at the International Symposium
"Challenges for the Defense Industry"
organized by the Royal Swedish Academy of Engineering Sciences
and the Royal Swedish Academy of War Sciences
November 1, 1994
Keidanren was established in 1946, the year after the end of World War II. Today its membership consists of approximately 1,000 leading Japanese companies and some 120 industry groups. Under the leadership of its Chairman, Mr. Shoichiro Toyoda, Chairman of Toyota Motor Corporation, the organization works through the activities of its 64 committees to find practical solutions to problems facing the business community and to canvass corporate views and present recommendations to the Japanese government and foreign governments and politicians. Through activities such as these, we are striving actively to bring about the implementation of policies that contribute to the development of the Japanese economy and the world economy.
The Defense Production Committee is one of Keidanren's most eldest committees and has existed longer than the Japan Defense Agency. Keidanren's long involvement in this area through the activities of the Defense Production Committee reflects our view that a domestic defense production base is extremely important to Japan's security.
Participating in this symposium with me are representatives of 11 companies and two organizations who occupy positions of leadership in the Japanese defense industry. As reported in the Japanese media, the purpose of our visit to Europe is to hold discussions about the defense industry with government officials and industry representatives in the Europe as part of our efforts to explore future directions for the Japanese defense industry.
Today's symposium, which is entitled "Challenges for the Defense Industry," is of considerable interest to us. We look forward to meaningful discussions with you.
The first characteristic is the fact that the activities of the defense industry conform with Japan's basic national defense policy, which rules out attacks on other countries and is limited to the maintenance of the minimum of self-defense capabilities required to defend Japan against attack from other countries. In addition, the output of the Japanese defense industry is limited to conventional weapons, in line with Japan's three non-nuclear principles, which preclude the possession, production, or permitting the entry of nuclear arms.
The industry's second characteristic is the large role played by the private sector defense industry in the development, production and maintenance of arms, reflecting the fact that Japan has no state-owned industrial capacity. This is another reason why the maintenance of a domestic defense production capability is important to Japan.
Unfortunately, public understanding of the importance of the defense industry is generally inadequate in Japan due to regrets about World War II. However, those of us who are involved in the defense industry are conscious that we are a major federation in Japan's security, and we approach our day-to-day activities with a sense of pride and mission.
The third characteristic of the Japanese defense industry relates to Japan's export control policy, which is often referred to as the "Three Principles on Arms Export." This policy limits the industry to the domestic market, with the result that the Japanese defense industry is small in scale. Defense production accounts for only 0.6% of Japan's total industrial output of around \330 trillion, or $3 trillion. There is also a tendency toward small production runs of large product ranges.
The fourth characteristic of the Japanese defense industry is the fact defense demand accounts for a small percentage of the sales of manufacturers, particularly large companies. This is apparent from the figures in the OHP graph. For example, defense-related sales account for about 17% of the total sales of my company, Mitsubishi Heavy Industries. This ratio is one of the highest among the major manufacturers. NEC's ratio is only 3%, while Ishikawajima-Harima Heavy Industries has a ratio of 15%.
The fifth characteristic of the Japanese defense industry is that it includes numerous small and medium-sized enterprises, as well as major corporations. As shown in the graph, 1,140 companies are involved in the production of F-15J. The majority of these firms are small and medium-sized companies with less than 300 employees, but some possess technology that is vital to the industry. In other words, small and medium-sized companies play an essential role in the Japanese defense industry.
As shown in the graph, Japan's defense expenditure has increased marginally in the current fiscal year. However, the increase merely reflects rises in personnel costs and expenditure on U.S. bases in Japan. On an expenditure basis, the equipment acquisition budget peaked out in fiscal 1991 and is now declining. The present level is equivalent to around 80% of the peak level. This expenditure has been reduced from approximately \1.2 trillion to about \1 trillion, which is equivalent to approximately $10 billion.
