Letting the civilian sector support the military sector: Yimin Yangjun 以民养军 Locating military potential in civilian capabilities: Yujun Yumin 寓军于民 Military representative office: Jun Daibiao Zhidu 军代表制度 Olive-shaped model: Ganlan Moshi 橄榄模式 Opening up to the outside world: Kaifang 开放 Research and development of serial equipment: Xinghao Yanzhi 型号研制 “Revitalizing the country through science, technology, and education”: Kejiao Xingguo 科教兴国 Small inner core, large supporting base: Xiao Hexin, Da Xiezuo 小核心，大协作 Spin-on: Minzhuanjun 民转军 Supervision: Jiandu 监督 “Third Line”: San Xian 三线 “Two Bombs, One Satellite”: Liangdan, Yixing 两弹一星 “Two layers of skin”: Liang Zhang Pi 两张皮 Vertical functional system: Tiao Tiao 条条 Vigorously promote coordination and cooperation: Dali Xietong 大力协同

[264]

Historical Official Exchange Rates between the Renminbi and U.S. Dollar, 1955–2008

1955–1971 1 U.S. dollar = Rmb 2.4 1972–1974 1 U.S. dollar = Rmb 2.2 1975–1976 1 U.S. dollar = Rmb 1.9 1977–1980 1 U.S. dollar = Rmb 1.5 1981–1986 1 U.S. dollar = Rmb 2.8 1987–1989 1 U.S. dollar = Rmb 3.7 1990–1993 1 U.S. dollar = Rmb 5.8 1994–2005 1 U.S. dollar = Rmb 8.28 July 2005 1 U.S. dollar = Rmb 8.11 January 2008 1 U.S. dollar = Rmb 7.31

[265]

Select Chinese-Language Bibliography

This is a select bibliography of key Chinese-language books and journal and newspaper articles on the Chinese defense economy. Pinyin transliterations of the titles can be found in the chapter footnotes. Cao Shixin, ed. China’s Military Conversion. Beijing: China Economic Press, 1994. Chen Lin and Chen Kai. “Working to Transform Popularization.” Defense Science and Technology Industry, March 2003. Chen Xiushan and Hu Tiecheng, eds. Research into Defense Industry Development Strategy and Defense Industry Policies. Beijing: Ordnance Industry Press, 2004. Cheng Dongsheng and Liu Lili. The Truth of Huawei. Beijing: Contemporary China Press, 2004. China Electronics Industry 50th Year Editorial Committee. 50 Years of the Chinese Electronics Industry. Beijing: Electronic Industry Press, 1999. China Industrial Yearbook Editorial Board. China Industry Yearbook 1994. Beijing: China Industry Yearbook Press, 1995. Chinese Academy of Sciences Comprehensive Planning Section. 2000 Statistical Yearbook of the Chinese Academy of Sciences. Beijing: Science and Technology Press, 2000. Chinese Academy of Sciences General Office. Chinese Academy of Sciences 2000 Yearbook. Beijing: Science and Technology Press, 2001. Chinese Academy of Social Sciences Industrial Economy Research Institute. 2002 China Industrial Development Report. Beijing: Economic Management Press, 2002. “The Chinese Manned Space Program: The Decision-Making Record.” Decision Making and Information, nos. 1–2 (2005). Chinese Ministry of Science and Technology. China High Technology Industry Development Report. Beijing: Science and Technology Press, 1999. Chinese Ministry of Science and Technology Development and Planning Section. 2005 Annual Report of State Science and Technology. Beijing: Ministry of Science and Technology, October 2005. http://www.most.gov.cn.

[267]

Select Chinese-Language Bibliography Chronicle of China’s Defense Conversion Editorial Writing Group. Chronicle of China’s Defense Conversion, 1978–1998. Beijing: Defense Industry Press, 1999. “Civilian Enterprises, Experts, Military Officials, Military Industrial Enterprises Speak Publicly about Defense Building.” Defense Science and Technology Industry, April 2004. “The Construction of a Merged Civil-Military Innovation System.” Outlook, 24 November 2003. Contemporary China Series Editorial Committee. Chinese Academy of Sciences (Lower Volume). Beijing: Contemporary China Press, 1994. COSTIND System Reform Section. “The Work of the Reform, Restructuring and Reduction of the Defense Science and Technology Industry.” Defense Science and Technology Industry, December 2002. “ ‘Decision’ on the Direction of the Science and Technology Industry.” China New and High Technology Industry Newspaper, 29 October 2003. http://www.cutech.edu.cn/ zhonghe. Ding Feng. “Military Use of Civilian Technology.” Dual-Use Technology and Products, May 2005. Du Renhuai. “The Predicament and Countermeasures for the Reform of Military Industrial R&D Institutes into Enterprises.” Journal of the Nanjing Political Academy, no. 1 (2004). ——. “The Transfer of Military-Oriented Enterprises in China’s Defense Industry.” Military Economic Research, July 2002. Du Ying. “Research into the Protection of Defense Technological Intellectual Property Rights.” Intellectual Property, April 2002. “The 863 Program in the 10th Five-Year Plan Gains a Batch of Self-Developed Innovative Commercializations.” Science and Technology Daily, 30 April 2006. “Expand the New Road of the ‘Military Use of Civilian Products’ in Defense Construction.” Defense Science and Technology Industry, May 2004. Fan Baoyuan. “Strengthen Civil-Military Technological Cooperation, Promote the Economic Development of the Capital.” Dual-Use Technology and Products, September 2001. “The Functions of the Defense Patents System.” Electronics Intellectual Property, May 2002. Gan Zhizhen and Liu Xisong. “The Distinction and Relationship Between the ‘CivilMilitary Dual Use’ Plan and the ‘Defense Conversion’ Plan.” Defense Science and Technology Industry, February 2003. Gui Lan. “Concerning the Issue of Civil-Military Dual-Use Technology Development.” Dual-Use Technology and Products, September 2004. Guo Zengming and Zeng Weirong, chief eds. The Economics of Military Equipment. Beijing: Liberation Army Press, 2001. Huai Guomo. “Nongovernmental Technology Enterprises Want to Provide Services for Defense Construction.” Science and Technology Daily, 18 June 2005. http://www. stdaily.com/big5. ——, chief ed. Record of China’s Military Conversion. Beijing: Defense Industry Press, 2006. Hu Lihua and Liu Zhihong. Research into the Thinking of Jiang Zemin on the Building of the Defense Science and Technology Industry. Beijing: Electronics Industry Press, 2005. Jiang Huacheng and Zheng Shaoyu. “Some Ideas to Build a Perfect Equipment Acquisition System.” Journal of the Academy of Equipment Command and Technology 14, no. 3 ( June 2003).

