Leadership: The China Syndrome

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May 9, 2010: Using stolen Russian technology, China is on its way to driving Russia out of the low-end weapons business. In turn, Russian attempts to maintain their status as a major developer of military technology are fumbling, largely because of the sales stolen by China. Increasingly, China is undercutting Russian sales efforts with similar weapons containing lots of stolen Russian technology. The Chinese won't invest as much in developing new technology, and the Russians can no longer afford to. So the second tier weapons markets slide further into mediocrity.

Through the most (1960s-80s) of the Cold War, Russia (Soviet Union) had a well financed arms industry. Many innovative weapons were developed, but all this effort was hobbled by the fact that the Russian economy as a whole was very inefficient, and Russian industry could not build high tech as well, or reliably, as Western firms could. Thus Russian high-tech gear always came in second to Western counterparts.

When the Cold War ended, so did the lavish spending for the Russian defense industries. Many, actually over half, of these weapons manufacturers went bankrupt, or converted to non-military production. Those that survived, did so by exporting weapons. Throughout the 1990s, the Russian armed forces could not afford to buy much new stuff. China came to the rescue in the 1990s, and over the next decade, bought nearly $20 billion in Russian arms. But China also began to blatantly copy lots of the Russian tech, and build their own. Thus, not surprisingly, for the last five years, Chinese orders have shrunk, while production of copies of Russian tech have increased. In some cases, Russia has simply refused to sell China high tech stuff, to avoid having it copied.

All this is a big deal in Russia. There, the defense industry employs nearly three million people and account for about 20 percent of industrial jobs in Russia. At the end of the Cold War in 1991, defense work was more than three times as large as it is now. It was the large size of the defense industry that played a major role in bankrupting the Soviet Union. The Russians were never quite sure (cost accounting not being a communist favorite) what proportion of their GDP was devoted to military spending, but it is estimated that it was over 20 percent. That was more than four times figure for Western nations.

Russian arms sales are stalled at about $8 billion a year. These sales difficulties can be largely attributed to problems with the two largest customers; China and India. Russian arms exports had been growing rapidly during the last few years. In 2005 Russian arms exporters had already booked orders for six billion dollars worth of sales per year through 2008. Contrast that to 2004, when Russian arms sales were $5.6 billion. That went to $6 billion in 2005 and $7 billion in 2006. Russian arms sales were only $4.3 billion in 2003, and ballooned as the economies of their two biggest customers (India and China) grew larger. That, and the escalating price of oil (driven largely by increased demand from China and India),  sent international arms sales from $29 billion in 2003, to over $60 billion now. Oil rich countries, particularly those in the Persian Gulf, as eager to buy more weapons, with which to defend their assets.

Russia is trying to work out licensing deals with the Chinese, but are not finding much interest. The Chinese say their generals are angry over how Russia sells technology to potential Chinese enemies, like India. The Russians don't understand that, as they have been selling weapons to India for decades. Russia fears that the Chinese have just decided that they don't need to buy Russian technology, or equipment, any more, and can just steal what they need.

China has been doing some technology development of their own, but have not done much beyond perfecting their reverse-engineering (copying Russian tech) capabilities. China can handle high tech, but most of their best people are working on mastering and using high tech techniques for manufacturing a few items, which can then be mass produced at a good profit. This includes automobiles (which are basic tech, but reliable), consumer electronics and commercial aviation. Chinese weapons tech is, so far, decent copies of decades old designs. But keep in mind that the Chinese are determined to succeed at what they do. If that means they have to work on older, simpler, tech, so be it. But they are catching up, and they are relentless.

 

 


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