Shun Zhenhuan is Senior Researcher at the State Planning Commission.

China's defense industry system after 1949 was basically modeled on the plan in the former Soviet Union. It has been a highly centralized system since the first 5-year plan. Under the circumstances of a weak economic base, then, this system played an important role in concentrating abilities on those priority projects in the defense industry and rapidly improving the levels of weapon development and production. However, along with national reform, opening up, and the policy of developing the national economy, this kind defense industry system is not suited to the new situations.

A highly centralist planned economy can not meet the needs of the tremendous changes in military supplies. Those state-owned enterprises of the war industry command vast reserves of qualified scientists and technicians, high-level technology, well-equipped facilities and great potential. During peacetime there are fewer military production quotas, therefore many productive forces are left unused. But during wartime military supplies increase sharply and are urgently needed. In the face of today's unceasing changes in military strategy and operational modes as well as the continual improvement in weapons, modern war requirements for weapons and equipment have grown considerably.

The special military enterprises could hardly satisfy the needs for supplies expended in warfare, even in a regional war. As a result, we should try to reform our present system in accordance with the objective requirements.

Because the military enterprises represent a small group, we can not hope such a closed system will encourage civil industry development. The Soviet Union proved this argument. The Soviet Union adopted a plan of highly centralized but separate military and commercial industries. Although there was remarkable success in the production of munitions, the price that was paid was the sacrifice of other civil industries that should have grown. Like the Soviet Union, China devoted major efforts to developing the A-bomb, the H-bomb, satellites, and nuclear-powered submarines with limited funds and an inadequate technical force. While some areas in the defense industry came up to advanced world standards, much of our general mode of production lagged. Shortcomings such as high consumption, high cost, inefficiency, and low quality were present everywhere, and some advanced defense technologies were set aside for years. Obviously this is harmful to the national economy.

The system has not solved these long-standing problems; for example, defense and commercial industries are separate, enterprises are isolated from each other, manufactures and imports are duplicated, and factories, whether large or small, are unnecessarily affected. Management and administration followed conventional supply systems. The state issued projects, allocated materials of production, bought products, and assumed sole responsibility for profits and losses; consequently, enterprises were dependent on the state, and workers dependent on the enterprises. The military product price was fixed (cost and 5 percent of profit). One factory, one price, no matter the volume; the more cost, the more profit, and vice versa.

A poor variety of products made it difficult for military enterprises to be productive. Because most of the enterprises, over a long period of time, were preparing for war and targeted only military products, it was not until 1979 that the output value of commercial products in four war-industry departments finally accounted for 8.1 percent of the total output value.

The state had total control over military enterprises so that they could not develop their own designs. Lacking power and function, and with responsibility being divorced from profit, the enterprises were not at all vigorous.

From the 1960s to the mid-1970s, the movement called the construction of the third defense line was fully under way. Almost all the enterprises, were committed to large projects, pursued high production targets and were eager to succeed. They practiced the tactics of "mountain," "dispersion," "cave," "village," and so on. This finally resulted in a far-flung front that was too large in scale.

After the CCP's Third Plenary Session of the Thirteenth Central Committee, China's defense industry was steadily reformed, as restructuring of the state economic system was implemented. During the past decade, the State Council and Military Commission of the Central Committee passed a series of resolutions: the State Council governed directly the six departments formerly run by the State Defense Science and Industry Commission but headed by both the State Council and Central Military Commission. According to their special needs, every military department, restructured themselves, from the governing body to administrative setup to product structure to internal organization to work patterns and distribution. The variety of changes propelled the defense industry forward. The success and experiences laid a good foundation for further reform.

New Merits of Military Production

The whole defense industry entered a new strategic stage of history after the reform. Scientific research for military products is carrying out a policy that emphasizes small scale and advanced levels. By putting stress on the foundation, strengthening key science and technology, and keeping in step with high technology, we are amking progress and are renewing our military production.

There are some new achievements in the nuclear industry. New nuclear weapons designs have given our strategic missile force the ability to counterattack, which is one of the important factors that helps establish our nation's international status. A new generation of research has also made considerable headway. The completed high-flux engineering test reactor provides a significant medium for development in the nuclear industry.

In the last decade, aviation industry factories have manufactured the most modern aircraft in history. Of the more than 20 types of aircraft on our assembly lines, 75 percent are new types that were put into production this decade. A new lot of fighters, attack planes, bombers, helicopters and unmanned planes have been furnished to the army to replace old ones. The fact that more advanced warplanes have been designed and finalized marks our capability to make aviation product designs of our own.

