Japan defense review could help contractors to compete globally

TOKYO, July 26 Fri Jul 26, 2013 12:55am EDT

TOKYO, July 26 (Reuters) - Japan's promised review of its longstanding ban on arms exports, as part of a push for a more robust military, could help make its defense contractors more globally competitive by reducing costs and expanding markets.

The Defense Ministry said on Friday it would review a decades-old self-imposed ban on arms exports and take action as needed. Media reports have said Japan could issue new guidelines to replace the ban, which has already been eased several times.

A lack of clear guidelines on what arms gear could be sold, and to whom, by firms such as the builder of the wartime Zero fighter, Mitsubishi Heavy Industries Ltd, submarine maker Kawasaki Heavy Industries Ltd and licensed Apache helicopter maker Fuji Heavy Industries Ltd, has held up efforts to translate the policy shifts into actual deals.

"To improve the technology of our production base from the viewpoint of strengthening our international competitiveness, we will aggressively promote joint international development production with the United States, Britain and other countries," the Defense Ministry said in an interim report on its review.

The moves form part of Prime Minister Shinzo Abe's review of the nation's long-term defense posture in the face of perceived threats from China and North Korea.

Allowing more arms exports and joint production could help Japan to forge a stronger military as its budget for new equipment dwindles.

Japan's defense spending has remained at around 1 percent of GDP for decades, but swelling maintenance costs have shrunk its procurement budget by a third over the past 20 years.

PAYING A PACIFIST PREMIUM

Industry sources say Japan often pays up to three times more for military gear than other nations, because of the small volumes its manufacturers, unable to sell overseas, produce.

A wider customer base for Japan's military suppliers, particularly in the United States, where defense spending is ten times more, could help lower those costs and give the nation a bigger bang for its yen.

But Japan is unlikely to find foreign customers lining up to buy its weapons, defense industry experts warn.

"The Japanese will find that exporting into the world defense market is going to be tough sledding for most, if not all makers," said Lance Gatling, an aerospace and defense consultant at Nexial Research in Tokyo.

"It is an increasingly globally competitive market, and new entrants in Israel, Singapore, Korea, India, and East Europe make increasingly competent equipment at attractive prices."

Instead, Japan may seek a place in the global supply chain of bigger global defense contractors, in the same way that Mitsubishi Heavy, Kawasaki Heavy and others are already major component suppliers for Boeing Co commercial aircraft.

U.S. INTEREST

Lockheed Martin Corp, which helped Japan build its F-2 fighter and will supply it with F-35 fighters assembled locally by Mitsubishi Heavy, wants to widen its supply chain to Japan, in a move to cut costs amid tighter defense spending at home, through access to a larger pool of potential suppliers.

With fewer restraints on exports, Japanese firms could be ready to become suppliers to the whole F-35 program within four years, Richard Kirkland, Lockheed's executive in charge of international business development, told Reuters in October.

But fitting the Japanese into the global consortium that builds the fighter would mean taking work away from others.

"We understand Japanese industry has the quality and has the processes to be an integral part of this, should they decide to participate," Kirkland said.

Also interested in Japan as a supplier is Raytheon Co. , which is seeing revived demand for its Patriot missile defense system. Tapping firms that make the system in Japan under license, with Mitsubishi Heavy as the prime contractor, could help keep down production at the U.S. company.

The same logic could work for Boeing, too, as it revamps its twin-rotor Chinook transport helicopters. The aircraft, deployed by Japan's Self-Defense Forces, is built locally by Kawasaki Heavy.

IMMEDIATE GOAL

The government's immediate goal is to hash out guidelines for military exports, said Nexial's Gatling, perhaps to allow an upgraded ship-based SM-3 missile to be sold to third countries beyond the United States and Japan.

Designed jointly by Raytheon and Mitsubishi Heavy, it is meant to take out intercontinental ballistic missiles at the edge of space as part of a defense shield Japan is deploying to counter any potential threat from missile-armed North Korea.

To begin with, however, Japanese firms may find it easier to hawk dual-use technology to overseas military buyers, equipment they already sell, competitively, to commercial customers.

Japanese components, such as cameras in surveillance drones, communications equipment, and other electronic gadgets are already in common use by military forces worldwide.

The U.S. army and British armed forces have already taken Panasonic Corp's logo to the battlefield, using its rugged Toughbook PCs, acquired through third-party vendors, rather than directly from the company, to guide surveillance drones.

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