[268]

Select Chinese-Language Bibliography Jiao Qiuguang, chief ed. The Study of Military Armaments Management. Beijing: Academy of Military Sciences Press, 2003. Kao Ming. “A Historic Opportunity.” Aviation Precision Manufacturing Technology 40, no. 2 (December 2004). Kong Xiangfu. “Japan’s Defense Industry.” Contemporary Economy of Japan, March 2003. Kong Xianlun, chief ed. Military Standardization. Beijing: National Defense Industry Press, 2003. Liang Qingwen. “The Understanding and Recommendation of Issues Concerning CivilMilitary Cooperation.” Space Industry Management, February 2004. Li Bin. “Thoughts on Establishing a System to Industrialize Achievements Made by Defense R&D Institutes.” Ship Science and Technology 24, no. 6 (December 2002). Li Chengruo. “Combine Military with Civilian Capability to Build a 21st Century Military Information System.” Mobile Communications, February 1999. Li Jinxiang, “The Industrial Optimization and Platform of Industrial Restructuring of CETC.” Master’s thesis, Beijing Communications University, 2007. Li Wei. “Fourth Department Steps Up Aerospace Preliminary Research Work.” China Space Daily, 10 December 2003. Liu Dajun and Jin Xinliang. “Some Ideas on Economic Globalization and Countermeasures in China’s Defense Construction.” Military Economic Research, February 2004. Liu Daxiang. “Thoughts on Speeding Up the Development of Our Country’s Aviation Strength.” Aviation History Research, no. 2 (2001). Liu Jianjun and Zhao Bo. “Initial Successes Secured in Armaments Acquisition Reform.” Liberation Army Daily, 28 April 2004. Liu Jianshe. “Reflecting on a Number of Issues in the Advancement of the Integration of the Civil-Military Industry.” Defense, August 2002. Liu Jingshu. “New Military Changes in the World and Research on the Distribution of China’s Defense Economic Resources.” Military Economic Research, March 2004. Liu Linshan. “Investigative Research into the Defense Conversion Situation of Military Industrial R&D Institutes.” China Defense Technology Information, no. 5 (1997). Liu Xirong and Gan Zhiyu. “Introduction and Special Features of the Civil-Military Dual-Use High-Technology Park.” Defense Science and Technology Industry, April 2003. Liu Yanqiong. “The Experience and Enlightenment from the Success of the Two Bombs and One Satellite Projects.” Master’s thesis, National Defense Science and Technology University, 2002. Liu Yichang. “Lifting Defense Scientific and Technological Industries Out of Their Predicament.” Military Economic Research, January 1998. Luan Enjie. “Promote the Development of the Defense Manufacturing Industry Through the Strengthening of Manufacturing Technology Innovation.” Defense Science and Technology Industry, August 2003. Ma Chenyi. The History of the Testing of Conventional Weapons. Beijing: Chinese Communist Central Party School Press, 2005. Ma Hua and Yang Xueqing. “A Chapter in the Military Chronicle of Technology Leading the Army: The IT Alliance Embroiders the Military Flag.” Computer World, 4 August 2003. Ministry of Science and Technology. Development Report on China’s New and HighTechnology Industry. Beijing: Scientific Study Press, 1999. National Statistics Bureau, Ministry of Science and Technology. China Science and Technology Statistics Yearbook 1999. Beijing: China Statistics Press, 2000.

