The Journal The Authority on Global Business in Japan

What a difference 30 years make. In the mid-1980s, the United States and Japan began a wary partnership in the defense technology arena, developing a new fighter jet for the Japan Air Self-Defense Force amid intense trade friction.

Many in Washington feared that Japan would use the joint project to make competitive gains for its aerospace industry at the expense of US companies. The result was an uneasy collaboration that left both sides dissatisfied.

Today, Japan’s government is overhauling the way it develops, procures, and exports defense equipment, in a series of bold steps that could open a new avenue of high-tech cooperation, this time with US encouragement. Although many challenges remain, the United States and Japan are at the forefront of a new era of private- and government-sector collaboration.

In Tokyo, Dempsey Reinforces U.S.-Japan Alliance

U.S. Army Gen. Martin Dempsey (center) and Adm. Katsutoshi Kawano at a ceremony commemorating the 70th anniversary of the Battle of Iwo Jima, on March 21.

Turning point for Tokyo
Japan’s move to enter the global defense market is just one part of a new national security strategy unveiled in late 2013 by the administration of Prime Minister Shinzo Abe.

Concerned with rising Chinese military spending, as well as North Korea’s ongoing nuclear and missile programs, the Abe government is taking steps to empower the Japan Self-Defense Force (JSDF). This includes a focus on enhancing defense-related production and technological bases.

Japan’s goals are to extract more value from limited defense spending, strengthen the country’s defense industry (for both economic and national security benefits), and bolster its alliance with the United States and other world partners (to enhance competitiveness and deterrence). Tokyo initiated the defense-industry component of the strategy by revising its principles on the transfer of defense equipment and technology in April 2014.

From the end of World War II until this administration, Japanese governments have effectively banned defense exports as a way to demonstrate the country’s commitment to peace and avoid foreign entanglements. Banned exports included items with any Japan-made components, which made Japanese companies undesirable business partners because a co-developed product could only be sold in Japan.

Tokyo allowed a few exceptions when the United States and Japan collaborated on certain missile defense and aircraft technologies, but this never opened the door to meaningful exports. Instead, Japan’s defense industry focused only on the domestic market, developing sophisticated capabilities but in small quantities and at relatively high prices.

Under the new rules, Japan allows defense transfers overseas in a variety of situations, including those that support peacekeeping and disaster relief efforts as well as “international cooperation.” Transfers must also contribute to Japan’s national security, such as by implementing joint development projects and deepening defense cooperation with allies and partners.

The new rules also allow so-called third-party transfers, or sales to another country beyond the initial buyer, when “appropriate control” of that technology is ensured, further widening the potential market.

The first export license Japan issued under the new rules was for a small gyroscope used by the United States in the Patriot missile defense system. But it probably will not be long before the government issues licenses for parts of a submarine sold directly by Japan to Australia, or an entire patrol plane to India.

“This is a new challenge and opportunity for Japan,” Lockheed Martin Japan Director Chuck Jones told the Tokyo Shimbun in March.

In June 2014, Japan followed up its revised principles for defense transfers by publishing the Strategy on Defense Production and Technological Bases, which aims to help industry navigate both the greater competition and the opportunities expected from the new transfer policies. The strategy calls for forging long-term government and industry partnerships, doubling the upper limit for contracts to 10 years, promoting international joint development of certain technologies, formulating an R&D vision for the industry, and strengthening research cooperation with universities, among other measures.

Another key to shoring up the defense industry is Japan’s formation of a new agency to oversee the entire procurement process, from R&D and identifying military requirements, all the way through selection, purchasing, and life-cycle management of the equipment. Wayne Fujito of Decisive Analytics Corp—who also heads the US National Defense Industry Association’s international division—considers this the most meaningful aspect of Japan’s new policies.

Over the course of 2015, the government is setting up the Acquisition Technology and Logistics Agency (ATLA) under the minister of defense, consolidating functions that had been scattered around the ministry and the JSDF branches and adding new capabilities to manage international collaboration and exports. According to Fujito, “the establishment and execution of this new agency should be the real game changer for Japanese industry.”

Alliance opportunity
In contrast to the 1980s and ’90s, US policy makers are welcoming Japan’s entry into the global defense arena. Washington sees an opportunity to broaden the US supplier network, improve cost efficiency, enhance alliance interoperability, and maintain an allied edge in certain military technologies where it fears other states are gaining.

Revised bilateral defense guidelines announced by the two governments in late April describe equipment and technology cooperation as a new bilateral enterprise. And large US companies such as Northrop Grumman and Lockheed Martin are currently upgrading their presence in Japan to take advantage of the changes.

