Perspectives from Around the World
Transforming Japan's Aerospace and Defense Industry for the 21st Century
Stephen T. GANYARD
President, Avascent International
President and Founder, Global Insight Corporation
For NAGASE Masato's full bio,
James E. AUER
Director, Center for U.S.-Japan Studies and Cooperation at the Vanderbilt Institute for Public Policy Studies
Japan's A&D Industry is Changing
Japan's postwar aerospace and defense (A&D) industry has been handicapped by history as well as by the long-standing arms export restrictions that have not only prohibited the export of arms but also hindered integration of defense and commercial aerospace industries and the development of globally competitive capabilities.
In the years after the Pacific War, Japan's military industries were totally shut down during a period of internationally rapid development, particularly in the case of the aircraft industry. While the rest of the world entered the Jet Age with the rapid introduction of new models of fighters and bombers, German scientists and engineers helped to inaugurate the rocket and space industry, particularly in the United States. Missing out on virtually all development and participation during this critical period of rapid evolutionary change was a severe handicap for Japan, particularly for what had been world-class Japanese aircraft companies.
Japan's A&D industry began to stir after 1950. It started slowly as a supplier of parts and eventually delivered complete aircraft to the United States during the Korean War. In subsequent years, Japan began to build and produce various indigenous aircraft such as the C-1 and PS-1, and more recently the P-1 and F-2.
And although Japanese industry has made great progress in recent years, building components for the most advanced civilian aircraft such as Boeing 767s/777s/787s and co-producing advanced military aircraft such as the Lockheed P3Cs and F-15s, it has been further handicapped by restrictions placed on exports of military technology or products. These restrictions, which began in 1967 and strengthened in 1976, have recently been relaxed with the changes to the so-called "3 P's". There is reason to believe that these changes will enable Japan's A&D industries to finally compete in global markets.
This once in a generation opportunity should be embraced by a partnership of industry and government, and dedicated to the rejuvenation of national capabilities that for too long have lagged global leaders. Now is the time for Japan to broadly transform its A&D sector into a world-class competitor with high value added products, jobs, and technologies that will boost Japan's economic growth and national security.
- Japan now faces serious national and regional security challenges that require advanced war fighting and deterrence capabilities as supported by a robust defense industrial base to support military operations in Japan and abroad.
- Prime Minister Shinzo Abe has called for investments that lead to Japan's future economic growth, the third arrow of his economic platform. He is also committed to a strong national defense and a vibrant U.S.-Japan security relationship. Japan's proactive participation in bilateral armament cooperation will serve to strengthen the alliance relationship.
- Japan is changing its arms export policies as evidenced by the statements of the Chief Cabinet Secretary in December 2011 and March 2013. These and additional revisions will not only enable export of defense products and technologies but will also allow international joint development and production, logistic support operations overseas, merger and acquisition (M&A) of foreign and domestic A&D firms, as well as integration and restructuring of defense and civil/commercial aerospace industries.
- The decline of defense budgets has only recently been arrested. Even so, the acquisition budget remains 20% less than 20 years ago. This austerity forces the Japanese defense industry to become more efficient to survive, as military services can no longer bear the cost premium required to subsidize inefficient domestic production.
Why A&D industrial transformation is important:
- Increases exports by high value added industry. A&D exports would allow Japanese industry to access new international markets. Japan is fundamentally competent in high-technology, high value added manufacturing, has superb reliability in quality and schedule, and is skilled in compliance in industrial security/intellectual property and long term acquisition and planning.
- Contains costs and achieving much needed production efficiencies.
- Contributes to the U.S.-Japan alliance and regional security by facilitating the strategy of Partner Capacity Building (PCB). It also addresses the need for cooperative acquisition and global supply sourcing and supports the requirements for sustainment operations for U.S. forces in the Asia Pacific region.
- Boosts domestic job creation: An A&D industry which can sell to the larger world market will provide greater high quality employment to Japanese citizens, reducing unemployment and boosting tax revenues. The A&D industry would spur demand for workers with experience and education in science, enhances technology, engineering and mathematics skills development. Growth in A&D industries will strengthen Japan's commercial industries and engage the university system which is well suited to providing the necessary talent.
- Grows a more capable indigenous defense technology base and enables Japan to match advanced technologies and global standards. By strengthening indigenous defense capability, Japan has the potential to reduce its reliance on imports of defense products as indigenously developed technologies can be tailored to Japan's specific needs. This has the added benefit of increasing economic activity at higher levels of the value chain, including design and research and development (R&D). Additional considerations include strengthening of sovereignty, unique operations and safety standards, autonomous operation, and critical defense technology.
