Japan passes defense subsidy bill to stop industry bleeding

 

The law provides for subsidies for expanding production and improving efficiency, as well as to cover cybersecurity and business succession costs, Nikkei Asia reports.

 

Prime Minister Fumio Kishida's government hopes to improve business conditions for Japan's defense contractors after more than 100 companies have left the industry in the past two decades. Doubts have arisen about the country's ability to supply ammunition and other materiel in the event of a national security crisis.

 

"If there's an emergency in Japan's vicinity, equipment will be damaged," Itsunori Onodera, a former defense minister and head of the ruling Liberal Democratic Party's Research Commission on Security, told reporters Wednesday.

 

"Maintaining our defense industry, including supply networks, is defense in and of itself," Onodera said. "The new law is a step in that direction."

 

To promote sales of defense equipment beyond Japan's small market, Tokyo will set up a fund to help companies modify the specifications of their products for other buyers.

 

For businesses that continue to struggle despite these measures, the government will be able to take ownership of their manufacturing facilities and contract their operation out to other companies.

 

The Defense Ministry aims to ensure defense companies have a profit margin of about 8% on its contracts. But these orders often end up with an actual operating profit margin of around 2% to 3%, or even sometimes losing money, owing to high material costs and delivery delays.

 

Because sales of these products are limited almost entirely to Japan's Self-Defense Forces, the small production scale adds to the profit challenges.

 

Big defense contractors in the U.S. and Europe boast operating profit margins of 10% or more. The defense also makes up a small share of Japanese players' overall sales. Mitsubishi Heavy Industries generates only about a tenth of sales from the sector, compared with roughly 90% for Lockheed Martin.

 

Japan's defense industry runs the gamut from blue chips like Mitsubishi Heavy to small and midsize enterprises. About 1,100 companies are involved in making fighter jets, 1,300 in tanks and 8,300 in frigates.