The Weekly Wire: For Your Situational Awareness 7.25.19

 In Weekly Wire

Keys to Success for Chinese Defense Firms

Aaron Lin, Senior Market Analyst

Earlier this week, Defense News released its list of Top-100 defense contractors for 2019. Notably, this year’s edition included Chinese defense firms for the first time. While not exhaustive in its coverage of the Chinese defense industry, it is interesting to see where these firms sit in relation to Western competitors in terms of defense revenue. Three contractors—the Aviation Industry Corporation of China (AVIC), China North Industries Group Corporation (Norinco), and China Aerospace Corporation (CASC)—are among the top-10, alongside the likes of General Dynamics, Airbus, and BAE Systems. The lion’s share of this revenue is thanks to China’s large and rapidly growing defense budget, which is enough to expand local industry without having to rely on exports. The Chinese defense industry also supplies the expansive People’s Armed Police, Coast Guard, Ministry of Public Security, and other non-military security services. Internal security spending has exceeded investments in the armed forces since 2010.

China’s large domestic budget affects defense exports in two ways. First, Chinese defense firms do not need to rely heavily on foreign exports to keep their businesses profitable. While defense exports may have beneficial financial and political outcomes, they are not necessarily a top priority for these companies. Second, thanks to a large defense budget, Chinese firms have a steady R&D budget that isn’t subject to the vagaries of inconsistent foreign sales. This allows firms to concentrate on developing advanced equipment for Chinese forces. As equipment for Chinese forces becomes more sophisticated, these firms will have more flexibility in gaining central government approval for the export of high-value systems that can compete on the global market.

At first, Chinese export success will likely be found in a limited set of countries—like Bangladesh, Cambodia, and Sri Lanka—that have tight budgets, are looking to diversify suppliers, and wish to cement ties with China. However, that set could be growing as some countries seek to diversify their suppliers. Some of these countries include Algeria, Turkey, Saudi Arabia, and Egypt.

Chinese exports in the past decade could provide clues about the future. The most high-profile export success has been the JF-17, which was jointly developed with Pakistan and borrows several subsystems from the J-10. More recently, Pakistan has ordered a variant of the Type 054A frigate, and both Thailand and Pakistan have ordered a variant of the Type 039A submarine. Both the Type 054A and Type 039A are workhorses of the PLA Navy. The CASC Rainbow series of drones, particularly the CH-3 and CH-4, have seen action with Iraqi, Jordanian, and Saudi forces.

Western defense firms can expect to see increased competition from China in fighter aircraft, ships, submarines, long-range cruise missiles, and EW systems in the coming years. These are all classes of systems that have benefitted significantly from heavy Chinese investment. Furthermore, these are also areas where China has built up significant parallel R&D expertise and competitive advantages in the commercial marketplace. Defense News’ Top-100 list makes clear that separating defense and commercial revenues is difficult due to Chinese defense firms being part of large state-owned enterprises (SOEs) with multiple subsidiaries, many of which are commercially focused. This has led to many “spin-on” technologies being adapted for defense use from the commercial market. There are important systems, however, that Chinese industry has yet to master for export. Aircraft engines, for example, are the most prominent example.

In some sense, these origin of these developments date back to sweeping defense industry reforms initiated in 1998. At the time, Chinese leaders pushed selective modernization of key capabilities, leveraging commercial competitive advantages and dual-use technology. While Beijing debated the exact set of technologies to modernize, China’s defense export successes appear to be—at least in part—the result of these selective modernizations. Xi Jinping clearly intends to continue this strategy, having stressed in 2015 the serious prioritization of innovation and breakthroughs in specific turnkey technologies. While Xi’s statement was intended as a broader national strategy, the Ministry of National Defense will likely be key stakeholder. Defense watchers should expect Chinese firms to feature prominently in future Top-100 lists going forward.

