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Between a rock and a hard place: Why Japan’s defense industry is struggling

  • September 25, 2022
  • , The Japan Times
  • English Press

BY GABRIEL DOMINGUEZ

STAFF WRITER

 

With tensions and threats growing in East Asia and elsewhere in the world, Japan is aiming to boost its military spending. That’s set to be a boon for foreign defense contractors, but it’s a different story for domestic firms.

 

And without a change in acquisition trends, analysts say, the very viability of the domestic defense industry could be called into question.

 

The severity of the situation was made clear by Naohiko Abe, head of Integrated Defense and Space Systems at Mitsubishi Heavy Industries (MHI), who told the Financial Times in July that a wider shake-up was needed. He said the country’s defense industry was not sustainable if it could only generate razor-thin margins from Defense Ministry contracts.

 

“Industry players all say that they need more profitability, continuity as well as predictability. We must do something to sustain the industry because companies are withdrawing in the last five years,” Abe was quoted as saying.

 

Last year, Mitsui E&S Shipbuilding decided to pull out from naval shipbuilding, selling the division to MHI, while Sumitomo Heavy Industries withdrew from the selection process for the next series of machine guns for the Ground Self-Defense Force. Two years earlier, Komatsu — once the seventh-largest supplier to the Defense Ministry — announced it would gradually stop developing its armored vehicle business, while Daicel, a major chemical company and supplier of devices for warplane ejection seats, pulled out of the defense business in 2020.

 

“From a shareholder’s perspective, the defense segments are only causing inefficiencies to the overall businesses of these conglomerates,” said Yuka Koshino, a research fellow at the International Institute for Strategic Studies (IISS).

 

Even conglomerates that continue to operate in this low-margin sector do not put military technologies at the core of their operations. Defense comprised 12% of MHI’s overall business in 2021, while the figure was 14% for Kawasaki Heavy Industries, according to a Defense News ranking of the world’s 100 largest defense companies.

 

This explains why Japan does not have any large defense-focused companies such as Lockheed Martin or BAE Systems.

 

Tough competition, little foreign experience

 

A mix of economic, historic and cultural factors are behind the current situation. Masashi Murano, a Japan Chair fellow at the U.S.-based Hudson Institute, said that, after World War II, the defense industry was revitalized through licensed production, resulting in almost 90% of the Self-Defense Forces’ equipment being built locally. Today, however, those benefits are no longer available, as defense systems have become more technologically sophisticated and more costly.

 

“International joint development and production have become the trend, and license-holding countries have been more reticent to release the license of defense equipment containing sensitive and critical technologies,” Murano wrote in an article for the Center for Strategic and International Studies (CSIS).

 

This trend has resulted in an increase in defense imports via the U.S. Foreign Military Sales program. However, the cost of such equipment tends to increase, and delivery dates tend to be delayed, Murano wrote.

 

The amount of foreign military sales has risen nearly tenfold in Japan over the past decade, accounting for nearly 20% to 30% of the nation’s procurement costs. In its latest defense white paper, the Defense Ministry said this situation puts the industry “under severe pressure.”

 

In that white paper, the ministry acknowledged that the skyrocketing costs of sophisticated foreign equipment have led to lower domestic procurement levels, despite increased military spending.

 

Murano said in an interview that Japan’s domestic defense industry has not been able to provide critical capabilities needed by the SDF. And as the defense companies fail to meet their sales targets, they become less of a priority for the conglomerates that own them in terms of allocating research and development resources, which ultimately affects technical skills and innovation.

 

However, he also warned that procurement through foreign military sales is essentially like a booster shot that temporarily strengthens and complements Japan’s defense capabilities. “If Japan continues to overdose on them, it will put pressure on the defense budget, erode Japan’s defense industrial technology base, and eventually cause Japan to lose its value as a healthy ally capable of producing its own antibodies.”

 

No economies of scale

 

Another important factor affecting the industry is that the defense market for Japanese companies has mostly been limited to the Defense Ministry and the SDF as a result of a decadeslong government ban on arms transfers to foreign markets, which was only eased in 2014 under certain conditions.

 

Even after the rules were eased, overseas orders were limited, hitting the firms’ economies of scale, Murano said.

 

“As a result, Japanese defense systems, while high performance, are extremely overpriced, making it difficult for Japanese firms to compete on price in the Southeast Asian and Middle Eastern markets,” Murano added.

 

For example, despite Tokyo’s efforts to encourage foreign military sales in recent years, the only export of finished equipment to date has been a 2020 contract for the transfer of warning and control radar systems to the Philippines.

 

Japan’s issues with selling equipment abroad and working with foreign partners was also showcased by a failed bid to sell Soryu-class submarines to Australia. Despite growing research cooperation in recent years with allied nations, foreign defense firms have remained cautious about partnering with Japanese companies due to the risk of limits on transferring products to third countries and concerns about the industrial security in Japan, the IISS’s Koshino said.

