In 2019, China spent an estimated $261.1 billion on its military – the second highest amount of any country besides the United States.

Possessing a highly developed defense industrial base is a prerequisite to becoming a leading military power. While China is already the world’s second largest arms producer, the ability of its arms industry to domestically develop certain advanced weapon systems is still growing. If China can successfully strengthen its defense industry, it can reduce its reliance on foreign technologies and establish itself as a global leader in cutting-edge military capabilities.

China’s Arms Industry Giants

The Chinese Communist Party (CCP) has named modernizing the People’s Liberation Army (PLA) among its top priorities. At the 19th Party Congress of the CCP in October 2017, Chinese President Xi Jinping outlined the goal to “complete national defense and military modernization by 2035” and to transform the PLA into a “world-class military by mid-century.”

Upgrading equipment and technologies is a central focus of China’s military modernization campaign. From 2010 to 2017, China’s annual spending on military equipment rose from $26.2 billion to $63.5 billion. While attributable to growth in China’s overall military spending, this is also the result of higher prioritization. In 2010, 33.3 percent of total military spending went toward equipment. By 2017, that figure stood at 41.1 percent.

The vast majority of the equipment and technologies purchased by the PLA are supplied by nine state-owned enterprises (SOEs) and one state-owned research institute. These organizations tend to be conglomerates that own multiple – often dozens – of subsidiaries.

According to the Stockholm International Peace Research Institute (SIPRI) Arms Industry Database, at least four of China’s primary arms companies rank among the world’s top 25 in 2019 (based on value of arms sales). They include Aviation Industry Corporation of China (AVIC), China Electronics Technology Group Corporation (CETC), China North Industries Group Corporation (NORINCO), and China South Industries Group Corporation (CSGC), which ranked 6th, 8th, 9th, and 24th, respectively.

It is important to note that SIPRI’s arms sales estimates rely on publicly available financial reports. As a result, there are likely more Chinese arms companies that would rank in the global top 25, given more data. Other rankings besides SIPRI’s have used different methodologies, and have included additional Chinese arms companies in the top 25. DefenseNews’ 2020 Top 100 Defense Companies, for instance, ranked China Aerospace Science and Industry Corporation (CASIC) 11th, China Shipbuilding Industry Corporation (CSIC) 14th, China Aerospace Science and Technology Corporation (CASC) 20th and China State Shipbuilding Corporation (CSSC) 24th.

The four Chinese companies in SIPRI’s Top 25 ranking generated $56.7 billion in arms sales, or about 15.7 percent of the total among the top 25 in 2019.1 This puts China at a distant second behind the US, whose 12 top companies sold $221.2 billion worth of arms (61.2 percent of the top 25). Nevertheless, China’s companies garnered more sales than the companies of the next three countries (the UK, France, and Russia) combined. Rounding out the top arms-producing countries were Italy, a trans-European grouping, and the UAE.

Some caution should be taken when comparing arms sales between Chinese companies and those from other countries. As state-owned firms primarily supplying the Chinese military and police, Chinese companies likely price their products differently than private companies in other countries. Substantively, $56.7 billion worth of transactions with Chinese firms probably involves a larger amount of equipment compared to transactions of the same value with private companies in Western countries.

The Chinese government has launched numerous rounds of organizational reforms to spur demand and competition within China’s defense industry. Some of the most far-reaching reforms took place in the 1990s, but efforts to reorganize the industry continue. In 2019, for instance, China’s two largest state-owned shipbuilding companies merged to form China State Shipbuilding Corporation (CSSC).

These consolidations have resulted in a small number of massive firms that tend to dominate each of the five major defense industry sectors: aerospace, electronics, land systems, nuclear, and shipbuilding. For instance, the aforementioned CSSC is the single SOE dominating the shipbuilding sector, which includes both surface vessels and submarines. By contrast, top non-Chinese arms companies – such as Lockheed Martin and Boeing – offer products and services spanning multiple defense sectors.

As SOEs, decision-making in Chinese defense firms is top-down and receives heavy direction from military and civilian leaders. When specific weapons are deemed to be a national priority, top-level military and civilian leaders participate in extra oversight mechanisms to guide development. This is similar to the setup in Russia, where leading companies like Almaz-Antey and United Shipbuilding Corporation are state-owned. By contrast, firms in the US and UK arms industries are generally private and more responsive to market forces.