[269]

Select Chinese-Language Bibliography People’s Republic of China Ministry of Science and Technology. Development Report of China’s New and High-Technology Industry. Beijing: Science and Technology Press, 1999. Research Group on Chinese Science and Technology Development and Strategy. Annual Report of Science and Technology Development of China 2004–2005: The Construction of Civil-Military Integration and National Innovation System. Beijing: Intellectual Property Rights Press, 2005. Sha Nansheng, Liang Qingwei, and Liu Ganzhuo. “Policy Suggestions and the Current Situation of the Development of Our Country’s Civilian-Military Dual-Use Technology.” Defense Science and Technology Industry, September 2001. Shi Jinwu. “Plan and Utilize the State’s Technological Resources to Assist in the Building of a Technologically Powerful Military and Economy.” Dual-Use Technology and Products, March 2002. Shi Lei, ed. The Flight of Shenzhou: The Record of China’s First Manned Space Program. Beijing: Machine Industry Press, 2003. State Planning Commission Defense Mobilization Research Development Center. “An Assessment of the Employment Problem Regarding the Restructuring of Defense Enterprises.” Defense Science and Technology Industry, November 2002. “Strengthen Basic Defense Research Work.” China Basic Science, February 2000. Study Group on “The Research of Jiang Zemin’s Theory of Weapons Construction.” “Remarkable Innovation in the Theory of Military Equipment Development.” Chinese Military Science, no. 2 (2003). Sun Fei and Chen Houzi. “The Defense Industry Should Proceed Along the Road of Civil Military Integration.” Economic Forum, December 2003. Sun Guangyun. The Problems of the Reform and Development of the Chinese Defense Technology Industry. Beijing: Aviation Industry Press, 2003. “Ten Major Military Industrial Conglomerates Establish a ‘China Silicon Valley’ Alliance.” Liberation Army Daily, 8 February 2002. Wang Feng, ed. The Management of the Achievements of Defense Science and Technology. Beijing: Defense Industry Press, 2005. Wang Li, Long Tianyi, and Yu Guichen, chief eds. The Contemporary Chinese Ordnance Industry. Beijing: Contemporary China Press, 1993. Wang Qinzheng. “Yujun Yumin.” Defense Science and Technology Industry, February 2000. Wang Shilin. “The Brilliant Achievements of the Defense Science and Technology Industry in the Ninth Five-Year Plan.” Liberation Army Daily, 28 December 2000. Wang Yifeng. “Where Will China Buy Advanced Weapons?—An Analysis of the Chinese Acquisition Market.” Shipborne Weapons, March 2004. Wen Xisen and Kuang Xinghua. The Theory of National Defense Science and Technology. Beijing: National Defense Science and Technology University, 1997. Wen Xisen, Kuang Xinghua, and Chen Yingwu, chief eds. Introduction to the Study of Military Armaments. Changsha: National Defense Technology University Press, 2002. “The Work Report of COSTIND Minister Zhang Yunchuan at the Work Conference.” Defense Science and Technology Industry, January/February 2005. Wu Heng and Yang Kai, chief eds. The Contemporary Chinese Science and Technology Industry. Beijing: Contemporary China Press, 1992. Wu Jianeng. “My Opinion on the ‘Combining Military and Civilian, Combining Peacetime and Wartime’ Guiding Principles of New China’s Defense Technology and Industry.” Military Economic Research, July 2002.

[270]

Select Chinese-Language Bibliography Wu Weiren, chief ed. The Practice of Defense Science and Technology Industry Intellectual Property. Beijing: Intellectual Property Press, 2005. Wu Yuanping, Zhao Xinli, and Zhao Junjie. Research into the Formation and Development of New China’s Defense Science and Technology System. Beijing: Defense Industry Press, 2006. Wu Yuguang. “Dissecting the Problem of the Transfer of Civilian Use High and New Technology for Military Use.” Technological Achievement, June 2004. Xie Guang, chief ed. The Contemporary Chinese Defense Science and Technology Sector. Beijing: Contemporary China Press, 1992. Xin Guoping. “Research on the Industrialization and Commercialization of Science and Technology Achievements from Military Industry.” Gas Turbine Experimentation and Research 14, no. 2 (2001). Xi Qiaojuan, chief ed. The Kejiao Xingguo Strategy. Beijing: Beijing Science and Technology Press, 2002. Yang Huizhong, Chen Yan, and Lin Kaocheng, chief eds. The Laws of Equilibrium in the Comprehensive Development of the Defense Economy. Beijing: Haichao Press, 1999. Yang Jieping and Wang Xiaoping. The Path of Reform of the Military Industry. Beijing: Ordnance Industry Press, 2000. Yang Xinggen. “Transformation from ‘Mechanical Military Factory’ into a ‘Digital Military Factory.’ ” Aviation Science and Technology, January 2004. Ye Weiping. “Research into Civilian-to-Military Conversion under the Conditions of Non-Warfare.” Military Economic Research, January 2004. Yu Liankun, chief ed. The Management and Functions of the Chinese Defense Economy. Beijing: National Defense University Press, 2002. Yu Zonglin. “Important Contents of the Participation of Civilian Enterprises in Defense Construction through the Establishment of the Yujun Yumin Innovation System.” Speech published on the Defense Conversion Magazine website, 8 September 2004, http://www.chinajzm.com/wenzhang. Zeng Huafeng, ed. Casting Swords into Ploughshares. Beijing: Beijing Posts and Telecommunications University Press, 2000. Zeng Peiyan, chief ed. China High-Technology Industry Development Almanac 2002. Beijing: Beijing Institute of Technology Press, 2002. ——, chief ed. 2003 Report of the Opening Up of the West. Beijing: China Water and Hydropower Press, 2004. Zhang Bin. “Research into Our Country’s Defense Technological Development Strategy.” China Technology Forum, July 2003. Zhang Haifeng. “Changes in the Thinking on the Development of Dual-Use Defense Science and Technology.” Dual-Use Technology and Products, July 2001. Zhang Kan and Liu Yi. “On the Strategy of Opening Up the Military Products Market to Privately Owned Enterprises.” Military Economic Research, December 2004. Zhang Nanzheng and Zhang Shengwang, eds. Research into the Forward Problems of Contemporary Defense Economic Theory. Beijing: National Defense University Press, 2003. Zhang Qiong. “An Analysis of the Evolutionary Strategy of Japan’s Defense Science and Technology since World War II.” Journal of Harbin Institute of Technology (social sciences ed.), June 2000. Zhang Simei and Song Bin. “Meet the Challenge, Grasp the Favorable Circumstances.” Dual-Use Technology and Products, April 2006.

