The global implications of China's military modernization
China is flexing its military muscles, in large part to satisfy its insatiable demand for resources. The consequences and resulting competition with other nations will be felt far and wide.
China's military modernization is integral to the country's ambitions to expand its global economic and political power. Already the world's second-largest economy-and forecast to become the largest by 2021-China sees its continuing growth and prosperity as being linked to its ability to secure energy and mineral resources, expand trade and access new markets.
Since embarking on its most recent modernization in the late 1990s, China has exhibited periodic provocative tendencies to challenge extant security arrangements, as well as maritime borders and boundaries, particularly in the South and East China seas. Moreover, it has been an occasionally destabilizing force beyond its region by exporting arms and technology to states under Western sanctions, such as Iran.
China clearly aspires to establish itself as the pre-eminent geopolitical, economic, and military power in East Asia, eventually expanding its ability to influence political and economic conditions; shape geopolitical competitions; and secure critical sea lines of communication on a much more ambitious geographic scale-from the Middle East to the eastern Pacific. Its pursuit and attainment of this goal are of interest and potential concern not only to the global aerospace and defense industry and national security communities in Asia, North America, and elsewhere, but to all companies with international business interests.
Risks of China's military modernization
On January 15, 2014, China's Ministry of National Defense confirmed in a press release that it had conducted a test of a "new ultra-high-speed missile delivery vehicle"-later confirmed by the US Department of Defense to be a hypersonic glide vehicle (HGV) capable of traveling between Mach 5 and Mach 10 and, once the technology is mature, enabling a kinetic strike anywhere in the world within minutes to a handful of hours. The HGV test was a direct response to the US Prompt Global Strike program and served as a signal of the steady and significant progress of China's ongoing military modernization program.
The investment is paying dividends for China's People's Liberation Army (PLA) and its increasingly capable indigenous defense industry, while also creating new risks for regional security. These risks include proliferation of advanced military capabilities; exposing vulnerabilities associated with integration of advanced Chinese systems; and increasing competition in the global defense industry.
China's modernization effort began in earnest soon after the 1995-96 Taiwan Strait crisis, and has sought to achieve two objectives. First, China has sought to provide a specific set of linked, enhanced, and advanced military capabilities to the PLA Navy (PLAN) to deny access in the western Pacific to potential competitors during a crisis or conflict. In the short term, these capabilities are focused on controlling access to the Taiwan Strait or in the East or South China seas (the "first island chain," according to the US Department of Defense). During the next 10-15 years, the objective is for PLA forces to be able to operate freely out to Guam, the "second island chain". (See map below.) In the next two-plus decades, China hopes to be able to leverage its modern military to more effectively project power and secure critical sea lanes from the Indian Ocean to the eastern Pacific.
China's anti-access/area denial (A2/AD) strategy, as it is called, has prioritized investments in a number of areas including: development of advanced missile technologies (including anti-ship ballistic missiles); launching a robust network of intelligence, surveillance, and reconnaissance (ISR) satellites designed to track the movements of surface ships and aircraft flying into the networked area; developing counter-space capabilities to disrupt potential-adversary ISR assets; and developing cyber capabilities to be able to deliver a massive, difficult to attribute (and therefore to deter), and highly asymmetric pre-emptive strike to debilitate increasingly networked advanced military forces. (See sidebar "China's cyber-espionage activity" below.)
China has also invested in tactical aviation, including developing two fifth-generation fighter designs, and strategic lift aircraft, which, along with an air-to-air refueling capability, is critical for China to effectively project power beyond Asia during the next two decades. China has also invested in naval assets, especially in its carrier fleet. A case in point is the Liaoning, which came into service in 2012, the first of a four-ship carrier fleet that IHS reported in February 2014. China has also invested in an enhanced submarine capability, amphibious assault ships, and improved surface combatants.
The second core objective of China's military modernization effort is to develop an indigenous defense industry that is self-sufficient in its ability to provide required PLA capabilities and can support expansion of Chinese influence through defense exports. Recent activity has been notable in key areas frequently seen as indicators of growing indigenous capability, including military aviation, shipbuilding, missile development, and space, where China has "enhanced its space-based ISR, navigation, meteorological, and communications satellite constellations" and improved its capacity to deny "the use of space-based assets by adversaries during times of crisis and conflict," according to a 2013 US Department of Defense report to Congress.
