Saturday, September 15, 2012

How a slowdown in Chinese economy may effect PLA

If you have not been following Asia news recently, you may have missed out on the dramatic slow down recently in the Chinese economy. There are many reasons for this slow down. The most obvious of which has been the extreme unbalanced growth model that China has been on in recent year to exports and investments. With Europe, China's biggest export market, in an economic free fall and America also getting into a recession, China's export is unlikely to pick up in the near future. At the same time, we are seeing a collapse in the real estate caused by the bursting of housing bubble. Local governments are saddled with debts from all of the infrastructure projects, so the investment part of Chinese economy is seeing a collapse and this is confirmed by all of the PMI numbers that have come out recently. While Chinese government may push for more stimulus and infrastructure projects to kick start the economy, this is really a great time to start the de-leveraging process and come to a more balanced growth model with increased consumption making up the growth. I'm not sure how long this period will last, but this is all part of the capitalism. You have the boom and bust period. During bust period, the government will hopefully cut back on some programs and reduce the spending. When it comes to PLA, that should point to a lower growth in the defense budget. This happened in 2009 when the defense budget grew at the slowest pace in a long time. And Chinese government has shown in the past that it is willing to divert money from defense to help economic development. The question is how PLA will adjust to smaller increases in its budget. Which programs will it cut? Or which programs should be cut or reduced?

If we look back in the 80s, when PLA saw its budget cut pretty much every year, most of the programs it embarked on were cut or abandoned very early on. When Su-27s were purchased in the early 90s, there were even many who called for abandoning the J-10 program. That's quite amazing considering that J-10 has been described as China's Apollo project by some. At the same time, many naval projects like 052 and nuclear submarines were delayed while the shipyards continue to build low technology ships due to lack of funding, lack of technical expertise and arms embargo. Of course, the PLA build up of the past 20 years were the results of increased funding, technology transfer from Russia and improved civilian industries.

First of all, what should PLA look into slowing down, reducing or cutting if the procurement and RnD budgets are cut by 10 to 20% vs PLA's current projection levels. Suppose the four services of air force, navy, army and second artillery all get cut around that level, I will look at the two areas I'm more familiar with: air force and navy. I will talk about training and personnel cost later.

In the air force, there are programs that must go on like J-20, Y-20, KJ-2000 (or some future variants of it) and Y-8 special missions aircraft. They will receive proper funding for the foreseeable future. There are ongoing programs like J-10 and flankers series that may see cut in funding resulting in early termination of some variants and shelving of some variants. For example, J-10B has been stuck in the test stage for seemingly a long time and looks to finally be ready for induction. If J-20 becomes successful early, PLAAF may choose to shelve future "semi-stealthy" variants of J-10 to save on development cost and continue to produce J-10B while upgrading J-10A with more advanced electronics and weaponry. In the case of the flanker series, PLAAF may terminate J-11B project early due to its bad performances in the recent red flag/blue flag aerial exercises at Dingxin. The J-16 project could also be cut if SAC continues to have problem actually developing new flanker variants to serve PLAAF. And SAC's 5th generation project may loose PLAAF funding if SAC continues to struggle. There are also many UAV and UCAV projects that are under way in China as we've seen in the recent Zhuhai air shows. Many of these projects are privately funded or for export purposes, but we know PLAAF also has requirements of different types of UAVs and UCAVs. PLAAF may delay the purchase of some of the UAVs while going with more mature and less advanced designs. Of course, these are just my personal speculation and the success of many programs depend not only on their performance but also on the political connection of the people involved in the projects. On top of these core PLAAF projects, there are also the less essential ones that may not get chosen or delayed. JF-17 has long been talked about as a project that may provide the lo-end of China's fighter force and I've long advocated PLAAF purchase a variant of it. However, if PLAAF is in a cash crunch and deems JF-17 to be too expensive, it may continue to purchase J-8IIs or cut some of the regiments and restart J-10A production to lower the logistical cost of having another type of fighter jet in service. In the area of advanced jet trainer, PLAAF may completely give up on purchasing the more expensive L-15 project and only purchase the less advanced JJ-9 project. Future variants of JH-7 will probably be left on the drawing board while JH-7A replaces all remaining Q-5 regiments as the workhorse attacking aircraft of PLAAF. Future bomber projects will get pushed back even more while XAC continues to churn out newer variants of the 50s era H-6 bombers. The Y-9 project will probably get enough funding by then to already be in service, but the speculated jet engine powered version of medium transport will probably be abandoned.