[271]

Select Chinese-Language Bibliography Zhang Wannian, chief ed. The Contemporary Military World and China’s National Defense. Beijing: Military Sciences Press, 1999. Zhao Jiangeng, Chen Guang, and Wang Yongjie. “Thinking about the Establishment of Defense Industrial Science and Technology Parks.” Science and Technology Progress and Policy, January 2004. Zhou Jianping. “Applying Civilian High-Technology to Military Construction.” Journal of Beijing Institute of Technology (social sciences ed.) 7, no. 1 (February 2005). Zhu Qinglin and Meng Renzhong, chief eds. China’s Disarmament and the Research of the Disposal of Defense Resources. Beijing: Military Sciences Press, 1999. Zhu Songshan, Tang Dade, Chen Guiming, and Dong Peifu, eds. Fundamental Theories of the Economics of Weapon Armaments. Beijing: Defense Industry Press, 2002. Zou Guowan. “Raising the Beneficial Use of Defense Science and Technology Research Funds.” Military Economic Research, March 1998.

[272]

Index

Absorptive capacity, 11–12, 18, 171–72 All-Country Defense Industrial and Technical Conversion Liaison Group, 56 Annual Military Equipment Research, Development, and Program Plan (AMEP), 77, 83 Annual State Plan for Military Equipment Orders, 77 Antisatellite (ASAT) test: Central Special Commission, 254; United States reaction, 235 – 36, 261– 62 Aviation Industry Corp. of China One (AVIC 1), 120t, 123, 148, 209, 224 Aviation Industry Corp. of China Two (AVIC 2), 120t, 123, 125, 148 Aviation sector, twenty-first century: conglomerates, 123; intellectual property, 143 – 44 AviChina, 247 Beijing, technology sector and, 223, 226 Beijing Aeronautics and Astronautics University, 155 – 56, 157t Beijing Institute of Technology, 155, 157t Belarus, 138 Bonds. See Capital markets, twenty-first century reforms Brazil, 253 Budget management: Deng Xiaoping era defense conversion, 79, 82– 85; twenty-first century reforms, 124 –27, 151– 52

CAC FC-1 fighter, 200 Cao Gangchuan, 104, 113, 154 Capital markets, twenty-first century reforms, 125 –26 Cartwright, James, 236 Catch-up approach, 235 – 62; developmental model and paths, 245 – 47; policy and security challenges for United States, 258 – 62; space industry sector, 247– 57; strategy debates, 242– 45; techno-nationalist ideological underpinnings, 237– 41 Center for Information Technology (CIT), 217–18 Central Special Commission (CSC), 29 – 30; catch-up approach, space industry, 254 Changsha, in dual-use economy, 226 Chen Qiufa, 117 Chengdu Aircraft Corp. (CAC), 68, 73, 162– 63, 200 “Chief designer system,” 150 – 51 China Aerospace Science and Industry Corp. (CASIC), 121t, 151– 52, 254 – 55 China Aerospace Science and Technology Corp. (CASTC), 120t, 254 – 55 China Association of Peaceful Uses of Military Industrial Technology (CAPUMIT), 56; defense conversion guidance, 71; linkages and information exchanges, 165 China Aviation Industry Corp., 149

[273]

Index China Commercial Aircraft Co. Ltd., 123 China Electronics Technology Enterprise Corp. (CETC), 119, 122t, 148, 150, 211, 213 “China in 2000” development strategy, 169 –70 China National Nuclear Corp. (CNNC), 82, 120t China Northern Industries Corporation (NORINCO). See China Ordnance Industrial Group Corp. (COIG) China Nuclear Engineering and Construction Corp. (CNECC), 120t China Ordnance Equipment Group Corp. (COEG), 121t, 124 –25 China Ordnance Industrial Group Corp. (COIG), 82, 121t, 124 –25, 127, 128 –29 China Posts and Telecommunications Industrial Corp. (CPTIC), 217–18 China Shipbuilding Corp., 82 China Shipbuilding Industry Corp. (CSIC), 121t China Space Industry Group, 149 China Space Technology and Industrial Corp. (CSTIC), 163 China State Shipbuilding Corp. (CSSC), 121t, 148 Chinese Academy of Engineering (CAE), 205 – 6 Chinese Academy of Sciences (CAS): Deng Xiaoping era, 50; dual-use economy and universities, 205 –10; Maoist era, 30; overhaul, 109; research and development, 89 Chongqing, in dual-use economy, 224, 225 –26 Christensen, Tom, 259 Civil-military integration (CMI), 197–202; benefits, 199 –200; categories, 198 – 99. See also Civil-military technological divide; Dual-use economy Civil-military technological divide, bridging of, 1–19; balancing wealth and military power, 5 – 9; integrating civilian and defense economies, 2– 5; NIS, defense economy, 13 –16; NIS, framework, 9 –13; technological innovation, 16 –19. See also Dual-use economy Commercialization, 3 – 4, 110 –11. See also Dual-use economy Commission for Defense Science and Technology Equipment (CDSTE), 49, 80 Commission of Science and Technology for National Defense (COSTND), 28, 29, 31, 35, 43, 49

