China pours money into private sector military technology

China pours money into private sector military technology

China has mobilised at least Rmb387bn ($55.6bn) to fund private sector companies that develop technology with potential military applications, according to Financial Times calculation.

“Civil Military Fusion”, or the infusion of private companies into China’s defence sector, was a key theme at this year’s Zhuhai air show, where exhibitors were keen to stress how their products fitted into the national strategy.

As a result, state defence companies and provincial governments have pooled money into what are in effect state-backed venture capital funds, designed to guide the private sector into helping to modernise the People’s Liberation Army.

In recent years, officials have broken state monopolies over critical sectors by allowing private companies to participate in designing, manufacturing, and operating everything from telecoms to rockets.

While traditional state-owned players such as the weaponry group Norinco and aerospace company AVIC still head China’s largest defence projects, the regulatory relaxation has spurred private entrepreneurs to related sectors such as secure communications, light arms and unmanned vehicles.

“When Chinese military planners discuss civil-military integration, they do not view it as a uniquely Chinese concept . . . the US defence industry as the golden standard,” said Lorand Laskai, a research associate at the Council on Foreign Relations.

The result is a new generation of tech companies that blur the line between state and private, said Mr Laskai: “The drive to meet the PLA’s modernising goals has given rise to a class of private start-ups and companies that specialise in advanced technologies like semiconductors, energy solutions, drones, and aerospace.” 

Thus far, the private sector has helped state companies outsource the development of key projects, often with an eye on selling to other countries. 

For example, Guangdong Hongda, once a metals and mining company, sprouted a subsidiary in 2011that produces short-range missiles and other explosives that can be mounted under drones and manned aircraft.

“Our leaders were quite visionary and sensed that the direction of opportunity was pointing towards civil-military fusion,” said Feng Hui, an engineer. Hongda developed the missile design and propulsion system, while the controls system was provided by state contractors, reducing the development cost had it been entirely designed by state-owned companies, according to the company’s engineers. 

Hongda keeps its missiles’ range to 290 kilometres so as to meet international export standards, which limit ranges to 300km. “Missiles made by Chinese state companies actually go much farther so domestically, we cannot compete with them,” said Mr Feng.

Other state firms, once cultivated to servicing exclusively Chinese military groups, are being encouraged to develop civilian-only businesses.

In 2016, Haige Communications Group, a Shenzhen-listed military enterprise spun out of China’s navy, launched a line of svelte satellite phones compatible with American and European satellites. They are planning to export their phones to countries that are part of China’s Belt and Road Initiative by 2020. 

“You see that we follow national policy quite closely,” said Zhang Ziyi, a company engineer.

As part of civil-military fusion, state-owned firms are also being encouraged to acquire commercial assets such as Maipu, a start-up from the southeastern city of Chengdu that provides secure network communications hardware.

In 2015, Maipu was acquired by China Electronics Corporation, a major state-owned telecoms hardware provider. Phytium, a wholly-owned CEC semiconductor manufacturing subsidiary, supplies Maipu with all of its computer chips so it no longer needs to rely on foreign chips. That has enabled Maipu to meet growing demand as Chinese defence clients increasingly demand domestic components for security reasons. 

“Everything including the semiconductors and their design, come from Chinese manufacturers, making it reliable and safe,” said Xie En, a company engineer. “But of course, our manufacturing equipment is still imported.” 

Follow Emily Feng on Twitter @emilyzfeng

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