Status
of Japanese Defense Industry and Maintenance
of
Industrial Bases
by Masahiro SHIGEMURA
Member
of Research Committee,
1. End of Cold War
and Situation of Defense Industries
The end of the Cold War had made the change of the world military situation, and every country began to look over the military strategy and to reorganize the military structures that is suitable for the new military situation. Many countries were trying to reduce the size of military forces and the defense budget, and they were making effort to build the defense systems which are multi-purpose，mobile with high-technological systems .
Therefore, the defense industries were groping for large scale mergers to adjust to the decreasing defense budget and the requests for developing high-technological weapon systems.
In
In this paper the status of the
2. Trend of the
(1) US Defense Industries in Cold War
In 1980s, to counter the Communist Bloc, the US government adopted
the “Competitive Strategy” which was to compete with the USSR in the areas of
politics，diplomacy, economics,
military, science & technology and so on. President Reagan had increased
the
Chart 1 Sales of US Defense Industries in
1990 (Top 13 Companies)
(2) US Defense Industries after Cold War
In 1990 the international military
situation changed greatly by the end of US and
|
Services |
Forces |
FY1990 |
Objective of BUR |
|
Army |
Active Division Reserve Division |
18 10 |
10 5+ |
|
Navy |
Aircraft Carrier Aircraft Division Ship |
16 15 546 |
12 11 346 |
|
Air Force |
Active Fighter Division Reserve Fighter Division |
24 12 |
13 7 |
|
Marine Corps |
Active Personnel Reserve Personnel |
197,000 44,000 |
174,000 42,000 |
|
Strategic Nuclear Force |
Ballistic Missile Submarine Strategic Bomber ICBM |
34 301 1,000 |
18 184 500 |
Chart 2 Forces Reduction in Bottom Up Review (BUR)
In 1993 President Clinton and his administration issued their first national defense strategy as “Bottom Up Review (BUR)” after investigation of defense posture.
By the transformation of the strategy, the mass reduction of military forces was executed. Chart 2 shows the reduction of US Forces in the Bottom Up Review.
At the same time the US defense budget was decreasing sharp in relation to the reduction of the forces. Chart 3 shows the US defense budget reduction. The Peak of the defense budget was 292.9 billion dollars in 1990. And the peak of procurement budget was 96.8 billion dollars in 1985, but the research and development budget was constant more or less at 37 billion dollars and 34 billion dollars; so US is regarding R&D as important.
|
Fiscal Year |
DOD Total |
Procurement |
R&D |
|
Peak Fiscal Year |
FY1990 293,0 |
FY1985 96,8 |
FY1989 37,5 |
|
1990 |
293,0 |
81,4 |
36,5 |
|
1991 |
276,2 |
71,7 |
36,2 |
|
1992 |
281,9 |
63,0 |
36,6 |
|
1993 |
267,4 |
52,8 |
38,0 |
|
1994 |
251,4 |
44,1 |
34,7 |
|
1995 |
255,7 |
43,6 |
34,5 |
|
1996 |
254,4 |
42,4 |
35,0 |
|
1997 |
258,0 |
42,9 |
36,4 |
|
1998 |
258,5 |
44,8 |
37,1 |
|
1999 |
278,4 |
49,0 |
36,6 |
|
2000 |
280,0 |
53,0 |
34,4 |
Chart 3 US Defense Budget (1990～2000) (B$)
Meanwhile the reduction of defense budget had caused the reduction of procurement budget. In 1996 the procurement budget decreased to 44% of the peak, and the R&D budget in 1995 was 91% of the peak. By those budget reduction the defense industry had experienced the severe period.
(3) Last Supper of Defense Industries
In July 1993 the Department of Defense invited the top managers of the defense industries to the supper. In the table speech Mr. William J. Perry, the Secretary of Defense showed the estimates of future military force reduction and the related defense budget estimate, and pointed out that the present capability of defense production was in excess of necessity of defense. And he said,
“We expect companies to go out of business, and we will stand by and let that happen.”