Although each Chinese defense company tends to offer a narrower range of arms products, they have a diverse customer base, since these companies also produce non-military products and services for civilian entities. NORINCO, for example, manufactures heavy machinery, petrochemicals and minerals, electrical optics and financial services in addition to supplying small arms and light weapons. About 77.9 percent of NORINCO’s 2019 sales were not related to arms.

On average, 70.7 percent of all sales by Chinese firms were not classified as arms sales in 2019. The proportion stood at 42.9 percent for the top US firms and just 9.7 percent for Russia’s two major companies. By producing a diversified portfolio of products, China’s defense companies are insulated, to a certain extent, from fluctuations in demand for military goods.

The Rise of China’s Defense Industry

The Chinese defense industry has undergone enormous changes in recent decades. Through much of the 1970s, China was primarily capable of producing weapons based on outdated Soviet technologies from the 1950s. Under Chinese leader Deng Xiaoping, national defense was prioritized as one of the “four modernizations,” which helped kickstart the growth of China’s domestic defense industrial base.2

Subsequent decades of economic development allowed the Chinese government to dramatically increase defense spending, leading to growing demand within China’s defense industry. China’s defense spending stood at just $26.1 billion (constant 2018 US$) in 1995, accounting for only 2.4 percent of the world total. By 2019, it had grown tenfold to $266.5 billion and accounted for 14.2 percent of global defense spending. In the same period, Russia’s defense spending doubled, and the US’ spending grew by 47 percent.

The Chinese defense industry has long relied heavily on an absorptive model in which firms acquire foreign military and dual-use technology and incorporate this into the design and development of products. This approach has significantly reduced the amount of time and money China has had to invest in research and development (R&D), testing, and integration. This significantly sped up Chinese efforts to modernize its military and narrow technological gaps, especially in areas such as aviation, naval shipbuilding, and precision strike missile production.

China has used various means to acquire foreign military and dual-use technologies. In 2014, for example, several of China’s top arms companies signed a deal with Russian defense firm Russia Technologies (Rostec), including an agreement between AVIC and Rostec to collaborate on fixed-wing and helicopter manufacturing, engine production, aircraft materials, avionics, and other areas.

Chinese arms companies are not alone in reaping benefits from foreign cooperation. In 1998, India and Russia signed an agreement forming a bilateral joint venture known as BrahMos Aerospace to produce supersonic cruise missiles. In Japan, which is heavily reliant on US-made military equipment, Mitsubishi Heavy Industries is receiving help from Lockheed Martin to develop a new jet fighter.

However, in addition to legally acquiring foreign know-how, China has also illegally copied and stolen foreign military and dual-use technology. In the 1990s, China purchased Russian Su-27 fighter jets and S-300 missile systems and reverse-engineered them to assist with designing its J-11 fighter jets and HQ-9 surface-to-air missiles. In 2019, Russia’s Rostec accused China of illegally copying various equipment and technologies, including aircraft engines, planes, air defense systems, and missiles.

China has also engaged in sophisticated cyber espionage campaigns against the US. In 2007, 2009, and 2011, Chinese hackers gained access to some 50 terabytes of US Department of Defense data containing the blueprints of American stealth fighters and other information. In 2016, Chinese national Su Bin pleaded guilty to conspiring to steal data relating to Boeing’s C-17 strategic transport aircraft and Lockheed Martin’s F-35 and F-22 stealth fighters. Two Chinese nationals, Zhu Hua and Zhang Shilong, were charged in 2018 with running a multi-year campaign to steal critical aviation, space, satellite, manufacturing, communications, computer processor, and other technologies.

These efforts highlight the difficulties China has faced in domestically producing certain military aviation equipment. Purchases of aircraft and engines accounted for 71 percent of the $6.3 billion in arms that China imported from 2015 to 2019. These purchases helped make China the world’s fifth largest arms importer behind Saudi Arabia, India, Egypt, and Australia.

Russia supplied 75.5 percent of China’s total arms imports during this period – including the bulk of the aircraft and engines. China has a long history of purchasing Russian military equipment dating back to the Korean War. Decades of tensions saw Russian exports to China cease, but following the rekindling of diplomatic relations between the two countries after the Cold War, China once again became a top purchaser of Russian arms.

