Defence Industry Conversion in China: Problems and Prospects

Deba R. Mohanty, Associate Fellow, IDSA


The Problem

The conversion1 of People's Republic of China's (PRC's) huge military-industrial complex (MIC)—the nuclear, ordnance, aviation, space, electronics, and shipbuilding sectors under the State Council (known as 'defence industries') direction and enterprises run by the People's Liberation Army (PLA) (known as 'PLA industries')2—to production for the civilian market has been one of the prominent themes of the post-1978 economic reforms debate. Beginning in the late 1970s in an experimental and unofficial way, this programme has been approved formally and applied extensively since the mid-1980s. This programme has received attention at the highest levels. It is accounted for in the mechanisms of the Central Five-Year Plans. It is directed by a Three-Commission Liaison Group for Defence Conversion. This Commission brings together officials from the State Planning Commission (SPC), the State Science and Technology Commission (SSTC), the Commission on Science, Technology, and Industry for National Defence (COSTIND), and a State Council office dealing with the problems of the "Third Front industries".

By mid-1990s, the Chinese proclaimed their conversion programme to be an incredible success. Statistics, both from Chinese as well as other sources, confirm this claim According to a March 1994 article in the People's Daily, 77.4 per cent of the gross output value of the MIC in 1993 was in civilian products, up from 8.1 per cent in 1978. In some industries, the share of civilian production has topped the 80 and even 90 per cent levels.

In 1994, the ordnance industry claimed that 90 per cent of its industrial output in southwest China was for the civilian market. The ordnance sectors gross sales of civilian products in 1994 had reached 18.5 billion yuan with a possible annual increase of 30 per cent for the next five years. The China North Industry Corporation (NORINCO), China's largest defence equipment producer, has an ambitious development plan (according to Jhang Weimin, Vice President, NORINCO): 157 large and medium-sized factories, more than 30 research institutes, 200 sales companies, and 60 subsidiaries trading in 100 countries are engaged in civilian production. The Group's joint ventures (JVs) produced 40 per cent of the motor cycles sold in the domestic market and aimed to produce 450,000 mini cars and 20,000 heavy trucks per year by the end of the century. The aerospace industry claims that more than 70 per cent of its 1993 output value was in goods and services for the non-military market-place. The electronics industry, traditionally an integral part of China's military production complex, is reported to have been completely civilianised.3 The success record of the PLA industries has been almost similar. According to an official publication, in 1996, the PLA industries manufactured over 15,000 kinds of civilian products, and 2,500 items of national defence technologies that had been turned over for civilian use, generating 10 billion yuan in annual output value. The PLA's share of the civilian production value within the arms industry has increased by more than nine times to reach 76 per cent between 1980 and 1992 with a corresponding diversification of production lines into numerous civilian products ranging from household consumer goods to high-tech nuclear products.4 In a nutshell, these claims reflect remarkable achievements. China's success in its conversion programme is regarded as an international model by countries whose conversion efforts have by and large failed.

Tall claims, indeed. There is no doubt that China's 'defence industry', a term that calls for more precise definition, has increased its civilian production dramatically. Yet, there are many doubts as to the extent to which this increase constitutes 'conversion'. Given the economic and political imperatives—and extreme difficulties—of conversion in the West and elsewhere, the Chinese experience is unique and hence, worth investigation. In this paper an attempt has been made to examine some basic queries that might help in understanding the problem in its totality. The queries, among others, include the origins and motivations behind China's conversion policy; its short and long-term objectives; the unique features of conversion programme related decision-making, progress, and achievements; and problems and prospects. Analyses of all these aspects because of the very complex and exhaustive nature of the problem, if examined in great detail, will run into a couple of hundred pages, which is not possible here. Hence the broad points that are relevant for this investigation will be touched upon as briefly as possible.