In the navy, most of the programs are amazingly efficient due to China's very competitive civilian shipbuilding industry and advancing electronics industry. Off the top my head, I really cannot think of any ship class currently under production that's really badly managed and deserve to get cut. In the beginning part of PLAN's modernization, it was forced to make large leaps in technology and had numerous classes with limited production to eventually get modern warships. You can see that from 052 to 051B to 052B to 052C. In cases where it did make huge leap like from 052/051B to 052B/C, PLAN waited 7 years before the problems are all sorted out and it can start mass production at much lower cost. At this point, it is no longer forced to make as large leaps in technology, so I think cost escalations have not been major issues with PLAN. As seen in recently in new surface ships, PLAN chooses to either create a new ship class with the same hull but new weapon system or the same weapon systems but the same hull. You can see this in the transition from 053H3 (Jiangwei II) class transition to 054 and then from 054 to 054A. If PLAN had jumped directly from 053H3 to 054A, that would have carried a lot of risks in terms of having a entirely new hull and propulsion system on top of a wholly new air defense system. We've also seen this with 052C to 052D to the speculated 055 class. The new major item weapon systems eventually intended for 055 class will get tested out on 052D. So when 055 program starts, the risk of the project lies only with the new hull and propulsion system and not with the weapon system. The air defense suite, VLS, new naval LACM, main gun, and CIWS would already have been tested on 052D. So after complimenting PLAN for this long, what can they do to lower cost. I think one answer would be to reduce the production level of each ship class that's been mass produced. For example, 022 class could've stopped at 64 instead of whatever the total is now. 054A production run could've stopped at 12 instead of the 16 that's been planned. Yuan class submarine could've been stopped at 8 instead of 12 or 16 that's been planned. I would also advocate for the earlier retirement of some ships that have run out of use like most of the Luda class "destroyers" and Jianghu class "frigates". Recently, we've seen many new warships coming into service, but PLAN has shown an utter reluctance to decommission older ships. PLAN needs to retire some of the older ships or else it will have too many personnel to maintain. Above all, I think if PLAN is really facing a cash crunch, it could always delay the production of a carrier and planned escorts to cut costs. Naval air projects could also be delayed to cut down cost. If the choice for funding of blue water navy was between nuclear submarine or a carrier force, I think it's more important for PLAN to continue to fully fund its nuclear submarine research and development rather than aircraft carriers. There is nothing wrong with spending more time training and learning to operate on one domestic aircraft carrier (+ Liaoning, formerly known as Varyag) before speeding up aircraft production.

I think when it comes to training, large scale exercises and oversea missions, PLA should not cut back its funding in these areas at all. China is finally learning to devote more resources into more advanced training method and improving the quality of its sailors and pilots. Both PLAAF and PLAN have received a lot of new toys recently and I have always wondered whether improvement in software can keep up with improvements in hardware. So even if the procurement budget goes down, the training budget should continue at current pace to bridge the back between China and better trained military forces around the world. Finally, I think personnel cost is not going to be an issue. A large part of the recent climb in PLA budget has been to accommodate the increased quality of life around China. Food and fuel cost in additional to cost of goods have all been going up due to the economic boom. At the same time, better living quarters using more expensive construction material and increased wages have to be allotted to recruit more intelligent young people around the country to have a career in the increasingly less attractive profession of serving in the military. In the bust portion of the economic cycle, these costs will all be turned upside down with inflation likely to completely disappear and worker wage increases falling to flat.

So in the face of increasingly gloomy economic situation in China, PLA will be forced to make some choices in cutting back some of its projected increases. I think that both procurement and personnel cost will see reduction from projected levels. I'm sure the conversation within PLA will be no different than some of the conversations going on in the Pentagon right now

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