Some of China’s most advanced systems are still reliant on Russian technology. For example, many of AVIC’s Chengdu J-20 stealth fighters employ Russian Saturn AL-31 engines. Versions of the Shenyang FC-31 jet fighter, produced by AVIC subsidiary Shenyang Aircraft Corporation, have likewise used Russian RD-93 engines. However, China appears to be making headway on replacing Russian engines. A domestically built WS-10C engine is reportedly being used in variants of the J-20, and new variants of the FC-31 are likely to be outfitted with Chinese WS-13E engines. Over the next decade, both planes are expected to feature more advanced Chinese-made engines, including the WS-15 and WS-19.

Prioritizing Innovation

China’s arms industry has historically favored lower-cost mass production over creating state-of-the-art weapons with high price tags. This has been crucial to affordably arming the PLA and has allowed Chinese firms to dominate segments of the global market with cost-sensitive customers. However, leaders are increasingly pushing to shore up domestic innovation capacities to lead in key technologies critical to national defense in the decades to come.

Chinese leaders acknowledge the weaknesses of the country’s defense industry and the need for China to push to the leading edge of innovation in military and dual-use technologies. China’s 2019 defense white paper states that the country lags in critical defense technologies and concludes that “[g]reater efforts have to be invested in military modernization to meet national security demands. The PLA still lags far behind the world’s leading militaries.”

Recent efforts to upgrade China’s defense industrial base have been guided by the 13th Five-Year Plan (FYP) for Defense Science, Technology, and Industry Development, which was issued in 2016. Compared to previous iterations, the 13th FYP places a higher priority on indigenous innovation and the development of advanced technologies. It sets out several key tasks, including improving the efficiency of the defense industry, enhancing innovation capabilities, promoting military-civil fusion (MCF), and boosting arms exports.

Under President Xi Jinping, China has intensified its pursuit of MCF (junmin ronghe) as a means of making the defense industrial base more efficient and innovative. The concepts behind MCF have been around in China since at least the 1980s. An earlier iteration of MCF, known as “military-civil integration” (junmin jiehe) was reflective of well-established efforts pursued by the US and other countries to promote joint development of the military and commercial industrial bases.

However, MCF goes further than simply seeking integrated military and civilian development. The 2020 DoD annual report on China’s military describes MCF as “a nationwide endeavor that seeks to ‘fuse’ [China’s] economic and social development strategies with its security strategies to build an integrated national strategic system and capabilities in support of China’s national rejuvenation goals.”

One area where China is making notable strides toward heightened innovation is growing expenditure on R&D. China’s national R&D spending witnessed a more than 35-fold increase between 1991 and 2018, from $13.1 billion to $462.6 billion. While Chinese R&D expenditure was still second to the US in 2018, it was more than the next four countries – Japan, Germany, South Korea, and France – combined.

Given a lack of data, it is unclear how much of this R&D is defense-related. One recent estimate finds China may have spent as much as $27 billion on defense R&D in 2018.3 While it is impossible to directly compare this figure to those of other countries, this estimate suggests that China spends much less than the US. According to the OECD, the US spent $67.5 billion on defense R&D in 2018.4 Still, China likely spent far more than other major players like South Korea ($3.6 billion) and the UK ($2.4 billion).

Efforts to improve the defense industry are falling somewhat short in other areas. While the systems developed by China’s arms companies are overwhelmingly produced for the PLA, the 13th FYP called for Chinese arms companies to boost arms exports in order to scale up demand within the industry. Yet China’s arms sales have not seen impressive growth in recent years. From 2015-2019, China exported $8.1 billion worth of military equipment – just 6.3 percent more than during the 2010-2014 period ($7.6 billion).

This is consistent with a 5.5 percent increase in global arms exports, but well behind the growth demonstrated by top exporters like France (72.2 percent), the US (22.7 percent), and Germany (16.8 percent). China consequently slipped from the third-largest arms exporter to the fifth largest. Expanding their customer base remains a challenge for Chinese firms. Top arms buyers tend to be more interested in low-end products from China, and prefer to purchase more advanced equipment from the US or Russia.