The Problem of Definition

Investigation of any problem must begin with its definition. A generally accepted definition of conversion is that it is a "permanent programme consisting of political, economic, and technical measures for assuring the orderly transformation of labour, machinery, and other economic resources now being used for military purposes to alternative civilian uses".5 In common usage, conversion is described as turning 'swords into plowshares'. Here, the question is can all swords be turned into plowshares? The answer is 'no'. It is simply because of the fact that though the global arms (sale, procurement, and production by different states) expenditure has witnessed a decline in recent years, it is still slightly above the $700 million mark that the world is spending per year. Though the declining trend is partly due to a reduction in demand for military equipment all the world over (barring a few), no symptom has yet emerged or is likely to emerge for a complete abandonment/stoppage of military equipment production. In this context, the eternal national security question has been the primary bottleneck. In other words, if national security is a fact of life, production of weapons to ensure national security is the corollary. Hence, conversion, a noble yet irreversible process, becomes irrelevant. This is primarily the reason why it has failed (when applied) in many western countries. But, a more pragmatic question that follows is: if not all, can some swords be turned into plowshares? Here, the answer is 'yes'. In this regard, the definition cited above has to add "surplus" to "military purposes". Though it is still vague as to what surplus military purpose connotes, it nevertheless reflects the fact that surplus weapons do exist. The fact that there is a reduction in demand for military equipment, if added to this, makes a case for conversion. If this is so, then conversion has to be applied rationally, though not necessarily totally which is seemingly impossible. Even a rational element in conversion can contribute in substantial terms to the process of disarmament.

Conversion is a complex subject. It goes far beyond the commonplace that defines conversion as using defence production facilities to make civilian products. Economics, the discipline most commonly used for studying conversion, provides only partial answers. Politics, playing an equally important role in formulating public policy, is not the total answer either. Study of conversion has to take into account, among others, economics, management practice, public policy, national security, and social issues. In the conventional wisdom of economics, conversion has a positive economic effect. To put it simply, military production has a lower multiplier effect than civilian products. Spending on military goods is considered as expenditure on nonproductive capital. Hence, in a militarised economy, opportunity costs are high. It is often argued that conversion of surplus military capacity will compensate, to a great extent, those costs and at the same time increase the efficiency and wealth-generating capacity of the economy. Sounds good. But, more importantly it is related to the question of national security—how much the defence industry provides a nation for its security needs and how much conversion is needed so that the security needs are not hampered. In this sense, conversion is part of an optimisation problem that must balance different demands—military, political, social, and diminishing economic resources.

Operationalisation of conversion can take place in many ways. Some of them are mentioned here.6 First, production changeover—this occurs when the same equipment and line that are used to produce military items are used to produce civilian goods. This may completely disarm a particular arms industry. Second, consolidation or diversification—the former meaning merger of different production lines of the same MIC for civilian production and the latter meaning creation or acquisition of new lines for civilian production. Third, commercialisation of military R&D—in which one may witness visible involvement of defence firms or military research institutes developing technologies for potential civilian applications. Fourth, management of surplus weapons factories—in which one may notice a production facility, by adding or eliminating certain plant machinery, being able to produce a similar civilian item. Fifth, demobilisation and retraining—in which one may witness a successful redirection of specialised military talents for civilian works. Sixth, closure of unused military production lines—in which, through civil industrial participation, new production facilities (civilian) can be built. Seventh, sale/lease of surplus or unused military real estates—whereby it can generate money for civilian production or other purposes. And last, reengineering of an entire sector—which involves concentration of an entire redundant defence industrial capacity (a response to diminished demands for certain military items). It involves rationalisation of a whole indutrial base and reshaping its structure.

In general, two types of conversion can be contemplated—positive and negative.7 The former is based on moral grounds—the realisation that military production comes at the expense of economic development and welfare of the people may make a nation turn toward conversion thus contributing not just to national development but also to international cooperation, peace, and disarmament. The latter, unlike a seemingly Utopian model (that is, the former), is pragmatic and a product of lack of choice. It may be the corollary of a certain circumstance like the termination of war or conflict, signing of a peace treaty, a considerable relaxation of tension, the downfall of a military regime or a leader, economic crisis or other socio-political disruptions, or shrinking of demand by arms consumers at home or abroad. Such situations may make government, military enterprises, or political leaders realise that continued large-scale military production is not only counterproductive and wasteful but also impossible to attain.

