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Strategic Analysis:
A Monthly Journal of the IDSA
Defence Industry Conversion in China
By Deba R. Mohanty
*
I : The Early Years 1949-76
The recent order in July 1998 by Jiang Zemin, President of the People’s Republic of China (PRC), to the People’s Liberation Army (PLA), to stop all commercial activities and hand over all commercial establishments to the State Council and other civilian authorities in due course of time, has once again brought into the limelight an important question—has the much publicised market-driven conversion policy of China been under stress? This question automatically raises doubts over several related issues like excessive emphasis on commercialisation by the armed forces, defence industry, negative implications of conversion, etc. However, all the issues put together point to a single query—is this decision a result of the failure of the official conversion policy in China? To find answers to this is not easy as a full understanding and examination of “defence industry conversion in China” 1 requires a multi-disciplinary approach—no single perspective can capture the complexity of the problem as a whole. The vastness and complexity of this study, ab-initio, requires an in-depth examination of the origin of the conversion policy in China. In this article, I will examine the political, socio-economic, and strategic factors that have, in a period of time, influenced the Chinese leadership to formulate a viable long-term policy on defence conversion. In other words, I will examine the politics and economics of defence industry conversion in the pre-reform period—from 1949 to 1976, that is broadly known as “Mao’s Era.”
The Origin
Military industry was one of the earliest industries in modern China. 2 Earlier, China had invented gun powder, and designed and produced large varieties of weapons, including swords, spears and halberds, sophisticated crossbows, chariots, incendiary weapons, firearms as well as armoured cars, rockets and ballistic weapons, and cannons. Although China had demonstrated a remarkable improvement in its weaponry, during each successive century these were no match for the Western advanced military technology when these two giant civilisations clashed in the mid-19th century. The Western advancement in military technology has been witnessed by the Chinese from time to time—the most recent example being the Gulf War which more or less convinced the Chinese leadership, though they hate to admit it, that, as far as advancement in military technology was concerned, in reality they lagged far behind their Western counterparts. One of the most important lessons learnt by the Chinese during the second half of the last century was the need to launch a modern military industry. A number of military factories were built during and after the 1860s. Most of them survived till the turn of the century. Some of them are still operative under different names or in different locations, for example, the Chongqing Chang’an Machinery Plant, built in 1862, and the Jianshe Machine Tools Plant, which was founded in 1889 as the Hubei Guns and Cannons Manufacturing Factory in Hanyang and then moved to Chongqing during the Sino-Japanese War. 3 Military factories were also set up after the 1911 revolution. Both the nationalist Guomindang government and the powerful landlords who controlled the northern parts of China set up their own military factories. A few of these factories, like the Shenyang Wusan Complex, built in 1920, are still operative. During the late 1920s and 1930s, the Chinese Communist Party (CCP) built its own military production facilities, usually in isolated and remote base areas. It is to be noted here that the CCP’s policy of setting up military factories in the remote areas of north and north-east China was seemingly deliberate. The motives behind such a step are still unexplored, though it is generally agreed that this set up a precedent which was revived during the 1960s and early 1970s as a deliberate move to build a vast military-industrial complex and facilities in the remote areas, known as “Third Front Industries.” 4 After 1945, the CCP also succeeded in taking over a small number of Japanese military plants, such as the North-East Machinery Plant in Shenyang and the Qingyang Chemical Plant (later renamed as the Liaoning Qingyang Chemical Industrial Corporation), both built in 1937. 5 Many military factories built by the Japanese in the early 1930s were dismantled and removed by the Soviet Union following Japan’s surrender in 1945.
During the time of the Communist victory, the CCP controlled approximately 100 military factories. Nearly three-fourths of these factories had been nearly abandoned and occasionally sabotaged by the retreating Nationalists. The CCP began to convert some of these backward military plants to civilian use in such fields as farm machinery, light industry, machine-building and metallurgy, even before October 1949. This step was apparently taken because of Soviet military support and also the CCP had expected the end of the Civil War which also brought with it a moderate commencement of economic construction. By the end of the year 1949, no more than 76 military enterprises remained, mostly for ordnance (45), but also for aircraft (6), radio equipment (17), and shipbuilding (8), with over 1,00,000 employees. 6 A close look at these factories also reveals that China at that time was most backward in the field air force, the most dependent being the ground and naval forces. China barely had the capability to produce aircraft, although elementary aeronautical engineering research was carried out in a few universities with crude experimental facilities. Ordnance, aircraft, radio equipment, and shipbuilding became four major branches of China’s military-industrial sector during that time and as consequent events show, it was time for devoting necessary facilities, including research, to all of them. Two additional main branches—space (missiles and satellites) and nuclear weapons—were added later.
The Nascent Stage of Development
Long before the conversion of defence industry in China became an official policy in the early 1980s, attempts were made to bring about a viable military-civilian combination. 7 After the founding of the PRC, as early as in May 1952, the Central Ordnance Commission, in a report to the Party Central Committee (PCC), had concluded that every defence factory should also produce civilian goods. 8 Such a conclusion by a military institution was quite unprecedented at that time. It is to be noted here that during the early 1950s, the PRC was witnessing sporadic but violent domestic uprisings at many places which forced the leadership to carry out several military operations (in the name of “national unification”) to suppress them brutally. The external threat perception was also quite visible. Fears of aggression by outside forces, including the military, were never low. Hence, such a decision probably indicates that severe shortages of civilian goods existed at that time and also civilian restoration was viewed as an imperative after many years of civil war.