“We are exploring options for joint development with major Japan-affiliated defense companies,” says Jones of Lockheed Martin, and he wants this partnering “to reflect the expansion of overseas markets.”

The allies also have an opportunity to move beyond this incremental approach to take cooperation to a higher level by involving Japan as a partner in executing the US Defense Innovation Initiative, an effort that harkens back to America’s Cold War military competition with the Soviet Union. This time, China has joined Russia as a major concern, primarily due to its development of accurate long-range missiles and integrated air defense systems, among other military investments.

An important aspect of this US initiative is identifying, developing, and fielding breakthrough technologies in the areas of space, undersea, air dominance and strike, and air and missile defense, as well as a flexible basket of emerging technologies. The Department of Defense has organized small teams for each category, drawing on the best talent in the government and military, to solicit and receive information from industry, academia, federal labs, think tanks, and others—including other countries.

The United States is placing particular emphasis on the fields of autonomous systems, miniaturization, big data, and advanced manufacturing. Japanese prowess in robotics, energy storage, and artificial intelligence make this a natural avenue for fresh bilateral cooperation, involving not only traditional Japanese defense firms but also off-the-shelf commercial technologies from Japan repurposed for defense applications.

Such collaboration could result in cheaper and more effective missile defenses (using electromagnetic rail guns or directed energy, for example) that could defeat Chinese cruise missiles without threatening China itself.

Exercise Forceful Tiger

A U.S. Air Force sergeant takes part in a refueling exercise near Okinawa City.

Obstacles ahead
Although the potential benefits of collaboration are great, so are the challenges. Many Japanese bureaucrats hoped that last year’s defense transfer relaxation would stimulate multiple corporate deals and export license applications in something of a market-driven dynamic, but businesses are being cautious. Most are looking for more guidance from the government regarding what kinds of collaboration will be supported, to clarify what ventures will contribute to “peace,” “international cooperation,” and “national security.”

Japanese executives note that simply making money is not a sufficient reason to receive export license approval, and many would feel more comfortable working within a government-to-government framework at this early stage.

Another challenge is the legal confusion about what kinds of assurances Japan requires regarding third-party transfers.Tokyo’s revamped defense procurement agency should help address some of these challenges, but ATLA will not be fully operational until the fall, and it is not clear yet how effective and well-funded it will be. This has the Ministry of Defense looking for ways to leverage other parts of the Japanese government, perhaps by conducting defense R&D in existing laboratories funded by the Ministry of Economy, Trade and Industry, or by receiving marketing or financing help from agencies currently supporting Japanese industry.

On the US side, Congress has put in place a variety of restrictions related to international defense procurement, and these cannot be sidestepped until Tokyo and Washington conclude a Reciprocal Defense Procurement Memorandum of Understanding (MOU). The US government has signed these MOUs with several other partners, but doing so involves a review process that can take up to two years.

Industry representatives in both countries are exploring new opportunities and partnerships, but Fujito cautions “to remember the asymmetry between Japan and the United States regarding the size and scale of our respective defense industries.” He thinks it will take a few years for Japanese executives to feel comfortable entering into high-value deals with major US industry players.

Japanese businesses also face an element of reputational risk. Defense-related sales often make up just a small percentage of a company’s overall revenue, and many executives worry that high-profile arms exports might alienate the peace-loving Japanese public. This is especially true for companies considering first-time entry into the defense industry supply chain.

New bilateral enterprise
Defense cooperation can facilitate breakthroughs that could be applied to other fields such as energy efficiency, protection against terrorist threats, and mitigation of environmental challenges and natural disasters. Although increased cooperation is not aimed foremost at reducing procurement costs, it might also help in this regard.

Efforts will be driven by the market from the bottom-up, and guided—and occasionally subsidized—by top-down policymaking. Private industry will look to build partnerships and find ways to solve supply chain and technical problems, to make existing products more efficiently, and to develop innovative ways of satisfying evolving military requirements. The two governments, meanwhile, can work to build an enabling environment for bilateral cooperation, including opportunities for long-term R&D collaboration in strategic areas.

Industry in both countries should move quickly with small-scale cooperative projects to help establish administrative precedents while the architects of Japan’s new policies are in their current positions. Now is the time to invest (even if modestly), clarify regulatory parameters, and deepen personal networks in these fields. A strong technological edge for the allies will serve them and the region well in the future, just as it has before.

JSchoffBioDivider

James L. Schoff

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Efforts will be driven by the market from the bottom-up, and guided—and occasionally subsidized—by top-down policymaking.