Military might: Japan’s expanding needs open market to U.S. defense business

While media sometimes paint a picture of uneasy defense relations between the United States and Japan—U.S. President Donald Trump wants Tokyo to quadruple what it pays for hosting U.S. forces—on an industry level, it is a healthy time for bilateral ties.

Regional tensions and uncertainty mean that Japan must consider stronger self-defense capabilities, and US companies are in prime position to help.

WINDS OF CHANGE

An expansion of Japan’s collaboration with U.S. defense compa­nies is possible due, in part, to a reinterpretation in 2014 of the country’s Constitution. Dubbed the Three Principles on Arms Exports, the change liberalizes rules around the country’s ability to export arms, advances international defense and security collaboration. A separate effort by the Japanese government also sought to redefine the role of the Japan Self-Defense Force (JSDF) under the United Nations principle of collective self-defense. The shift in position also led to the establishment on October 1, 2015, of the Acquisition, Technology & Logistics Agency (ATLA), whose commissioner reports to the Minister of Defense.

ATLA aims to:

-- Upgrade technological capacity and readiness of the JSDF

-- Streamline acquisition of defense equipment

-- Strengthen defense equipment and technology cooperation

As the world’s largest arms producer, the United States is likely to reap benefit from Japan’s expanding needs. According to the latest data from the Stockholm International Peace Research Institute, reported on December 9, the top five arms producers are all US companies:

-- Lockheed Martin Corporation

-- The Boeing Company

-- Northrop Grumman Corporation

-- The Raytheon Company

-- General Dynamics Corporation

The first three are Corporate Sustaining Members of the American Chamber of Commerce in Japan. Combined, these five accounted in 2018 for $148 billion in sales—some 35 percent of all revenue generated by the top 100. And total sales by all U.S. companies in the ranking was $246 billion (59 percent).

What’s next for these industry powers?

SPENDING BOOST

Japan’s proposed defense budget for fiscal 2020, which would take effect on April 1, has grown 1.1 percent from last year to a record high $48.8 billion. Of that, $102 million has been allocated to a project—announced in January—to develop the next generation replacement for the Mitsubishi F-2 jet fighter. Boeing and Lockheed Martin are expected to be in the running when the choice of partner is revealed, likely this summer.

Japan is taking the lead on the fighter development, and the government wants to have a majority of the work done domestically. One reason for this, given by Japanese Minister of Defense Taro Kono, is to “ensure a degree of freedom for future upgrades and performance improvements.”

But partnering with a non-Japanese company would allow access to existing technology and help keep the cost of the project under control. Modern fighter aircraft development has proven to be both expensive and challenging for the United States and European nations alike. The Eurofighter, F-22, and F-35 are examples. Even Russia’s Su-57 and China’s J-20 have run into developmental and production delays.

While Tokyo is reportedly considering both UK and U.S. contractors as top options, some suggest the United States has become the favorite given the importance of the U.S.–Japan Defense Cooperation pact.

And Trump’s demands have had an influence on some decisions. In November 2018, Japan more than tripled its original order of Lockheed Martin’s F-35 from 42 to 147. At more than $88 million per plane, the increase is worth more than $9.24 billion.

At the time, Japanese Prime Minister Shinzo Abe told Trump, “Introducing high-performance equipment, including American, is important for our country to strengthen its defense capabilities.”

It is a sign of Tokyo’s desire to maintain the important bilateral alliance as it looks to the next cost-sharing arrangement with Washington. The current five-year agreement—under which Japan bears about 80 percent of the costs of hosting U.S. forces—expires on March 31, 2021. Trump is asking for a more than four-fold increase in that contribution.

INDUSTRY GATHERING

Beyond the fighter jet project, many other aspects of the defense industry and cooperation were on display in November when Japan hosted the Defense and Security Equipment International (DSEI) event for the first time.

Based in London, DSEI is one of the largest fully integrated, large-scale defense and security exhibitions in the world.