- Provides investment to develop non-defense industries: Development in a country's defense industry can spur development in other industries, as the experience of other developed nations has shown. Defense technology can often be applied to the electronics, computing, or commercial aerospace industries. Japan may find that its robotics industry benefits by leveraging technology and processes developed in the defense industry. The skills necessary to design complex defense systems are not unlike those required for creating business IT networks, and the skills of defense employees could transfer to those commercial industries as well.
- Strengthens Maritime Domain Awareness and the defense of undersea resources: Japan's national interest includes the protection of resources within its maritime territory, including possible oil & gas reserves. Access to these resources can help Japan reduce its dependence on energy imports. The A&D industry will be required to develop maritime domain awareness capabilities for Japan's large territorial waters, its exclusive economic zone (EEZ) (6th largest in the world) and sea lines of communications (SLOCs). Other key requirements will include maritime surveillance, an inter-agency and perhaps international Common Operating Picture, sea lane safety/security, and defense of national and marine resources.
- Securing the Global Commons: In addition to maritime domain, space and cyberspace are increasingly important areas of global commons, and critical to the establishment of trust among allies.
Despite progress and optimism, there still exist limitations and obstacles that may hinder growth and reform in Japan's aerospace and defense industry. The nation has several economic priorities which may compete with the indigenous defense industry, such as social welfare and healthcare spending for the elderly population, priorities on other areas of growth stimulus as well as payments on outstanding debt. Without a national level A&D strategy, political will for the growth of aerospace and defense and exports will face a challenge. The continued relative strength of the yen increases the cost of exports to foreign customers, even as it makes foreign acquisitions more attractive to Japan. It is also important to note that industrial policies should not excessively protect the indigenous industry. The true future competitiveness of Japanese aerospace and defense can be accomplished only through continuous competition and reform of acquisition practices that enable efficient production and adoption of reciprocal, open market acquisition principles.
Opportunities for Japanese Industrial Advancement
Japan can be more competitive in the defense sector if it leapfrogs established technologies. Following the Meiji Restoration, Japan demonstrated such a capability by skipping the age of sail and developed a formidable steam powered Navy to the amazement of the developed world.
- "Leapfrogging": This term is used here to describe the process of developing technologies which are fundamentally different from existing technology. Leapfrogging involves the development of revolutionary new technologies, which offer new capabilities and solve new problems that existing technology cannot.
- Examples of technologies with leapfrogging potential: There are several technologies where innovative investment has the potential to generate "leapfrogging" technologies. Investment in technology may apply to both defense and commercial uses. 3-D printing (or additive manufacturing) has been called "The Third Industrial Revolution" and is an emerging area that offers potential for improvements in prototyping and the manufacture of small components. 3-D printing is still an emerging technology, and the first companies to demonstrate practical applications may be able to capture a leading position in the market. Japan has long invested in robotics technology, and the exploration of defense applications for this technology could open up new possibilities. Defense robotics, like its civilian counterpart, will likely need to find new ways to augment a limited supply of manpower as Japan's population shrinks. Additionally, energy-related technologies such as smart grids and fuel cells also hold promise. Energy efficiency remains a key priority for Japan, and fuel cells and smart grids can aid progress toward that goal. But these technologies require investment and collaboration to reduce their cost and increase their efficiency before they can be widely adopted.
- M&A can rapidly increase complementary capabilities: Japanese defense companies have an opportunity to take advantage of a relatively strong yen to acquire foreign A&D companies. This could allow Japan to rapidly obtain new capabilities that will further the development of its defense industry. Examples of such capabilities could include proprietary technology or R&D. Japanese companies can also leverage acquisitions to establish a presence in international markets. It may be desirable to acquire one or more companies with established sales channels and manufacturing capabilities in a key export market. A Japanese presence in a market can then grow from the initial acquisition, to include partnerships, joint ventures, and product development based in the foreign country.
- Potential integration and M&A within the domestic Japanese aerospace and defense industry: Japanese defense companies should seek domestic partners to create new defense capabilities. As global defense budgets decline, Japanese industry may need to go through the same sort of A&D industrial consolidation in order to increase efficiency and become more competitive in international markets.
- The Japanese government could take on a greater role in promoting the A&D industry.
