Mitsubishi Heavy warns against the survival of the Japanese defense industry

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Mitsubishi Heavy Industries, Japan’s largest defense contractor, has warned that the survival of the country’s ailing defense sector is at stake as the government debates a historic increase in military spending to counter the Chinese threat.

Naohiko Abe, who heads the sprawling conglomerate’s defense and space businesses, told the Financial Times that Russia’s invasion of Ukraine has crystallized the security risks to Japan posed by China and South Korea. North, creating greater public support for a larger defense budget. Recent polls have shown that a majority of the Japanese public favors an increase.

“It was a big factor that everyone, including the general public, started to feel that something similar to Ukraine could happen around Japan. Aside from the actual budget increase figure of defense in percentage terms, action needs to be taken,” Abe said.

But beyond a simple increase in military spending, Abe argued that a wider shake-up was needed, saying the country’s defense industry was unsustainable if it could only generate very high margins. slim from Department of Defense contracts.

“More and more companies are getting out of the defense business because they are chronically losing money,” he said. “Industry players are all saying they need more profitability, continuity and predictability. We need to do something to support the industry as companies are pulling out over the last five years.

He even warned that additional military spending would not necessarily provide a greater business opportunity for MHI’s defense business, which accounts for about 10% of the group’s revenue of 3.8 billion yen (29 billion) in the year to March.

But he added that the situation could improve now that the Ministry of Defense is reviewing contracts to improve business profitability.

While companies can theoretically expect a profit margin of up to 7% by supplying military equipment to the government, the actual margin has often been nil or even negative given the sporadic nature of contracts as well as other cost factors. The increased dependence on imports from the United States also led to a drop in purchases of homemade equipment.

As a result, Japanese companies have withdrawn from defense activities in recent years. Last year, Mitsui E&S pulled out of naval and government shipbuilding operations, selling the division to MHI. In 2018, Komatsu announced that it would stop development of wheeled armored personnel carriers shipped to the Japan Ground Self-Defense Force.

Japan’s biggest business lobby, Keidanren, warned in April of “a crisis” in the national defense supply chain and urged the government to “position the defense industry as an important partner for the National Defense”.

The review of the country’s defense industry comes in a pivotal year for Japan. By the end of December, Prime Minister Fumio Kishida is expected to release a new national security strategy, national defense program guidelines and a five-year procurement plan that will form the basis of the defense strategy.

In the aftermath of the war in Ukraine, the ruling Liberal Democratic Party said Japan should increase military spending in line with NATO’s pledge for member nations to spend 2% of their gross domestic product. For about half a century, Japan has capped its defense budget at 1% of its GDP. In the current fiscal year, this amounts to 5.4 billion yen.

Japan is expected to increase its military budget, but analysts are divided on how far Kishida can go given the fiscal pressures the economy faces from rising health care costs for its elderly population.

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