Fellows Feature: How Does China’s Dual-Use Industrial Base Enhance Its Mobilisation Readiness for War?

Accumulate to Dominate

Welcome to our OCPL Fellows Feature series, brought to you by our current cohort of talented researchers. These pieces explore key challenges at the intersection of U.S.-China and global emerging technology competition.

BLUF:

• China's massive manufacturing capacity gives it a major military advantage that could decide future wars, even though it wasn't necessarily built for that purpose

• China dominates global production in critical areas like shipbuilding (53%), drones (90%), steel (54%), and rare earth magnets (91%)

• This "peacetime overcapacity" could be rapidly switched to military production during conflict

• The US and allies rely on "just-in-time" production that takes too long to ramp up in wartime

• China's system allows faster conversion from civilian to military production than Western democracies

Introduction

Despite the rise of precision-guided weapons and advances in information technology, it is raw mass that still decides modern wars. The Russia-Ukraine war illustrates this vividly. In the words of The Economist’s Defence Editor Shashank Joshi, the conflict remains “an industrial-scale contest of manpower, steel, and explosives.” Russia has adapted to high battlefield attrition by sourcing cheap drones from Iran, artillery shells from North Korea, and electronic components from China. For its part, each month, Ukraine loses roughly 10,000 drones and requires a minimum of 200,000 155-mm artillery rounds to hold its defence lines confidently. Its limited industrial capacity meant it must rely on imports and foreign military assistance to replenish its arsenal. Without a hot, scalable industrial base, even technologically advanced militaries struggle to generate and sustain the combat power required to prevail.

This is why China’s peacetime industrial strategy poses such a formidable challenge to the defense planning of the United States and its allies and partners. At first glance, China’s dominance in commercial production might seem like a purely economic concern. Its developmental model has long favored supply-side policies, encouraging overinvestment in key industries through subsidies and other forms of state support. Market incentives and the entrepreneurial drive of Chinese firms have also contributed significantly to building China’s impressive manufacturing ecosystem. While Xi Jinping has increasingly securitized economic policies in recent years, Chinese leaders have so far refrained from explicitly linking its vibrant commercial industrial base with the People’s Liberation Army’s (PLA) war preparation.

However, whether driven by military intentions or not, China’s supercharged industrial base has clear military implications for the world. In certain dual-use sectors like shipbuilding and commercial drone industries, China’s export-oriented economic model systematically converts foreign demand into domestic production capacity. That reserve capacity can be rapidly redirected toward military output, offering China a potential mass advantage in any future conflict. International orders—including from countries likely to confront China militarily—are helping to fund and maintain the very shipyards, drone lines, and industrial chains that could serve the PLA tomorrow. Western policymakers cannot afford to ignore the centrality of China’s peacetime industrial production capacity when planning for wartime contingencies.

Dual-Use Industrial Base as Latent Military Power

Modern wars consume material far faster than any one domestic market can support. Cultivating peacetime overcapacity in dual-use industries—defined here as production capacity that exceeds commercially profitable levels, but can serve as a strategic reserve for wartime mobilization or military assistance to allies—could alleviate the industrial bottlenecks created by a rapid surge in war demands. These strategic sectors span the full vertical of defense production: from heavy industries that supply foundational inputs (such as steel and chemicals), to intermediate industries (like microelectronics), and finally to those producing dual-use finished goods, such as ships and drones. Importantly, overcapacity in these sectors is often sustained not just by internal demand but by international demand. These foreign orders keep factories warm and labor pools active, maintaining readiness without requiring a formal shift to a war economy.