Japan's defense procurement budget may seem huge in dollar terms. However, this is largely due to the appreciation of the yen, and the notion that Japan is spending heavily on defense does not reflect the realities of the situation. Furthermore, Japan imports key procurement items, such as AWACS and Aegis. In the current fiscal year, 38% of the budget for military aircraft will be spent on imports.
Japan's defense capabilities are being developed under the five-year Medium-Term Defense Program. The next fiscal year will be the last year of the current plan, but it is apparent from the Defense Agency's draft budget requisition for that year that the government has abandoned the procurement targets set down in the plan for most key items. For example, procurement of portable surface-to-air guided missiles has been reduced from 48 groups to 25 groups.
In the coming fiscal year, the sales of major contractors to the Defense Agency are expected to decline by at least 30-40% compared with fiscal 1991 levels. Defense industry companies are striving to maintain their technology and production bases in this environment, but the task is becoming extremely difficult.
Defense industries in Europe and North America are going through an extremely active restructuring process. Changes include the merger of Lockheed and Martin Marietta, and the establishment of Deutsche Aerospace through the merger of several companies. In Japan, moves toward restructuring are already manifested in the retrenchment of defense divisions and the amalgamation of affiliated companies, but so far there have been no major takeovers or mergers. As is apparent from the graph, however, higher percentages of sales at small and medium-sized companies are defense-related than at large manufacturers, and many smaller firms are seriously considering restructuring measures.
Some in the audience may conclude that since defense represents only one area of activity for major Japanese companies, those companies should be able to flexibly transfer technical personnel from one division to another. However, defense technology and equipment require special skills that are not found in civil industries, and redeployment is thus an extremely difficult process. It is also extremely difficult for technicians to revert to defense-related work after being redeployed to other activities. Redeployment can thus lead to the dispersal of technical work forces.
At present the outlook for the development of Japan's defense capabilities after the conclusion of the current medium-term plan in fiscal 1996 is totally unknown. For their part, contractors are making every possible effort, including the streamlining of operations. However, we are now starting to wonder how much longer the industry can withstand the crisis.
The Japanese defense industry is encouraging the government to implement a number of measures with the aim of maintaining Japan's defense production capabilities. First, we are calling for the early formulation of a medium- or long-term defense program for the period after 1996. This is vital in order to encourage efforts based on industry initiatives. Second, we want government to promote research and development. Military equipment is becoming more and more sophisticated, and it is essential that we channel more effort into research and development. Third, steps must be taken to ensure that small and medium-sized companies can continue to be involved in defense production.
Obviously the reduction of defense expenditure since the end of the Cold War means that there is an increasing need to focus on the cost-effectiveness of defense production. However, policy decisions that affect the defense industry should not be based solely on economic considerations. Keidanren believes that the government should implement various measures in order to maintain the defense production base, which is vital to the improvement of Japan's defense potential.
We accept that the defense industry itself must strive to reduce costs. However, Keidanren hopes to work with the Japanese government to develop measures that will ensure the maintenance of the defense production base. To what extent can the Japanese defense industry maintain its production base in the face of these head winds? That is the first challenge confronting the industry.
The most important limitation on international cooperation is Japan's export control policy, which is based on the Three Principles on Arms Export. In essence, the export control policy prohibits the exportation of weapons to any part of the world. The export ban encompasses technology as well as hardware. Weapons and military technology are defined as products and technology that are used exclusively in defense equipment.
Even though civil products and technology can be used in defense equipment, there is no legal restriction relating to the exportation of these items. However, the boundary between arms and civil products is extremely indistinct.
What happens if a Japanese company engages in behavior that could lead to the contravening of the Three Principles on Arms Export? It is likely that media criticism would result in serious damage to the public image of the company in question. As I stated earlier, the Japanese defense industry forms just part of the activities of the companies involved, and generally their business in civil fields is substantially larger than their defense business. The managers of those companies inevitably give priority to their non-defense activities and are determined to avoid situations that could be controversial in relation to the Three Principles. Japanese managers hesitate to take risks in areas where the boundary between arms and civil products is blurred, even when there would be no problems legally.
