The first part can be found here: “Silk Road Arsenals – Part 1“
China exports influence under the guise of military products
The industrial expansion of the Celestial Empire through the export of military products is facilitated by several factors that attract attention to China and its defence products.
There are several emerging markets with optimal options, such as the Middle East, Latin America and Africa, and some Eastern European countries, and China has established contacts with virtually everyone. Beijing strives to become a reliable supplier for countries such as Iran, Myanmar, Sri Lanka, Thailand and Venezuela. They have a tense relationship with the US for a number of reasons, including lack of diligence in democracy and human rights, according to the Americans. This means that in order to continue the military modernisation, the conflicting states have to buy military products from China, as well as from suppliers from countries that are independent of the West, for example, from Russia. This is especially true of sensitive military technologies such as combat UAVs, which China, unlike the US, is ready to export.
Another important factor that attracts customers is that they do not have to have the requirements to obtain the most modern military technologies or the financial means to purchase them. Today, Chinas is the world’s leading exporter of inexpensive military products. In its favour, the restrictions imposed on Western manufacturers for the transfer of sensitive technologies, the trend is towards procurement through intergovernmental agreements rather than competitive bidding. By getting in touch with the customer, the Chinese have become more skilled in offering trading methods that are considered attractive to importers, especially to economically dependent countries. These approaches include savings on proven projects, flexible debt repayment mechanisms, ease of doing business, short listing of terms of sale and application, financial assistance, strategic and economic ties and industrial cooperation and technology transfer in the defence and commercial sectors.
Three for the price of two
The Chinese military products, as a rule, fall within the range from one to two thirds the cost of similar platforms or systems of major suppliers from the West. Price advantages are achieved through low labour costs, high volume production, proven technology and limited upcharges. Chinese industry has traditionally been allowed to include only five percent of profits in defence contracts.
For example, the fighter jet JF-17 “Thunder”, classified as a 4+ generation, was sold to Myanmar in 2016 for $16 million, while similar Western-made platforms would have cost three to four times as much. The Thai Navy was able to order three “Yuan” Chinese submarines in 2017, while from other foreign suppliers they would have received only two for the same amount of money.
China offers its customers preferential loans and flexible repayment forms and counter transactions. Loans are often granted for a period of more than 20 years, which consolidates the relationship. Counter-trade has become an important tool in supporting military transfers for customers who are short of finances but rich in natural resources.
The effectiveness of this trade policy is noted by the official PLA ChinaMil website, which states that China provides the most flexible payment terms. Customers pay for military products through exchanges of goods, including food, oil and gas. According to ChinaMil, barter is becoming increasingly attractive to customers who often do not have hard currency. Since military sales are considered politically significant, payments for goods can be made through intergovernmental agreements. Giving recent examples, the site notes the export of military products to Venezuela in exchange for oil; Thailand paid with dried products, Turkmenistan and Uzbekistan with natural gas.
China has also long promoted industrial expansion through communications, which, according to Beijing, are free of political threads. This is a direct reminder of the Celestial Empire’s tendency to refrain from interfering in the internal affairs of the client state, including judging the human rights of the client state or the political system, and from dictating how to use the acquired military product.
Civilian products as a bonus
Another key strategy is cooperation, which should be in line with the growing global requirements for local industrial development, obliging exporters to transfer technology and know-how and to cooperate with companies in the importing countries
China is not alone in this approach. All major military manufacturers pay great attention to industrial cooperation with customers. The Chinese side has been more successful than many competitors because it is more flexible and efficient. China’s military export technologies are usually “mature” and based on existing projects, which reduces the buyer’s concerns about violations of intellectual property rights. Moreover, China is the least concerned about the cost of such a military-technical cooperation, understanding that the main goal is to achieve strategic influence rather than income through exports.
While maintaining openness in technology transfer and industrial cooperation, Chinese military products are often described as sufficiently good or capable of meeting the needs of unsophisticated customers in developing countries. In emerging markets, this strategy is effective, cost-effective and attractive to countries facing monetary constraints.
One of China’s most successful export platforms is the Karakorum K-8 training aircraft. It was produced under license or was assembled in Egypt, Myanmar and Pakistan.