[274]

Commission of Science, Technology, and Industry for National Defense (COSTIND), Deng Xiaoping era, 49 – 50, 56, 114f; competence building, 93; contract responsibility system, 83; defense conversion guidance, 71; 863 program, 59; linkages and information exchanges, 96, 97; regulation, 58, 65; research and development, 67, 77–79, 89; state-owned corporations, 82; vertical function system, 79 – 81 Commission of Science, Technology, and Industry for National Defense (COSTIND), dual-use economy and, 178, 181– 83, 186 – 90; 863 program, 191– 92; geographic placement, 223, 225 –26; linkages, 202– 3 Commission of Science, Technology, and Industry for National Defense (COSTIND), twenty-first century reforms: competition, 130; diffusion system, 145; foreign technology transfers, 137– 38; linkages and information exchanges, 165 – 66; regulatory regime, 132– 36; research and development, 147– 48; responsibilities, 112–13, 114f, 122; university system, 153 – 56, 161; Zhang and catch-up approach, 255 Communist Party Central Military Commission (CMC), 28, 49 – 50 Competence building: Deng Xiaoping era, 67– 69, 92– 94; twenty-first century reforms, 154 – 61 Competition: strategic weapons development in Maoist era, 46; twenty-first century reforms, 122, 130 Computer-aided design (CAD) technology, 162– 64 Computer-integrated manufacturing systems (CIMS), 162– 63 Conglomerates, twenty-first century reforms: catch-up approach, 245 – 46; catch-up approach, space industry, 254 – 55; company reorganizations, 119 –23; linkages and information exchanges, 166 – 67; research institutions, 148 – 50 Consumers. See End users Contract responsibility system (CRS), 83 – 86, 130 Conventional weapons, Deng Xiaoping era, 49 – 50, 79 – 81 Conventional weapons, Maoist era: barriers to growth, 31– 40; building of base, 23 –25; industrial base organization, 26 –28; political base organization, 28 – 30

Index Corruption, twenty-first century reforms, 131– 32 Cost-cutting measures. See Budget management Creative adaptation, 11–12, 140 Creative imitation, 11 Creator/producers, alignment with end users and regulators, 17–18 Cultural Revolution: aftermath, 93; as conventional defense industry hindrance, 25, 28, 32– 35, 38, 39; strategic weapons development shielded from, 43, 48 Dali Xietong strategy, 9, 183 Datang Microelectronic Technology Co., 221 Datang Telecom Technology Co. & Industry Group, 194, 220 –23 Debt reduction, twenty-first century reforms, 125 Defense conversion, in Deng Xiaoping era, 60 –73, 99; change to dual-use from, 177– 83; competence building, 67– 69; end users, 72–73; impact on defense economy, 73; implementation, 69 –71; innovation, 60 – 63; linkages and information exchanges, 71–72; performance-based evaluation and regulation, 63 – 66; research and development, 66 – 67; successes and drawbacks, 74 –75 Defense Conversion Liaison Office (DCLO), 56, 65 Defense economy, ix; balancing wealth and military power, 5 – 9; China’s two-pronged approach to transformation, 2; Deng Xiaoping era hierarchical division, 57– 58; integrating with defense, 2– 5; late 1990s, 98 –100; NIS and, 13 –16, 55 – 60. See also Defense conversion, in Deng Xiaoping era; Legacy defense industrial bureaucracy Defense mobilization systems, 195 – 96 Demand-pull considerations. See End users Deng Xiaoping, 6 –7, 82, 177 Deng Xiaoping era, 52–100, 104; defense conversion, 60 –75; defense economy and NIS, 53 – 60; key activities of reform, 88 – 98; legacy defense industrial base overhaul, 75 – 88; military to civilian shift, 48 – 51; state of defense economy, 98 –100 Diffusion system, twenty-first century reforms, 142– 46 Ding Henggao, 50, 84, 85, 86, 104, 168 Dombrowski, Peter, 19