In short, this was the suggestion of Secretary of Defense that the many defense industries should be removed from defense business. And moreover he made the estimate that more than half of the existing defense industries could not stay in the defense business in five years, and showed the appropriate numbers of defense industries as shown in chart 4.
This Mr. Perry’s speech was “the bolt out of the blue” to defense industries, and this dinner was called “The Last Supper of the Defense Industries”, likened to the Last Supper of Christ. After that Last Supper every defense industry had to make strategic choices, to sell, liquidate and consolidate, and tried to make the efforts to merge and consolidate each other, or to sell the defense department. And many companies retreated from the defense business.
|
Field of Weapon |
Equipments |
Number of Suppliers |
|
|
Current (1993) |
Future |
||
|
Aircraft |
Bombers Fighters Helicopters |
3 5 4 |
1 2～1/2 |
|
Space |
BMD ELV Satellites Rocket Motors |
6 3 5 5 |
2 2 2～1/2 2 |
|
Shipbuilding |
Aircraft Carriers Submarines Surface Combatants Auxiliary/Amphibious Shipyard |
1 2 5 7 8 |
1 1 2 3 4 |
|
Tracked Vehicles |
Tanks Armored Personnel Carriers |
1
2 |
1 1 |
|
Missiles |
Strategic Tactical |
１ ８ |
１ ４ |
Chart 4 Industrial Base Review by DOD
(4) Mergers and Consolidations of US Defense Industry
After the DOD Supper the defense industries began to merger and consolidate in to six groups. They are Boeing, Lockheed Martin, Raytheon, TRW, Northrop Grumman and General Dynamics. (In 2002 Northrop Grumman and TRW consolidated.) And GE, Westinghouse, TI, Philips and many other defense industries retreated from the defense business. There were more than 60 main defense suppliers in early 90s, they were consolidated to six big industries in 2001.
Corresponding to those big consolidations the Department of Defense supported the Defense industries to mitigate the Antitrust Act and make new laws to promote consolidations. And the DOD made the financial supports for defense industries to shift the defense business to commercial sectors and to train the workers to adjust to new business or transpositions. At the same time the DOD encouraged the defense industries to export weapon systems to other countries.
In those big mergers and consolidations every defense industry experienced many difficulties such as the confrontations of different corporate cultures, mass reduction of workers, scrapping the excess facilities and the huge burdens of the capital account. Overcoming those difficulties defense industries revived again as the healthy companies by pursuit of scale merits, sound finances and efficiency of capitals, cost efficiency of research and development and the improvement of cash flows. The chart 5 shows the situation of US defense industry in 2001.
Chart 5 Total sales of US Defense Industries‐2001
The total sales of 6 defense contractors were 14.20 billion dollars in 2001, on the other hand those of 13 defense contractors were 12.40 billion dollars in 1990. And the total capital assets of 6 defense contractors were 11.20 billion dollars in 2001, and those of 13 defense contractors were 4.60 billion dollars in 1990. So the 2001’s evaluation of defense industries in stock market were 2.5 times compared to the 1990s.
Moreover the DOD has been developing the new technologies under the concept of the “Transformation” using information technology, and after the terrorist attack on “September 11th” the US Government is increasing the defense budget to strengthen the Homeland Security. This policy contributes to activate the defense industries.
In June 2002 Northrop Grumman decided to merge TRW and the big 5 regime was established in US defense industry. Now US defense industry has surmounted the difficulties and revived as leading industry in the world.
