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China up close

Xi, Huawei and China's powerful military-industrial complex

How Beijing harnesses the private sector for national security

KATSUJI NAKAZAWA, Nikkei senior staff writer | China

TOKYO -- The woman tipped as a future leader of one of China's top technology companies smiled and gave a thumbs-up sign as a Vancouver judge granted her bail on Tuesday.

The arrest of Meng Wanzhou, daughter of Huawei Technologies founder Ren Zhengfei, had ignited an international furor. Canadian authorities detained her at the request of the U.S., on the same day that Chinese President Xi Jinping and U.S. President Donald Trump were enjoying a sirloin steak dinner together at the G-20 leaders' meeting in Buenos Aires, Argentina.

Any hopes for an easing of the trade war between the world's two biggest economies were quickly dashed as the gloves came off in their increasingly testy relationship.

Meng, 46, is chief financial officer of a company with revenues close to $100 billion. Her father Ren Zhengfei, 74, is a former officer of the People's Liberation Army (PLA). Meng holds multiple passports and owns two luxury homes in Vancouver.

While her father's military background immediately raises flags outside China, the truth is that Ren has skillfully piloted the company, preventing the government from intervening too much and enjoying a certain degree of autonomy. This was the secret of Huawei's success.

But that is not the most important point of the Meng incident. At the heart of the Huawei case is the rise of China's "military-civilian integration," and the U.S. government's instinctive reservations over it.

Military-civilian integration is a strategy designed to increase China's national power by mobilizing and incorporating all advanced technologies held by the PLA, the national government as well as state-run and private companies.

The strategy is spearheaded by Xi, who simultaneously serves as the top official of the Chinese military, the Chinese Communist Party and the state. It has been pursued in tandem with a bold organizational reform of the military.

There was a major turning point in 2017, when Xi established the Central Commission for Integrated Military and Civilian Development as a new body to promote military-civilian integration under the oversight of the Communist Party's Central Committee. 

China will "deepen reform of defense-related science, technology, and industry" and "achieve greater military-civilian integration," Xi said at the Communist Party's 19th national congress in October 2017.

"In step with our country's modernization process, we will modernize our military," Xi went on. "We will make it our mission to see that by 2035, the modernization of our national defense and our forces is basically completed."

The goal is to make China a great military power within 17 years. In China, even private companies are required to contribute toward modernizing the military, as it seeks to upgrade its arms and equipment.

Xi addresses the Chinese Communist Party's 19th National Congress in October 2017. China will "deepen reform of defense-related science, technology and industry" and "achieve greater military-civilian integration," Xi said.   © Reuters

The concept of military-civilian integration dates back to the Cold War. In 1961, then-U. S. President Dwight Eisenhower criticized what he called the "military-industrial complex" in his farewell address.

In a bid to catch up with the U.S., China has emulated this U.S. industrial model from the 20th century and adjusted it to conform with Xi's call for "stronger and bigger" state-run companies. It is, so to speak, "a 21st century-style military-industrial complex with Chinese characteristics."

Under China's one-party authoritarian system, any company, state-run or private, in effect comes under the umbrella of the Communist Party. Under China's legal system, the party's word is law. Huawei is no exception.

Developing a military-industrial complex in China, therefore, is easy -- and dangerous.

Xi's interest in military-civilian integration can be seen in his personnel decisions, in which individuals with links to the defense industry and military research have received big promotions to key party and government posts.

For example, Ma Xingrui, 59, the current governor of Guangdong Province, is a rising star often seen as a potential leader for the next generation.

Guangdong Gov. Ma Xingrui, left, and Tianjin Mayor Zhang Guoqing (Original photos by Reuters and Getty Images)

Ma was originally a top aerospace engineer researching areas such as rockets and missiles. He studied flight dynamics at the prestigious Harbin Institute of Technology and served as a senior official at China Aerospace Science and Technology Corporation (CASC). After serving as vice minister of industry and information technology, he rose to be governor of a province dubbed "the world's factory."

Zhang Guoqing, the 54-year-old Tianjin mayor, is another high-profile figure. Zhang was promoted to the post after roles including top party official at Norinco, a major Chinese state-owned defense company, and Chongqing mayor.