Downsizing measures, twenty-first century reforms, 124 –27 Du Renhuai, 197 Dual-use economy, x, 4 – 5, 176 –234; balancing wealth and military power, 5 – 9; catch-up approach, 246 – 47; civilian high technology companies, 215 –23; civilmilitary integration (CMI) approaches, 197–202; compared with United States and Japan, 227– 33; COSTIND, 186 – 90; defense conversion change to, 177– 83; defense mobilization systems, 195 – 96; 863 program, 190 – 95; electronics and information technology sectors, 210 –15; establishment, 183 – 86; future, 233 – 34; geographic concentrations, 223 –27; long-term structure, 19; military high-technology systems, 203 – 4; mobilization system, 195 – 96; universities, 205 –10; Yujun Yumin defined, 183 – 84 Duplicative imitation, 11 EADS (European Aeronautic Defence and Space Company), 247 Education system, 13. See also Universities 863 program, 8, 59, 80, 162; dual-use strategy, 177–78, 190 – 95, 204 Electronics sectors, dual-use economy and, 210 –15 Encouragement, as twenty-first century reform, 132 End users: alignment with creators and regulators, 17–18; Deng Xiaoping era, 72, 79, 90 – 91, 97– 98; Maoist era, 33 – 34; twenty-first century reforms, 167–70 Espionage, twenty-first century reforms, 140 Evaluation, as twenty-first century reform, 131 F-10 fighter, 138 F-8II fighter, 138 FC-1 fighter, 162– 63 Feigenbaum, Evan, 25, 42, 46, 80, 238 Financial issues. See Budget management 511 project, 156 Foreign technology transfers: catch-up approach, 239; Deng Xiaoping era, 61– 62, 99; twenty-first century reforms, 137– 42 “Four mechanisms,” twenty-first century reforms and, 129 – 32 Fragmented authoritarianism, 37 Fregat M2EM3D radar system, 140 FSW-Jianbing satellites, 257

[275]

Index General Armament Department (GAD), 112, 130; end users, 170; linkages and information exchanges, 167; regulatory regime, 132– 36 Geographic clusters of industries, 87, 223 –27 Gerschenkron, Alexander, 243 Gholz, Eugene, 19 Globalization, defense industry and, 3 Gompert, David, x Great Dragon Telecommunications Co., 217–19, 222–23 Great Leap Forward: as conventional defense industry hindrance, 24 –25, 37, 39; Nie Rongzhen and, 47 Great Proletarian Cultural Revolution. See Cultural Revolution Guangzhou Shipyard, 61 Guizhou province, in dual-use economy, 224 Guo Yunfei, 193 Harbin Engineering University, 157t Harbin Institute of Technology (HIT), 155, 157t He Long, 27, 28 High technology companies: civilian and dual-use economy, 215 –23; geographic placement, 223 –27; military and dual-use economy, 203 – 4 HJD-04 commercial telephone switch, 194, 218 Huai Guomo, 178, 189 Huang Xuhua, 48 Huawei Technologies, 185, 215 –17, 222–23, 226 Hubei province, in dual-use economy, 223 –24 Hunan province, in dual-use economy, 224 Hunan University, 209 Indigenization, 6 Indochina, 23 Information and communications technology (ICT), 210 –15, 246 Information Engineering University (IEU), 158, 159t, 160, 161, 209 Information security industry, 214 Information technology: catch-up approach, 242– 45; defense industry, 3; Deng Xiaoping era, 80 – 81; 863 program and dual-use economy, 193 Informatization, 242– 45 Innovation: defense technological process, 16 –19; Deng Xiaoping era, 60 – 63; Maoist era, conventional weapons, 31– 33, 36 – 38;

[276]

Maoist era, strategic weapons, 30, 40 – 48; NIS framework, 9 –13; space industry and catch-up approach, 249 – 51. See also Research and development Institute of Automation, 207 Institute of Computing and Technology, 207 Institute of Electronics, 207 Institute of Metals Research, 207 Institution-building, as twenty-first century reform, 132– 37 “Institutions,” in NIS system, 10 Intellectual property rights: lack of, 38, 143 – 46; twenty-first century reforms, 106, 143 – 46 “Iron rice bowl” mentality, 60 – 61 Israel, 258 Japan, 227–28, 230 – 32 Jialing Machine Factory, 61 Jiang Mainheng, 180 – 81 Jiang Zemin, 6 –7, 106, 109, 158, 179 – 80, 239, 242 Jiangnan Machinery Group, 209 Jianshe Machine Tools Factory, 61 Jiefangjun Bao, 132– 33, 137, 153 – 54, 170 Jin Zhuanglong, 123 Jiuquan Atomic Energy Complex, 44 Joint design and development work, twenty-first century reforms, 139 Junmin Jiehe strategy, 7– 9, 177, 182 Junpin Youxian, 8 Kim, Linsu, 11 Knowledge Innovation Program (KIP), 109 Korean War, 23 –24 Leapfrogging strategy: information technology, 243; twenty-first century reforms, evaluation, 170 –75 Lee Teng-hui, 103 Legacy defense industrial bureaucracy, 19, 75 – 88; central planning’s continued dominance, 77–79; contract responsibility system, 83 – 85; COSTIND and vertical system, 79 – 81; geographic clusters, 87; implementation of changes, 87– 88; opposition to performance-based criteria, 85 – 86; state-owned corporations from ministries, 81– 83 Lewis, John, 27, 40 – 41, 46 Li Yizhong, 117 Liang Qingwen, 186 – 87 Liangdan Yixing (Two Bombs, One Satellite), 43, 238 – 41