The strategic benefits of maintaining an active industrial base during peacetime are threefold. First, China reduces the uncertainty of military ramp-up, achieving a mobilisation readiness advantage. By maintaining an active industrial base in peacetime, China could ensure that the switch from peacetime exports to wartime military production is smooth. Continuous production ensures that machines stay calibrated, skilled labor remains employed, and output is demonstrably scalable. This ensures the reliable supply of weapons and materials with high attrition rates, where the ability to replace losses quickly can determine battlefield outcomes. This model contrasts sharply with US and European reliance on “just-in-time” military production in recent decades, where supply chains spool up only in response to active demand. The result is a stark readiness gap, which could prove disastrous if an adversary is capable of achieving a quick and decisive victory before the defense-industrial base reaches full wartime capacity. Russia’s war machine demonstrates the strategic value of treating the commercial industrial base as a reserve for defense production. A recent study by the Royal United Services Institute finds that Russia has been able to maintain a high level of military production since its 2022 invasion of Ukraine due to “its comprehensive ability to take existing engineering enterprises servicing civilian functions and repurpose them for military production.”

Second, China’s industrial dominance cultivates foreign dependencies on China for certain military inputs. Rare earth magnets, including samarium magnets, are crucial components in fighter jets and missile systems due to their ability to withstand extreme temperatures while retaining their magnetic force. For instance, each F-35 fighter jet requires 50 pounds of samarium magnets. China’s 91% share of the global refined production of rare earth magnets leaves US and allied advanced arms manufacturers dependent on Chinese input. In April 2025, China halted exports of samarium, among six other kinds of rare earth metals, undermining the US and its allies’ attempt to rebuild their inventories of advanced weaponry after shipments to Ukraine. Thus, dependencies on Chinese industrial products have undermined the readiness of Western defences’ arsenals.

Third, China’s commercial overcapacity distorts global markets, undermining the industrial bases of its competitors. For example, China's steel industry accounted for 53.9 percent of global production in 2023. This glut has depressed global prices and hurt major producers elsewhere. Nippon Steel, Japan’s largest producer, saw profits fall by 11 percent between 2023 and 2024; ArcelorMittal, Europe’s top steelmaker, suffered a 73 percent drop. This erosion of allied industrial capacity leaves the US and its allies less prepared to scale up their own war economies in a crisis.

Without a hot industrial base, the transition from peacetime capacity to wartime military production could be sluggish. For instance, despite its commitment to supply Ukraine with one million rounds of ammunition within a year, the EU has failed to expand industrial production lines, relying instead on purchases from the international market to fulfill its pledges. Experts highlight three major barriers to the EU’s attempt to scale domestic procurement of munitions: 1) the uncertainty around how long the demand would last deters investments in production capacity; 2) chronic low production capacity could not keep up with the sudden surge in wartime demand, leading to price surges and hence budgetary strains; 3) the offshoring of parts of gunpowder production to China depleted European companies’ readiness to scale ammunition production. At the same time, China is supplying Russia with a wide array of war-relevant materials, including drones, artillery shells, tooling machines, special chemicals, gunpowder, and defence manufacturing components. As the Russia-Ukraine war has evolved into an industrial contest, Russia—bolstered by China’s vast industrial base—has a mass advantage over Ukraine, whose European backers face a weakened and fragmented defence-industrial base.

China’s Dominance in Dual-Use Industries

The same mobilisation readiness advantage could apply to other dual-use industries. The shipbuilding sector offers a clear case study. China now accounts for 53 percent of global commercial ship production, ahead of South Korea (29 percent) and Japan (13 percent). It also leads in naval expansion, projected to field a 425-ship fleet by 2030—significantly larger than the U.S. Navy’s. Crucially, many of these shipyards are sustained by foreign demand. According to CSIS, over 75 percent of vessels built at China State Shipbuilding Corporation (CSSC) yards—which also produce People’s Liberation Army Navy (PLAN) warships and are blacklisted by the U.S.—are sold to foreign buyers, including companies based in U.S.-allied countries.