The ordnance industry is quickening its pace of renewing heavy weapons. The industry has been fruitful in manufacturing modern tanks, armored carriers, infantry fight vehicles, heavy-caliber guns, and antitank missiles.

Numbers of special ships oceangoing comprehensive monitoring ships, oceangoing survey ships, oceangoing supply ships, landing ships, and minesweepers are proof of the development of the ship-building industry. These ships successfully completed many trials. According to statistics, within the China Shipping Industrial Company, the output value of new-style products accounted for 60 percent of the gross value of industrial output, and of those products, 38.6 percent came up to the advanced world standards of the 1980s, including 47.7 percent of necessary ship-building industry accessories.

The successes in the space industry have attracted worldwide attention, especially the results in strategic missiles, space technology, and tactical missiles. In May 1980 we successfully launched a long-range carrier rocket to the Pacific for the first time. In October 1982 a rocket launched underwater from a submarine showed a qualitative leap in our strategic missile technology. The manifold tactical missile weapon systems finalized one after another are increasing the modern combat effectiveness of the troops. Today, our space technology reflects the advanced world standards:

• The satellite retrieving technique. Only the United States, the former Soviet Union, and China have mastered the technique, and China has successfully retrieved 11 satellites in succession
• The multisatellite technique. Following the former Soviet Union, the United States, and the European Space Bureau, China was the fourth country that launched several satellites at once with one carrier rocket.
• Space measurement and control technique. We have built more than 10 ground-observing stations containing complex monitoring and telecommunication centers, as well as oceangoing and tracking monitor ships, which together form a network that has world-class level measuring precision.
• High-energy, low-temperature fuel rocket technique. This represents a modern level of rocket science that is the same as that of the United States and France.
• Earth stand satellite launching technique. China is one of five countries that can launch such a satellite.

Since the Third Plenary Session of the Thirteenth Central Committee, civilian production of the defense industry has made great strides. The proportion of commercial product output value in the industry has risen from 8.1 percent in 1979 to 62 percent in 1990.

Concerning the military enterprises located in 'three-line', from 1980 to 1987, the output value of their commercial products increased at an average rate of 40 percent a year, and in 1987 reached around 50 percent of the value of all military enterprises in the whole nation. According to preliminary estimates, departments in the defense industry have completed more than 400 main commercial product assembly lines, developed over 300 kinds of key products, and sent over 7,000 commercial products to market. For the last 10 years, they have supplied, to domestic and foreign markets, large quantities of products and technical equipment for energy, traffic, light textile, and other trades, and have technically transformed assortments of spare parts for import equipment to improve food machinery, packing machinery, and medical instruments. Isotopes (and their outcomes) have been used into agriculture, industry and medical services. Commercial aircraft is one good scene of prosperity: over 500 passenger transport planes are flying for over 70 airlines, and 13 main line passenger planes made cooperatively with Mydao Co. have been delivered to the General Administration of Civil Aviation of China. Three military factories, in Chongqing, Baotou, and Taiyuan, have the capacity to produce 5,000 open freight cars in 1 year but the investment is only 40 percent of what is needed to build these same items.

During the sixth 5-year plan, 193 kinds of commercial products made in defense industry departments won national gold, silver, or national invention prizes.

Through 10 years of experience and practice in developing commercial products, military enterprises created a set of rules for product development, administration, management and restructuring, organization, sales, and service:

• Develop production and subsistence, centering on production.
• Combine close-technology with multispecialized products, stressing technology products.
• Develop high-value, high-technology products and low-value, labor-intensive products, stressing the former.
• Develop key support products with side products, stressing key support products.
• Develop their own products and do those recommended by competent authorities, stressing their own developing.
• Use available military industry techniques combined with foreign advanced techniques, and take available military industry technology as the dominant factor.
• Introduce key-technique and equipment combined with assembly lines, stressing key techniques and equipment.
• Combine specialized assembly lines with mixed-assembly lines, stressing serialized assembly lines.
• Readjust structure, bring potential into full play, and reform production, combining all with building new assembly lines.
• Do both cooperative production and independent production, stressing cooperative production.
• Factories raise funds by themselves using every channel, and apply for state loans, stressing the former.
• Combine the plan with the market, relying mainly on the plan.
• Purchase raw materials and necessary accessories by themselves, supplemented by state allotments, stressing factory purchases.
• Sell not only according to competent authorities but also by enterprise-operated sales departments, stressing sales through the enterprises' own channels.
• Combine quality and credit with benefits, stressing quality and credit.