3. The Defense
Industry in
(1) Exposed Gap
of Military Capabilities between US and
The end of Cold War gave the big influences to European defense industries as well as the US. Every European country reduced the military forces and defense budget and began to reform the military structures. At the same time the defense industries tried to merge and consolidate each other to survive. In those situations the Kosovo conflict gave the severe influences to European defense structure. Namely, NATO countries participated to bombing for 79 days from March to June in 1999, but this operations had exposed the gap of military capabilities between US and other NATO countries, especially in C4ISR, precision guided weapon systems and rapid deployment capabilities. Therefore the Kosovo operations were conducted under the sole leadership of the US. As the result, US requested to European countries to improve their interoperability with US forces. This meant that European countries should purchase more the US military equipments and those equipments should be operated under the same operational concept with the US forces. Meanwhile the European countries recognized the necessity to solve the matters within Europe. So European countries tried to establish their own defense structures and develop their own weapon systems. At that time they are introducing the common currency “Euro” and the trend for the European unity was in full swing. So they are trying to create the 60,000 readiness forces in Europe.
(2) Mergers and Collaborations across Borders
Corresponding to the changes of the strategic environments, European defense industries tried to merge and collaborate each other, and those mergers and collaborations were done across the borders. the typical mergers and collaborations were as below.
・BAE Systems (BAe and Aero & Defence Department of Marconi Electro Systems)
・Aerospatiale Matra Hautes ( Aerospatiale and Matra Auto Technology)
・European Aeronautic Defense & Space Company (DaimlerChrysler Aerospace AG, Aerospatiale Matra Hautes and CASA)
・ASTRIUM (Aerospace department of BAe, Aerospatiale Matra Hautes and DASA)
・THALES (Thomson-CSF )
At the same time the European countries had cooperated to co-develop and co-produce the weapon systems such as helicopters, fighters, missiles and cannons, and tried to reduce the research & development cost and production cost and to improve the interoperabilities.
Investigating the situation of mergers and collaborations in the US and Europe, next step will be ones across the Atlantic Oceans, and the globalization will be accelerated.
4. Present Status of Japanese Defense Industry
(1) Weakening Japanese Defense Industrial Bases due to Long Term Business Depression
After the end of Cold War the security environment surrounding Far East has changed; especially Russian Forces that Japan had regarded as the potential enemy for several decades has been reduced drastically in the Far East, and Russia is promoting the mutual confidence policy. Therefore Government of Japan revised “Taikou゛(the outline of defense buildup programs) to correspond to the new situations, and began to decrease the size of defense forces.
On the other hand the economic situations could not recover for more than a decade after the Crush of the Bubble. Japan is now suffering from this recession, and the national finance has more than 6,000 billion dollars debt; the defense budget is decreasing every year．
(2) Decrease of Defense Procurement Budget and the Weakening Defense Industries
 |
The defense industries’ financial situation is growing worse
because of the reduction of defense budget and the deflation of the commercial
sector. The chart 6 shows the trend of the procurement budget, whose peak was
in 1990 and the procurement budget in 2000 was 72% of its peak.
Chart６ Procurement Amount of Weapon Systems
As shown in chart 6 the procurement budget of cannons, tanks and combat vehicles were reduced to 44% in 1996 in comparison with the peak year, 1990. Those decrease of procurement budget caused the excess of production facilities and workforces, and therefore it made the degraded efficiency of productivities and the financial conditions. As the result many defense industries had reduced its production facilities, workforces and technicians. Therefore they suspended new investments for defense areas, and as the result the defense production bases and technical bases had become weaker and weaker.
 |
Chart 7 Procurement Amount of Cannon,
Tanks and Combat Vehicles
Those trends were the same in other areas; in 2000 the procurement amount of aircrafts were 59%, as of missiles were 46% and as of ships were 84% in comparison with the amount in the peak year. At the same time Defense Agency started procurement reform in the form of 10% cut of overall contract amount, and introduced disorderly competitive bid systems in every area. As the result every defense industry’s financial condition became worse and the investment mind for the research and development of weapon systems was discouraged, and the future facilities build-up was decreased.
On the other hand defense industries began to reduce their workforces, to consolidate the facilities and tried to improve their profits. The reduction of the workforces in defense sector of one electric company is shown in chart 8.