Regardless of how we may define or operationalise conversion, there are several social, economic, strategic and management issues that need to be addressed. What are the implications of conversion for employment? Will the skilled technicians be able to make the shift? How do communities dependent upon military support activities cope with reductions? How does one reform the management and business strategy paradigms of defence businesses? Conversion is not only a technical problem, but also an organisational and commercial problem. It demands major shifts in corporate strategy and culture to focus on markets and customers. It requires changes in ingrained work habits and mindsets.

The Chinese Approach to Conversion

The Chinese take a pragmatic approach to conversion. It is necessary for them, but it must suit their objectives—hence, a conversion with Chinese characteristics. Conversion, according to official Chinese sources, involves "an economic strategy of military integration that brings military industrial technologies, facilities, and skilled labour into the purview of overall reforms".8 This strategy aims gradually to "reform and convert the past unified military product system into an integrated military civilian national defence scientific research and military indutrial production system". Unlike the western version, it is a reversible process—meaning conversion to reconversion and vice versa, according to needs. As an important reform process, it mixes industrial strategies as part of a larger effort to modernise the military. Thus, the approach, in contrast to what conversion means, is "swords into plowshares…and better swords".9 If we go beyond the achievement claims, for many Chinese officials, it means not only enhancing the civilian economy but also aiding the military capability. Thus, the Chinese use the term "civil-military combination", not "conversion" in their literature. Backed up by the political leadership, though resistance is coming from certain quarters, the conversion programme is expected to contribute significantly to the overall reform process.

Conversion is a part of the reform process in both the economic and military spheres. Economically, China is in the midst of the marketisation of a command economy which requires a shift in the mechanism used for the allocation of most of the resources from top-down politically directed administrative system of plans and quotas to the market place. This painful process has brought mixed results—the economy witnessing a spectacular consistent growth, huge GDP, growth in foreign trade and reserves, growth in FDI and above all a remarkable improvement in the Chinese lifestyle on the one hand, and negative consequences like rampant corruption, problems of inflation, unemployment, bankruptcy, problem of economic adjustments, social security, on the other. The Chinese economy is in transition, so is the military. Its vast MIC cannot escape the impacts of reforms. Hence, conversion has to play an important role in both economic as well as military spheres.

The Stages of Development

Before conversion in China became an official policy in the early 1980s, attempts had been made to bring about a viable civil-military combination. As early as May 1952, the Central Ordnance Commission, in a report to the Party Central Committee, had concluded that every defence factory should produce civilian goods.10 Such a conclusion by a military institution was quite surprising at that point of time considering the not-so-favourable conditions for such a proposal. Protracted civil war, sporadic but violent domestic uprisings (which forced the leadership to order several military operations in the name of national unification), external threats, and fragile political condition—all went against such a proposal. Such a thing probably points to the severe shortage of civilian goods which was due to the primacy given to military construction. Support for the civil-military combination also came from leaders like Mao and Zhu De in the mid-and late 1950s.11 In May 1956, Mao, addressing a State Council meeting, urged the authorities to pay attention to civilian goods that could be produced during peace time by the defence industries. In April 1957, Zhu De, one of China's revered military leaders, in a report to the PCC, stressed for a combination of civilian and military production within the defence industry to make more civilian goods during peace time and more military goods during war time. In other words, this policy may be described as "conversion to reconversion"—that is, the factories in the defence sector should be able to adjust their production according to varying threat perceptions. The period under study was not favourable for such a programme. In 1964, Zhou Enlai, at the Third National People's Congress (NPC), vehemently stressed for a reintroduction of civilian-military combination12 and peace time and war time production combination to help the national economy. It is important to note here that contrary to such calls, subsequent years till early 1970s saw what is called the "Third Front"13 military industrial construction in the remote regions. This ambitious programme, an answer to external threats and a notable contribution to national defence industry, was capital intensive (consuming more than 200 billion yuan) and exclusively meant for military production. In brief, calls for civilian-military combination were often faced with contradictory actions. There were attempts to renew such calls in subsequent years, but considering the difficult circumstances, it was shelved till the late 1970s. Throughout this period, top priority was nevertheless given to military production. It was only when Deng Xiaoping came up with his comprehensive reform programme, reforms in the military sector were undertaken Conversion, for the first time as a matter of practice, was contemplated.

