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Contractors Hope for Movement in Japanese Defense Market

September 11, 2016 (Photo Credit: Yuya Shino/Getty Images)
TOKYO — Several nascent procurement plans offer some hope of increased revenues for Japan’s top military contractors, but the overall picture could remain business as usual without either a radical increase in defense spending post-2018, when Japan will release its new Mid-Term Defense Program (MTDP), or a major breakthrough in overseas weapons sales.

Japan’s defense budget request, unveiled in late August, requests 5.17 trillion yen ($50.6 billion), an increase of 2.3 percent over the current amount, and will include 100 billion yen ($980 million) to upgrade PAC-3 missile batteries to PAC-3 MSE and account for rising F-35 costs, according to local media reports.

But a radical rise in the budget or overseas sales success looks unlikely unless the prospect of an actual armed conflict with China emerges, or Japanese contractors and the Japanese defense establishment works much harder to sell internationally, according to analysts.

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Japan’s defense procurement is governed by MTDPs that decide exactly how many and what type of weapon systems and programs will be required over a five-year period. Equipment is then bought by the Self-Defense Forces in small, annual lots. While the self-contained system provides a stable annual income for five years, it leaves little room or incentive for major contractors such as Mitsubishi Heavy Industries (MHI), Mitsubishi Electric Corp., NEC Corp., Kawasaki Heavy Industries (KHI), IHI Ltd. or Mitsui Engineering & Shipbuilding Co. to invest in major new weapon platforms, and it leaves them inexperienced in international contract bidding.

A case in point is this year’s loss to French shipbuilder DCNS by an MHI and KHI-led consortium to convince the Royal Australian Navy to purchase 12 advanced Soryu-class submarines in a deal worth up to $40 billion, despite the vaunted stealth superiority of the Japanese submarines, and their advanced propulsion systems. 

“I don't think Japan 'blew it' with the OZ subs,” said Grant Newsham, a senior research fellow at the Japan Forum for Strategic Studies.

“They just never had a chance once the Australian government looked at it from a business perspective and also weighed the 'risks' associated with Japan versus France. Building submarines is darn complicated, and here was Japan making its first serious foray into overseas defense production. What could possibly go wrong?” he said. 

Similar hopes to sell other weapons platforms, for example the Kawasaki P-1 maritime patrol aircraft to the UK, have also stalled. Some good news has emerged with the news that the Indian Navy has ordered 18 ShinMaywa US-2 amphibious search-and-rescue aircraft at a cost of $1.65 billion, but, overall, Japanese companies will find further sales an uphill struggle, Newsham said.

“I haven't seen . . . increased opportunities, partly owing to Japanese companies being 'babes in the woods’ in what is a sharp-elbowed business. Nor is there much evidence I've seen that Japan Inc. sees defense exports as a particularly attractive niche,” he said. 

However, two major defense procurement programs have emerged this year -- a new fighter and a new surface-to-ship missile program -- offering some hope of increased revenues for Japanese contractors.

This June, the Ministry of Defense (MOD) issued a request for information to replace its fleet of 94 F-2s with a putative “F-3” aircraft in around 2030, with a decision due in 2018 for what could be a $40 billion program. The request has been necessitated by shortcomings of the F-35 (Japan wants to buy 42 planes) in air-to-air combat, a critical factor for the Japan Air Self-Defense Force (JASDF), and Washington’s refusal to sell Japan the F-22 Raptor.

A US industry source familiar with the MOD’s thinking predicted that domestic lobbying would press for an extremely highly priced indigenous successor to the F-2 that could prove just as poor a value to taxpayer as its predecessor. The Mitsubishi F-2 multirole fighter is a modified F-16 that proved disastrously expensive, costing about four times as much as the F-16.

Richard Aboulafia, vice president at the US-based Teal Group, said the price of developing an indigenous F-3 could be so prohibitive that the project becomes unlikely.

“Continued F-35 procurement beyond the current plan is the likeliest scenario,” he said. “However, if the US resurrects the F-22 and agrees to export it, the JASDF would be the perfect customer,” he said.

“I am still not sure what an F-3 would actually look like, as surely the JMOD cannot be serious about developing something indigenously,” said Chris Hughes, Japan military expert and professor of international politics and Japanese studies at the University of Warwick.

“Japan must be holding out now for joining an international consortium for a 6th-generation fighter. So maybe just some stop-gap aircraft is a possibility,” he said. 

Last month, the MOD also announced plans to deploy in around 2023 a new class of 300 km surface-to-ship missiles to deter Chinese People’s Liberation Army Navy threats to Japan’s southern island chain and around the disputed Senkaku Islands, reinforcing the 200 km-capable Type 12 missiles procured in 2012. 

Meanwhile, Japan’s capabilities to meet increasing Chinese pressure are becoming increasingly stretched. This July, the MOD’s Joint Staff revealed that in the first quarter of 2016, the ASDF had scrambled 199 times, more than double the scrambles of the same period a year earlier. On Aug. 5, China had sent a flotilla of more than 230 ships, guarded by large coast guard vessels, near the Senkakus, alarming Japanese authorities.

Hughes predicted that Japan will concentrate on missile defense and may consider further filling out its fleet of eight Aegis destroyers to 10 boats. 

“For outlying island defence, the shore-to-ship missile being talked about would be an important new capability enabling Japan to close the straits between its islands and Taiwan and help to bottle up the Chinese fleet,” he said. 

“The recent announcement of developing a longer-range SSN (anti-ship missile) typifies some of the problems with Japan's defense industry,” Newsham said. 

“Particularly, the target date is 2023 -- instead of 'next week.' The Chinese are breathing down Japan's neck, for crying out loud, and the best they can do is seven years to develop a missile that's sorely needed down in the Nansei Shoto -- the key terrain? 

“Japan should be moving fast to work with US companies, or even Norwegian companies -- that make excellent anti-ship missiles -- rather than taking the go-it-alone, take-your-time approach they are used to,” Newsham said. “Kind of makes it all look like a jobs-for-Japanese-industry effort rather than a serious effort to defend Japan,” Newsham said.

Top1002016-Asia
Top1002016-Asia
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