But the endeavors of the defense industries reached to its limit already. The government of Japan should promote the strong policy to restructure and activate the defense industries to maintain the defense production bases and defense technology bases.
 |
Chat 8
Reduction of Workforce in One Company (Defense Sector)
5. Milestone to Revitalize the Defense Industries
We estimate that the difficult conditions of defense industries will continue in foreseeable future. Japan Self-Defense Forces (JSDF) will extend its missions to military operations other than war and asymmetric warfare, so the weapon systems to counter those missions will be various and JSDF will request more sophisticated equipments at lower costs. To correspond to these requests Government of Japan and defense industries have to take measures to maintain and promote the defense production bases and technology bases as follows.
(1) Revision of Policy on Weapon Export
It is estimated that the mergers and consolidations of world defense industries will occur actively like in the US and Europe. At the same time co-production and co-development will be done more frequently. But only Japanese defense industries are left behind the globalization. This comes from the strict policy of weapons export ban. As the result it is limited to co-develop and co-produce the weapon systems with the US and European countries. And the exchange of parts with other countries are also prohibited, so the production quantity is small and the production and R&D cost of weapon systems remains high. To avoid those abuses Government of Japan should revise the “ Three Principles on Arms Export” and make possible to export weapon systems and parts to other countries. Therefore Japanese defense industries can co-develop and co-produce the weapon systems with foreign countries. So they can compete with the US and European industries in the areas of cost and performance. This will restore the health of Japanese defense industries, and the defense cooperation and the interoperability with allied and friendly countries.
(2) Strengthening Health of Defense Industries under Leadership of Government of Japan
The capabilities of defense industries are the one factor of military powers in the Japanese situation of reliance of defense technology and production bases on industries. But Government of Japan and Defense Agency request strongly to reduce the production cost in the standpoint of consumers only and they have no consideration to promote the health of defense industries as the element of military powers.
To improve the health of defense industries as the military power, Government of Japan should give financial supports to initial investment for production of new weapon systems, lend government facilities to produce equipments, give financial supports to keep the technicians and make tax exemptions to research and development of new weapon systems to defense industries.
（３）Increase of Research and Development Fund for Defense Weapon Systems
The Japan Defense Agency budget for the research and development is approximately 140 billion yen ( 1,2 billion dollars) for several years, and it is less than 3 % of total defense budget. Meanwhile the US military Ｒ＆D budget is 36 billion dollars, and it is about 13,7% of total defense budget. In the case of UK and France it is same as US. To maintain the health of defense industries and to produce excelled weapon systems Japan Defense Agency should increase the budget for R&D so that every defense industry can foster engineers and technicians and can promote technical bases. At the same time, to enhance the co-development and co-production of defense weapon systems with allied and friendly countries, Japan Defense Agency should increase R&D budget.
(4) Improvement of Procurement Systems
The procurement policy in the US military forces is to purchase the excellent weapon systems at right prices. Of cause, defense industries make very severe competitive bids, and those competitions are about the performance of systems. For instance DOD prepares 100 million dollars for some system, and as several defense industries make each proposal in competitive bid, DOD will select the best performance system, not the cheapest system. Therefore DOD eliminates weapon systems that are cheaper but less performance. On the other hand Japan Defense Agency is now accomplishing the procurement reform such as 10% overall cost cut and the return of the excess profits which defense industries gain by their efforts. Moreover JDA is adopting the unlimited competitive bidding system which causes the price race only ignoring the performance.
If JDA does not adopt the right procurement system such as purchasing excellent weapon systems at right price, the defense production base and technology base will collapse and as the result JSDF can not acquire the useful weapon systems in case of emergency.
As I mentioned, every country makes efforts to maintain the health of defense industries. But although JDA almost entirely depends on the defense production and technology base of defense industries, JDA is playing only the customer’s role and do not have the consideration to improve the health of the defense industries as the one of the defense powers. Continuing those situations in future, many defense industries will retreat from defense business. To overcome those situation and to maintain the defense industrial bases, JDA should cooperate with the Ministry of Economy, Trade and Industry, and build up long-term policy at the global standpoint as to how to strengthen the defense industries.
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