Strong support for the military-civilian combination came also from Mao Zedong and Zhu De in the mid-and late 1950s. Indeed, throughout the 1950s, there was a simmering debate between two influential groups, one favouring the continuation of the status quo by periodic reforms and the other opting for radical initiatives, in the armed forces. This, it seems, indirectly influenced the decision-making in favour of reforms where the issue of civil-military combination was a hot topic. In May 1956, Mao Zedong, addressing a State Council meeting, urged various authorities to pay attention to civilian goods that could be produced during peace-time by the defence industries. In April 1957, Zhu De, in a report to the PCC, stressed for a combination of civilian and military production within the defence industries to make more civilian goods during peace-time and more military goods during war-time. In other words, as China’s most famous military leader, he focussed on a policy that may be described as “conversion to reconversion”—that is factories in the defence sector should be able to adjust their production according to varying threat perceptions. 9
The overall environment during most of the period under this study was not favourable to fostering the policy of conversion. It is hardly surprising that few resources were available to overcome civilian production problems in the late 1950s and early 1960s. Sensing this, in 1964, Zhou Enlai, at the Third National People’s Congress (NPC), vehemently stressed for a reintroduction of military-civilian combination and peace-time and war-time production combination to help the national economy. It is important to note here that contrary to such calls, the subsequent years till the early 1970s (1964-71) saw the Third Front industries coming up at an alarming pace which consumed more than 200 billion yuan. 10 Defence industries in the remote regions were not only capital intensive but also were exclusively producing military products. Hence, to say that conversion or civil-military combination had already been in sight is to contradict some facts. In subsequent years, there were attempts to renew a military-civilian combination policy. Considering the difficult circumstances (from the Cultural Revolution to the succession struggle after Mao’s death), however, it was only in 1982 that Deng Xiaoping was able to reinitiate this policy. Nonetheless, it is quite evident that, throughout these years, top priority was given to guarranteeing military product assignments.
The Military Industry Under Mao
Soon after the establishment of the PRC, the leadership found itself involved or implicated in domestic, regional, and even global conflicts. The problem of internal unification as well as preparation to face external forces, coupled with China’s ambition to become a great power, called for a considerable investment in the construction and expansion of its military-industrial infrastructure. For the next two and a half decades, the nature and development of China’s military industry were shaped by Mao’s revolutionary legacy and ideological militancy; by frequent political upheavals, centralised control and constant bureaucratic interference, economic difficulties, and technological backwardness; overwhelming dependence on massive Soviet support in the 1950s; and no less important, by Beijing’s high threat perceptions and constant security concerns both within and beyond its borders. 11
One of the problems that complicated the military production process in China comprised frequent reorganisations and structural changes. 12 No distinction was made initially between military and civilian production. Both were administered and controlled by the Ministry of Heavy Industry which guided both production systems through specialised bureaus and commissions. In August 1952, this ministry became the First Ministry of Machine-Building (MMB) responsible for civilian production (including shipbuilding). Consequently, the Second MMB was established to take charge of ordnance and aviation industries. The Bureau of Telecommunications was transferred from the First MMB to the Second MMB in March 1953. The two MMBs were recombined in February 1958. They were separated yet again in September 1960, when a Third MMB was set up to supervise all aspects of conventional military production. Non-conventional military production (nuclear weapons) had become the sole concern of the Second MMB. 13 The core of China’s machine building industry was formed through the massive material and technical assistance provided by the Soviet Union during the 1950s. 14 During the First Five-Year Plan (1953-57), nearly 100 of 166 major Soviet-assisted industrial projects were undertaken in the field of machine building. 15 Structurally, the defence industries were configured in the Soviet organisational mode. They practised vertical integration, whereby each plant was composed of as many departments as the whole manufacturing process required. The two ministries in charge of the machine building industry were also comprehensive in nature. It is quite obvious that as the organisational structure expanded, its efficiency declined.
Research and development (R&D) related to military production had been coordinated by the National Defence Science and Technology Commission (NDSTC), created in October 1958 under the Ministry of National Defence. It was originally responsible for overseeing nuclear weapons and delivery systems development. Through a series of reorganisations, its responsibilities were expanded to include supervision and coordination of all military R&D projects, allocation of funds, and personnel training. In November 1959, the Central Military Commission (CMC or “Military Commission”—as it was called at that time) established a Defence Industry Commission under Marshal He Long, which merged with the Third MMB in January 1961. In November 1961, an Office of Industry of National Defence (OIND) was set up by the State Council and the CMC to coordinate military industrial production. Because of its very nature, available details regarding the OIND are few. 16
A major reform of the entire MMB system became necessary with the growth and diversification of China’s defence industry in the early 1960s. In February 1963, radio (later called “electronics”) was removed from the Third MMB to form the Fourth MMB. Ordnance and shipbuilding industries were taken from the Third MMB to become the Fifth and Sixth MMBs. Now responsible for aviation and missiles alone, the Third MMB was dismembered again in November 1964, when a Seventh MMB was set up to control all aspects of the missile industry. In sum, by the mid-1960s, China’s defence industrial complex comprised six MMBs: the Second (nuclear weapons), the Third (aircraft), the Fourth (electronics), the Fifth (ordnance), the Sixth (shipbuilding), and the Seventh (missiles). During the Cultural Revolution and later, from the mid-1960s to the mid-1970s, there were many changes in the overarching organisation of the Chinese military-industrial sector, but this ministerial structure remained virtually unchanged until the early 1980s.
Frequent reorganisations reflected the domestic and bureaucratic tendencies, China’s international relations, and economic and technological shortages. The Korean War, indeed, gave an early boost to China’s military-industrial production and Soviet assistance played a major role in the overall military-industrial development. The First Five-Year Plan itself included the establishment of 44 new big military-industrial projects, and 51 medium-to-big projects for reconstruction or expansion of old military factories. In 1956-57, owing to economic difficulties, Beijing decided to slow down the construction of defence industry and to shift (or convert) funds for economic construction. This shift was apparently a result of Mao’s resolution of a heated leadership debate over external threats and defence needs. In his April 1956 speech, “On Ten Major Relationships,” 17 Mao had vehemently pressed for a reduction of defence expenditure so as to accelerate overall economic growth, particularly heavy industries, which in turn could serve the needs of defence. This slowdown in both construction and production was again witnessed during the Great Leap Forward (1958-60), when the construction of small plants and backward furnaces diverted scarce raw materials from the heavy industrial sectors. Decentralised planning and control of the small plants resulted in haphazard location and poor construction, poor quality control and exaggerated output claims. The shift was evident in the machine building industry’s growth among the branches of modern industry (28.7 per cent). Between 1957 and 1967, the machine building industry’s rate of growth was behind the chemical fertilizers and petroleum industry. Also indicative of the increased attention being paid to agricultural machinery was the establishment in the mid-1960s of an Eighth MMB. The tenure of this MMB was brief. It is not clear as to exactly when it became defunct.
