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China seeks private sector help to streamline bloated army

Charles Clover
Feng Li, Getty Images News, Getty Images

Wang Zegang makes mining machinery for the coal industry at his factory in Shandong province. But by next year he plans to branch out into a new business: making jets for China's air force.

The way he views it, the more of his products that get shot down, the better. The sole job of "Blue Fox" target drones — for which his factory will make jet thrusters — is to get blown out of the sky during aerial weapons tests.

Thanks to sweeping reforms, private sector entrepreneurs such as Mr Wang are now able to compete in tenders to sell high-tech aviation to the People's Liberation Army.

While the PLA used to be the final bastion against capitalist aggression, it has been forced by Community Party fiat to allow private companies into the guarded inner sanctum of defenseprocurement — once the exclusive preserve of elite state-owned monopolies.

"We are starting at the less demanding, less technical section of the market," said Mr Wang.

Making engines for target drones is perhaps one of the less prestigious missions in the Chinese air force. But it is one area that the elite state factories have relinquished to the private sector. And it is a foot in the door of a lucrative sector.

"In 10 years we hope to be making more sophisticated aircraft," Mr Wang added.

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The decision to bring in the private sector is part of a broad reform aimed at streamlining China's bloated, 2.2m-man army and turn it into a 21st-century fighting force that can outfox US carrier battle groups in the western Pacific, rather than win low-tech land battles in case of a mass invasion by Russia or Japan.

Defense is a growth industry in China, with its military budget growing at double digits nearly every year for the past two decades, as Beijing seeks to assert itself as a global power. Allowing the private sector to participate is also part of an effort to bring transparency and fight entrenched vested interests that have bloated the costs of military hardware in China.

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"The government wants to get the private sector into this area essentially because they want to spend their military budget more efficiently," said Yue Gang, a retired PLA colonel. "Introducing competition from the private sector and breaking up the monopoly of the previous military factor groups means that they will get more bang for their buck, and better high-allocate resources."

While the reform was initially announced at the National People's Congress in November 2013, the PLA set up a website last month to handle procurement tenders and to make the process more transparent. Until then, only a few private companies sold to the PLA, according to Col Yue, and in limited categories of goods, such as bulletproof vests and armored limousines. Now the reform has opened the gates to dozens, even hundreds, of companies.

Mike Pillsbury, a US Pentagon consultant on China's military and author of The Hundred Year Marathon, a forthcoming book on China's hardliners, said the long-term strategy was to mimic the US system of defense procurement.

"What the PLA wants to do is follow the American approach," he said. "If they want to make a missile they don't have just one single state factory which produces rockets and missiles. The US has Lockheed, Grumman and Boeing all competing."

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Mr Wang's entrée into aerospace is through a joint venture between his Shandong Mining Machinery Company and the Beijing-based Gas Turbine laboratory, which is part of the Chinese Academy of Sciences and headed by his former college roommate, that designs jet prototypes for military production.

"Private companies can do things for one-third the cost of state companies," said Yang Xiaojie, general manager of the joint venture who originally hails from the lab.

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Ms Yang, who has spent most of her career working in the state-owned aerospace sectors, said the elite state factories had a tendency to look down their noses at the new entrants. "In terms of qualifications and experience, the private companies are clearly still inferior to the state companies. The state companies still attract better degrees from better universities, a better calibre."

But the private companies learn quickly, and they make do with fewer people — "they develop people better", she said. She added that their new commercial tie-up has meant they have a curious relationship with their former clients, the state-owned Aviation Industry Corporation of China, one of China's largest aviation concerns. Although they are competing with AVIC, they are also still using some of its higher-end production lines to make components that remain beyond their capacity, such as turbine blades.

However, AVIC has not taken kindly to the market entrants. "We certainly don't feel welcome there any more," Ms Yang said. AVIC declined to be interviewed.

"It will be a few years before they are good enough to make high-tech jet engines but that is the way things are moving now," she said.