China's steady and significant modernization has been supported by increased investment-the official defense budget grew from $20 billion in 2000 to $148 billion in 2014 and is estimated to reach $189 billion by 2018-but actual spending is estimated to be at least 20% higher. This includes China's acquisition of foreign technology, and an impressive capability to reverse-engineer this technology to create indigenized versions of military platforms for internal use and export.
Indeed, China's reliance on foreign technology has diminished as indigenous capability has increased, but China still seeks foreign technology to fill capability gaps, particularly around engines, advanced radars, and guidance systems. Russia has been China's primary provider of military equipment, but even Russia has grown squeamish about continuing high-end military exports to China. This is evidenced by the protracted negotiations surrounding a deal for Russia to sell 48 advanced fourth-generation Sukhoi-35 fighters to China over concerns that, according to IHS, the aircraft's passive electronically scanned array radar and engine will be reverse-engineered by China. As a Russian industry representative said in March 2012: "Some of us would be happier if this deal with Beijing is just never signed because we know how it will end."
While China's A2/AD capability is not expected to reach full maturity for another decade or more, the competition between the development of these capabilities and US and allied development of enhanced power projection (P2) and territorial defense capabilities is accelerating. The military and geopolitical risks are becoming more evident as the rhetoric and territorial disputes in Northeast and Southeast Asia intensify. While these risks tend to grab headlines, China's military modernization has also produced risks that are increasingly occupying the attention of defense industry executives and military and security planners throughout the world. Their concerns include increased competition from China in the next decade in the already savagely competitive defense export market; cyber risks associated with the integration of advanced Chinese systems into existing military frameworks; and risks associated with the proliferation of advanced military and dual-use technologies to and from China.
The competitive risk from China
China's defense exports have increased substantially in the past six years, from US$1.2 billion in 2009 to US$1.8 billion in 2012 and a slightly higher total of US$1.9 billion in 2013. As a consequence, China has moved up from the eighth-largest global defense exporter in 2012 to seventh in 2013, just behind Israel and surpassing Italy. (See figure below.)
While China's current exports constitute approximately 2.8% of total global defense exports, up from 2.1% in 2009-which IHS estimates its total exports to be just under US$70 billion in 2013-it is clearly very competitive with recognized Western defense exporting nations, such as Spain, Italy, Sweden, and Canada and is closing the gap on Israel, Germany, and the United Kingdom. This upward mobility and increased competitiveness as a defense exporter is likely to be sustained over the next five years and beyond and has positioned China to become a consistent competitor in the global arms market. Indeed, China maintains a backlog of orders estimated at around $11 billion, according to IHS.
China's export activity has focused primarily on secondary and tertiary defense export markets that are under US or Western export sanctions (Iran, for example) or simply cannot afford or do not need the most expensive Western and Russian platforms and systems. (See figure below.) These markets seek to balance "good enough" military technologies with cost, forgiving payment terms and, in a growing number of cases, a strong desire to build or enhance indigenous defense industry through production work-share and technology transfer programs.
While many of China's export markets are not attainable or even desirable for the Western defense industry, there are some that are. China's ability to access these markets is of concern to Russian, Western and Korean defense companies because it comes at a particularly vulnerable time. The defense industry in the West, in particular, is already enduring home country budget cuts and political issues by seeking to navigate emerging markets in Latin America, the Middle East, and East Asia, including Saudi Arabia, Thailand, and Indonesia-all of which are significant export markets for China-as well as other "good enough" markets China is well suited to service.
This risk may well be set to intensify. In September 2013, the Turkish government announced it had selected China Precision Machinery Import-Export Corporation's FD-2000 air defense system as the winner in its T-LORAMIDS project to provide a long-range air defense capability that will operate within NATO's Integrated Missile Defense System. Turkey selected the FD-2000 over bids from Raytheon and Lockheed Martin; Russia's Rosoboronexport; and Eurosam, an Italian-French consortium.