However, the period between 1949 and 1959 can be called “one of the best periods in the defence industry constuction in new China.” 18 The next decade was one of the worst. In this decade (1960-70), the Chinese military industry was facing enormous challenges of how to manage qualitative output with scarce resources. Growing isolation and perceived threats from external forces and stagnant domestic economic conditions forced Beijing to adopt two fundamental policies which affected its military industry in two major ways. One policy was to concentrate its military doctrine on the two extreme and opposite ends of the strategic spectrum: the most primitive (people’s war) and the most modern (nuclear war), in order to achieve quick and credible deterrence. Obviously, the mid-way option (conventional war for which it depended on substantial Soviet assistance) was downgraded. By this time, China’s conventional military-industrial infrastructure had accumulated an enormous surplus of underutilised human and material capacity and relatively outdated technology. It is to be noted here that this surplus is an essential component in understanding China’s later military-to-civilian conversion.
The other fundamental policy was Beijing’s strategic decision in May 1964 to shift many defence industries to, and create more in, remote regions—known as the “Third Front” industries. This is regarded as one of China’s colossal mistakes, for the reconstruction of which it is still spending an enormous amount of money. These difficulties were further exacerbated by the turmoil caused by the Cultural Revolution that disrupted all aspects of life in China, not even sparing its conventional military industry. Much of this disruption was over by the late 1960s, yet, military production continued to be undermined by radical politics. In mid-1971, a major policy debate between military and civilian planners surfaced. The controversy went by the rubric of the “electronics” versus “steel” debate. The issue was not civil versus military production, but rather a more refined argument as to budgetary allocation within the defence industries—an important corollary being the relationship between defence production and overall heavy industrial production—which was to be the “leading factor.” 19 The debate politically polarised national security planners—the “radicals,” led by Lin Biao took the “electronics” side of the debate while the “steel” faction was a coalition of Party bureaucrats, headed by Zhou Enlai. This latter group was more closely in line with Mao’s strategic outlook, and consequently, steel was favoured over electronics.
The role of Lin Biao and his supporters and consequently, the Gang of Four, had a lasting impact on the military industry. The former pushed for accelerated development of all weapons on crazy plans, fantastic imaginations, and hunting targets, which were far beyond China’s reach. 20 This resulted in inflated capital investment, escalation of investment in not-so-important production facilities, over-running of national resources, and a serious disorder in the science and technology sector. The Gang of Four, adding more misery, used all means available to frustrate the efforts of China’s more moderate leaders to readjust and stabilise military production. 21 These efforts were aborted with the death of Zhou Enlai in January 1976 and the purge of Deng Xiaoping shortly afterward, but not for long. Mao died in September 1976 and precisely a month later, the Gang of Four was smashed, thus, ending ten years of turmoil.
Preliminary Assessment
By the mid-1970s, China’s conventional military industry had managed to move on from copy production to independent design and development of a variety of weapons. However, it is a fairly well established fact that most of these weapons were no more than upgraded versions of Soviet hardware rather than original high-tech Chinese creations. It was primarily in the non-conventional field and its related technologies—atomic and hydrogen bombs, missiles, satellites, and nuclear submarines—that China had made its more remarkable achievements. It is also important to note that in those turbulent years, China’s defence industry, controlled for a while by the soldiers rather than officials, catered almost exclusively to military needs, ignoring civilian ones almost completely.
Though exclusive emphasis on military production by the defence industries had continued for a long time, occasional resistance favouring civil-military integration also came from some quarters. The first such case came in 1952 when the Central Ordnance Commission pressed for production of civilian goods by the military industries. Mao Zedong had dealt with this issue in his famous April 1956 speech (ref: third section on the “Relationship Between Economic Construction and Defence Construction”). Marshal Zhu De also suggested for a civil-military integration in 1957. Based on these convictions, the defence industry was instructed to implement the policy of “Dual Duty, Dual Skills, Combination of Peace and War Production,” enabling production of both military and civilian products simultaneously on the basis of ensuring the fulfilment of military production and gradually raising the level of technology.
This policy was implemented at a fast pace by the MMBs. In 1959, the value of civilian output produced by the defence industries reached 52 per cent of their total production value. 22 This was probably the best period for both military and civilian production—while the former had the Soviet blessings, the latter was backed up by a well scattered but comprehensive industrial infrastructure created by the MMBs. The beginning of the 1960s saw a negative change, with the growing radicalisation of politics and increased external threat perception. A substantial fall in the civilian production output was obvious as the military enterprises were blamed for “not attending to their original duties.” In other words, military enterprises were urged to produce military products only and ignore the civilian goods which could be taken care of by the civilian industrial units.
Zhou Enlai tried to revive the policy of civil-military integration (expressed in his report to the Third NPC in 1964) but failed due to increasing pressure from powerful groups working against him at that time. This was followed by the Cultural Revolution, and civilian production by the military factories practically came to a standstill. Till 1978, the share of civilian products in the total defence industrial output seldom crossed the 7 per cent mark. Assessing the period under this study, it can be argued that as far as civil-military integration was concerned, China made an initial experiment which brought out mixed results during the 1950s. This was primarily due to political initiatives and diversion of huge amount of resources to the MMBs, not to overlook the massive industrial infrastructure. Most parts of the two successive decades fared badly because of depressing economic conditions, radicalised politics, emergence and consolidation of powerful factions at the top, and a perceived threat, among others. It only began to improve after Mao’s successors reintroduced the policy of conversion, as part of a long overdue Four Modernisations programme.