Commercial nuclear fuel has entered into the overseas market with the government's approval. The metal calcium made by the nuclear industry also occupies a certain status in international market.

Aircraft made in China were on display at the International Aviation Fair. Six Y-12s, a light multiuse plane of our own design and manufacture, was sold to overseas buyers. Another new medium-range transport plane carrier-8 was also exported. The British General Administration of Civil Aviation, recognized as a worldwide authority in aviation, issued a certificate of quality to our carrier-12 in 1990; this signifies that the carrier-12 has reached a world-class level and increases the plane's export channels. Besides the eight already sold, we have also signed contracts for 14 other carrier-12s. Our aviation industry system as a whole has exported several hundred aircraft to about 10 countries, and has also exported aircraft engines, carrier equipment, parachutes, and aircraft spare parts. We manufactured aircraft parts and engine parts for a dozen foreign factories or companies, thus earning foreign exchange totalling 12 million.

Ordnance industry manufactured and sold their motorbikes, bicycles, and others to the United States and other countries or areas. During just the first sixth of the 5-year plan, the exports and projected contracts of the whole ordnance industry were 80 percent of the total business of the preceding 30 years.

Our space technology started servicing the international market. The Long-March-2, Long-March-3, and Long-March-4 carrier rockets were put on the international market one after another. In 1987 and 1989, we provided carrier service to the former West Germany and France using our retrieval satellites. Our new Long-March-2E and Long-March-3 carrier rockets will launch satellites for Australia and an Asian satellite company. This is a indication that China is entering the international space technology international market and is catching up with the advanced world.

The shipbuilding industry was unwilling to lag behind in their export business. In the latter half of 1981, the world's shipbuilding output was less than half its actual production capacity, and many shipyards went bankrupt. But China's shipbuilding output rose uninterrupted, doubling from 1986 to 1987. And during the first seventh of the 5-year-plan, ship exports were 1.53 million tons, twice as much as that during the first sixth of the 5-year-plan. The volume of export was 40 percent of the general volume of ship-building. The trade volume of export business reached $2.3 billion, three times as much as during the first sixth of the 5-year plan.

Military Technology Shifts to Commercial Use

• Initial Trial Sale of New Developed Products. This means to sell products of the partner's own manufacture, which are not brought into line with the civilian production plan but have a higher technology level.
• Technology Cooperation. Both sides make full use of their own favorable conditions and technological superiority to share work and cooperate with each other according to the rules of their contracts.
• Contracting Projects. These are contracts for surveying and designing industrial and commercial projects.
• Technology Shareholder. Actions when one exchanges his technology as a price for buying shares and cooperates with another who introduces the technology. Both sides constitute an economic stake.

The transfer of military technology to commercial technology may occur in various ways and forms. Through mediums such as technical interchange and the technology market, both sides can strike bargain, or by means of direct talks they make agreements. The following ummary of our practices in carrying out technology transfers amke clear the five areas in which we find it important to engage jointly:

• Joint efforts in the research and development of the state's major items of technological innovation.
• Utilizing the state or district's major capital construction and technology to rebuild items.
• Joint programs to carry out each city or district's economic development.
• Combine efforts to import advanced foreign technology and equipment, and to evaluate, digest, assimilate, and redesign the state's needs.
• Give full play to the technical forces in the Ministry of Machine-building and the Ministry of Electronics Industry.

Although this is not easy, it is a good beginning and lays a foundation for building military/commercial joint efforts. There are five general policies on the conversion from defense to military/commercial joint enterprises:

• With regard to service, the military enterprises change from formerly serving only the defense industry to serving the military sector prior to others and managing in an all-around way to serve both the defense industry and commercial industry for national economic construction.
• About product structure, the national defense industry has been changing step by step from one production method to various types of production and administration. Now the variety of products made by the industry show that the industry has the ability to make not only war products but also commercial products.
• Concerning enterprise structure, the industry should adopt a style of cross union in order to cooperate with other industries in economics and technology.
• For product development, the focus should be transferred from general products to high-quality, high-tech, intensive-tech products for both the domestic and export markets
• On management, military enterprises should expand from production alone to the development of new products, technical training, market forecasting, and repair services.