The Turkish announcement was shocking, but clear: China's offer beat the competition in terms of "price, technology, local work share, technology transfer, and credit financing terms," according to Murad Bayar, Turkey's Undersecretary for Defense Industries. These are all critical selling points for a Turkish government seeking both to save money-the FD-2000 bid was $1 billion less than the next-closest bid-and build its own indigenous defense industry.
Protests from US and NATO member states have delayed the deal, and when this article went to press there were signs that Turkey might in fact back down. Still, Bayar indicated in late 2013 that it could be signed by April 2014 and delivery of the system could occur by 2017.
If the deal is completed, the T-LORAMIDS procurement would be a bellwether deal for China. It would enhance China's credibility as a defense exporter and could indicate an intensification of the risk of China's military modernization for Western, Russian, and emerging Asian defense industries. The fear is that China will now be in a position to compete for sales in critical emerging markets and force China's competitors to adjust their export models by offering lower costs and better payment terms. In addition, Western defense companies may be forced to expand technology transfers to remain competitive in the sizeable "good enough" market.
Critically, though, China's state-owned enterprises will also accrue risk as they are exposed to a more diverse and sophisticated set of customers. China's defense industrial establishment will need to ensure that it is a good partner to its new customers and that it reliably provides the "value" for which these customers are looking. Initial research by IHS on China's export record indicates that China's 2008-10 exports to Latin America, in particular, but also to Southeast Asia, were plagued by issues pertaining to equipment quality, after-market support, and even concerns over China's ability to export critical components of finished platforms-such as Ukrainian engines on the Chinese VT-1A tank, which was scheduled to be exported to Peru in the early 2010s. Of course, China's is not the first nor will it be the last defense industry to struggle to deliver on proposal promises. Still, despite a notable focus on enhancing the buying experience, China risks a stunted emergence into the more advanced "good enough" markets it is targeting.
Integration and network vulnerability
The T-LORAMIDS deal also presents risks associated with the integration of Chinese systems into advanced militaries that are linked to critical military systems of other states, alliances, or partnerships. US and NATO objections to Turkey's decision not only to select the FD-2000, but also to integrate the Chinese system into NATO's Integrated Missile Defense System reflect deep and abiding concerns about the network security and cyber vulnerabilities arising from a Chinese state-owned enterprise having access to this critical system.
As seven US senators wrote to President Obama in October 2013: "We are concerned about the risk of third-country access to NATO and US classified data and technology." Turkey claimed in November 2013 that it had developed a notional solution that would cut Chinese personnel out of NATO communications, but no technical solution is likely to fully alleviate the concerns surrounding Chinese access to NATO systems, given China's demonstrated cyber capabilities.
This specific risk is unlikely to be precisely replicated in the near future. Turkey is perhaps the only NATO ally that would consider acquiring Chinese military systems, although it is worth noting the expanding economic relationships between Western European states and China. However, the T-LORAMIDS deal is instructive of a category of potential risk that could result from the combination of increasing Chinese defense exports and cyber capability and the continuation of a recent trend toward new geopolitical, defense, and military relationships and evolving geopolitical competitions, particularly in the Middle East, where China, Russia, and even Western European powers have sought to enhance their geopolitical as well as defense relationships.
Proliferation and dual-use threats
China's military modernization has also generated intense concern, particularly in the United States, about the proliferation of advanced military and, significantly, dual-use technologies both to and from China. The importance of dual-use imports and the related difficulty in distinguishing between military and civilian activities in China's state-owned enterprises was highlighted in the US Department of Defense's 2013 Annual Report to Congress on China, which stated bluntly that: "China's defense industry has benefited from integration with its expanding civilian economy … particularly sectors with access to foreign technology." The report also noted that China's opaque corporate structures, hidden asset ownership, and the connections of commercial personnel with the central government, serve to obfuscate the true nature of commercial activities in industries related to military modernization, enhancing access to militarily relevant technologies.
The difficulty in controlling export of such items to China-despite the existence of export-control regimes-and the complexity of the geopolitical relations associated with these controls are highlighted by the late December 2013 resignation of Meir Shalit as the head of Israel's Defense Export Control Agency following the accidental re-export of an Israeli-manufactured miniaturized cooling device to China. The item, which is used in electro-optic systems and in missiles, was originally part of a licensed export to a French company but had subsequently been retransferred to China. The US expressed its intense concern over the incident, fearing that the item would have been marked for transfer from China to Iran-China has a history of ballistic missile sales to Iran-to support the development of Iran's ballistic missile program.
