Rapidly Growing Chinese Defense Industry: Are There Any Vulnerabilities?

[Kim Hoseong, Professor of Business Administration, Korea Army Academy at Yeongcheon] I pose this question to those working in the defense industry or students studying the field: “How many defense companies does China have?” The answers vary widely, ranging from thousands to tens of thousands, often based on assumptions about China’s economy or population size. This is understandable. However, if we consider only the parent companies, the correct answer is nine, as follows: AVIC (Aviation Industry Corporation of China), CASC (China Aerospace Science and Technology Corporation), CASIC (China Aerospace Science and Industry Corporation), CSSC (China State Shipbuilding Corporation), CSIC (China Shipbuilding Industry Corporation), CNGC (China North Industries Group Corporation), CSGC (China South Industries Group Corporation), CNNC (China National Nuclear Corporation), and CETC (China Electronics Technology Group Corporation).

In the 1990s, China undertook a restructuring of its defense industry. The defense sector was divided into five categories, each reorganized into two group corporations, resulting in ten state-owned large enterprises. In 2002, the 11th major enterprise, CETC, was newly established focusing on key national defense electronics, bringing the total to eleven. In 2008, the two aviation corporations, AVIC 1 and AVIC 2, merged into AVIC, reducing the number back to ten.

Then, in early 2018, the nuclear-related corporation CNECC (China Nuclear Engineering & Construction Corporation) was absorbed into CNNC, resulting in the current structure of nine state-owned defense conglomerates. These nine companies possess vast and hierarchical networks with countless subsidiaries and research institutes. In fact, it is difficult to find data on the exact number of subsidiaries and research institutes included in this hierarchy.

These subsidiaries and research institutes are scattered across various locations. An interesting fact is that the headquarters of all nine parent companies are located in Beijing, reflecting a highly centralized governance model. They represent all sectors of China’s defense industry and are responsible for most national defense R&D. Before the 1990s, these nine large enterprises existed in completely different forms, such as government ministries like the Ministry of Machinery Industry and the Ministry of Nuclear Industry, rather than the current commercial corporate forms.

A frequently asked question concerns whether companies like Huawei (the accurate Chinese name is ‘Huawei Technologies Co., Ltd.’) are defense contractors. In China’s private sector, there are four companies that participate directly or indirectly in the defense field: Huawei Technologies, Zhongxing Telecommunications Equipment (ZTE), Datang Telecom Technology, and Great Dragon Telecommunications Equipment. These companies mainly operate in new fields of computing and information technology. Recent studies suggest that they are likely to continue playing a supporting role (second fiddle) to state-owned defense enterprises and are known to be involved in dual-use military-civilian technologies.

Since 2012, under the Xi Jinping administration, China’s defense industry has been flourishing. Driven by a clear goal to transform China into a global leader in science and technology by 2050, the defense industry enjoys high levels of political and economic support. Recently, there has been a trend of mutual shareholding between defense conglomerates and state-owned banks, forming an ‘industry-finance-military complex.’ Based on this large-scale financial backing, numerous destroyers such as aircraft carriers, Type 054A, and 052C have been continuously constructed, and significant achievements have been made in aircraft development, including the J-16 and J-20.

However, despite these achievements, China also reveals technological limitations. One example is the J-20 stealth fighter, whose engine output issues have been widely reported in the media. Recently, China decided to import 24 Su-35 fighters from Russia. Interestingly, China ordered an unusually high number of spare engines?six per fighter instead of the typical two?and there is speculation that these engines might be integrated into the domestically developed J-20 stealth fighters.

Moreover, China appears to lack innovation capabilities not only in advanced technology fields but also in system integration. This seems to be a problem stemming from China’s role as a technology follower of advanced countries rather than a true innovator in the 21st century. This phenomenon is inevitably linked to China’s historical focus on single-technology innovation, leaving it deficient in areas requiring complex and sophisticated engineering.

Recently, China’s defense exports to the West have also been identified. In 2016, China signed its first contract to supply the HQ-9 air defense system to Turkmenistan, a post-Soviet state, and even proposed this system to Turkey, a NATO member. Going forward, as part of the Belt and Road Initiative, China may use arms exports as a means to weaken the alliances of countries traditionally allied with the United States, such as Thailand and the Philippines. If this trend continues, China could become one of the world’s top arms exporters in the near future, offering competitive prices, affordable services, and upgrade packages without geopolitical restrictions.