Armed forces

Switching Strategy: Lessons from China for India’s Defence Industry

If Modi’s aim of becoming an arms exporter is to be realised, India should look to how China has restructured its state-owned defence enterprises.

India can take a page out of China's defence playbook. Credit: Reuters

India can take a page out of China’s defence playbook. Credit: Reuters

A look at the defence industries in both China and India shows that China has already cemented its position as a leading exporter of defence products. China has established itself as a world leader in arms manufacture by doubling its arms exports in the past five years as reported earlier this year by the Stockholm International Peace Research Institute. China’s arms imports reduced by almost 25% during 2011-15 and its arms exports jumped by almost 88% in the same period. India’s defence spending in 1988 was $11.35 billion or 3.6% of GDP which grew to $51.25 billion or 2.4% of GDP by 2015. China’s defence spending on the other hand was $11.4 billion or 2.5% of GDP in 1989 and grew to $214.78 billion or 2% of GDP by 2015.

Over the course of more than two decades, the defence spending of both nations increased. However, China’s increase was both exponential and sustained whereas India’s defence spending fluctuated and saw only marginal year-on-year increments.

Apart from the exponential increase in defence spending, what is it that helped China transition from being an arms importer to being a leading global arms exporter? Tracing the evolution of reforms and their subsequent implementation in China’s domestic defence industry provides the answers to this and could serve as lessons for India’s current focus on indigenising defence production under the aegis of ‘Make in India’.

The Chinese approach

China’s success in revitalising its defence industry is owed to two main factors – one, providing ample funding for weapons acquisition and two, fundamental reforms based on the ‘Four Mechanisms’ of ‘competition, evaluation, supervision and encouragement’. The reforms of 1998 were followed up with a foundation principle put forward during the Sixteenth Party Congress in 2003 – yujun yumin (locating military potential in civilian capabilities). This was done to encourage the building of a civilian sector capable of meeting military needs and to ensure the coordinated development of civilian and defence economies.

Starting from 1977, Chinese military delegations travelled abroad in order to inspect equipment and weapons –  concentrating on selective components, technologies and on concluding co- production agreements. Part of the strategy of building domestic capability in defence products was to build production volume by reverse engineering weapons systems from components and systems acquired from foreign entities. However, in the long run both military and civilian leadership recognised that this approach would not stand them in good stead owing to the lack of indigenous military technology, research and innovation.

Growth has to be bolstered by constant innovation in order to build efficiency and adaptability into all economic activity. Chinese policy makers and industrialists recognised this and worked in tandem to provide greater funding for scientific and technological research. China spends 2.09% of its GDP, or $372 billion on R&D compared to India spending only 0.85% of its GDP or $61 billion on R&D. On a global scale, China’s spend on R&D accounts for 20% of the global spending on research, which is far higher than India which contributes a mere 3.6%. These numbers are not industry specific and thus cannot clearly indicate how far research expenditure has helped in developing the potential of the defence industry. However, in conjunction with the defence budget numbers, it is clear that China is spending almost four times as much as India on defence, five times as much on R&D and exports twice the amount of arms it was five years ago.

Structural reform was integral to the efficient implementation of policy and regulations. In order to make defence industry more efficient, the overarching state-owned enterprises (SOEs) were broken down by sector. Based on operations and products SOEs were categorised under – missiles, shipbuilding, information technology and aviation. This was complemented by a simultaneous reorganisation of ministries to oversee the segregated sectors with ministry of aeronautics and ministry of astronautics for aviation, ministry of electronics industry for information technology and finally, ministry of ordnance industry and ministry for nuclear industry for missiles. Individual units were made more efficient by necessitating relocation closer to cities and ports, shutting down of non-performing units and transferring production and control of certain equipment to civilian authorities.

The Indian take-away

The current focus in India is on indigenisation of defence production. The 2016 iteration of the defence procurement policy and recently notified changes to the FDI policy are instruments in this process. Several critics have pointed out that allowing FDI (especially 100% FDI in defence) and allowing wholly owned subsidiaries to come under the definition of Indian companies will not help in developing domestic defence manufacturing capability. The policy changes are welcome in so far as they will help spur competition as well as pave the way for foreign technology in armament and weapon systems to be more accessible in the domestic market. However, these are only short-term measures and only in a best case scenario will bring our lagging defence economy up to speed.

It has taken quite a long time to finalise the acquisition of Rafale jets from Dassault Aviation, even after government to government negotiations. A critical area in which India can take a leaf out of China’s book is in negotiation tactics during weapons acquisitions. China is known to drive a hard bargain, but their attractive co-production agreements and the availability of both cheap labour as well as R&D funding prove to be strong selling points for foreign OEMs.

The larger goal of indigenising defence manufacturing is to eventually become an exporter of defence equipment. If the larger goal is to be met, there are some important things that India can learn from the Chinese experience. The process and the means need not be replicated, but rather adapted to the Indian context. The nation cannot perhaps afford to increase its defence budget in either capital or revenue terms, not only because of the economic concerns but also because of different sociopolitical priorities. However, structural reforms and providing a fillip to R&D are crucial steps required for providing a solid base to domestic defence industry and innovation.

Structural reform in public sector enterprises, as in the case of state-owned enterprises in China, is required in order to enhance the competitiveness of our DPSUs. These reforms can come in  the form of relinquishing or transferring certain products or their manufacture over to the private sector (i.e. the civilian economy). DPSUs are dependent on SMEs for component systems and spares. It would be worth a try to allow SMEs to take over production of component systems for larger weapons platforms, providing DPSUs the opportunity to divert capital towards R&D as well as improving their scale of operations. This would be a win-win for both DPSUs and SMEs as both would be able to devote time and resources to improving scale and productivity, which would lead to an improvement in the overall quality of products.

When it comes to R&D in defence, the DRDO has held the fort for a long time now. However, the products and innovation that have come out of the organisation have been found wanting in terms of quality and adaptability to scaling up for production. Bringing in SMEs and private sector players as junior partners in defence R&D would help DRDO enhance both their ‘know- how’ and ‘know-why’ in terms of product innovation and quality. Given the relatively low budget allocation for R&D, diversifying labs and having each lab specialise in specific areas such as electronics or missile technology, would help make effective use of the limited funds by directing them towards priority sectors.

Among the major challenges facing China with regard to its defence industry (specifically the SOEs) are security implications of using foreign investment and technology. The recent stockmarket turmoil served as a means for the political elite to reinforce their conviction that central control of SOEs is essential in order to avert financial crisis. This is something that the Indian administration is also concerned about. However, the possible solution to this would be to reduce state and administrative intervention as far as possible in order to enhance efficiency of resource allocation and encourage participation of smaller private entities.

India has focused on policy mechanisms for spurring growth of domestic defence industry thus far. It is now imperative that structural reform and R&D are given greater attention as the means to the end of achieving indigenisation of defence manufacturing. If India aims to become an exporter of defence products, a change in strategy now will be crucial in determining success in the future.

Dnyanada Palkar is Senior Research Associate, Pahle India Foundation, New Delhi