II : Examining Definitional Problems and Contradictory Policies
Conversion of the PRC’s vast military industrial complex (MIC)—the nuclear, ordnance, aviation, space, electronics, and shipbuilding sectors under the State Council direction, plus enterprises run by the PLA—to production for civilian market has been one of the continuing themes of the regime’s post-1978 economic reform efforts. Since the mid-1980s, scholarly attention, both from Western and Chinese sources, has been paid to examine the economic and politico-strategic impacts of conversion in China. Conversion efforts, however, received a serious blow recently when President Jiang Zemin issued an order to the PLA to stop all commercial activities as well as transfer all money making establishments to the civilian authorities in due course of time. This decision obviously raises a question—has the much publicised market-driven conversion policy of China paid negative dividends? To find answers to this question, it is necessary to examine the Chinese motives behind such a policy, which did not come all of a sudden during the late 1970s. It indeed was the result of the interplay of various dynamics—socio-economic, political, and strategic—at work especially since the founding of the PRC in 1949. In this part of the article, I have tried to examine one important component of the problem. This is because of the fact that study of such a complex problem requires a multi-disciplinary approach where one component complements the other. Before the problem is examined, it is necessary to understand the meaning and necessary connotations of the conversion policy of China which has been deliberately pursued since the 1950s, yet became official only after three decades. The official policy has been carefully worded—ambiguous most of the time—as happens in most of the cases with the Chinese. The scope of this section is thus limited to an examination of its definition and analysis of various meanings attached to it by the Chinese. Before this is done, it is also necessary to ask—why conversion and what are the Chinese explanations for it?
Why Conversion?
The post-Cold War international environment, among others, presents two strikingly opposite scenarios—security problems in many parts of the world and a global trend of diminishing demand for military equipment. The recent American assault on Iraq, the Gulf War, the Iraqi annexation of Kuwait, and various hot spots (where one or the other form of violent conflict between state and non-state actors is still going on) around the globe illustrate the former. The resultant uncertainty forces states throughout the world to prepare for the real possibility of involvement in military conflicts which in other words makes modernisation of the armed forces necessary. As a result, production of military weaponry becomes a perpetual necessity. The latter scenario is marked by a visible reduction in the levels of military effort by the arms producing countries, especially after the Cold War. Sales and employment figures for the largest defence companies are indicative of this scale of change. Arms sales by the hundred largest companies in the OECD (Organisation for Economic Cooperation and Development) and developing countries fell by 15 per cent between 1991 and 1994. 23 Worldwide employment in the arms industry has fallen from 17.5 million workers in 1987 to 11.1 million in 1995. More than 90 per cent of the reductions have occurred in the member countries of NATO (North Atlantic Treaty Organisation) and the former WTO (Warsaw Treaty Organisation). 24 Middle and small-scale arms manufacturers have also shown negative trends during these years. In brief, the post-Cold War international environment has not been friendly for the weapons producers. Rise in the technological sophistication of the armed forces, deeper uncertainties of various domestic and external conditions in the major centres of arms production, uncertainty about the precise nature of the future demand for military equipment—all have contributed to a kind of negative scenario for the arms industries. Hence, on a global basis, the central issue for the traditional defence industries—manufacturers of conventional arms, delivery systems and platforms—is to how to reduce production capabilities without any significant loss in line with the reduction in demand.
To overcome such challenges, the defence industries and the countries in which they reside have sought remedies as diverse and numerous as the industries themselves and the weapons they produce. A recent buzzword for such problems is corporate consolidation. In some cases, massive layoffs of personnel are witnessed. Yet, in some other cases, complete cessation of operations has followed. In many cases, the side effects have been as damaging as the illnesses themselves. Tens of thousands of workers—once heroes of the national defence effort—have found themselves without work or pay, and as a result, the communities in which they live have had to face widespread unemployment and societal dislocation. Such a scenario is visible in most of the member countries of the WTO. Other defence industries have attempted “conversion.” 25 However, even the much heralded conversion process has not proven to be the panacea for the industries’ woes. The Chinese case is quite different. They have attempted conversion, the prime motive behind this being political which is closely linked with economic and strategic factors as is explained elsewhere, consciously followed it and claim to have succeeded with remarkable results.
China’s defence industry has undergone a series of comprehensive reforms since the death of Mao Zedong in September 1976. Most important among these developments is the conversion from military to civilian industrial capacity. 26 This, of course, has not come all of a sudden. Nascent stages of development of such reform had their origin in 1952. 27 Prominent leaders like Mao Zedong, Zhu De, Zhou Enlai and prominent military as well as civilian institutions like the Central Ordnance Commission and CCP have from time to time paid attention to this. It was only after Deng Xiaoping assumed and consolidated his power at the apex that this reform received top priority in the late 1970s. Beginning in an experimental and unofficial way, this has been approved formally applied and extensively since the 1980s. This policy has got attention at the highest levels: it is accounted for in the mechanisms of the central Five-Year Plans and is directed by a Three Commission Liaison Group for Defence Conversion, which brings together officials from the State Planning Commission (SPC), the State Science and Technology Commission (SSTC), the military’s Commission on Science, Technology, and Industry for National Defence (COSTIND), and a State Council office that deals with the problems of the “Third Front Industries.” 28
The Chinese proclaim their conversion to be an incredible success. In 1993, 77.4 per cent of the gross output value of the MIC was in civilian products—up from 8.1 per cent in 1978. Fifty per cent of the cameras and 65 per cent of the motorcycles made in China are said to be produced by the defence factories. 29 In 1994, the ordnance industry claimed that 90 per cent of its industrial output in south-west China was for the civilian markets—motorcycles, mini cars, heavy duty trucks, cameras, refrigerators and other white goods, optical and electrical equipment, and machinery for oil production. 30 In some industries, the share of civilian production has topped the 80 and even 90 per cent levels. The electronics industry, traditionally an integral part of China’s MIC, is reported to have been completely civilianised. 31 In early 1995, the official China Daily reported that 1994 sales of civilian products made by the ordnance sector increased 31 per cent over 1993, to reach 18.5 billion yuan (nearly US$2.2 billion); the forecast was for another 30 per cent increase during the year. 32 In a paper delivered at a conference on conversion held in Beijing in mid-1995, Zhang Weimin, a China North Industry Corporation (NORINCO) Vice President, gave an upbeat account of the group’s development: 157 large and medium sized factories, more than 30 research and development (R&D) institutes, 200 sales companies, and 60 subsidiaries trading in 100 countries; the group’s joint ventures (JVs) produced 40 per cent of the motorcycles sold in the domestic market and aimed to produce 4,50,00 mini cars and 20,000 heavy trucks per year by the end of the century. 33 The aerospace industry claimed that more than 70 per cent of its 1993 output value was in goods and services for the non-military market place. 34 These claims suggest remarkable achievements and are even regarded as an international model by countries whose conversion efforts have by and large failed. Given the economic and political imperatives—and extreme difficulties—of conversion in the West, the Chinese experience is thus of more than passing interest. In this regard, it can only be said that less prominently advertised problems and strategies behind China’s conversion effort also warrant examination. The very first of such problems lies with the term “conversion” itself and its Chinese connotations.