China’s drone industry follows a similar pattern. Shenzhen-based DJI controls more than 90 percent of the global consumer drone market. These consumer sales, largely to foreign customers, have helped finance R&D and build a production scale that China can draw upon for military use. China has already weaponized its centrality in global commercial drone manufacturing to influence war outcomes elsewhere. In the Russia-Ukraine war, Chinese firms have selectively restricted drone shipments to Ukraine while continuing to supply components to Russia. In September 2024, China officially restricted the export of key drone parts—flight controllers, carbon frames, motors, and radio modules—citing national security. While Ukraine has sought workarounds, including imports via Europe-based intermediaries, these come with higher costs and lower reliability. Meanwhile, Russia’s drone supply has remained robust.

But this export strategy has implications far beyond third-party conflicts; it enhances China’s own military planning. In a Taiwan Strait scenario, China would likely prioritize the deployment of more advanced, hardened uninhabited aerial vehicles (UAVs). While commercial drones are better suited for close-range combat, these military UAVs are capable of covering longer distances and in harsher maritime conditions. Still, commercial systems would play a valuable role in later stages of amphibious and land fighting. According to analysis by the Center for New American Security (CNAS), the PLA could deploy large numbers of commercial drones—likely including DJI models—to support landing troops with real-time situational awareness, strike capabilities, and the ability to probe Taiwan’s defenses. Although high attrition is expected, China’s expansive domestic drone industry enables rapid replenishment. Production lines for commercial components—such as sensors, flight-control software, and batteries—could be repurposed to support military production. Alongside these commercial systems, the PLA could field tens of thousands of FPV kamikaze drones to enhance ground-level lethality and overwhelm defensive positions.

Grand Strategy or Spontaneous Outcome?

It would be a mistake to assume China’s industrial overcapacity reflects a coherent strategy to dovetail its military expansion, as analysts often overstate strategic intent behind threatening outcomes. It is difficult to discern whether China’s industrial overcapacity is primarily the result of strategic foresight or economic overreach. On the one hand, Chinese strategic doctrine has long emphasized “peacetime-wartime integration” (平战结合), and policies like Military-Civil Fusion (MCF) show how Beijing views civilian industry as a latent source of military capabilities. Having a hyper-scaled industrial base could reflect a longstanding Chinese strategic thought of blending peacetime economic activities with wartime readiness.

On the other hand, overinvestment has been an enduring feature of Chinese economic policy, regardless of variations in its military posture. Historically, Chinese economic policy has always prioritized investment over consumption, generating substantial surpluses. Xi Jinping has doubled down on this approach through Made in China 2025 and other initiatives aimed at “New Quality Productive Forces” to unlock cutting-edge economic development.

For a more complete understanding of China’s manufacturing dominance, analysts should also consider the role of subnational economic actors. In some sectors, like drones, market logic may explain Chinese dominance—Chinese companies simply produce better and cheaper products. In others, overcapacity may stem from fragmented implementation of broad political goals, with local governments and firms improvising to meet vague central directives. The overcapacity of Chinese solar panels is a case in point: Xi Jinping’s carbon-neutral pledge encouraged local governments to compete for photovoltaic (PV) factories by offering land-use rights, tax breaks, preferential loans, and direct investment contributions. This subsidy race has helped China dominate the global PV manufacturing, now capable of producing more than twice the world’s current demand. These alternative drivers of overproduction caution against reading strategy into outcomes that may be an emerging phenomenon of subnational opportunism or improvisation.

Regardless of whether it stems from a top-down grand strategy, China’s overcapacity in dual-use sectors has significant military implications. Even if this industrial strength was not originally developed with militarization in mind, there is nothing preventing Chinese leaders from leveraging it strategically in the future. Ultimately, the original intent behind building such capacity may matter less than how effectively it can be exploited in a conflict scenario.

Analysts can look at three factors to evaluate the strategic significance of China’s mobilisation readiness advantage. The first is the conflict’s duration. Industrial capacity has the greatest impact in a protracted war. If China achieves a quick and decisive victory with its first echelon of forces—or avoids committing to a prolonged war—its industrial capacity may be less relevant to war outcomes. In a war of attrition, China’s industrial capacity would pose a serious threat. Specifically, its continuously active industrial base offers the greatest strategic utility in the early stages of a protracted war, when China could exploit its head start in industrial mobilisation before its adversaries fully transition to a wartime economy.