The Origin and Motivations

To begin with, conversion has been determined by political, economic, and strategic factors. Favourable political climate came after Deng and his reformist leaders consolidated power by gradually demoting and removing their neo-radical opponents. Based on their 20 year old belief that economic backwardness is the most serious obstacle in China's path to socialism, they avowed the modernisation agenda, according highest priority to reforms in agriculture, industry, science and technology, and lowest priority to national defence. The economic reforms, out of which emerged kaifang—opening to the outside world to acquire advanced technology and scientific information, to promote exports, and to ultimately become a prominent member in the emerging global village. The long-term objective of China becoming a powerful economy was, during the initial years, hindered by a large surplus of facilities, both productive and obsolete, and workers, both skilled and unskilled. Obviously, it was thought that the principle of civil-military combination would link organically the defence building with national economic development and to use military industrial technologies for the development of peace. As an important component of the modernisation programme, reform in the military sector had to be undertaken on a priority basis considering the fact that the Chinese defence industries kept producing obsolete and low-tech weapons, even rejected often by the PLA, also there was considerable reduction in domestic orders, a huge under-utilised production capacity as well as a substantial surplus of workforce. The other factor behind conversion was a reappraisal of the international balance of forces. Considerable improvement in China's relationship with both the superpowers, and along with this a marked improvement in its relationships with states within the region paved the way for an orientation toward a new era of peace and stability. Emphasis on an independent foreign policy and the 'peace and development line' approach14 suggest that the danger of a global confrontation entangling China had considerably diminished. This was not only a period of relatively stability but also a period conducive to economic growth and modernisation. Anticipating at least a decade or two of peace, China could think of downplaying military modernisation in the short run and concentrate on economic development and modernisation so as to lay the foundation for military modernisation in the long run.15 In this strategy, the Chinese have strived hard to create a huge GDP, based on market economy and extensive international economic relations, only a fraction of which could provide ample resources for modernisation of the military. In sum, a combination of internal and external incentives has provided an opportunity for converting useless military industrial production capacity to useful civilian ends.

The Features and Processes

Reform of the defence industry, in which civil-military combination became a buzzword, was conducted in several steps. During the initial period, Beijing did not have a specific programme in place for implementing conversion.16 As a result, the defence industrial enterprises, which had been no more than extensions of the central bureaucracy for more than thirty years and had no expertise in converting to civilian production were forced to do anything they could to survive. PRC sources contain a vivid description of the plight of these enterprises; as one writer described, "At that time, it was basically a case of doing anything one could. Some nuclear arms factories produced soft drinks, airfields produced chicken soups, mirrors, dressing tables, etc."17 Examples such as this suggest that the initial period of conversion depended entirely on short-term market demand. Realising the mistakes, the Chinese decision-makers followed a gradual approach. The first round of reforms was introduced in the mid-1980s which was identical to that introduced in the State Owned Enterprises (SOEs). Despite their military role, defence enterprises count as state enterprises, and most regulations that govern the SOEs also apply to them. Reform objectives for both were the same—break up of old rigid planning system, more autonomy, and modernisation. A range of major restructuring and practices were initiated, enabling the managers of defence enterprises to deal with market forces, contracts, taxes, etc. instead of plan, allocation, and quota.

Introduction of responsibility system (where production and marketisation of goods must be in tune with expected lines with the responsibility of both being thrust upon the manufacturing unit) allowed each defence enterprise more freedom to choose which product to manufacture. The factory director responsibility system (where the head or the apex management body has to be responsible for the overall performance) made enterprise decision-making more efficient. Legal reforms, though not all comprehensive, gave them protection in transferring classified military technologies to participate in civilian economic activities. Financial reforms enabled them to retain some portion of profit, thus raising funds for further development. Price reforms enabled them to fix prices of goods along market lines. Labour reforms promoted labour mobility and thus productivity. Foreign trade reforms enabled them to retain a portion of their foreign exchange earnings.18