While Israel has complied with US export-control requests since the early 2000s, the issue is becoming more delicate as Israel seeks to deepen trade relations with China, including establishing agreements to develop an alternative trade route between Israel and China that bypasses the geopolitically vulnerable Suez Canal. Israeli newspaper Haaretz reported in late December 2013 that Israeli defense and technology companies have started lobbying the prime minister's office as well as the economic and foreign affairs ministries to increase exports of defense and dual-use items to China, including currently controlled items, in response to growing market and economic pressures affecting the Israeli defense industry.
Even with export regulations in place, China has proven deft at acquiring advanced technology-including technologies undergirding US military modernization-to plug gaps, reinforce areas of relative strength, and better understand the platforms and systems that could be deployed against the PLA. Much is made of Chinese cyber and corporate espionage efforts but, during 2012 and 2013, China has complemented these efforts with a more transparent and direct approach to acquiring dual-use technologies, specifically through company acquisition.
IHS tracked two completed acquisitions in 2012 and five in 2013 in which Chinese enterprises acquired US or European aerospace companies with varying degrees of exposure to defense activities, including Chongqing Helicopter's purchase of Enstrom, a US manufacturer of commercial and military helicopters with sales to various Asian and Latin American militaries.
Proliferation of dual-use and advanced military technologies to China is a risk in part because of the potentially accelerating effect such proliferation will have on China's military modernization, but also because of concerns over the pace at which such technology will subsequently proliferate from China to key trading partners. China is not a member of critical arms and export-control regimes such as the Wassenaar Arrangement and Missile Technology Control Regime and, as a result, has a well-earned legacy as a powerful proliferator of advanced military technologies-primarily ballistic and anti-ship cruise missiles and, potentially, air defense systems-and critical dual-use items to states such as Iran, Syria, Pakistan, and even North Korea, enhancing these states' military capability and technological base.
For example, in November 2013, Pakistan launched its first two indigenous unmanned aerial vehicles-the Shahpar and Burraq. IHS described the Shahpar as "bearing more than a passing resemblance to the CASC CH-3"-China reportedly exported 20 CH-3s to Pakistan in 2010. Similarly, IHS reported in February 2014 that Pakistan was in negotiations to export the JF-17 Thunder fighter-co-developed with China-to long-time US defense partner Saudi Arabia, clearly demonstrating the cascading effects of Chinese proliferation as well as the potential knock-on export risks to Western, Russian, and emerging Asian defense industries.
Such proliferation is rightly viewed as a significant risk to international security because it provides novel advanced capabilities to states that would not otherwise be able to acquire them. This is a risk that is frequently amplified because proliferation can occur in ways that actually increase the uncertainty about the capabilities specific actors possess and about their ability to use these capabilities. Such enhanced capability and uncertainty complicates the tasks of deterrence and dissuasion.
US Air Force Chief of Staff General Mark Welsh summed up the risks created by Chinese proliferation in a November 2013 discussion with reporters. General Welsh noted that while the US did not expect to fight China directly, it did forecast fighting China's modern military technologies: "It will be on the street, and we will be fighting it. Their new stuff will be better than our legacy stuff. That's just the way it is."
China's desire to modernize its military is a natural development for an increasingly confident and capable power seeking to enhance its security and influence in Asia and throughout the world. However, the scale and approach of modernization and nature of the capabilities being developed, combined with recent activities in the East and South China seas, have increased tensions and the risks of escalation, miscalculation, and even crisis in east Asia. While these layered and complex risks require the attention of foreign, security, and defense policymakers in affected states, China's military modernization has already created critical issues and risks, particularly surrounding proliferation. These risks are driving uncertainty and competition related to the procurement of advanced military capabilities.
