Japan strugles to woo Australia in bid for $35 billion submarine contract

Matt Siegel, Reuters
26 August 2015

ADELAIDE, AUSTRALIA – Japan's effort to charm Australian politicians and the public over its bid for a A$50 billion ($35.60 billion) submarine project appeared to stumble on Wednesday, with officials from Tokyo resisting pressure to commit to building the vessels in Australia.
Japanese defence officials and executives from Mitsubishi Heavy Industries and Kawasaki Heavy Industries made their first major pitch to build 12 stealth submarines for Australia's navy during public briefings in Adelaide, a ship-building hub.
Once seen as the frontrunner to win the contract, the Japanese bid has since come under scrutiny over whether Tokyo would build any of the submarines in Australia, where manufacturing jobs are a hot-button political issue.
Rivals ThyssenKrupp Marine Systems of Germany and France's state-controlled naval contractor DCNS have both said they would build entirely in Australia, emphasising the economic and political benefits of their proposals.
The European firms have also courted the Australian defence industry and media in key cities.
The Japanese delegation, led by retired Admiral Takahashi Saito, stressed Japan's cutting-edge technology, track record in manufacturing and strategic relationship with Australia during an open forum for local industry leaders.
But two sources present at separate private meetings between Japanese and Australian officials said the Japanese did not seem to have much understanding of the political sensitivities and appeared to have lost ground to their rivals.
They said the delegation gave few details about the Japanese proposal beyond reassurances they would adhere to the bidding rules.
"It seems like the (Australian) federal government just told them that they had to come down here and talk to us," one source told Reuters under the condition of anonymity because he was not authorised to speak to the media.
"I think they're really struggling to connect to the public. It's just not in their DNA to speak publicly about defence issues."
A defence industry source in Tokyo said the German bid was shaping up as the one to beat.
"There is some concern in the Japanese government," said another industry source in Tokyo familiar with the proposals.
Both sources said Japanese defence ministry officials had informally asked U.S. contractors with close ties to Japanese industry, including Raytheon Co and Lockheed Martin Corp , to advise Mitsubishi Heavy on managing its first ever bid to sell military equipment to an overseas government.
No Secret Deal
Australian media has said Australian Prime Minister Tony Abbott and Japanese Prime Minister Shinzo Abe privately agreed last year that Japan would get the contract, which also involves maintenance of the vessels. Both sides have denied such a deal.
The issue dominated a news conference held by the Japanese delegation.
"The current situation has us a little bit perplexed and confused why such speculation is still being voiced," said Masaki Ishikawa, director general for acquisition reform at Japan's Ministry of Defence.
Ishikawa declined to be drawn on whether Japan would build the submarines in Australia.
Abbott has described Japan as Australia's "closest friend in Asia.” The United States is also keen to spur security cooperation between two key allies.
Officials in Adelaide, capital of South Australia state, insisted on at least 70 percent local worker participation in the project.
"The French and the Germans have been out there in the public domain making their case and, look, that's understandable because this is an argument that will be determined in the court of public opinion," South Australia defence minister Martin Hamilton-Smith said in an interview.
Influential independent Senator Nick Xenophon, who met with the delegation privately, told Reuters the Japanese had put themselves in a position to play catch up.
Senator Sean Edwards, chairman of the economics committee in the upper house of Australia's parliament, said he had repeatedly told the Japanese officials the political importance of pledging to build in Australia.
"They get it," he told Reuters.
The Japanese declined to meet with labour union leaders, said Glenn Thompson, assistant national secretary of the powerful Australian Manufacturing Workers Union.
"We would have thought the Japanese ... would have liked to have talked to the unions," he said.
Each of the bidders has been asked to provide three estimates: one for construction overseas, one for a partial assembly in Australia and one for a full build in an Australian shipyard.
An expert advisory council is expected to deliver its recommendation in November.
($1 = 1.4047 Australian dollars)
(Additional reporting by Tim Kelly in Tokyo; Editing by Lincoln Feast and Dean Yates)