- This would include government tax incentives or investment in state-of-the-art production and sustainment facilities and tooling for next-generation defense projects, in order to enhance Japanese defense industrial competitiveness. Government industrial policy should be focused on long-term, non-recurring investment rather than government subsidies to recurring costs of defense production so that Japanese manufacturing and service costs become more compatible with global market standards. Such long term government investment for future defense industrial centers in the Asia Pacific region such as state-of-the-art manufacturing and test capabilities, operational support and training facilities and high-tech maintenance centers will establish a formidable business base for future Japanese A&D industrial competitiveness.
- Increased funding for R&D in basic science: Future increases in the defense budget could create opportunities for the government to fund research in basic science. This investment would offer wide benefits to the entire Japanese economy. Government funding for basic science research could build the foundation of knowledge which enables the development of leapfrogging technologies. Furthermore, basic science funding fills a gap by supporting research activities which generate little to no profit, but have the potential to create prosperity in the long run.
- Government initiatives (including funding support) to encourage industrial dialogue and involvement in bilateral government discussions of military projects, and support for establishing non-government organizations to supplement government functions for the promotion of exports and international partnerships.
Areas for cooperation between Japan and the United States
Above all, Japan must first define a defense industrial strategy that includes key allies such as the United States:
- Strategy should drive requirements for cooperation activities: Without support from both stakeholders, there could be challenges in increasing defense industrial cooperation between Japan and the United States. There must be agreement within the Government of Japan on goals, and the methods of reaching those goals as the primary consideration when crafting a defense industrial strategy. However, it is also in Japan's interest to begin defense industry collaboration with the United States in earnest. Starting with even modest activity could bring Japan's defense industry and government together.
- A national level defense-industrial strategy is necessary: A coherent strategy with overarching multiple ministries (Cabinet Secretariat; Ministry of Defense; Ministry of Economy, Trade and Industry; Ministry of Education, Culture, Sports, Science and Technology; Ministry of Land, Infrastructure, Transport and Tourism; etc.) that encompasses critical national technologies and industrial base, roles of government and private sectors, international cooperation and security policies and the U.S.-Japan security alliance. Strategy should also drive requirements for cooperation activities, to include U.S.-Japan defense industrial cooperation.
- Expansion of existing partnerships and projects: Two key defense industrial partnerships which already exist between both countries involve the F-35 Joint Strike Fighter aircraft and the SM-3 missiles for ballistic missile defense. There will likely be numerous other opportunities for the expansion of such partnerships, including the export of technologies. Developing export products and services, with their attendant high paying and high skill jobs, should be a priority of both governments and industry. As a first priority, however, it is necessary for Japan to affirm a national commitment for defense industrialization that will be supportive and complementary to U.S. and regional security.
- Emerging areas of cooperation: U.S. and Japanese governments recently held a comprehensive dialogue on space cooperation. The two countries share a long, successful cooperation in civil space development and operations. With the Aerospace Basic Act (2008) that enables Japan to utilize space for national security purposes, there should be a significant potential for U.S.-Japan defense industrial cooperation in space areas. In a similar way, such new areas as maritime domain awareness and cyber security that require close bilateral and multi-lateral cooperation and coordination based on U.S.-Japan security alliance present emerging requirements and opportunities for defense industrial cooperation.
- Export promotion consortium: Business and government leaders in Japan and the United States could create a joint export consortium in Japan. This non-government organization would promote both exports and international partnerships to encourage the development of Japan's A&D industry. This would help small-medium sized companies to efficiently comply with arms export control and management requirements, as well as make better market based decisions. It could also leverage the strong commercial ties which already exist between Japan and the United States. The consortium could serve as an advocate for the Japanese government on A&D industry issues. It also provides a forum for dialogue and increased understanding between industry representatives from Japan and the United States.
- Other areas for cooperation: Japan and the United States can increase their defense industry cooperation in other ways. U.S. defense companies are showing greater interest in exporting to Asia. Several Japanese companies already have long experience and commercial ties throughout Asia, and could serve as knowledgeable partners to American firms seeking to expand their presence in the region.
This is a period of rapid change for Japan, not the least because of increasing regional threats that will require changes in both defense strategy and military capabilities. Recent changes have opened a window of opportunity for Japan's A&D sector to increase the security of the nation as well as help lead the economy forward with jobs, better technology, and greater high-value exports. A bright future awaits Japan if industry and government work together to take advantage of this unique generational opportunity. This paper has offered some modest suggestions as to how to ensure that future comes sooner rather than later.
April 1, 2013
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April 1, 2013［Perspectives from Around the World］