The ultimate aim of restructuring our defense industry is to build a integrated system of defense/commercial production viable for both war and peace times. In addition, we should build a multi-administrative policy body we can centralize or decentralize. The system must guarantee that the State Council and Central Military Commission are able to keep national defense under their macro control, which includes control of the direction, scale, speed, layout and structure of national defense development. Moreover, it will help national economic actions to keep its vitality, separate organization from production and streamline administration.

Suggestions about how to make various military enterprises more efficient include further reduction of scale, adjustment of structure, strengthening macrocontrol, increasing necessary investment, and making serious efforts to develop commercial products. To realize defense/commercial production unity, the national defense industry should serve the Four Modernizations, meaning take on a double task:

• One, they should center their intelligent and capable power on research and developing new weapons, track foreign high technology, lay a good technological foundation, heighten technical levels, and provide service for strengthening the combat effectiveness of our army.
• Two, in their commitment to support national economic construction, they should energetically support the transfers from defense to commercial technology.

• To develop an appropriate scale for military production, institute a system of so-called small military production but great mobilization. Appropriate scale of military production is the basis of national defense industry and its modernization. In peacetime, too much volume of military products might be unfavorable to national economic development, whereas too little could be unfavorable to national defense construction and might shrink it. So the scale depends on military needs but is restricted by China's economic limitations. Compared to some other countries conditions, the national defense sector has abilities to design and produce, much more than in peacetime. If our national defense industry wants to be good at meeting emergencies, to be able to produce not only in peacetime but also in wartime, a system of so-called small military production and great mobilization, should be considered as a way to restructure the existing national defense system. The new system keeps the appropriate productive scale in peacetime by managing the whole business according two different factors, standing ability and mobilizing ability. Standing ability means not only meeting the orders of military equipment every year, but also taking on the tasks of replacing the old with the new, researching and developing new weapons, trading military products, and following a policy of "more research and development, less production; higher level, small batch; more technology reserve, less product reserve." Mobilizing ability means, based on the core of standing ability, make full use of existing surplus energy, and then design a mobilizing plan, finally working out mobilization rules and perfecting its regulations, depending on the district economy and industry. It will help to strengthen industry administration and cooperation, thus building gradually a mobilization system of rational distribution, perfect regulation, and quick-action that is efficient and qualified and that pursues joint defense/commercial production in both war and peacetime.
• To restructure the existing administrative system and enhance the enterprises' vitality. There are six rules we have to follow in restructuring our national defense industry:

The national defense system will adjust its industrial and productive structure, according to the principles of planning, rational division of labor, mutually complementary advantage, and coordinated development. The department responsible for military enterprises will send the plans for adjustment of research and production of military products one by one, down to their enterprises as soon as possible. This will further restructure these enterprises by making them more self-governing so that they have the rights and duties that average state enterprises have. It will help most of them to become socialist commercial firms, and manufacturers that are able to run a business by themselves and assume sole responsibility for their profits or losses. In addition to fulfilling military orders, it will intensify the reform of the administrative system by pursuing and perfecting production, and by rewarding the hardworking but punishing inferior quality and indolence, it willencourage military enterprises and their workers.

Military enterprises need to heighten their commodity consciousness, market sense, and competitive ideas and keep aware of market information isre always changing, the factories should constantly develop new products on the basis of market requirements. They also must foster the three kinds of motivation forces that modern factories have: inventing or finding new technology, applying new technology to production, and promoting products to domestic and external markets.

The military sector should introduce competition through separate cost accounting for defense and commercial products, which would solve the problems that arise from sharing equally regardless of ability or contribution. A small accounting unit exists within every factory. Under certain conditions, a branch or workshop of a factory will run relatively independently, whereas the group of enterprises that possesses economic strength will properly retain the power of decisionmaking over investment.

After talking with departments and districts concerned, the factories, which must have approval not to undertake military production, can according to their technical specialty and equipment situation, decide to whom they are subordinate. They can also not change subordinate relationships and just incorporate each kind of products into commercial departments or districts, taking responsibility for production plans and product types. We encourage interindustry, interdepartmental, and interregional relationships. The factories can arrange their production on the basis of voluntarism, mutual benefit, specialized cooperation, and responsibility, and can develop new products by way of economic or technical cooperation with each other.

We will give energetic support to export commodities and urge enterprises to be familiar with the concept of two resources and two abilities. They should open up their own path to international markets through widespread cooperation and strengthen their competitive power through high-quality, low-priced products.