Over the last decade, several Chinese platforms of their own assembly have appeared abroad. For example, Pakistan produced the JF-17 “Thunder” fighter (based on the FC-1 aircraft); the “Sword” frigate (type 053H3 of the Jiangwei II class) and the Al-Khalid MBT on the basis of the Norinco type 90-II/MBT-2000 tanks. Argentina, Bangladesh and the Sudan have mastered the production of other Chinese military vehicles. Self-propelled multiple rocket launchers (MLRS) developed in the People’s Republic of China were produced in Belarus, anti-ship missiles were produced in Indonesia and Iran, and Malaysia signed a contract for the construction of coastal warships.
Although China’s participation in direct industrial cooperation has increased, there is evidence that the country is also using indirect synergy strategies in export markets. This applies to cooperation and technology transfer not directly related to the purchase of military equipment, and usually takes place in sectors such as construction, energy and infrastructure. Here, Chinese defence companies have strong positions, as they are centrally managed and diversified. It should be noted that the largest defence industry corporations “AVIK” and “Norinco” have potential in civil aviation, transport, energy, electronics, optics, machine- and ship-building, automotive industry, finance, media and consulting, as well as software. Accordingly, methods of indirect industrial cooperation are numerous and varied.
Integration as intervention
An important element of the expansion is the acquisition of aerospace, defence and engineering firms in foreign markets, as well as integration into technological networks in developed economies such as Australia and the United States. In particular, the “AVIK” and others have demonstrated a strategy to capture small foreign companies operating mainly in the commercial sector.
For the PRC, such purchases are important in line with the ongoing civil-military integration strategy (CMI). With its help, Beijing seeks to support the development of defence using advanced commercial technologies. Priority acquisition targets are companies that can provide modern technological capabilities and competences in western methods of production management. For Chinese corporations, these purchases also provide an opportunity to expand military and commercial exports.
It is likely that China’s efforts to enter the US and European aerospace and defence markets through such acquisitions will increase in the future. The country’s rapid economic recovery since the early 2000s has contributed to this. Industry in the Celestial Empire has become the dominant player in the exploration and processing of resources used in “defence” (“Rare Elements”). A report from the US Department of Defense says that China is now producing “an increasing number of widely used and specialised metals, alloys and other materials, including rare-earth metals and permanent magnets. China is also the sole source or major supplier of a number of critical energy materials used in ammunitions and missiles.” The US military identified many parts of Chinese production in US military systems, mainly in microelectronics, integrated circuits and transistors.
The report of the Australian Strategic Policy Institute’s International Cyber Policy Centre (ICPU) states that China’s technological partnership with companies in Australia and the United States has created a “dual-use dilemma” for countries that seek to advance their capabilities but also fear support for China’s military development. Such a partnership could lead to the transfer of research and technology that would contribute to the military modernisation of the Celestial Emprise, with the prospect of a possible imbalance of forces in the Asia-Pacific region. “The main dilemma is that the Chinese state has demonstrated its ability and intention to co-opt private technology companies and scientific research to advance national and military goals that are far from being transparent,” the report stresses.
The ICPU document contains several examples of partnerships between China and legal entities in Australia and the United States. These include a subsidiary of CETC (China Electronics Technology Group Corporation), one of China’s state-owned military-industrial groups, which participated in the creation of an innovation centre in Silicon Valley (USA) in 2014. In 2017, a joint venture between CETC and the University of Technology Sydney (UTS) established a centre for advanced research in science and technology, including artificial intelligence (AI) and autonomous systems. They note examples of cooperation between Chinese military researchers and the National University of Defence Technology of Australia, other institutions, contacts of Huawai Communications Company in Australia and the United States, strong ties between Beijing and Berlin in advanced technologies such as robotics and AI.
China’s industrial integration into global networks is characterised by data published by China’s Ministry of Science and Technology in early 2017. They show that the GWI programme has established scientific and technological linkages in more than 150 countries. A total of 111 such partnerships are based on intergovernmental agreements. The Chinese have established 70 science and technology offices in embassies, consulates and diplomatic missions in 47 countries.
China’s defence industry’s efforts to expand its military exports and deepen cooperation with foreign institutions are firmly linked to strengthen the country’s strategic influence around the world. The strategy is fully supported by a centralised and public sector approach to integration, which allows the defence and commercial sectors, as well as banks, research institutions, institutions and government agencies to coordinate efforts. This all-Chinese trend means that the work is directed from above and is fully promoted by budget financing.
Although China’s economy has slowed down in recent years, it will continue to expand rapidly in the coming decades and beyond. This should ensure the implementation of a coordinated industrial and governmental strategy, as well as the support needed to continue to expand China’s influence through various means, including integration into global technology networks and export of military products.