Defining Conversion
What is conversion? How does one define its success? What are the domestic Chinese political, military, and economic contexts of conversion? These are some of the questions that come to mind when we try to understand its meaning. 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.” 35 In popular usage, conversion is described as turning “swords into ploughshares.” In the conventional wisdom of economics, conversion has a positive economic effect. To put it simply, military production has a lower multiplier effect than production for the civilian market. Spending on military goods is often considered as expenditure on non-productive capital. Thus, in a militarised economy, opportunities are high—conversion of unneeded defence capacity, it is thought, will recoup these costs and at the same time increase the efficiency and wealth generating capacity of the economy. 36
But conversion must also take into account the qualitative and quantitative aspects—how much is enough and whether quantity factors should complement the quality or not? Given this, it can fairly be said that it is part of an optimisation problem that must balance different demands—military, ecological, political, social and diminishing resources. It is also suggested that conversion contributes to peace and stability. Indeed, it is true, but only at a theoretical level. Reality shows that if it leads to economic efficiency thus contributing to the well-being of a state during peace-time, it can also result in a reduction of military capability either through demobilisation of manpower and facilities or cuts in defence procurements and other means like cuts in expenditure, etc. which may in the long run affect the military preparedness of a state, and more so a state like the PRC.
There are many ways in which conversion can be operationalised. First, production changeover, which can produce goods for the civilian market using the same equipment and line that used to make military items. This changeover may completely disarm a particular arms industry. Second, diversification, in which one may notice creation or acquisition of new lines and facilities for civilian production. Third, redeployment and commercialisation of military R&D and the exploitation of spin-offs. In this, one may see complete or visible involvement of defence firms or military research institutes developing classified technologies and processes with potential civilian applications, like remote sensing technologies which are useful for military intelligence as well as environmental surveillance, or possible commercialisation of advanced aircraft radar. Fourth, demobilisation and retraining, in which the talents of the people of the military establishment are successfully redirected toward civilian works. Fifth, management of surplus weapons, in which one may notice that a factory producing tanks may with some difficulties be able to produce tractors. The smoothness of this transition is difficult but not impossible. Sixth, closures of unused military bases, including real estates. This may involve a tactful management of economic dislocation caused by such closures. And seventh, re-engineering of an entire economic sector. This involves concentration of redundant defence industrial capacity. It is indeed a response to diminished demands of certain military items. It involves rationalisation of a whole defence industrial base and reshaping of its structure.
At a general level, although there are many varieties of conversion, reflecting different dynamics, they all boil down to two fundamental types. 37 The most common type is called negative conversion, which is based on lack of a choice. This may be a corollary due to the termination of war or conflict, the signing of a peace treaty, a considerable relaxation of tension, the downfall of a military regime or leader, economic crisis or other socio-political disruptions, or the shrinking of demand by arms consumers at home or abroad. Such situations can make governments, military industrial enterprises or political leaders realise that continued large scale military output is not only counter-productive and wasteful but also often impossible to attain. The other type is called positive conversion, which is based on moral grounds and pursuit of peace, stability and international cooperation, as well as on the realisation that military production comes at the expense of economic development and the people’s welfare. 38
Conversion strategies must take into account all the seven aspects described above, as they can never be considered in isolation. Of the two types—negative and positive—the former is the most common while the latter is rarely applied. Hence, the assumed result can always be deceptive. Regardless of how we define conversion, there are several social questions and management issues that need to be addressed. What are the implications of conversion for employment? Will the highly trained and specialised defence industry engineers and technicians be able to make the shift or be employable in an economy of conversion? How does one reform the management and business strategies of defence industrial enterprises? And, so on. In this regard, one may even suggest that conversion is a technical problem. It not only demands a change of public policy but also major shifts in corporate strategy and culture to focus on markets and customers. It requires, most important of all, changes in work habits and mindsets that seldom take place in a vaccum. 39 Conversion not only includes technical but also organisational and commercial aspects. Finally, successful conversion means earning a profit, modernising organisations and being highly competitive in a global market.
The Chinese Connotations of Conversion
There is a fundamental difference of connotations of the term “conversion” between the Chinese and Western applications. While for the latter, it is irreversible in many ways, for the former it is just the opposite. 40 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. In other words, it is part of a reform process in both the economic and military spheres. 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-industrial production system.” 41 As an important reform process, it cleverly mixes industrial strategies as part of a larger effort to modernise the Chinese military. Thus, the overarching approach, in stark contrast to what conversion really means, is “swords to ploughshares...and better swords.” 42 If we go beyond the achievement claims with regard to conversion, for many Chinese officials, it means not only enhancing the civilian economy but also aiding the military production capabilities. The Chinese use the term “military-civilian combination,” not “conversion” in their literature which is quite obvious as it aims to achieve the dual objective of enhancement of the economy and modernisation of the military. The leadership has realised that this objective can be achieved only if they are backed up by enough political preconditions and incentives. Hence, it has been because of the endeavour by the leadership in all the three most important spheres—economic, political, and military—that the reform process has shown a remarkable success.
