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Friday, May 16, 2008

China is the New Russia

At last Russia, for so many years childishly thumbing its nose at copyright protection, is now getting a brutal taste of its own medicine. The Weekly Standard reports:

RUSSIA AND THE PEOPLE'S REPUBLIC of China are about to go head-to-head on issue of significant national security and strategic importance to both nations. Believe it or not, it is not about the placement of a gas pipeline, nuclear weapons development, or the rapidly rising price per barrel of Russian oil. What it concerns is the age-old Chinese penchant for making illegal copies of almost anything imaginable.

"You wouldn't steal a car!" is the warning that flashes across the screen almost every time you put a movie in your DVD player. What usually follows is a series of messages about the evils of pirating movies, including the obligatory warning from the US Federal Bureau of Investigation about how video piracy is punishable by up to 5 years in a federal penitentiary and/or $250,000 in fines.

One country where these warnings have had little or no effect is the People's Republic of China, no matter where you are in this vast country. As you move through various regions of the country one, the people look different, the food tastes different, the Putonghua (Mandarin) Chinese that is spoken in Beijing and other parts of northern and southwestern China is replaced by Guangdonghua (Standard Cantonese) or other local dialects. What does not change in any city is that almost every DVD and CD shop behind a hidden panel or bookcase that contains a mammoth selection of pirated films and music--all of which are supposedly illegal. The last such hideaway room I visited this past month was offering 10 DVDs for 100 Chinese Yuan (RMB), with an 11th disk thrown in for free, which works out to about $1.30 per disk. This may be one of the few places in the world where the US dollar still buys something. (I do not want to say which city, lest the local gendarmeries decide they need to make a symbolic crackdown on these entrepreneurs to create some positive pre-Olympic games publicity and take everyone's attention off the debacle of the torch relay and the recent exposure of a secret Chinese Navy submarine base.)

But, Hollywood and the trade associations that represent the famous entertainers trying to stamp out video and music pirating have comparatively little to complain about when you look at the situation that Russia's military aircraft industry finds itself in. As the Russian newspaper Pravda reports, "Chinese pirates have entered a new level of activity."

In the early 1980s and before the collapse of the USSR, Soviet aircraft industry turned out two extremely capable, twin-engined, twin-tailed fighter designs: The Mikoyan MiG-29 and the Sukhoi Su-27. The latter aircraft was considerably larger than the smaller and more nimble MiG. It was in the same weight class as the Boeing F-15, and like its US analogue it was designed to be a long-range interceptor that could give its operators the long reach needed by nations with a plethora of air space to defend.

In the early 1990s, the PRC was desperate for just such an airplane. Chinese industry had tried to produce one for years, but had seen its efforts at design innovation stalled for more than a decade. At the same time orders and funding to Russian industry from its own military had dropped to nothing. The only way the makers of Russian weapon systems were going to survive was from export sales to China, India, and other nations.

Several years after their first purchase of Su-27SK export variants, China signed an agreement with Russia's state arms export agency, Rosvooruzheniye, for the licensed production at the Shenyang Aircraft Works of 200 additional Su-27SKs, as well as subsequent orders of Su-30MKK two-seat, multirole versions of the aircraft. Russian industry breathed a sigh of relief as billions of Chinese dollars began to fill their coffers.

But, in 2004 China's military told Moscow that the airplanes it was licence-producing were no longer needed because--according to the Chinese military--"the combat performance of these aircraft is far too limited." The 200-aircraft production run was truncated at 95 units of the J-11, which was the designation given by Shenyang for the Su-27SKs assembled in China, with only 180 of the twin-engined aircraft's Saturn/Lyulka AL-31F jet engines delivered as well.
Three years later in 2007, it was easy to see why the Shenyang plant had cut off the licensed production of the Su-27SK at the halfway mark. Chinese industry had learned all it needed to know in order to copy this airplane and soon presented their "indigenously developed" J-11B fighter, which from all external appearances appeared to be an analogue of the Su-27SK. Russian officials were less than diplomatic in their reaction. Another Moscow paper, Nezavisimaya Gazeta, reports Russian sources stating "the J-11B is an absolute imitation of the Su-27SK."

Beijing making its own copies of Sukhoi airplanes, or "Sushki" as they are sometimes referred to in Russian slang, has Moscow worried. A copy of the Su-27SK has the potential to do to Russia's defense market abroad what Chinese industry has done to the US consumer electronics industry. Just as Wal-Mart contains almost an entirely Chinese-made selection of products, the future world fighter market could be crowded with cheap, Chinese copies of the Su-27. Some of the more dire Russian predictions are that the Shenyang plant could flood the export market with as many as 5000 J-11Bs, which would eliminate many of the Western and even Russian alternative choices for numerous nations looking to upgrade their air forces.

Nezavisimaya Gazeta reports that as a consequence, "Russia has officially informed China that it considers the J-11B to be an absolute copy of the Su-27SK and that this is a direct violation of the two nations' contractual agreement. Moscow has further promised that it will initiate legal proceedings in order to protect its intellectual property rights."

However, it is hard to see in what legal forum Moscow can address these grievances. China belongs to the World Trade Organisation (WTO), but Russia does not. Even if there was a clear-cut path to make a legal case against China they would be on questionable legal grounds--pirating of software and other copyrighted products in Russia is as widespread as anywhere in the world.

But the larger problem that Moscow has is its dependence on China for export orders of other defense products. Currently most of the military jet engines produced in Russia are exported to China. Beijing is also one of the only prospective customers for a slew of new-generation Russian weapon systems. Taking legal action against their Asian fellow travellers can only mean that that the drop in defense exports to China, which has fallen by more than 60 percent in recent years, will become even more pronounced.

During a lending crisis one will hear that "if you borrow $5,000 the bank owns you, but if you borrow $5 million you own the bank." Transposed to the situation in Russia's defense industry, this means that there is little Moscow can do to reverse the situation it now finds itself in. Having invested so much in its defense business with China, Moscow would find it almost impossible to cut these ties and give up this market entirely.

At the same time, the price for staying in the Chinese market is like a high-stakes poker game. Giving up what you have already thrown into the pot on the bet that you can get Beijing to finance a next generation of military technology. The risks are high for Russian industry--and even higher for the rest of the world. The question now is where will the market for Russian weaponry on the international market end--and that for products made in China (based on what they have learned from Russia) begin? The answer will depend on who is more clever--the Russians or the pirates--in this next round.

1 comment:

Mark said...

Or is Russia the new China?