 

Another important point, as noted by former Lockheed Martin Japan CEO Chuck Jones in an article for CSIS, is that not even Tokyo — which had traditionally capped defense spending at 1% of gross domestic product — generally purchases enough major defense equipment to provide a base for Japanese companies to achieve effective economies of scale.

 

For example, he wrote, the current plan is for Japan’s still-to-be-developed F-X fighter aircraft to replace its existing F-2 fleet, which is composed of 94 aircraft with four prototypes. By contrast, the planned domestic purchase of F-35s in the United States is 2,456 aircraft, not including sales to F-35 partners and other international customers.

 

Moreover, in competition with Western defense industry giants, Japanese companies have no advantage in terms of battle proofing, logistics, stable parts supply and after-sales services such as operational training support.

 

Experts also point out that, unlike in Europe and the United States, the defense industry in Japan did not undergo a restructuring process after the Cold War to strengthen international competitiveness.

 

Further, there is the issue of the social acceptance of the industry as a result of postwar pacifist norms. Whereas societies in the U.S., U.K and South Korea attach prestige to defense industrial skills, self-reliance in defense and military exports, there is a deep-seated cultural aversion to the military in Japan coupled with constitutional limits to waging war, said James Angelus, president of the International Security Industry Council Japan.

 

Stephen Nagy, a senior associate professor at the International Christian University in Tokyo, agrees, arguing that Japanese businesses being explicitly involved in producing defense-related equipment is seen by the general public as a violation of the pacifist traditions.

 

“Being reputationally sensitive, Japanese companies … are unwilling to risk their broader reputation for investing deeply and broadly in defense-related R&D and production,” he said.

 

Potential to support the industry

 

At the same time, no country wants to fully rely on another for its national security, which is why Tokyo has been taking steps to strengthen the country’s defense-industrial base. For instance, in 2015 the ministry launched an agency to define the country’s priorities in military-technological innovation.

 

Japan has also been looking at more flexible methods of defense procurement, including the utilization of civilian technologies, and has been spending more on research and development to upgrade key capabilities such as missiles and electronic warfare aircraft.

 

The defense budget request for the fiscal year beginning in April has signaled Tokyo’s intention to expand and accelerate major domestic research and development and procurement efforts. Among the various projects, the diverse list of indigenous missile capabilities listed in the request shows potential in Japan’s growing high-speed and long-range missile technologies required for remote islands defense, Koshino said.

 

Tokyo is also joining international development projects with like-minded partners that will help it save costs and development time, while allowing Japanese industries to gain access to advanced technologies and the know-how to sell equipment to foreign markets — experiences that are critical for Japan to enhance its defense industrial base.

 

Koshino cited Tokyo’s interest in pursuing joint development with the U.K. of the next-generation fighter aircraft as an example of efforts to diversify the nation’s partners in the sector.

 

An Air Self-Defense Force’s F-2 fighter jet takes off during a U.S.-Japan joint exercise at Misawa Air Base in Aomori Prefecture in November 2012. | JOINT STAFF, JAPAN / VIA REUTERS

An Air Self-Defense Force’s F-2 fighter jet takes off during a U.S.-Japan joint exercise at Misawa Air Base in Aomori Prefecture in November 2012. | JOINT STAFF, JAPAN / VIA REUTERS

Nagy argues that such international cooperation can help Japan develop complementary technologies that can provide the Defense Ministry with the critical tools it needs to deal with its challenges within the region.

 

“Using the experience of working with other countries, there could be a possibility of multilateral defense spending, which can decrease costs, while boosting innovation and interoperability. Japan has a huge capability to produce high-quality, multifunctional technologies, such as drones, cameras and radar systems” he said.

 

Various parts of the government could play a role in promoting defense-related research at universities, helping the defense industry identify sales opportunities abroad or assisting them in working with foreign partners. For instance, Koshino said, the Defense Ministry could help identify opportunities to transfer equipment as part of their capacity building efforts in Southeast Asia.

 

Japan is planning to issue a new National Security Strategy, as well as release updates to the Medium-Term Defense Program and National Defense Program Guidelines by the end of this year, all of which should give further indications about Tokyo’s plans to bolster the local defense industry.

 

As a part of the NSS, the government is also reportedly considering providing limited financial incentives to the industry as well as promoting the sale of military equipment abroad by getting directly involved in negotiations with foreign countries.

 

Whether this will be enough to save the industry in its current form is questionable, particularly given the significant advantages foreign defense manufacturers have in certain areas and the constraints placed by Japan’s pacifist Constitution.

 

As such, the government faces a hard choice of protecting certain segments while allowing weaker ones to become extinct.

 

“Prioritization is essential to the strategy, as ‘everything is important’ is tantamount to ‘everything is unimportant,’” Murano said. “We cannot protect all industries. We must also avoid unwillingly weakening our current defense capabilities in order to protect our future industrial base.”

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