Military-civilian integration was also on display in the Guangdong provincial city of Zhuhai, where a massive air show was held in November. Particularly eye-catching this year was an exhibition hall specializing in military-civilian integration, where the instructions of the Communist Party's Central Committee had been faithfully followed.

A domestically made J-10B fighter jet displayed outside was equipped with an engine touted by the Chinese military as a "significant technological breakthrough." The fighter jet's aerobatics display was a centerpiece of this year's show.

A J-10B fighter jet of the Chinese People's Liberation Army Air Force performs during the Zhuhai Airshow in Zhuhai, Guangdong Province, on Nov. 6.   © Reuters

The Trump administration, meanwhile, has called for Xi's "Made in China 2025" plan, a blueprint for upgrading China's industries, to be retracted. Under "Made in China 2025," China has provided subsidies to help domestic companies achieve technological innovation and expand exports. China has also encouraged acquisitions of foreign companies with advanced technologies.

Chinese companies that exhibited their products at Zhuhai this year are now at the forefront of the Sino-U. S. war for technological supremacy.

According to a Wall Street Journal report, Trump's pressure appears to be having some effect. Early next year Beijing is planning to replace "Made in China 2025" with a new plan with less emphasis on Chinese manufacturing and more opportunities for foreign companies, the Journal said.

Over the past few years, however, many Chinese companies have grown rapidly thanks to Xi Jinping-style military-civilian integration. Among them is Hytera Communications, a major manufacturer of radio transceivers and radio systems for police based in Shenzhen.

"Thanks to Made in China 2025, the Belt and Road Initiative and the Digital China strategy, we have achieved unprecedented growth, especially abroad," a Hytera executive has said.

An exhibition of police communications equipment provider Hytera Communications, a company sanctioned by the U.S. Congress. 

The Trump administration is not standing idly by. It has given China until the end of February to address the issue of cyber theft, in which Chinese military-backed cyber units play a leading role.

The U.S. believes that China's newly created PLA Strategic Support Force, the cyberspace and electronic warfare branch of Beijing's military, is involved in cyber theft. Cyber theft is inseparable from Xi Jinping-style military-civilian integration.

Because of these security concerns, the U.S. Department of Commerce has taken action. In August, it added some Chinese companies, including China Electronics Technology Group (CETC), to its export control list due to national security concerns.

CETC, is a huge state-run company under the direct control of the Chinese government and believed to be close to the nation's military.

CETC also has Hangzhou Hikvision Digital Technology under its umbrella. Hikvision is the world's top surveillance camera maker in terms of market share.

In a similar vein, the fiscal 2019 National Defense Authorization Act (NDAA) was enacted in the U.S. in August. It targets five Chinese companies, including Huawei, Hikvision, Zhejiang Dahua Technology and Hytera.

Dahua is the world's second-biggest surveillance camera maker in terms of market share. Both Hikvision and Dahua are based in Hangzhou, a place where Xi spent many years earlier in his career.

Under the draconian fiscal 2019 NDAA, even companies which use products made by the five Chinese companies only in their offices will be banned from conducting transactions with U.S. government organizations starting in August 2020.

Many of the Chinese companies targeted so far by the U.S. are headquartered in Zhejiang province and the city of Shenzhen, places which Xi and his family have close links. Whether they like it or not, they are in the vanguard of the military-civilian integration spearheaded by Xi.

Against this backdrop, Huawei has become the main Chinese target for the Trump administration.

Two months ago, a Chinese Foreign Ministry spokesperson said half-jokingly, "If there are concerns about Apple calls being listened-in on, then you [Trump] can change to Huawei phones." But that relaxed mood has already disappeared.

The Chinese Foreign Ministry summoned the Canadian and U.S. ambassadors in Beijing to protest against Huawei CFO Meng's arrest between Dec. 8 and Dec. 9. The ministry is desperate to avoid criticism at home for being soft on the issue.

Meanwhile, analysts fret that Xi's effort to harness the resources of the private sector for military development could undermine China's 40 years of economic freedom under the "reform and opening-up" policy championed by Deng Xiaoping and his successors. Inefficient state-directed economic management risks China suffering the same fate as befell the former Soviet Union.

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