The three-day event, held November 18–20, welcomed 200 exhibitors—many of which are small and medium-sized enterprises (SMEs)—as well as 16 regional pavilions and about 10,000 visitors. Dignitaries from around the world, including Kono and Lt Gen Jerry P Martinez, retired commander of U.S. Forces Japan and commander of the 5th Air Force, Pacific Air Forces, Yokota Air Base, also attended.

“The inaugural DSEI in Japan exceeded all expectations by bringing SMEs and global giants together. It provided the ideal environment for the seeds of collaboration and sales to be sown,” DSEI Japan Vice President Richard Thornley, who is an aerospace and defense consultant, told The ACCJ Journal.

Thornley said the fact that Japan’s defense minister was present demonstrates Tokyo’s desire to make DSEI the premier defense show in Asia to help Japan’s defense industry boost its exports and collaborations. “The numerous foreign military delegations underscored the interest in Japan’s defense equipment as well as that of other nations.”

MEETING OF MINDS

DSEI Japan featured six 30-minute presentations by non-Japanese contractors on day one. Shorter presentations by 20 Japanese SMEs—from logistics to production and maintenance to security and technology—followed on the second day. Speakers included representatives from the government, military, and diplomatic corps. The third day offered a forum where SMEs could network.

In a DSEI Japan press release, James Angelus, president of the consultancy International Security Industry Council (ISIC) Japan, spoke of a security renaissance for business between Japanese contractors and their foreign counterparts. ISIC Japan aims to strengthen Japan’s defense and security capacity through business-to-business collaboration.

“As military threats rise in East Asia, and U.S. and Japanese defense budgets increase to meet them, prime contractors in America, Australia, and Europe are building networks of smaller subcontractors in Japan to strengthen their supply chains. Local SMEs are anxious to go global,” Angelus stressed.

The chairman of DSEI and ISIC Japan, Masanori Nishi, confirmed the urgent need for robust security in the Indo-Pacific and the need for collaboration between defense contractors in like-minded countries.

Nishi, a former administrative vice minister of defense, said: “Japan’s security rests on innovative technologies, efficiencies across the spectrum, and focused corporate leadership. Industrial strength is critical to the survival of the free world.”

SME NETWORK

One session during DSEI Japan, organized by a newly formed non-profit organization, featured SME networking among 12 Japanese and three U.S. companies: General Atomics, Raytheon, and General Dynamics.

On the evening of the last day, ISIC Japan held an inaugural reception at The New Sanno Hotel, in the Minami-azabu neighborhood of Tokyo’s Minato Ward. The hotel is managed by the U.S. Naval Joint Services Activity. At the reception, Martinez and Japan Maritime Self-Defense Force Retired Admiral Katsutoshi Kawano raised a toast to fruitful com­mercial ties between the two nations’ defense industries.

Senior officials from the Ministry of Defense (MOD), ATLA, and the Ministry of Economy, Trade and Industry (METI) attended, as well as industry representatives from Hitachi, Fujitsu, Toshiba, and Marubeni. The reception was supported by Collins Aerospace, General Atomics, and Raytheon.

NEW HORIZON

Planning for DSEI Japan began about four years ago, shortly after the reinterpretation of the Constitution. During that time, approval for the event was secured from Japan’s MOD, METI, and the Ministry of Foreign Affairs.

Speaking to The ACCJ Journal, Alex Soar, international devel­opment director at DSEI organizer Clarion Events Limited, said that the involvement by government ministries really helped them feel comfortable bringing the show to Japan. He could tell that this was the right year for the inaugural DSEI Japan and to begin exploring the Japanese defense market.

A spokesperson from Mitsubishi Heavy Industries, Ltd., which has struggled to secure overseas defense contracts over the past few years, said: “There were a range of capabilities that we wanted to exhibit at DSEI Japan. We have seen many delegations from many countries and had good feedback. We hope for even closer collaboration between the UK, U.S., Europe, and ASEAN countries.”

The same goes for U.S. companies looking for opportunities in Japan. With connections made through DSEI, projects such as the next-generation fighter jet development in the pipeline, and calls from Washington to boost purchases and collaboration, the potential for stronger defense ties is bright.

Custom Media publishes The ACCJ Journal for the American Chamber of Commerce in Japan.

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