In the economic sphere, China is in the midst of the marketisation of a command economy. This requires a shift in the mechanism used for the allocation of most resources from a top down, politically directed hierarchical administrative system of plans and quotas to the market place. Overall, reforms have had major success. The economy has seen spectacular growth—an above average annual growth of 10 per cent since the reforms began. The Chinese nominal gross domestic product (GDP) is consistently projected to continue its upward trend. The 1995 GDP is estimated at US $695 billion and has been growing since then. Its total foreign trade volume reached US $280 billion in 1995, making it the world’s tenth most important trading state. Foreign reserves in the same year stood comfortably at around US $70 billion. It continues to attract substantial amount of its foreign direct investment (FDI) and increasing amount of portfolio investment as well. The effect on the standard of life for millions of Chinese has been remarkable. 43 On the other hand, the negative effects of the reforms have been witnessed with concern. The process has encountered much political resistance. Unintended negative consequences have emerged in the form of corruption (the leadership of late has shown its displeasure over this issue), problems of inflation at consumer level (even officially it stood at 25 per cent in 1994, although moderated in 1995 and 1996), questions over ownership, control, employment and bankruptcy, ill-directed bureaucratic enterpreneurialism, social disruptions, and significant adjustment problems. In brief, the general scenario has brought mixed results, although it is feared that the negative consequences are very likely to be multiplied in future in this populous country.
The economic reform programme could not have been taken off if China’s perception of its security environment had not changed. Its initial conversion endeavour 44 in the 1950s reflected the leadership’s self-confidence, relative domestic political stability, civilian control over the military, emphasis on economic development, and a reduced threat perception. This decade is called “one of the best periods in the defence industry construction in new China.” 45 The period between the early 1960s and late 1970s saw China in a different situation—domestic economic difficulties, political disruptions, and extended security threats from both the Soviet Union and the US—that impacted negatively on conversion. However, since the late 1970s, the major requirements of China called for a shift in priorities toward economic development regardless of any possible external threat. In fact, China’s post-Mao leaders, most notably Deng Xiaoping, even began to suggest that the danger of a global confrontation, in which China could become entangled, had diminished considerably. Anticipating at least a decade or two of peace, China could afford to downplay military modernisation in the short run and concentrate on economic development, so as to lay the foundation for military modernisation in the long run. In such a scenario, it was quite pragmatic to create an opportunity for converting outdated as well as surplus military industrial production capacity to useful civilian goods.
Military-Civilian Combination Policy
Soon after the founding of the PRC, preliminary attempts were made for a military-civilian combination policy. As early as 1952, the Central Ordnance Commission, in a report to the Party Central Committee (PCC), concluded that every defence factory should also produce civilian goods. Such a conclusion by a military institution was quite unprecedented at that time. It probably revealed that severe shortages of civilian goods existed at that time; it also indicated that the perception of external threat was less severe during that time and that civilian restoration was viewed as imperative after long years of civil war. 46 Strong support for military-civilian combination also came from Mao Zedong and Zhu De in the late 1950s. In May 1956, Mao Zedong, at a State Council meeting, stressed for more attention by the defence sector toward civilian goods that could be produced during peace-time. In April 1957, Zhu De, in a report to the PCC, vehemently argued for the idea of a combination of military and civilian production within the defence industry to make more civilian goods during peace-time and more military goods during war-time. In brief, he focussed on a policy that may be described as “conversion to reconversion”—that is, companies in the defence sector should be able to adjust their production according to varying threat perceptions. 47 However, the overall environment during the late 1950s and 1960s was not favourable to fostering such a policy. 48 In the mid-1960s, attempts were made again to reintroduce this policy. In 1964, Zhou Enlai, at the Third National People’s Congress (NPC), stressed for a reintroduction of the military-civilian combination and peace-time and war-time production combination to help the national economy. The period between the mid-1960s and mid-1970s saw many political upheavals, including the Cultural Revolution, the Third Front failure, the Gang of Four terror, and the succession struggle after Mao’s death that made the Chinese life difficult in every sphere of activity. It was only in the early 1980s that Deng Xiaoping, after consolidating his hold over the Party and the PLA, was able to reinitiate this policy. His famous “16-Character Slogan,” first articulated in 1978, set the ball rolling. This slogan deserves an in-depth analysis because, as part of the overall reforms, it had a lasting impact on restructuring and conversion of the defence industry in the 1980s. The “16-Character Slogan” spells it out: “Combine the military and the civil; Combine peace and war; Give priority to military products; Let the civil support the military” Authoritative Chinese commentators interpret it through the lenses of Marxism-Leninism-Mao Zedong thought. 49 While the Chinese definition of conversion refers to “the use of military industrial production capacity and military industrial technology to serve the national economy,” some noted analysts like Chen Dedi and Bao Qubing take a long-term view typical of Marxist thought: “As social development advances to higher levels, peace and development become the demands of human society, the class struggle abates and...although national defence industry will not completely disappear, they are still necessary in a small scale...in this context, defence conversion is the product of a certain stage of social development.” 50 The argument is that the very existence of military industries provides a country a certain amount of security, and, in any event, modern warfare requires high technology equipment—if these are not developed and stored in peace-time, once war breaks out, there is no time to obtain them. Against this background, the 16-Character Slogan serves as the military-industrial construction policy of China and also the policy for the development of the national economy. 51
The Chinese dissection of the Slogan connotes four primary objectives. First, combination of the military and the civil. Here, the Chinese emphasis is on the development of production technologies that can produce both military and civilian goods. This, in many ways, points to an interchangeability of technologies that can be used for both purposes with an eye on the requirements. Both duplication and compatibility between military and civilian requirements, thus, exist. Second, combination of peace and war. In this, the Chinese stress is on military production, including reserve capacities. Peace-time production of civilian goods indeed gets secondary importance. Third, priority to military products. In this, the business activities of the military industry surprisingly get noticed. However, the state’s requirement for military goods gets the highest priority. At the same time, the state should ensure that military industries are able to achieve the national security requirements by producing macro-economic guarantees of profits. If military industries make high profit civilian products, then they must sacrifice those profits to meet the military needs. Fourth, civilian support to the military. This means using the profits from civilian products made with military production technology to upgrade that technology and those products. In other words, the money earned by factories developing and selling civilian products would be used to develop military products.
