Mitsubishi Heavy's F-35 deal with BAE caught in Japan funding spat -sources

ShinMaywa Industries

04/08/2014 09:33

By Tim Kelly 
    TOKYO, Aug 4 (Reuters) - Mitsubishi Heavy Industries Ltd's 
 7011.T  broader participation in the F-35 stealth fighter 
program could be delayed by an intra-governmental spat over 
subsidies, two people familiar with the process said. 
    The dispute could force Japan's biggest arms maker to 
renegotiate a deal of undisclosed size with Britain's BAE 
Systems PLC  BAES.L  to supply F-35 rear fuselage parts under an 
international consortium, the people told Reuters. 
    "Mitsubishi will likely have to backtrack on its earlier 
agreement, but if BAE can wait something could be worked out," 
one of the people said. 
    The spat exposes a rift between arms industry bureaucrats 
seeking subsidies to back Japan's part in the F-35 program, and 
finance ministry officials intent on reining in spending to curb 
Japan's massive budget deficit. 
    A Mitsubishi Heavy spokesman declined to comment. A 
spokesman at BAE was not available to respond to an emailed 
request for comment. 
    Cabinet Secretary Yoshihide Suga declined to comment on the 
matter at a regular press briefing. 
    "Participation in the F-35 program will help improve skills 
in Japan and help underpin our defence industry," Suga said. 
    Prime Minister Shinzo Abe in April eased four-decade-old 
restrictions that had sharply limited the ability of Mitsubishi 
Heavy and other defence contractors from selling their wares 
overseas. 
    Abe hopes to spur international collaboration and tap 
overseas markets in a bid to widen Japan's arms production base 
and lower procurement costs at home, to help build a more robust 
military to counter China's growing strength.   
    Japan's participation in the $400 billion F-35 project has 
been touted as a sign of the nation's willingness to end decades 
of isolation. 
    Japan so far plans to buy 42 F-35s, dubbed the Joint Strike 
Fighter, for its own military, with analysts expecting it to 
acquire as many as 100 more to replace older Boeing Co  BA.N  
F-15 fighters used by its air force. That, however, is a 
fraction of what is projected to be a global fleet of F-35s 
numbering in the thousands. 
    Mitsubishi Heavy, maker of the wartime Zero fighter, has 
been tasked with assembling the 42 F-35s that Japan has bought 
in a plant built with taxpayer money. 
    So far the government has budgeted 63.9 billion yen ($623 
million) for the plant, along with 18.2 billion for IHI Corp 
 7013.T  to build the engine parts and 5.6 billion yen for the 
radar components. 
    But in exporting parts, Mitsubishi Heavy is concerned a lack 
of experience in competitive global markets means it will 
struggle to make money, prompting some government officials to 
back subsidies, the people said. 
    BAE, Lockheed Martin Corp  LMT.N  and other partners in the 
nine-nation consortium welcome Japan's F-35 participation, but 
not if it means relenting on tight production costs, other 
people with knowledge of program told Reuters in January. 
 urn:newsml:reuters.com:*:nL3N0L11QO 
    Discussions for Mitsubishi Heavy funding have been ongoing 
for some time and so the holdup is unrelated to the recent 
grounding of F-35s, prompted by an engine on one of the jets in 
Florida breaking apart and catching fire during takeoff. 
 urn:newsml:reuters.com:*:nL6N0PL3OT 
 
 (Editing by William Mallard and Christopher Cushing) 
 ((tim.kelly@thomsonreuters.com; +813-6441-1311)) 
 
Keywords: JAPAN DEFENCE/F35