At national and regional levels, both organisational amalgamation and decentralisation were implemented to facilitate conversion. In the early 1980s, Beijing renamed its industrial ministries and set up COSTIND (whose functions included making key policy recommendations concerning conversion). In 1987, the entire defence industrial sector was placed under the State Council jurisdiction. Beijing also delegated authority over several centrally controlled enterprises to the provinces where they were located with an aim of breaking down artificial barriers, streamlining the central industrial bureaucracy, and facilitating the marketing of products produced by local defence factories. The government also began encouraging the defence industrial sector to form enterprise conglomerates19 in the early 1990s with the aim of breaking down the vertically organised self-contained industrial system of the past. These enterprise conglomerates have a fairly large degree of autonomy and perform projects under contract to their superior units. The overall enterprise organisation of the defence industry is structured thus: State Council—Industrial Department/General Headquarters—Provincial level General Corporations—Enterprise Conglomerates, Enterprises, and Individual Factories. It is to be noted here that this structure is vertical and there is very little horizontal interaction.

In addition to the above reforms, the government has offered special assistance to the defence industrial sector, especially to the Third Front industries. One important measure is to relocate enterprises and factories from remote mountainous areas to urban areas in the heartland or even to the coastal provinces to bring these closer to the market-place and improve communications. A number of regulations to facilitate relocation have been drawn up. Transfer of these enterprises has been included in the national plan, the cost of moving machinery and equipment as well as providing houses for employees and schooling for their children. All the cost has to be shared by the state, national banks, and the enterprises themselves. During the Seventh Five Year Plan (1986-90), 2 billion yuan was spent on relocation and reorganisation. This investment was spread among 121 enterprises and research units with a work force of 1,60,000.20 There was an increase of nearly 200 per cent in the allocation in the next plan. The Third Front is still in a very bad shape. It is estimated that overall reforms, including relocation, modernisation, and restructuring could demand an investment of more than 100 billion yuan which is a big sum for the state to provide. The more the delay, the more escalation in the cost.

Another form of assistance has come in the name of technological renovation. The government has encouraged defence industrial enterprises to select products of an appropriate technological level in order to make the most of their technology and work force. Provisions for technological renovations have been introduced in the national plan. After an enterprise fulfills the minimum requirements, the government then provides necessary capital grants and loans for the purchase of new equipment and technology. During the Seventh Five Year Plan, the government granted loans worth 4 billion yuan to renovate 296 items of technology and construct 450 production lines for civilian items. During the next Five Year Plan, 6.3 billion yuan in loans was spent on the renovation of more than 400 technology items.21 Similar assistance has come for capital construction. For example, Beijing intends small cars to be one of the main production lines for the Third Front enterprises. To ensure production efficiency, it has made provisions in the national plan and provided capital to enable the provinces concerned to construct automobile production zones.

The defence enterprises have been tried to be pushed into the market in other forms as well. One such measure is to transfer a few large and better run enterprises into joint sock companies and companies limited by shares, in which the state has a controlling or minority share. Enterprise conglomerates can become joint stock companies and will be permitted to hold shares in other enterprises. Some defence firms have become Limited Liability companies. In this, the shareholder's liability is proportional to his/her investment. The Company Law, coming into force in July 1994, states that both joint stock and limited liability companies have to register themselves with the authorities and those with monopoly rights in certain commodities will have to submit to inspection. By 1994, there were more than 200 defence firms, mostly medium-sized, which had been registered. Other mechanisms like management by foreign investors, leasing enterprises, leasing mortgaged property, employee buyout, and selling off to private enterprises have, due to some reason or the other, not been tried in the defence industrial sector.22

The PLA Case

One of the most dramatic examples of the new commercial spirit has come in the expansion of PLA activities into the commercial domestic and international market. It is not possible to narrate a historical account of PLA's commercial activities. However, recent trends merit attention. Its commercial activities, it seems, have gone beyond what the decision-makers had visualised because of its size, autonomy and the rapid pace with which it undertook commercial ventures. In recent times, there have been debates as to whether the PLA should indulge in commercial activities or not, and in July 1998, the CCP's Political Bureau in its fifth expanded session reviewed its performance and sought to curb them immediately.23 The decision to hand over all PLA commercial establishments to the civilian authorities provides ample evidence that all is not well with the PLA. Growing signs of corruption and considerable erosion of military ethics have invaded the smart but closed military system. At the same time there are very few signs that the PLA has shown till now to retreat from the commercial front. The large corporations run by the top command and many local operations under the military regions and group army control look as if they will be around for a while. This inevitably has brought a power tussle between the civilian and military authorities.