Yet there are exceptions to the Three Principles on Arms Export. The exportation of weapons technology to the United States is permitted from the viewpoint of strengthening the Japan-U.S. security relationship. Japan is currently cooperating with the United States on the development of the FSX, next-generation fighter support aircraft. Cooperation in this area is possible because it is legal to export military technology to the United States.
From time to time European companies approach us with proposals for international cooperation. Since the exportation of military technology to Europe is not permitted, there is nothing that we can do at the industry level. The Social Democratic Party of Japan, to which Japan's present prime minister belongs, is committed to the maintenance of the Three Principles on Arms Export.
Although our basic position is that the domestic defense production base should be preserved, and that high standards of technology should be maintained, we also believe that defense technology cooperation is vital in order to reinforce the Japan-U.S. security relationship, and because of the increasing sophistication of weapons.
For example, the Japanese defense industry is currently very interested in cooperation with the United States on the development of TMD technology. The United States has asked the Japanese defense industry to cooperate at the technology level, and the industry is taking its own initiatives to study the potential for defense technology cooperation with the United States because of the importance of defense against ballistic missiles to Japan's security. Before we can actually cooperate, however, it will be necessary for the Japanese government to make the decision to introduce TMD. If the two governments can reach decisions regarding methods of cooperation and other aspects, we are determined to ensure that cooperation results in success.
As I stated earlier, there is no legal restriction on the transfer of civil technology or the exportation of civil products. However, when civil technology or products are used in defense equipment, the manufacturers concerned might be accused of exporting weapons. For this reason, Japanese companies are reluctant to export such items. Moreover, many manufacturers of electronic goods and other products that have never been involved in the defense business are concerned that participation in the industry could itself harm their corporate images because of the defense allergy of the Japanese public.
The first requirement is clarification of how the Three Principles on Arms Export will be applied. Before they can decide for themselves whether or not to participate in defense technology cooperation, Japanese companies need clearer criteria regarding the distinction between military and civil products.
The next priority is to foster an environment within Japan in which companies that have never previously been involved in the defense business will be able to participate in defense technology cooperation without worrying about a backlash of popular sentiment. In essence, this will require the reform of public perceptions of defense. As a first step in this direction, the Japanese government will need to show a clear political will and build consensus regarding the need for defense technology cooperation in the context of debate in the Diet and elsewhere about the future improvement of Japan's defense potential.
The third requirement is the creation of an environment in which companies that are parties to cooperation can build strong relationships of trust with foreign companies on their own initiative. Japanese companies have worked with European and U.S. companies in numerous technical cooperation projects, but these projects were the result of decisions made freely by the companies concerned on their own initiative. Companies that own civil technology do not like government intervention in the transfer of their technology. It is necessary to have policies that give companies a free hand wherever possible. This is particularly important from the viewpoint of obtaining the cooperation of electronics manufacturers and other companies that have no experience in the defense business.
In this context, "joint production" means participation of Japanese companies in the production of defense equipment in Europe and the United States through the exportation of components.
Keidanren believes that more cost-efficient R&D and production would be possible if the way could be opened for international joint production of equipment, such as those used in both Japan and the United States. We also believe that the expansion of cooperation to include the joint production of hardware would also promote increased technology cooperation. Joint production would require flexibility in the application of the Three Principles on Arms Export. However, we regard the advisory group's recommendation as extremely important from the viewpoint of promoting defense industry cooperation in the future.
The Japanese industry is subject to special limitations, including the Three Principles on Arms Export. We need to work in consultation with the Japanese government to develop the most suitable approach to international cooperation in the defense industry. That is the second challenge facing the Japanese defense industry.
Thank you for your attention.