Thursday, November 19, 2015

Japan gunning for world's biggest defense deal: Aussie submarines

Isabel Reynolds and Jason Scott, Bloomberg News
18 November 2015
Less than two years after lifting a decades-old ban on arms exports, Japan is navigating one of the most complex and sensitive areas of the defense market: submarines.
The country faces a Nov. 30 deadline to submit a final proposal to Australia for its next-generation submarine, the largest such tender in the world right now. A team of government officials, military officers and corporate executives with no experience in international arms marketing is facing off against global heavyweights ThyssenKrupp AG of Germany and DCNS of France for the A$50 billion ($36 billion) program.
More than commercial interests are at stake. Winning the race to design and build the submersibles would cement the "special" relationship Prime Minister Shinzo Abe has sought to build with a fellow U.S. ally against an assertive China. For Australia, cooperating with Japan – whose Soryu is widely seen as the best submarine
of its type – risks angering China, its biggest trading partner.
"We are basically prepared to share all our technology," Masaki Ishikawa, a Ministry of Defense official working on Japan’s bid, said in an interview Friday. "Until now, we had never even shown our submarine technology to our ally, the U.S.”
Japanese Pacifism
The submarine competition comes as Japan agonizes over how far to loosen the constraints of the pacifist constitution imposed by the U.S. after World War II and revered by many Japanese. The passage of laws to expand the role of the military met with huge street protests over the summer.
“Make no mistake: a decision in favor of Japan would have tangible strategic implications," said Mark Thomson, a defense economics analyst at the Australian Strategic Policy Institute. "It would assist Japan down the path of military normalization, and it would also send an unambiguous message to both Beijing and Washington about the willingness of Australia and Japan to work together."
With Australia and the U.S. set to jointly develop a combat system to be installed in the new submarines, a Japanese deal could tighten ties between the three countries’ armed forces, Ishikawa said.
Sales Pitch
The A$50 billion contract would be to build the subs and service them over their decades-long lifetime. Defence Minister Marise Payne said at the Submarine Institute of Australia Tuesday the number of subs would be announced next year, though the country needs between eight and 12, analysts say.
Japan is set to ratchet up its sales pitch. Defense Minister Gen Nakatani leaves Thursday to meet South Australian premier Jay Weatherill and shipbuilder ASC, with that state a hub for naval manufacturing. He’ll join Foreign Minister Fumio Kishida for a meeting with Payne and Australian Foreign Minister Julie Bishop Nov. 22. Nakatani plans to raise the deal at the meeting, he told reporters in Tokyo on Tuesday.
New Design
Japan has deployed its conventionally powered, 4,000-ton Soryu class subs – the largest of their type in the world – since 2009. The latest models cost about 60 billion yen ($487 million). The Soryu, manufactured by Mitsubishi Heavy Industries and Kawasaki Heavy Industries, is a close match for the Australian Navy’s needs, though the new submarines would be a fresh design, Ishikawa said.
ThyssenKrupp, Germany’s largest steelmaker, has said its marine unit could build 12 submarines for Australia for about A$20 billion. Germany has experience exporting submarines, but it hasn’t constructed one to the size Australia requires.
“Our design will be customized according to Australia’s requirements and will be exclusively offered to Australia,” John White, chairman of ThyssenKrupp Marine Systems in Australia, said Wednesday. The company targets about 70 percent Australian involvement, pledging to create thousands of jobs.
‘Zero Experience’
The German government “is confident that our company is able to offer good quality” and “interesting” possibilities to produce locally, Chancellor Angela Merkel said last week at a briefing with Prime Minister Malcolm Turnbull in Berlin.
Japan has “zero experience bidding in an international competition of this size, complexity and political sensitivity, so it is flying blind," said James Hardy, Asia-Pacific editor of IHS Jane’s.
"It’s a fact we have no experience selling submarines overseas," Ishikawa said. "I have seen in the newspapers the view that our pitch has not been good enough. I think it’s necessary to explain in detail why this is the best choice for the Australian Navy’s needs and for Australian companies."
In response to criticism that Japan wasn’t providing enough information, Mitsubishi Heavy Industries has held meetings with more than 100 Australian firms, Ishikawa added.
Three Options
Australia has asked for three build options: Australia only, overseas only or a hybrid of the two. Japan’s teams is willing to build in Australia, Ishikawa said. The process would start with the establishment of design centers in Japan and Australia, and add an Australian training facility for local workers.
"The concept is similar to the way that Japanese motor manufacturers like Toyota and Honda work with overseas production," Ishikawa said.
Australia is likely to announce its decision next year, Ishikawa said, adding Australian officials have told him the ousting in September of Prime Minister Tony Abbott, known for his close relationship with Abe, in favor of Turnbull won’t affect the process. Abe and Turnbull met Nov. 14 on the sidelines of the G-20 summit in Turkey.
It’s not just Japan’s pride in its technical prowess that could be dented by a rejection, bilateral ties could also suffer, Thomson said.
"If it’s a purely commercial matter, a loss would merely be disappointing," said Thomson. "But my instinct is that the original deal had much more to do with strategy than money," he said. "If I’m right, a Japanese loss would amount to, or at least be perceived as, Australia rejecting a closer strategic relationship with Japan."

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