MIC organisations and the PLA have established several special economic zones like in Guangdong. Jingan, the commercial branch of People's Armed Police, has marketing operations for ammunition and small arms in the US. Units connected with China's strategic missile service arm run ice cream parlours in Beijing. Companies affiliated with Poly Group are active in the Hong Kong market. Some of the operations are quite substantial. The General Logistics Department (GLD) runs two of the largest operations: the Xinxing and the 999 Corporations. Xinxing was set up in 1984 with the explicit aim of becoming one of China's top business giants. It was incorporated as the Xinxing Group in 1989 and has close to 100 enterprises spread over several provinces. Its range of business includes import-export, marketing, industrial development, minerals and chemicals, real estate, hotel, tourism, and advertising. The 999 corporation is primarily involved in pharmaceuticals. It operates 34 enterprises, has branches in Germany, US, Russia, Thailand, and elsewhere. It has recently expanded its operations to include real estate, electronics, food, clothing, securities, and trust investment services. Large '999' advertising displays appear worldwide: not only do they decorate the flight tower at the capital airport of Beijing, they also add a distinctive touch to Hong Kong's spectacular harbour side. Even these displays can be found amid the billboard clutters of Times Square in Manhattan. In brief, it is noted that the PLA has entered into both civilian and commercial sectors and it seems that the latter has overshadowed the former—not a healthy sign. By doing this, it has not only defied some of the PRC's fundamental principles, but also created a situation which is fast going beyond the state authorities.24 Commercial activity of the PLA has powerful lobbies to protect which worries the civilian authorities. From Mao to Jiang—all political leaders have been urging the PLA to restrict itself to only productive civilian construction, not to venture into cheap commercialism, but what the PLA is doing only reflects what is happening in China now.

The Balance Sheet

The claims made and the evident diversity and scope of activities attributed to conversion are certainly impressive. There is no doubt that the MIC can produce goods and services for the civilian market, and it is evident that the defence sector's managerial and financial sophistication, though far from a satisfactory level, is increasing. But we must go beyond the obvious impacts of the reform in MIC and the resulting tactics of diversification.

Conversion has more problems than solutions. The Chinese do not admit it but it is quite visible when one looks into the problems faced by the civil industrial sector. To begin with, the MIC is part of the state sector which is in serious decline and now accounts for less than 50 per cent of China's total industrial output. By late 1995, some Chinese economists estimated that nearly 70 per cent of the SOEs were in the red. Zhu Rongji himself has admitted that the majority of the SOEs in trouble are from the defence sector, especially the Third Front—their plant capacity utilisation is between 10 to 30 per cent.25 If we examine the record since 1979, we find an interesting dialogue in progress: Beijing calls for greater effort for conversion and the industry responds with an assertion of successs. This has been going on for well over a decade which suggests that all is not well with conversion which has been resisted especially by the local as well as industrial groups. This is due to many reasons—primary among them being a tussle between local and regional versus big industries, differential treatment to defence industry by the state, violations of rules by the defence industries in many cases, and others. The state has allocated 20 billion yuan for defence conversion since 1979 which constitutes only 2 per cent of the total allocation for the state sector which shows that despite Beijing's urging, conversion appears to receive paltry direct financial support. The reform has pushed managerial responsibility down into the system and much of the converting units have been placed under local authorities that has led to problems like central-local tussle, local resistance due to market insecurity, subsidies for only defence firms, etc. Using macro economic analytical techniques, some Chinese economies point out that the profitability of conversion is about half that found in the civilian sector. Though the MIC's output is increasing, the overall economic contribution of conversion is less than 2 per cent of the total industrial production value. The most important factor that hinders conversion is social cost which is estimated to be consuming nearly half of the investment, thus even making the previously profitable units to lose.

