Insight: Japan battles to persuade its big brands to join military buildout
15/03/2023 23:00
By Tim Kelly and Kaori Kaneko
March 16 (Reuters) - As Tokyo spins up its defence
industry for the country's largest military expansion since
World War Two, it has run into a challenge: some of Japan's
best-known brands are reluctant to invest in the military side
of their businesses.
Japan, which renounced war in 1947, last year unveiled a
five-year $315 billion military expansion to deter Beijing from
using force in the East China Sea amid growing concern that
Russia's attack on Ukraine - which it calls a "special
operation" - could embolden China to invade Taiwan.
But a key part of Tokyo's strategy hinges on persuading
commercial firms such as Toshiba Corp 6502.T , Mitsubishi
Electric Corp 6503.T and Daikin Industries Ltd 6367.T , which
for decades have quietly armed its Self Defence Forces (SDF), to
ramp up production.
In a country with an ingrained public sentiment against
militarism, that is proving a hard sell for some of its
suppliers, according to Reuters interviews with six government
and company officials.
In private meetings with the defence ministry over the last
year, some firms have raised concerns such as low profit
margins, the financial risk of building manufacturing plants
that could be left idle after Japan completes its military
expansion, and potential damage to their public image from arms
sales, an official directly involved in the talks told Reuters.
The official declined to be identified or attribute the
complaints to specific companies, citing the confidential nature
of the talks.
The government is preparing legislation that includes
raising profit margins on military gear from a few percent to as
much as 15%, and the provision of state-owned factories that
companies can use to expand production risk-free. Some are
concerned that might not be enough.
"Until now, the ministry has taken the defence companies for
granted," said Masahisa Sato, an influential ruling party
lawmaker and former deputy defence minister.
Sato said it was increasingly difficult for Japanese
executives to justify defence sales out of "patriotic duty" to
shareholders focused on more profitable civilian ventures.
Prime Minister Fumio Kishida's military buildup plan
identifies defence manufacturing as a key pillar of national
security.
Japan, however, does not have a national defence champion
such as Lockheed Martin Corp LMT.N in the United States or
Britain's BAE Systems PLC BAES.L , and many of the firms
supplying the SDF are associated with more mundane products.
At Japan's biggest defence company, Mitsubishi Heavy
Industries 7011.T , which is developing Japan's next jet
fighter and new longer-range missiles to help deter China,
military contracts account for only a tenth of its $29 billion
in revenue last year. Most of its business is civilian aircraft
components, power plant equipment and factory machines.
Aircon manufacturer Daikin has a munitions sideline;
Toshiba, which makes electronic goods such as printers, also
produces military-grade batteries; and Mitsubishi Electric makes
radars and missiles alongside fridges and vacuum cleaners.
Since early last year, defence officials have been meeting
with these firms and other top suppliers, such as
car-and-helicopter maker Subaru Corp 7270.T , to urge them to
expand their lower-profile military units.
Reuters contacted 15 leading Japanese defence manufacturers,
whose CEOs the defence ministry invited to talks with then-
defence minister Nobuo Kishi in April, and in January with his
successor, Yasukazu Hamada.
Three of them, Mitsubishi Heavy, Mitsubishi Electric and IHI
Corp 7013.T , which makes jet engines, bridges and heavy
machinery, confirmed they had also taken part in other
lower-level discussions.
Five firms did not reply, and the rest declined to say
whether they had joined in other discussions. The companies who
responded declined to give details of the meetings or any
concerns they raised during the talks.
SWEETENERS
Many companies are reluctant to talk about their defence
units, fearing it might put off customers at home, where
anti-military sentiment lingers, or overseas, particularly in
China, where resentment over Japan's wartime past could be
politicised.
Reuters asked 10 of Japan's military suppliers, including
Toshiba, Mitsubishi Electric, Daikin and Subaru, for interviews
with their defence unit managers. Only Mitsubishi Electric
agreed.
Masahiko Arai, the head of Mitsubishi Electric's defence
systems division, said he welcomed government proposals and
hoped that contributing to Japan's "safety and security" would
be beneficial for the firm.
His biggest concern, he said, was what would happen after
Japan's five-year military buildup ends, adding that other
companies "are troubled by reputation risk". His unit accounted
for about 4% of the $34 billion in sales the company recorded
last business year.
An official at another major Japanese defence supplier, who
requested anonymity because of the sensitivity of the issue,
said being directly involved with regional tensions might be bad
for business.
"Reputation risk worries us a lot," the official said.
"There have been occasions when our Chinese customers have
expressed their discomfort when the topic of defence has come
up."
Despite diplomatic tensions, China is Japan's top trade
partner and a major manufacturing base for many Japanese
companies.
When Japan ended a decades-long ban on military exports in
2014, it did not spur industry growth because of corporate
timidity and overly cautious bureaucrats, analysts say.
Mitsubishi Electric is the only company to have sold defence
equipment overseas, with a deal in 2020 to supply radars to the
Philippines.
Meanwhile, chemical company Daicel 4202.T announced it
would close its pilot-ejection system unit in 2020, and Sumitomo
Heavy Industries 6302.T said it told the defence ministry in
2021 it would stop making machine guns. Daicel cited low
profitability, while Sumitomo Heavy said it was difficult to
maintain production and train engineers.
'SPECIAL EQUIPMENT'
An opinion poll published by the government this month
suggests there is growing public support for a bigger military
as regional tensions with China and North Korea escalate.
In the survey of 1,602 people, 41.5% said they wanted to
expand the SDF, up from 29.1% in the last poll five years ago.
Even so, Japanese companies often refer to their military
products as "special equipment," the government official said.
Daikin, which generates 90% of its revenue from air
conditioning, is among them. It does not list the artillery and
mortar shells it makes at its Yodogawa plant in Osaka, western
Japan, on its website.
"We aren't keeping our defence business secret; we disclose
information about it in a regular way," a Daikin spokesperson
said. "It's not about reputation risk."
On a street outside the barbed-wire topped wall that
surrounds the Daikin factory, Reiko Okumoto, 66, said she had
lived in the working-class neighbourhood surrounding it for more
than 40 years without knowing it produces shells.
"It would be good if (Daikin) could step away from military
work," she said. "But given how the world is, I know that's
unrealistic."
($1 = 133.6900 yen)
(Reporting by Tim Kelly, Kaori Kaneko, Kantaro Komiya, Nobuhiro
Kubo and Yukiko Toyoda; Editing by John Geddie and Gerry Doyle)
((tim.kelly@thomsonreuters.com; +813-6441-1311))