Japanese defense contractors' new challenge: battling for business

YUKIO TAJIMA and YOSHIFUMI UESAKA, Nikkei staff writers

The U.S.-led F-35 stealth fighter project involves a number of other countries. Japan is hoping to play a bigger role in defense cooperation with allies. © Kyodo

TOKYO -- Everyone seems to want a piece of Japan's defense industry these days. Now that Prime Minister Shinzo Abe has adopted a less-restrictive set of principles on arms exports -- effectively ending a decades-old, self-imposed ban on such sales -- foreign companies and governments are exploring opportunities for cooperation. But winning overseas contracts could be a battle for companies long cocooned at home.

     Executives of 15 Japanese and French companies gathered last Thursday at the Ministry of Economy, Trade and Industry in Tokyo. The list included big guns such as Mitsubishi Heavy Industries, Kawasaki Heavy Industries and Airbus Group. They discussed ways to work together under Japan's new "three principles on the transfer of defense equipment," including possible joint development of aircraft and ground systems.

     The principles, adopted April 1, state Japan will not export arms if doing so would fuel a conflict or violate United Nations resolutions. They allow transfers when they contribute to international peace or promote Japan's security. And they impose controls over transfers to third parties.

Welcome to the global market

Foreign defense contractors started quietly making contact with their Japanese counterparts after Abe's government launched a review of the arms policy late last year. The government's decision to go ahead and embrace new principles has triggered a flurry of activity.

     A Mitsubishi Electric plant in Kamakura, Kanagawa Prefecture, has become a popular destination for defense officials and contractor executives from various countries. The British Ministry of Defense has shown particularly strong interest in involving Mitsubishi Electric in development of an air-to-air missile called the Meteor.

     This is a nod to the Japanese company's advanced missile technology. The plant in Kamakura is also involved in licensed production of a successor to the Sea Sparrow anti-aircraft missile for ships. 

     The U.S. Department of Defense's research unit, the Defense Advanced Research Projects Agency, also appears keen to tap Mitsubishi Electric's technologies. 

     All this opens up huge possibilities for Japanese defense contractors that have been basically confined to their home market, which is currently worth about 1.6 trillion yen ($15.6 billion) a year. Mitsubishi Heavy, the domestic leader, manages annual defense-related sales of some 300 billion yen, about one-tenth what major companies such as Boeing and Lockheed Martin ring up. 

     The overseas defense market is valued at more than 40 trillion yen. If Japanese parts make their way into weapons systems supplied to the U.S. and other armed forces, the windfall could be huge.

     Yet Japanese contractors should not get too excited -- they have work to do.

Questionable competitiveness

One issue is their high-cost structures.

     An official in charge of the defense segment at major trading house Mitsubishi Corp. got a surprise when he visited Lockheed Martin's fighter aircraft plant in Fort Worth, Texas. He had not expected the production line to be so thoroughly automated.

     The plant is producing the F-35 stealth fighter jet. Lasers automatically make holes in the plane's fuselage. Painting is also done by robots. 

     Japanese contractors have experience with fighter production, thanks to their involvement in the development and production of the F-2. But they have been sheltered. The nation's Ministry of Defense has awarded them most contracts, and they have only delivered products to the ministry. They may have a hard time competing for contracts with foreign rivals that have spent years honing their competitiveness.

     Three South Korean conglomerates -- the Samsung, Hyundai and Daewoo groups -- found a way to sharpen their competitive edge in 1999. They merged their aerospace divisions to create Korea Aerospace Industries. Since then, KAI has exported military aircraft to other Asian countries.