Many authoritative critiques of conversion have been voiced in recent years. They are:

1. Lack of capital for conversion. When conversion is contemplated, the defence industries being capital intensive, financial constraints become a headache.

2. Low quality of converted products. Barring a very few technologically superior products, most of the products are for general consumer market. The profit ratio in the former is less and market is limited, but the latter fails to impress because the wide market is very competitive where quality matters most.

3. Because production cost is high for the converted items, its price fixation becomes a major worry. Uncompetitive price cannot survive in the market.

4. Lack of market research makes converted products chase other products, copy them and hence become secondary to others.

5. Lack of consumer consciousness and lack of understanding of the market.

6. Lack of cost consciousness.

7. Poor financial shape.

8. Management and organisational problems.

9. Social costs.

10. Inappropriate approach adopted—leaders look for a technological quick fix and go for short term gains whereas conversion is time consuming and demands a complete change in corporate culture.

All these observations come from Chinese sources. Yet, many are typical of remarks made about conversion around the world. They reflect problems not only of conversion but also of conversion of a command economy to one that is responsive to the post-modern market place.

The Future Issues

The future of defence conversion depends on the future course of the larger reform programme in China. Alongwith efforts have come problems such as corruption, opportunism, profiteering, powerful interest clashes. The MIC is vast and overcrowded. There is a surplus even in the skilled manpower sector including scientists, engineers, and technicians. One report suggests that even half the present size of the MIC will produce no less than the expected level. Despite Beijing's calls for conversion, it is clearly evident that the military production has never been ignored. The Chinese press continues to print both calls for 'self-reliance' and 'strengthening leadership in military production' on the one hand and emphasis on R&D, development of modern weapons, army building (a leaner, meaner fighting machine) in the new era on the other. At the same time, one should not forget that the conversion effort is embedded in the larger Chinese economy. It is subject to the effects of the Chinese business cycle which is uneven. But conversion being important, its urgency and lacunae call for a list of tasks to be undertaken by the state to make it a success. They are:

1. Dealing with the problems of social security.

2. Uniformity in formulation and implementation of industrial laws. Specific clauses can be of help to defence industries. Laws related to property and ownership rights of the industrial enterprises have to be clearly defined. Special care has to be taken in the governance of local, provincial and national laws.

3. Moving from capital-intensive (heavy and medium) to technology and information-intensive industry.

4. International standard of accounting and quality control.

5. Improvement in managerial and organisational efficiencies.

6. Developing 'pockets of excellence' zones and pillar industries.

7. Integration of conversion first to regional economic development and then moving up.

8. Expansion of export base for key industries.

9. Development of international cooperation.

10. Autonomy and minimum interference from the state.

The outcome of defence conversion in China is mixed. It has its success which can at best be described as partial. It has its failures. A balance sheet in the short term reflects positive results but this is not what the leadership wants. Conversion is a long term strategy primarily for military modernisation which can also contribute to national economic health. Going by this, one may say that the Chinese have lagged behind in their objectives. The difficulty of matching practical results with strategic intentions is certainly what the leadership is experiencing, but it still persists which might make the road ahead more arduous. It would be more accurate to describe this programme as an uneven and perhaps contradictory response to the economic reforms launched in the late 1970s. The way it was contemplated, programmed, and implemented shows inconsistencies. The result is visible—the recent call by the President of the PRC to the PLA to stop commercial activities and hand over all such enterprises to the civilian authorities is an ample testimony to it. Confusing indications have been coming from the state and industrial sectors as to how and where to move from here. Indeed, reforms and conversion have unleashed conflicting forces: maintaining a huge labour force or building sleek modern enterprises, building national defence or contributing to larger economy. To solve these is not easy. It seems that the road to China's wealth and power is not as easy as the Chinese leadership thought.



1. As is explained elsewhere, the Chinese do not use the term 'conversion', instead they use 'civil-military combination'. However, the operational modes have many similarities. Hence, I have used both terms.

2. This paper examines conversion in the 'defence industries' run by the State Council only as not much information is available about the operational aspects of conversion in the 'PLA industries'. The latter has only occasionally been discussed.

