The Journal The Authority on Global Business in Japan

Next year, Japan will begin manufacturing the F-35 fighter jet for the controversial Joint Strike Fighter program, led by the United States. The development and acquisition program, which includes participants such as the UK, Australia, and other allies, has been deemed the most expensive military acquisition in world history.

As such, a multitude of partner nations are heavily invested in the success of the jet. In 2011, the Japan Air Self-Defense Force joined the party. To replenish its aging fighter fleet, Japan selected Lockheed Martin’s F-35A model, which beat out the Eurofighter Typhoon and an enhanced version of the Boeing F/A-18 Hornet.

Tokyo has signed up to procure 42 aircraft, 38 of which will be manufactured at Mitsubishi Heavy Industries’ Komaki Minami plant in Aichi Prefecture. The facility is situated just north of Nagoya City, in the heart of Japan’s manufacturing mecca—Chubu. The Chubu region will undoubtedly be the principal beneficiary of the Cabinet’s decision.

The recently approved 2015 defense budget allocates about ¥103 billion for six F-35 fighter jets, accounting for more than 2 percent of the annual defense bill. The majority of funds will go directly to the Chubu region. The budget specifically includes ¥36 billion for domestic industrial spending and related expenses, primarily intended for establishing an F-35 factory.

The increase in domestic industrial spending will generate an economic ripple effect. Large engineering and construction companies will need to increase output, consequently stimulating their supply base as well. Tool and die companies, sheet metal shops, and even scaffolding suppliers will all reap the benefits of the newly injected cash, if only for a short while.

Today the program’s expenditures solely benefit construction companies and associated industry partners. By 2016, however, these exclusively domestic contracts will be scaled down, while production of the aircraft will intensify. Once production commences, a handoff of responsibility will occur.

Because the F-35 program is a US Foreign Military Sales contract—a form of security assistance authorized by the Arms Export Control Act and a fundamental tool of US foreign policy—Washington is the primary decision maker. Technically, the United States is selling the aircraft to Japan, and Lockheed Martin is the F-35’s prime contractor.

Along with Lockheed Martin, various US defense companies will deploy multitudes of engineering and production personnel to the Nagoya region to direct aircraft production. Lockheed Martin will deploy 35 expatriates for long-term assignments, while Pratt & Whitney, the US Defense Contract Management Agency, and many other entities will also have a presence.

In most cases, the expatriates’ families will accompany them, keeping the money earned within Japan’s GDP. The influx will stimulate diverse economic sectors such as tourism, mobile communications, automotive leasing, and retail.

Organic economic reform
The structure of the F-35 acquisition sets an example for much-needed economic change in Japan, as the program’s structure is the antithesis to standard Japanese business practices, with US defense companies holding the decision-making saber.

This revised model will create new revenue streams. Ashwin Parameswaran, a noted macroeconomics analyst, explains why: “[A country’s] malaise is caused by insufficiently exploratory incumbent firms.”

He says that Japan’s crony capitalism is characterized by an inefficient and uncompetitive corporate sector. The continuous guarantee of work to incumbent firms reduces competition, consequently increasing costs and stymieing innovation.

In the case of the F-35, objective criteria will determine the selection of sub-contractors, providing an even playing field for small business owners that never previously had the chance to do business with the titans of industry.

Departing from the status quo will transform the prospects of domestic and international trade in Japan. If this open-market mindset continues, it will lead to long-term growth for the country.

Small businesses in the aerospace industry will become more competitive. Lower costs and improved products will flow back up the chain to the large conglomerates, enabling them to offer improved components at lower prices.

This will attract foreign investment and create a virtuous cycle that is organic and self-sustaining. But the encouragement of industry and government leaders will be necessary, especially in the early stages.

Strike while the iron is hot
Currently, the magnitude of subsidies injected into the aerospace industry is staggering.

Government entities such as the Chubu Bureau of Economy, Trade and Industry (Chubu METI) and non-governmental groups such as the Chubu Aerospace Industry Technology Center (C-ASTEC) and the Greater Nagoya Initiative Center (GNIC) are doing brilliant things for Chubu’s aerospace industry. They are breaking decades-old barriers and building bridges in their place.

On March 5, the organizations jointly hosted the “Greater Nagoya–U.S. Aerospace Symposium 2015.” Drawing more than 160 aerospace representatives from the region, the event displayed the fervor of the industry.

Government efforts to boost awareness of the need for Japanese industry to adapt and globalize have not gone unnoticed, as most businesses are starting to recognize the importance of changing timeworn models. International business requires taking calculated risks, an aspect that must be addressed in a traditionally risk-averse economy.

Eventually, the government’s hand-holding will dissipate. Small companies will need to stand on their own, and the larger ones will have to reevaluate their methods for awarding contracts. Industry chaperones must encourage all participants to accept that risk can and does yield growth.

Dictating tiers of suppliers and a predetermined hierarchy—albeit a common business practice in Japan—is a death sentence for free trade.

Rather than promoting a fixed order and structure, the aerospace industry needs to believe that a third-tier supplier can become a titan. The industry must unite to break the chain of crony capitalism which, given the country’s social structure, is an order of enormous proportions.

Fortunately, the initial nudge from the F-35 program, paired with the united front presented by Chubu METI, C-ASTEC, and GNIC, make this hurdle surmountable.

Current aspirations and passions for new and international business methods are strong. The opportunities are bountiful, but must be tapped. We are currently in the perfect storm. Now is the time to strike.

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Rob Jacobs is vice chair of the ACCJ Chubu Aerospace Industry Subcommittee.

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The structure of the F-35 acquisition sets an example for much-needed economic change in Japan.