Looking East: promising future for China's aerospace industry.

China's plans to create a new civil aviation company in the first quarter of 2008 could signify much more than prospective competition in the regional jetliner class. The shift is emblematic of an evolving mindset in China's defense industry--one with far-reaching consequences.

Huang Qiang, secretary-general of China's commission on science, technology and industry for national defense, confirmed rumors in January that the nation would create a new aviation company before March.

In 1999, five bulky state-owned administrative entities of the domestic defense industry were reorganized into 10 major military-industrial groups, two of which have since seen success as Aviation Industry of China (AVIC) I and AVIC II. Working together, the two groups are responsible for the design of the advanced regional jet of the 21st century (ARJ-21), China's first indigenously produced civilian jetliner.

With passenger, executive and freight versions, the ARJ-21 was designed from the ground up with the needs of the Chinese regional aviation market in mind. Despite its homegrown design, however, some 50 percent of its components are foreign made. While the ARJ-21 is probably not destined for major sales in the U.S. market, certification will be sought from the U.S. Federal Aviation Administration, a process that will provide Beijing with much insight into standards and procedures of the U.S. aviation industry.

Focusing on larger civilian aircraft, the new Chinese company--to be named AVIC III--will represent the next milestone in the shaping of China's aircraft manufacturing sector, even as it results in infighting for resources among the three groups. Ultimately, AVIC-produced civilian aircraft--and military variants--could well find a market among countries that cannot afford state-of-the-art Western technology.

Reform in China's aircraft manufacturing sector is part of a larger shift in mindset from Soviet defense industrial thinking to more Western models in which the crossover between military and civilian technological applications is recognized and exploited. In April 2005, testifying before the U.S.-China Economic and Security Review Commission, a senior fellow in trade and productivity at Manufacturers Alliance/MAPI Inc. said the Chinese defense industry went through "a fundamental restructuring" from 1997 to 1999 that shifted control of defense enterprises from the military to the civilian government.

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The move "integrated their operations with commercial advanced technology enterprises, including competitive bidding for defense contracts," said Ernest H. Preeg, who had been executive director of the Economic Policy Group at the White House before his MAPI fellowship. "In effect, China shifted from the discredited Soviet model toward the U.S. model for weapons development and production."

The full course of this transition--by no means a simple one--remains to be seen. Nevertheless, recent developments with the ARJ-21 and AVIC III are starting to show the potential for more significant progress and the maturation of organizational changes begun in the late 1990s.

Production of the ARJ-21 regional jet and an agreement with Airbus to produce similarly sized A319/320 airframes in China are two ways Beijing is trying to address the massive expansion of domestic air travel and leverage that expansion for high-end domestic production. In line with that expansion, China's civilian radars and air-traffic-control systems will have to keep up.

The country's airspace traditionally has been shaped by military demands, with civilian access and mutes a secondary priority. Civil aviation currently has access to less than a third of all Chinese airspace. The People's Liberation Army (PLA) is reportedly the ultimate decision-maker regarding domestic air routes, an issue that still must play itself out.

But while the pace of China's domestic aviation expansion might make for a steep learning curve and some points of friction with the PLA, the management of heavier and heavier volumes of air traffic will also begin to inform and alter China's management of military air operations. Meanwhile, the Chinese radar industry is proceeding apace, and the avionics industry appears to have avoided some of the more counterproductive pitfalls of Soviet-style industry that have ensnared other sectors of Chinese industry.

The problem with the Soviet model was that military developments were closely guarded and, for the most part, segregated from civilian production, which was a secondary priority for the Soviet economy. Indeed, the entire economy was structured so that the Red Army was the primary privileged beneficiary. Efficiencies were not always encouraged, and the benefits of research and development, hindered by Stalinist classified systems, could not be applied to civilian projects.

Not only did the rollover ideas go unrecognized but they were rarely strong enough in the first place to overcome the Soviet culture of secrecy. The 1950s and '60s in the United States, on the other hand, were rife with the benefits of pooling civilian and military research and development in the aerospace sector. It was that very crossover that eventually made not only world-class airliners possible but also things like Iridium phones and satellite television.

Understanding how the lessons of one realm can be applicable to another offers Beijing a valuable avenue to further both civilian and military aerospace development. While managing crowded airspace over Beijing is certainly different from military command, communication and coordination in combat operations, such experience could be an important stepping stone for a China that is now talking extensively about "informationalization" (its word for network-centric warfare) in its national defense strategy documents.

The PLA has certainly studied the military developments of the last two decades. Seminal moments like the coordination of the U.S. air campaign during Desert Storm were wake-up calls for Beijing to modernize its military. At the same time, the increasingly global lines of communication that sustain the Chinese economy concurrently began to extend beyond the PLA's ability to project force. As China moved into the 21st century, its military was intent upon following and integrating the teachings of Western military powers.

From developing the FC-1/JF-17 fighter jet, which is equipped with a Russian engine, to bringing the new J-10 fighter on line, equipped with a domestic engine, China has already refined its domestic military aviation industry. Reduced engine noise levels and increased fuel efficiency are necessary to compete with Western airframes such as Bombardier, Boeing and Airbus. But these issues are not always among the top priorities in military designs. However, the ability to design and produce indigenously two fighter aircraft possibly equivalent to early F-16s is noteworthy.

The ARJ-21, a regional-scale stepping stone to larger aircraft, is not confined to the civilian sector. Both the regional jet and a potential wide-body airliner could one day offer great potential for the People's Liberation Army Air Force (PLAAF). This will be the case for at least a decade, even though Boeing and Airbus have yet to acknowledge the trajectory of the Chinese aerospace industry and where it might be by 2020.

Most modern air forces are made up of big and slow transport aircraft, rather than sleek fighter planes. Should a wide-body design pan out in a decade, China could start replacing its old Soviet transports with modified civilian airframes optimized for everything from airborne command-and-control and early warning to aerial refueling and palletized cargo transport. It has already begun doing this with smaller prop-driven aircraft.

The development of new transports would allow the PLAAF to become less dependent on foreign suppliers, and would also speed up its modernization.

Combine these trends with the mass-production experience and capacity of China and it becomes clear that the country will be playing a prominent role in the world arms market with larger and more complex weapons systems. In this regard, China will likely follow South Korea, which is perhaps the next burgeoning military-industrial powerhouse. South Korea's combination of industrial capacity, research and development and technological innovation have already positioned Seoul to take a leading position in the world's arms market over the next decade.

Chinese quality is unlikely to capture the top end of the market. An affordable Chinese airborne early warning platform might sell well in the mid-range markets that could not otherwise afford one. A low-cost Chinese tanker could make that capability accessible to militaries that cannot afford to buy from Boeing or Airbus.

Chinese anti-ship missiles have already found their way via Iran to Hezbollah. Play that trend through and the strategic and industrial implications of the PLA's continued modernization are certainly worthy of note. Indeed, the military utility and export potential of domestically produced regional and longer-range civilian jets are only the beginning. It remains to be seen whether China can adopt a more open and innovative approach to military research and development,

Nate Hughes is a military analyst at Strategic Forecasting Inc. (Stratfor), a private intelligence company based in Austin, Texas.