Index Licensing, twenty-first century reforms, 139 – 41, 188 – 89 Lieberthal, Kenneth, 36 – 37 Linkages: catch-up approach, space industry, 253; Deng Xiaoping era, 95 – 97; dual-use economy, 202–15; twenty-first century reforms, 165 – 67 Liu Huaqing, 104, 178 –79 Liu Jibin, 111 Liu Xielin, 10 –11, 59 Luo Peilin, 42 Luo Ruiqing, 26, 28, 30 Machine Buildings ministries, Maoist era, 27–29, 46 Manufacturing sectors: Deng Xiaoping era changes, 94 – 95; legacy defense industrial base overhaul, 78; Maoist era, alignment with strategic weapons, 44; Maoist era, separation from innovation, 32, 36; twenty-first century reforms, 146 – 47, 161– 65 Mao Zedong, 22, 29, 177 Maoist era, 22– 51; consolidation of defense economy, 48 – 51; conventional weapons, barriers to growth, 31– 40; conventional weapons, building base, 23 –25; conventional weapons, industrial base organization, 26 –28; conventional weapons, political base organization, 28 – 30; National Innovation Systems (NIS), 25 –26; strategic weapons, building base, 23 –25; strategic weapons, flourishing, 40 – 44; strategic weapons, innovation facilitator, 44 – 48 Market economy, twenty-first century reforms, 104 Medium- and Long-Term Science and Technology Development Plan (MLP), 239 – 41, 258 – 59 Mianyang, in dual-use economy, 225 Military academies, twenty-first century reforms, 158 – 61 Military representative office (MRO) system, 96 – 97, 166 Military sanctions, from West, 91– 92 Mineral-ME radar system, 140 Ministry of Industry and Informatization, 116 –17 Ministry of Science and Technology (MOST), 108, 221; dual-use economy and expansion of 863 program, 191– 92; dual-use economy and linkages, 202– 4; dual-use strategy, 182, 185

Mobilization systems, 195 – 96 Modern Enterprise System (MES), 84 – 85 Moseley, Michael, 235 Nanjing Aeronautics and Astronautics University (NAAU), 155, 157t Nanjing Institute of Technology, 155 Nanjing Polytechnic University, 157t National Defense Industry Commission (NDIC), 28 National Defense Industry Office (NDIO), 28, 30, 35, 80 National Defense Science and Technology University (NDSTU), 87, 93, 155, 158, 159t, 161, 209, 221 National Development and Planning Commission (NDRC), 116 National Energy Commission, 117 National Innovation Systems (NIS), 13 –16; in 1990s, 105 –11; characteristics and functions, 12–13; in Deng Xiaoping era, 53 – 60; framework, 9 –13; in Maoist era, 25 –26 National security. See Security concerns Naughton, Barry, 239 Nelson, Richard, 11, 13 –14 Neo-techno-nationalism, 137 Nie Li, 50 Nie Rongzhen, 26, 29, 30, 41, 43, 47, 50 985 project, 155 North, Douglass, 10 North Vietnam, 23 Northwest Nuclear Weapons Research and Design Academy, 30, 48 Northwestern Polytechnic University (NPU), 155 Nuclear energy. See Strategic weapons entries Nuclear power management, responsibility for, 117 Nuclear submarine reactor, 46, 48 Oksenberg, Michel, 36 – 37 “Open Door” policy, of Deng Xiaoping, 6 –7 Ordnance industry, twenty-first century reforms, 124 –27, 128, 145 “Organizations,” in NIS system, 10 “Outline of National Defense Science, Technology, and Industry Policy,” 115 –17 Pakistan, 200 Patents. See Intellectual property rights People’s Daily, 252 People’s Liberation Army (PLA), 1–2, 15, 19; contract responsibility system, 83;

[277]

Index People’s Liberation Army (PLA) (continued), conventional weapons research, 31, 33 – 34; COSTIND reorganization, 116; Deng Xiaoping era reductions, 54; Deng Xiaoping era research and development, 77–79, 97– 98; dual-use strategy, 178; end users, 168 – 69; foreign technology transfers, 137– 38; Information Engineering University, 152– 53; information technology, 242, 243; linkages and information exchanges, 96, 166 – 67; private telecommunications companies, 215 –19; realignment of priorities, 49; rearmament and manufacturing, 165; recognition of need for high-technology, 103; technological and engineering schools, 158 – 61; telecommunications companies, 185; universities, 205 – 6 Performance-based criteria, defense conversion under Deng, 63 – 65, 85 – 86 Persian Gulf War, 102 Phazatron slotted array radars, 138 Pingzhan Jiehe, 7 Political patronage, strategic weapons development in Maoist era, 48 Posen, Barry, 16 “Primary actors,” in NIS system, 10 Private property, first protections for, 186 Production systems. See Manufacturing sectors Productivity Promotion Center (PPC), of ordnance industry, 145 Profitability, defense conversion and, 63 – 65, 70 Project management: dual-use strategy, 200 –201; twenty-first century reforms, 150 – 52 Public research institutes (PRIs), 106, 110 Qian Lingxi, 48 Qian Sanqiang, 42 Qian Xuesen, 42 Qinghua University, 30, 48, 209 Reconnaissance satellites, 194, 257 Regulations: alignment of creators and end users, 17–18; COSTIND and twenty-first century, 115 –17; Deng Xiaoping era, 63 – 65; twenty-first century, 132– 36 Ren Zhengfei, 215 Reppy, Judith, 14 Research and development: catch-up approach, 244 – 45; catch-up approach, space industry, 252; CMI’s benefits to, 200;

[278]