The second is the degree of convertibility between commercial and military uses. Is the product itself dual-use? Steel, microelectronics, and legacy chips offer more examples of industrial inputs with both civil and military utility. If the product is not inherently dual-use, can the production process be redirected to military output? For instance, DJI’s commercial drones may not survive combat conditions, but the manufacturing process, flight-control systems, and sensor payloads could be adapted to support military platforms. The production process for container ships might similarly suit the production of frigates and destroyers.

The third factor is the government’s institutional ability to redirect the overcapacity. State-owned enterprises (SOEs), under tighter party control, can be rapidly repurposed to support military objectives. The COVID-19 pandemic offered a preview: SOEs built field hospitals and scaled up PPE production almost overnight. The fact that strategic industries like shipbuilding and shipping are controlled by SOEs like CSSC and COSCO makes wartime mobilisation and coordination easier for the Chinese government.

The Chinese government has also tightened its governance over private companies, as most recently shown by its willingness to interfere in CK Hutchison’s decision to sell port operating rights in the Panama Canal. If a forceful reunification with Taiwan is perceived as just and legitimate among broad segments of society, or if it is too politically risky or economically costly to oppose the invasion, private firms may even voluntarily align with the government’s military production goals. For instance, at the height of the COVID pandemic, Chinese electric car maker BYD, as well as smartphone manufacturer Foxconn, retooled parts of their production lines to make face masks, disinfectants, and other protective equipment, illustrating Chinese companies’ ability to act quickly in a national emergency.

In contrast, liberal capitalist systems may face greater hurdles in shaping private companies’ production priorities. In the United States, the Defense Production Act empowers the government to allocate resources for national defense and compel private firms to accept and prioritise federal orders. While the Act has been invoked more frequently in recent years—including for nontraditional needs like healthcare equipment during COVID and clean energy in the years following—its widening use remains politically contentious. Moreover, it cannot provide a full guarantee against the misalignment between private sector actors and government priorities. Starlink’s refusal to provide satellite coverage near Crimea during a Ukrainian counteroffensive in September 2023 underscores the ongoing challenges of relying on private companies for national security and regulating private actors’ behavior during critical moments.

Countering the Threat of China’s Dual-Use Industrial Capabilities

Recognizing the strategic threat posed by China’s commercial industrial prowess, US and allied strategists are increasingly seeking ways to undermine that capacity, most notably by leveraging demand-side pressure. As noted, China’s ability to sustain its overbuilt industrial base depends in part on foreign markets’ willingness to absorb its surpluses. If countries continue raising trade barriers against Chinese surpluses—through tariffs or anti-dumping measures, as seen in sectors like steel and electric vehicles—China’s industrial sustainability could be placed under strain.

However, this approach is not without costs. Curtailing Chinese imports would likely cause short-term economic pain, as allied economies may struggle to find immediate substitutes for low-cost Chinese goods. Leaders hoping to “de-risk” from China would need to make a compelling public case for “pricing in” national security when importing from China, and invest in allied production alternatives to gradually rewire supply chains. This path also carries strategic risks. A sweeping economic campaign against China—especially one framed around preparation for conflict—may appear highly escalatory from Beijing’s perspective. Chinese leaders could interpret such actions as signaling a narrowing window of strategic opportunity for military action against Taiwan, and may feel compelled to act sooner rather than later.

Ultimately, the US and allies and partners face a difficult balancing act: confronting the strategic risks posed by China’s latent military-industrial power while operating on the slower timeline required to rebuild their domestic manufacturing capacity and reduce economic exposure to adversaries. A prudent strategy must therefore aim to delay China’s timeline for military action, buying time for allied industrial capacity to mature. This is no easy task. But failing to manage this transition carefully could lead to a far more volatile and dangerous confrontation.