3. Most of the above mentioned data can be found in various editions of Foreign Broadcasting Information Service (FBIS): Daily Report China. See, FBIS-CHI-95-133, July 12, 1995, pp. 47-48; FBIS-CHI-94-204, October 21, 1994, p. 35; FBIS-CHI-96-004, January 5, 1996, pp. 21-25; and FBIS-CHI-96-026, February 7, 1996, p. 46.

4. For details, see Srikanth Kondapalli, China's Military: The PLA in Transition (New Delhi: Knowledge World & IDSA; 1999), pp. 194-98.

5. Lloyd J. Dumas and Marek Thee (eds.), Making Peace Possible: The Promise of Economic Conversion (Oxford: Pergamon Press; 1989), p. 7. Also, see Seymour Melman and Lloyd J. Dumas, "Planning for Economic Conversion", The Nation, April 1990, p. 509.

6. For details, see Jorn Brommelhorster and John Frankenstein (eds.), Mixed Motives, Uncertain Outcomes: Defence Conversion in China (London: Lynne Rienner; 1997), pp. 5-6.

7. These two types have been explained in detail by Yitzhak Shichor. See, Yitzhak Shichor, "Conversion and Diversion: The Politics of China's Military Industry After Mao" in Efraim Inbar and Benzion Zilberfarb (eds.), The Politics and Economics of Defence Industries (London: Frank Cass; 1998), pp. 144-47.

8. This official definition (by COSTIND) is cited in Mel Gurtov, "Swords into Market Shares: China's Conversion of Military Industry to Civilian Production", The China Quarterly, No. 134, June 1993, pp. 213-14.

9. Paul Humes Folta, From Swords to Plowshares? Defence Industry Reform in the PRC (Boulder, Colorado: Westview Press, 1992), p. 1.

10. Chai Benliang, "Conversion and Restructuring of China's Defence Industry" in n. 6, p. 67.

11. Brommelhorster and Frankenstein, n. 6, p. 68.

12. Brommelhorster and Frankenstein, n. 6, p. 68.

13. For a detailed description on Third Front defence industrialisation, see, Barry Naughton, "The Third Front: Defence Industrialisation in the Chinese Interior", The China Quarterly, no. 115, September 1988, pp. 351-86.

14. This approach was contemplated during the late 1970s period. It suggests that world peace and economic development are mutually supportive and should be pursued. See, A Doak Barnet, China's Economy in Global Perspective (Washington D.C.: The Brookings Institution, 1981).

15. Shichor, n. 7, p. 148.

16. Arthus S. Ding, "Mainland China's Defence Industry in the Context of the Central-Local Relationship", Issues and Studies, vol. 32, no. 7, July 1996, p. 12.

17. Sun Zhenhuan, Zhongguo Guofang Jingji Jianshe (The Development of China's Defence Economy) (Beijing: Junshi Kexue Chubanshe, 1991), p. 28. Cited in n. 16, p. 12.

18. Reforms in the defence sector are described in detail by Folta. See, n. 9, pp. 87-109.

19. The Chinese enterprise conglomerate consists of any group of companies linked by some form of cooperation: for example, a core plant and a number of satellite plants. It does not include the Western concept of the conglomerate as a collection of enterprises linked by a holding company. In other words, the Chinese concept expands the term.

20. Ding, n. 16, p. 9.

21. Ricky Tung, "Market-Oriented Reform of State-Owned Enterprises in Mainland China", Issues and Studies, vol. 31, no. 2, p. 11.

22. For details, see, Tung, n. 21, pp. 1-20.

23. Cited in Srikanth Kondapalli. See, n. 4, p. 195.

24. PLA's commercial activities are described in detail by Stacey Solomone. See, Stacey Solomone, "The PLA's Commercial Activities in the Economy: Effects and Consequences", Issues and Studies, vol. 31, no. 3, March 1995, pp. 20-43. Also see, Thomas J. Bicford, "The Chinese Military and its Business Operations: The PLA as Enterpreneur", Asian Survey, vol. XXXIV, no. 5, pp. 460-74.

25. See, Tai Ming Cheung, "On Civvy Street: China's Lumbering Arms Makers Face Market Rigours", Far Eastern Economic Review, February 6, 1997, p. 40.