How military strategies translate
China's military modernization, which is focused on territorial claims and anti-access/area denial (A2/AD) missions, in conjunction with US power projection capability development, is contributing to military tensions in the region that will play out over the next couple of decades. Here are three of the key areas that are being watched closely:
Undersea: The United States maintains the world's largest and most capable submarine fleet, which is viewed as a considerable advantage in the unfolding military modernization competition in east Asia, especially given widespread perceptions that anti-submarine warfare constitutes a weakness for China's military. However, Congressional Research Service analysis of the US conventional submarine (SSN) fleet indicates that this advantage may be difficult to sustain because of funding and political issues. The US conventional fleet is projected to fall below the US Navy's minimum required force of 48 SSNs in 2025, bottom-out at 42 SSNs in 2029, and remain below the 48-boat level until 2035. While the Virginia class SSNs in service from 2014 will have more capability and firepower, the decline in the size of the fleet will coincide closely with the expected timeframe for full maturation of China's A2/AD capabilities. Significantly, several other states in east Asia, including Japan, Malaysia, Vietnam, Singapore, Indonesia, and Australia, have announced plans to upgrade their submarine fleets.
Missile attack versus missile defense: China's investment in missile technologies has been designed to hold possible adversary assets, bases and infrastructure in east Asia at risk. While its status is uncertain, China's DF-21D anti-ship ballistic missile is considered a 'game-changing' technology because of its alleged ability to bring increased firepower at longer ranges-estimated at 1,500 km-against the most critical component of US power projection: carrier battle groups. Analysis of the missile's suspected capabilities has led to a debate over the ability of current US Aegis ballistic missile defense systems to meet this evolving threat.
The information blockade: Advanced modern militaries have become increasingly reliant on sophisticated networks of command, control, communication, intelligence, surveillance, and reconnaissance systems (C4ISR), which have driven a step-change in operational efficiency and capability. These networks also create potential avenues for cascading and paralyzing disruption through cyber-attacks and electronic warfare. China's information operations capabilities are designed to leverage this vulnerability to create an information blockade in which potential adversaries are unable to collect information and communicate, and in which command-and-control networks fail to function. A pre-emptive non-kinetic information blockade strike could render regional military forces inert, obviating the need for traditional kinetic operations.
China's cyber-espionage activity
A key element of China's military modernization is the development of robust computer network exploitation capabilities to support the surreptitious collection of sensitive and technical information (cyber-espionage). China's cyber-espionage capabilities and activities have received particularly acute attention since the release of a series of high-profile reports in early 2013, including reports from the US Defense Science Board, the private internet security company Mandiant, as well as a classified National Intelligence Estimate, elements of which were leaked to the press.
Collectively, the reports describe a significant and sustained cyber-espionage campaign against US companies in a variety of industries emanating from China and initiated by the Chinese government. This campaign has allegedly led to the theft of a disconcerting amount of high-technology engineering data and network security program data, the acquisition of which is designed to help accelerate China's national development and military modernization and also enable it to better understand the platforms, systems, and networks that could potentially be deployed against China's People's Liberation Army in a crisis. A sampling of targeted industries includes defense, IT, aerospace, energy, finance, chemicals, satellites, telecommunications, and media.
Of particular concern for US national security planners and regional security is the US Defense Science Board's contention that more than 24 critical military programs have already been compromised by activity originating in China, including some of the platforms and systems most critical to US efforts to counter China's A2/AD military modernization including: PAC-3; Aegis and terminal high-altitude area defense missile defense systems; the F/A-18 fighter, which is the US Navy's primary carrier-based fighter; the next-generation Littoral Combat Ship; and the fifth-generation F-35 Joint Strike Fighter.
The Mandiant report identified the "most prolific" of China's purported hacking groups, known as Unit 61398, detailing the scale of its alleged activities (141 organizations hacked in at least 20 industries); geographic focus (87% of attacks were in English-speaking countries, 115 against US targets); its spear-phishing tactics for penetrating systems; its recruiting history going back to 2004; and the average length (356 days) that the unit maintained access behind firewalls of targeted organizations.
The Chinese government and state-run media have vehemently denied accusations of cyber-espionage. Instead, they highlight the considerable issues associated with attributing cyber-attacks to state governments based primarily on the location of IP addresses and suggest that the narrative is another attempt by the United States to isolate and "encircle" China.
Paul Burton Content Director, industry and budgets, IHS Aerospace, Defense & Security
Tom Skomba Consultant, IHS Aerospace, Defense & Security
James Hardy IHS Jane's Asia-Pacific Editor, IHS Aerospace, Defense & Security