5/29/2014

Japan Prepares to Enter the Arms Market - Businessweek

Keenly aware of the trouble that came with ambitious generals and an expanding munitions industry, the Japanese government has long banned most weapons
exports. That policy helped buttress Japans pacifism, but it also hindered the growth of the countrys defense industry. Because it couldnt sell parts overseas,
Japanese defense companies missed out on chances to develop tanks, fighter jets, and other weaponry with the U.S. The ban has resulted in an isolated Japanese
defense industry that produces very small quantities at very high cost, says Lance Gatling, president of Nexial Research, a defense consulting company in Tokyo.
Japans Asian neighbors have taken advantage of its absence from the export scene. South Korea exported $3.4 billion worth of arms in 2013, up from $1.2 billion
in 2010. China last year passed France and Britain to become the worlds fourth-largest arms exporter, behind only the U.S., Russia, and Germany, according to the
Stockholm International Peace Research Institute.
While Japan was absent from the weapons scene, South Koreas arms exports grew to $3.4 billion last year and China became the worlds fourthlargest exporter
In April, the government of Japans conservative prime minister, Shinzo Abe, lifted a ban from the 1970s that restricted arms exports. The countrys contentious
relations with China, which claims Japanese-controlled islands in the East China Sea, made getting rid of the ban politically much easier for Abe, even though a recent
poll suggests most Japanese citizens dont support loosening export restrictions. The old policy was too strict, says Tsuneo Watanabe, director of policy research
and senior fellow at the Tokyo Foundation. The voice of pacifism is getting lower because of tensions with China.
Story: U.S. Defense Contractors Focus on Foreign Buyers
Abes policy change is part of a larger strategic shift. Since 1945, the Japanese have focused on the defense of their home islands. The task of policing the rest of
Asia fell to the U.S. Now, Japan sees itself as an active participant in the regions effort to thwart Chinas expansion. It considers the Southeast Asian states as
potential partners in this stand-off with China, and it wants to be able to sell arms to those countries, too.
The opportunities for Japan to grab market share wont be in building entire weapons systems such as jet fighters or aircraft carriers. Japanese companies have a
competitive edge in building high-end components, particularly electronics. You may have fighter jets and warships from different manufacturers, but the electronics
inside those ships and planes have to be able to communicate and share data with each other, says Robbin Laird, a defense industry consultant with International
Communications & Strategic Assessments in Arlington, Va. What you really care about are the electronics inside, and thats what Japan does best.
One of the most important tests of Japans new role will be the F-35 program, the Pentagons most expensive weapons project ever. The country is buying 42 of
Lockheed Martins (LMT) joint strike fighters. Almost all will be assembled at a Mitsubishi Heavy Industries (7011:JP) plant being finished in Nagoya. Japan now
has the chance to make components for the F-35 that other countries may be able to use.
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One interesting opportunity for Japanese arms exports is India, now the biggest foreign buyer of U.S. arms and possibly the worlds largest market for weapons over
the next 20 years. The country has had bad experiences buying Russian and French weapons. The Japanese could compete, especially if they do better by the
Indians, says Dean Cheng, an East Asian military analyst for the Heritage Foundation. It sounds funny, but customer service matters just as much when youre
buying weapons as it does when youre buying a car.
Story: An Arms Race Gets Into Gear and Other Predictions for Asia in 2014
The bottom line: Japan plans to be a competitor in the crowded global arms industry, but China and Korea have a big head start.

Einhorn is Asia regional editor in Bloomberg Businessweeks Hong Kong bureau. Follow him on Twitter @BruceEinhorn.
http://www.businessweek.com/articles/2014-05-01/japan-prepares-to-enter-the-arms-market

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