Canada flag


Canada has released the long-awaited Request for Proposal for its future fighter program that will acquire 88 advanced fighter aircraft. Initial proposals will be submitted in Spring 2020 alongside an updated security and interoperability plan. The bids will then be judged based upon technical merit (60%), cost (20%), and economic benefit to Canadian industry (20%). Canada plans to award the contract in early 2022, with the first aircraft delivery to come in 2025.

The competition has become a hot-button political issue after the program was initially sole-sourced to Lockheed Martin’s F-35 by the previous Canadian government but was overturned and delayed upon the election of Prime Minister Justin Trudeau. This delay led Ottawa to purchase 25 F/A-18s from the Australian Air Force in order to shore-up their aging CF-18 fleet. A potential new-build F/A-18E/F deal with Boeing collapsed amidst a trade dispute with the United States.

The emphasis upon the economic benefit to Canadian industry is notable. When the country first purchased the CF-18s, it was able to obtain almost all of the data necessary to stand-up its local sustainment capability for the aircraft. However, in the following decades, prime contractors have shifted their sales strategy to access these lucrative sustainment tails and have limited the dissemination of such key information. As a result, many Canadian firms will lose substantial business in the coming years should their access to support contracts be limited under the new procurement.

The government hopes to promote local industry through this new acquisition by several different means. First, the weighting of economic benefit in the evaluation criteria is one of the highest ever seen in a Canadian government acquisition. Second, it requires that bidders provide a plan for economic benefits at least equal to the value of the proposed contract. As a result, the four bidders on the project have begun to establish their Canadian footprints. Saab’s Gripen E offer will partner with Aeronautics, while Airbus’s Eurofighter offering will partner with MBDA UK, L3 MAS (Canada), and CAE Canada. Meanwhile, Lockheed Martin and Pratt & Whitney’s F-35 offer will look to leverage its significant Canadian foothold and established F-35 Canadian supplier base. Finally, Boeing will offer the F/A-18E/F alongside Peraton Canada, CAE, L3 MAS (Canada), GE Canada, and Raytheon Canada. Ultimately, the successful bid will emphasize economic and industrial advantages over narrow, operational considerations.

Sweden flag


On July 18, Sweden and the UK signed a memorandum of understanding (MoU) agreeing to examine the possibilities for “joint development of future combat aircraft capabilities and combat aircraft systems.” The agreement will be effective for ten years and serves as a starting point for the analysis of the conditions for deeper cooperation. Some publications appear to have jumped to the conclusion that this is effectively Sweden joining the UK’s Tempest program. But this is not the case, at least not yet.

In fact, neither the Swedish nor British government statements even mention Tempest. Sweden has a strong interest in protecting its own aerospace industry and building on the work that has gone into the Gripen E and any work that went into the secretive Flygsystem 2020 program. Joining Team Tempest raises the possibility of Saab’s industrial expertise being diluted as it would be forced to make do with developing only a portion of the aircraft. The final product will be in service for decades to come, meaning that Saab and Sweden may be tied to a consortium in future development and support work. The Swedish MoU notes that “this collaboration offers the opportunity to further insert advanced technologies into JAS 39 Gripen.” Sweden is clearly wedded to the Gripen for many years to come, and it will likely want to maintain as independent of a defense industry as possible. However, Sweden appears to be looking for ways to draw upon developments elsewhere to ensure that it is not left behind in advanced aerospace systems.


On July 24, the President of Bulgaria vetoed a proposed deal to buy F-16 fighters from the United States. The deal had been valued at $1.26 billion. The decision was attributed to a lack of consensus over the deal itself and a lack of transparency over details such as the price, delivery time, and indemnities. The proposed F-16 purchase was the result of Bulgaria’s second attempt to buy new fighters, with a previous effort to buy the Gripen being cancelled in 2018. However, the Bulgarian parliament could overrule the presidential veto with a simple majority during a vote on July 26.

Recent Posts

Start typing and press Enter to search