Going beyond the achievement claims of the MIC, it can be argued that conversion policy as part of the overall reform of the 1980s and 1990s has given top priority to guaranteeing military product assignments. The 16-Character Slogan itself is ambiguous and could be interpreted, as shown above, as a short-term strategy to use conversion proceeds for defence modernisation or a long-term strategy to develop the civilian economy before investing in military modernisation. High officials have repeatedly stressed the need to give priority to military products. The same feeling has also been expressed lower down on the Chinese bureaucratic ladder. 52 Some top officials have promoted dual-use technologies in the conversion effort. The CMC Vice Chairman Gen Liu Huaqing was reported by the Liberation Army Daily to argue at a January 1995 national conference on cooperation and coordination work in the military industries that “we must seize the opportune time of the end of the Eighth Five-Year Plan (1995) and the Ninth Five-Year Plan to push our national defence science and technology and weaponry into a new stage.” 53 According to him, contributions from civilian industries were important components for developing science and technology industries for national defence. China, he said, “should pay attention to turning advanced technology for civilian use into technology for military use.” 54 Huai Guomo, the COSTIND Deputy Director in charge of conversion has pointed out: “The trend toward the interchangeability of military and civilian technology is increasing, and this provides a solid technological basis for the rapid modernisation of national defence and constant upgrading of the weaponry.” 55 Dual-use technology makes a contribution to the civilian economy while keeping military production lines running. Many top officials share this sentiment. An official of the Chinese Defence Science and Technology Information Centre says, “The development of dual-use technologies in disguised form...can save the costs in weapons systems and military modernisation.” 56 According to the Chinese officials, conversion efforts have resulted in improvements in the economic efficiency of the military industry as well as creation of a number of military industrial enterprises. In other words, the intention of conversion appears to be not only to utilise redundant facilities but also to apply the proceeds of conversion to the maintenance of the defence industrial base and to further military modernisation. As it seems, the Chinese have achieved a reasonable amount of success in this effort.
Assessment
The claims made and the evident diversity and scope of activities attributed to conversion in China are certainly impressive. Few doubts can be raised about the ability of the MIC to produce goods and services for the civilian market. It is also evident that the military sector’s managerial and financial sophistication is increasing. But one must go beyond the positive impact of the reform programme and the resulting tactics of diversification. The first of the problems faced starts with the problematic nature of Chinese statistics. Conversion may represent some large percentage of industrial output value, but gross output value is full of double counting, and most importantly, does not take China’s high inflation rates into account. The numbers may even obscure a declining situation if we consider the poor condition of the state-owned enterprises (SOEs). Indeed, if it is accepted that a high percentage of defence industry output is for the civilian market and taken at face value the claims of a number of enterprises that they dominate their particular conversion sectors, it can fairly be concluded that the vast majority of defence plants account for a very small proportion of any kind of output. Even with the best of intentions, it is very difficult to come to a realistic assessment of the effort, and when strategies driving conversion in China are examined closely, important queries about the real intentions of the conversion effort are obviously raised.
Endotes
*: Associate Fellow, The Institute for Defence Studies and Analyses. Back.
Note 1: Scholarly writings on China’s defence industry conversion have started since the early 1990s. Most of the studies are based on examination of defence industry that only includes those which are under civilian control. Strictly speaking, defence industry in China consists of two types of industries—military under civilian control (State Council and others) and military industries owned and run by the PLA. Most available literature provides data on the former category. Back.
Note 2: For a detailed description about China’s defence industry during the pre-reform period, see Harlan W. Jencks, From Muskets to Missiles: Politics and Professionalism in the Chinese Army, 1945-81 (Boulder, Colorado: Westview Press; 1982), pp. 189-221. Also, see Sydney James, “China”, in Nicole Ball and Milton Leitenberg eds., The Structure of the Defence Industry (London: Croom Helm, Inc.; 1983), pp. 257-77. Back.
Note 3: Thomas L. Kennedy, The Arms of Kiangnan: Modernisation in the Chinese Ordnance Industry, 1860-1895 (Boulder, Colorado: Westview Press, 1978), p. 7. Back.
Note 4: For a detailed study of the Third Front industrialisation, see Barry Naughton, “The Third Front: Defence Industrialisation in the Chinese Interior,” The China Quarterly, no. 115, September 1988, pp. 351-86. Back.
Note 5: Yitzhak Shichor, “Conversion and Diversion: The Politics of China’s Military Industry Under Mao,” in Ifraim Inbar and Benzion Zilberfarb eds., The Politics and Economics of Defence Industry (London: Frank Caas, 1998), p. 137. Back.
Note 7: There is a difference of meaning between the Chinese and Western interpretation of the term “conversion.” A generally accepted Western interpretation defines defence industry conversion as 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.” According to official Chinese sources, it involves an economic strategy of civil-military integration that aims “gradually to reform and convert a past unified military product system into an integrated military-civilian national defence scientific research and military-industrial production system.” Thus, contrary to Western interpretation, the Chinese version, among others, includes reversal of the process itself. For the former definition, see Seymour Melman and Lloyd J. Dumas, “Planning for Economic Conversion,” The Nation, April 1990, p. 509. For the official Chinese version, see, Commission on Science, Technology and Industry for National Defence, Science and Technology Intelligence Agency eds., Survey of World Military Industry (Beijing: National Defence Industry Publishing House; 1990), p. 107. Back.
Note 8: Chai Benliang, “Conversion and Restructuring in China’s Defence Industry,” in Jorn Brommelhorster and John Frankenstein eds., Mixed Motives, Uncertain Outcomes: Defence Conversion in China (London: Lynne Rienner; 1997), p. 67. Back.
Note 11: For a fuller analysis, see John Frankenstein, “The People’s Republic of China: Arms Production, Industrial Strategy and Problem of History,” in Herbert Wulf ed., Arms Industry Limited (Oxford: Oxford University Press; 1993), pp. 271-319. Back.
Note 12: For the most comprehensive source describing structural changes in the machine building industry, see Chu Yuan Cheng’s, “Growth and Structural Changes in the Chinese Machine Building Industry, 1952-66,” China Quarterly, no. 41, January-March 1970, pp. 29-41. Back.
Note 14: David L. Shambaugh, “China’s Defence Industry: Indigenous and Foreign Procurement,” in Paul H.B. Godwin ed., The Chinese Defence Establishment: Continuity and Change in the 1980s, (Boulder, Colorado: Westview Press; 1983), p. 44. Back.
Note 15: J. Craig, J. Lewek, and G. Cole, “A Survey of China’s Machine Building Industry,” in US Congress, Joint Economic Committee, Chinese Economy: Post-Mao, vol. 1 (Washington, DC: Government Printing Office, 1978), p. 287. Back.