The enterprises located in the third defense line could, if possible, open a "window" in coastal cities or special to develop commercial products. The experiences of the last few years have showed that there are some principles we have to follow:

1. Focus on exports, combine production with trade, technology with commerce, and recognize that specialization is important but promote a diversified economy.
2. Actively depend on the backbone of the enterprises, uphold import but cooperate with internal; take products as the key factors to give full play to the "window."
3. Have both exports and imports to keep the foreign exchange balance and to win more foreign exchange; to bring economic benefits, stress advanced technology that could improve the quality of products, increase the variety, speed up the replacement of the old with the new, and lower the consumption of resources and materials.
4. Putting the stress on the key products that are intensive science and technology, take the above-mentioned road of import, digestion, creation, and development.
5. Boldly attract the investment of foreign capital, raise funds in every way, and actively use them.
6. Give full play to the enterprises and enhance competitive power through union with others.
7. Make full use of favorable conditions, create special districts or open cities as bridges to trade with Hong Kong, Taiwan, and surrounding countries, and then expand to other countries and areas.
8. Enable special districts to become centers for training managers, engineers, and other qualified personnel.
9. Strengthen the enterprises by adjusting both the plan for military production and the quantity of important civil production and by removing factories from the third line; formulate specific policies for reorganization, merger, and cooperation of the enterprises; and implement a rational organized system for each enterprise and form competent groups of enterprises in the spirit of voluntary participation and mutual benefit.

• Macroguidance and coordination. While arranging production, research, and construction, the State Planning Commission and all departments and districts concerned will, according products and the division of administration, merge commercial and defense production in line with state, industry, or district plans. This needs overall consideration, all-round arrangement, rational distribution, plus looking ahead and behind and proceeding from the interests of the state. There will be support of any item or product in the aforesaid plans. The above- mentioned governing groups will treat defense or commercial production equally and arrange investments, loans, and materials for both without discrimination according to the principle that although defense production is the same it has priority in the near future.

To protect national industry and avoid unnecessary equipment imports or technology re-introduction, the military sector should utilize existing abilities as fully as possible to produce things that can supply the market over a long period of time and to guarantee the products' quality and quantity.

When, in commercial industries, products are needed to expand production or some items require a large research basis, the military enterprises' surplus abilities, technical superiority and facilities should first taken into account. For any items needing technological reconfiguration, we should choose the better one between a defense or a commercial enterprise.

The nation will broadly guide the defense sector to cooperate with the commercial sector to developcommercial products. This will depend on market requirements and on enterprise's expertise. The aim is coordination rather than unchecked independence.

Defense and commercial units may have mutual concerns and need to exchange information, solutions, and motivations. The industries, departments, and districts will set up mediation netowrks and go between them to solve related problems.

We will link the military development plan with each regional economic development program.

• Parts of products will be directionally developed for a long time. The experience in that last decade shows these are the rules we have to follow:

• Further apply military technology to the national economy. Our defense industry has mastered more advanced technologies through backbreaking research and the manufacture of weapons. It will take effective measures to transfer these technologies to commercial uses, making them productive forces for the whole society, and pushing commercial technology forward, helping it master foreign techniques of production and scientific knowledge.
• Military enterprises also need necessary technological renewal. Among the military enterprises, not a small number have to face the problem of obsolete equipment. A national industrial census indicates that advanced equipment makes up only 3 percent of all equipment in the military sector, whereas it is 12.9 percent in commercial sector. About 40 percent of equipment used in some old military factories is over 20 years old, and some of it dates to World War Two. If not replaced, the existing assembly lines could not meet the needs of the renewed military or commercial production, especially under mass production.
• Raise special funds for developing commercial products only. Nowadays the urgent issue is to provide much-needed funds to transfer military technology to national economic construction. Each military department raises funds in every possible way and rationally cuts down expenses, but the state should provide financial support in the coming few years.
• Lay down national defense production rules. As part of modernizing the defense industry, we ought to draw up a set of regulations. It will be used to produce, research, reform, and renew military products. Also, it must involve the policies on remuneration and welfare, as well as on training workers, engineers, and managerial personnel in military enterprises. In addition, it should stipulate policies on raw material supplies, labor force disposition, productive coordination, peacetime preparation, and wartime mobilization within military sector.

SOURCE: Chinese Views of Future Warfare
edited by Michael Pillsbury
Institute for National Strategic Studies