Deng Xiaoping era, 66 – 67, 88 – 91; NIS and 1990s reforms, 108 –11; twenty-first century reforms, 146 – 54; twenty-first century reforms, evaluation, 171. See also Innovation Reverse engineering, 11 Russia: catch-up approach, space industry, 253; foreign technology transfers, 138 – 42. See also Soviet Union Satellites, innovation and catch-up approach, 194, 250 – 51, 257 “Secondary actors,” in NIS system, 10 Security concerns: catch-up approach, space industry, 256 – 57; Taiwan, 1–2, 19, 23 –24, 103; twenty-first century, 102, 140 Segal, Adam, 239 Shaanxi province, 224 Shanghai Alliance Investment Ltd., 180 Shanghai Institute of Technical Physics, 207 Shenyang Aircraft Corp. (SAC), 141, 163; F-8 fighter aircraft, 36; Shenyang J-11B fighter, 142 Shenzhen, in dual-use economy, 226 Shenzhou spacecraft program, 160 – 61, 253 Shipbuilding industry, 164 Sichuan Changhong Corp., 225 Sichuan Jiuzhou Corp., 225 Sichuan province, in dual-use economy, 224 “Sixteen character guidance,” 7– 9 Social welfare obligations, twenty-first century reforms, 126 Socialist market economy, 54 – 55, 104, 178. See also Market economy Solid-fuel rocket motor technology, 151– 52 Soviet Union: conventional weapons aid, in Maoist era, 27, 31, 38, 40; strategic weapons aid, in Maoist era, 24, 42, 92; as threat, 53 – 54. See also Russia Sovremenny II 956E destroyer, 140 Space industry, catch-up approach and, 247– 57; access to knowledge, 251– 53; 863 program, 191– 92; innovation, 249 – 51; institutional support, 253 – 56; security concerns, 256 – 57 Spin-ons. See Dual-use economy State Defense Patent Agency, 144 State Administration for Science, Technology and Industry for National Defense (SASTIND), 117, 165 – 66 State Economic and Trade Commission (SETC), 59 State Economic Commission (SEC), 56 State Intellectual Property Agency, 144

Index State National Defense Mobilization Committee (SNDMC), 196 State Planning Commission (SPC), 56; Deng Xiaoping era research and development, 77–79; 863 program, 59; regulation, 65 State Science and Technology Commission (SSTC), 50, 65; 863 program, 59, 191 State-owned corporations, Deng era ministry transformation of, 81– 83 State-owned corporations, twenty-first century reform of: conglomerates formed, 119 –23; financial performance, 127–29; market forces, 124 –27 Stocks and bonds. See Capital markets, twenty-first century reforms Strategic weapons, Deng Xiaoping era, 79 – 81 Strategic weapons, Maoist era: building of base, 23 –25; consolidation of defense economy, 48 – 51; flourishing, 40 – 44; innovation facilitator, 44 – 48 Sukhoi Su-27 fighter aircraft, 139, 140 – 41 Sun Laiyan, 153 Supervision, as twenty-first century reform, 131– 32 Suttmeier, Richard, 137 Taiwan, 1–2, 19, 23, 24, 103 Technical standards, twenty-first century reforms and, 135 – 37 Technology exploitation institutes (TEIs), 106, 109 Techno-nationalist approach, to catching up, 237– 41 Telephone switching systems, 217–22 Twenty-first century defense economy, 101–75; competence building, 154 – 61; COSTIND’s role reduced, 112–17; diffusion system, 142– 46; end use, 167–70; foreign technology transfers, 137– 42; “Four Mechanisms” introduced, 129 – 32; institutions built, 132– 37; leapfrogging prospects evaluated, 170 –75; linkages, 165 – 67; manufacturing, 161– 65; NIS, 105 –11; reform goals, 101– 5; research and development, 146 – 54; state-owned enterprises reformed, 118 –29 “Two Bombs, One Satellite” (Liangdan Yixing), 43, 238 – 41 “Two layers of skin” syndrome, 106 211 project, 155 2100 project, 158

Ukraine, 138 United Kingdom, 167 United States: civil-military initiatives, 227– 30; commercialization rate, 142; dual-use strategy, 181; as nuclear threat in Maoist era, 24; policy and security concerns, embargo, 258 – 62; policy and security concerns, options, 260 – 61; reaction to ASAT test, 235 – 36, 261– 62; research universities, 208; twenty-first century concerns, 102– 3 Universities: catch-up approach, space industry, 253; Deng Xiaoping era, 50; dual-use economy, 205 –10; Maoist era conventional weapons, 32– 33; Maoist era strategic weapons, 30 – 31; twenty-first century reforms, 153 – 58, 161 Wen Jiabao, 208 White, Steven, 10 –11, 59 Workforce training. See Competence building World Trade Organization, 144 Wu Bangguo, 104 Wu Jiangxing, 217–19 Wuhan Second Ship Design and Research Institute, 67 Wynne, Michael, 236 Xian Aircraft Corp., 163, 226 Xian Institute of Optics and Precision Mechanics, 206 –7 Xian Military Representative Bureau, 166 Xu Guanhua, 185, 204 Xue Litai, 27, 40 – 41, 46 Yao Xianghui, 137 Yimin Yangjun, 8 Yinhe Yuheng core router, 194 Yu Zonglin, 188 Yujin Yumin strategy. See Dual-use economy Zhang Aiping, 50 Zhang Qingwei, 117, 123, 255 Zhang Wannian, 147 Zhang Yunchuan, 190 Zhongguancun, 226 Zhongxing Corp., 219 –20, 222–23, 226 Zhou Enlai, 26, 30, 38, 177 Zhu Rongji, 104, 105, 119, 122 Zizhu Chuangxin, 9, 183 Zou Jiahua, 104

[279]