Note 16: Harvey Nelsen, The Chinese Military System (Boulder, Colorado: Westview Press, 1977, pp. 59-60. Back.
Note 17: For details, see Michael Y.M. Kau and John K. Leung eds., The Writings of Mao Zedong, 1949-76, vol. 1 (Armonk, New York: M.E. Sharpe Inc, 1986), pp. 49-50. Back.
Note 18: John Frankenstein, “People’s Republic of China: Defence Industry, Diplomacy and Trade,” in James Everett Katz ed., Arms Production in Developing Countries: An Analysis of Decision Making (Lexington, Massachusetts: Lexington Books, 1984), p. 92. Back.
Note 19: Within the military establishment, it appears that the ground forces and the Fifth and the Sixth MMBs argued for large investment in the steel sector, while the high technology oriented sectors like the Second, Third, Fourth and Seventh MMBs conceivably lobbied for the rapid development of the electronics sector. See n. 14, pp. 48-9. Back.
Note 21: See a reference by Deng Xiaoping, “On Consolidating National Defence Industry Enterprises,” in Selected Works of Deng Xiaoping: 1975-82 (Beijing: Foreign Language Press, 1984), pp. 39-42. Back.
Note 23: See Introduction in Stockholm International Peace Research Institute, SIPRI Yearbook 1996 (Oxford: Oxford University Press, 1996). Back.
Note 24: For details, see Bonn International Conversion Centre, Conversion Survey 1996 (Oxford: Oxford University Press, 1996) p. 4. Back.
Note 25: There is by now a considerable amount of literature on various aspects of conversion. Authoritative accounts can be found in Lloyd J. Dumas ed., The Socio-Economics of Conversion From War to Peace (Armonk, New York: M.E. Sharpe, Inc, 1995); Jacques S. Gansler, Defence Conversion: Transforming the Arsenal of Democracy (Cambridge: Massachusetts: MIT Press; 1995), and United Nations, Department of Disarmament Affairs, Conversion: Economic Adjustments in an Era of Arms Reduction, Disarmament Topical Paper 5, vols. 1 & II (New York: United Nations, 1991). Back.
Note 26: Academic research, reflecting all aspects of conversion in China, has been carried out both by Western and Chinese scholars since the early 1990s. Prominent among them are by Paul Humes Folta, From Swords to Ploughshares? Defence Industry Reform in the PRC (Boulder, Colorado: Westview Press, 1992), Jorn Brommelhorster and John Frankenstein eds., Mixed Motives, Uncertain Outcomes: Defence Conversion in China (Boulder, Colorado: Lynne Rienner, 1997), Efraim Inbar and Benzion Zilberfarb eds., The Politics and Economics of Defence Industries (London: Frank Caas, 1998), Jaen Claude Berthelemy and Saadet Deger, Conversion of Military Industries to Civilian Production in China: Prospects, Problems, and Politics (Beijing: OECD Development Centre Report, 1995), Cao Shixin ed., Zhongguo Jun Zhuan Min (Chinese Defence Conversion) (Beijing: Zhongguo Jiangji Chubanshe, 1994), and Commission on Science, Technology and Industry for National Defence (COSTIND), Science and Technology Intelligence Agency eds., Survey of World Military Industry (Beijing: National Defence Industry Publishing House, 1990). Back.
Note 27: For a brief account of the development of defence industry conversion in China, see Shichor, in Inbar and Zilberfarb eds., n. 5, 6, pp. 135-44. Back.
Note 28: See John Frankenstein, “China’s Defence Industry Conversion: A Strategic Overview” in Brommelhorster and Frankenstein eds., n. 26, p. 3. Back.
Note 29: See, “Conversion of Military Technology to Civilian Use Discussed,” Foreign Broadcast Information Service, Daily Report China, hereafter FBIS-CHI, March 25, 1994, p. 35. Back.
Note 30: “War Industry Produces More Civilian Products,” in FBIS-CHI, June 9, 1994, p. 36. Back.
Note 32: “Arms Maker Produces More Civilian Goods,” in FBIS-CHI, January 19, 1995, p. 36. Back.
Note 33: Cited by Berthelemy and Deger, n. 26, pp. 28-29. Back.
Note 35: Seymour Melman and Lloyd J. Dumas, “Planning for Economic Conversion,” The Nation, April 16, 1990, p. 509. Back.
Note 37: Yitzhak Shichor examines these two types of conversion in detail. See, n. 5, pp. 144-45. Back.
Note 38: See, Gansler, n. 25, p. 12. Back.
Note 39: John Frankenstein, “Dilemmas of Public Policy and Strategic Management: The Conversion of Defence Industries to Civilian Production,” The International Executive, vol. 37, no. 2, March-April 1995, pp. 105-25. Back.
Note 40: Mel Gurtov, “Swords into Ploughshares: China’s Conversion of Military Industry to Civilian Production,” The China Quarterly, no. 134, June 1993, pp. 214-15. Back.
Note 41: See, COSTIND, Science and Technology Intelligence Agency eds., n. 26, p. 107. Back.
Note 42: Folta, n. 26, pp. 11-54. Back.
Note 44: n. 5, pp. 146-47. Back.
Note 45: John Frankenstein, “People’s Republic of China: Defence Industry, Diplomacy, and Trade,” in James Everett Katz ed., Arms Production in Developing Countries: An Analysis of Decision-Making (Lexington, Massachusetts: Lexington Books, 1984), p. 92. Back.
Note 46: Chia Benliang, “Conversion and Restructuring of China’s Defence Industry,” in Brommelhorster and Frankenstein eds., n. 26, p. 67. Back.
Note 48: For details, see Shichor, n. 5, pp. 146-54. Back.
Note 50: This and the later Chinese interpretations have been cited by Chen Dedi and Bao Qubing, “Chapter in Theory,” in Shixin ed., n. 26, pp. 27-49. Back.
Note 52: n. 28, pp. 19-20. Back.
Note 54: “Liu Huaqing Urges Development of Defence Technology,” in FBIS-CHI, January 25, 1995, p. 30. Back.
Note 56: Cited in Ibid., p. 22. Back.