Japan firms to be a surprise no-show at Australian submarine event

Reuters News
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Posted: Mar 22, 2015 5:03 PM

By Tim Kelly and Nobuhiro Kubo

TOKYO (Reuters) - Two Japanese firms that until recently were the frontrunners to win a multi-billion dollar contract to build Australia's new submarines have rebuffed an invitation to attend a gathering of top Australian naval officials and politicians this week.

The no-show by Mitsubishi Heavy Industries and Kawasaki Heavy Industries at an event called Australia's Future Submarine Summit, held amid intensifying competition for the deal, exposes a potential weak link in Japanese Prime Minister Shinzo Abe's more muscular security agenda: Japan Inc.

While Abe wants Japanese firms to vie for overseas orders after he lifted a decades-old ban on arms exports last year, such companies are showing little appetite for doing business in foreign markets after being restricted to local sales for so long, Japanese defense officials and experts said.

That isolation, imposed after Japan's defeat in World War Two, has left the country's industrial heavyweights with few contacts in foreign defense departments and made weapons a small part of their operations. Experts say they also worry about being called "merchants of death" at home, where Japan's wartime role remains a sensitive issue, should they start selling state-of-the-art weapons abroad.

"Winning deals overseas means having to develop contacts in foreign governments or seek joint ventures, and that is a bit much for them, so they are holding back," said a Japanese Defence Ministry official who declined to be identified.

A source involved in organizing the conference in Adelaide said Mitsubishi Heavy and Kawasaki Heavy, makers of the Soryu-class stealth submarines, had declined an invitation.

Australian Defence Minister Kevin Andrews and senior naval officials will attend the two-day event, which starts on Wednesday. A decision on the submarine project, worth A$50 billion ($38.8 billion) over the life of the vessels, is expected by the year-end.

"We don't plan to send anyone. The sub issue is in the hands of Japan's Defence Ministry," said a spokeswoman for Kawasaki Heavy. A Mitsubishi Heavy spokesman added: "We aren't sending anybody." They declined to elaborate.

POLITICS

Australian Prime Minister Tony Abbott had pledged ahead of his election in 2013 that up to 12 submarines would be built at state-owned shipbuilder ASC in Adelaide, before back-pedaling by signaling that cost and timely delivery were paramount.

After Australia and Japan agreed in June to cooperate on military technology, sources said Canberra began leaning towards buying an off-the-shelf version of the 4,000-tonne Soryu-class submarine to replace six ageing Collins-class vessels.

Abbott's government ruled out an open tender in December, appearing to put Japan in the box seat.

But Abbott then came under growing pressure from labor unions and the main opposition party, which both demanded a local build to boost Australia's languishing manufacturing industry.

Just before an internal challenge to his leadership in February, which he survived, Abbott promised something closer to an open tender in an attempt to shore up political support.

The reluctance of Mitsubishi and Kawasaki to chase Australia's biggest defense deal - they have let the Japanese government play the lead role in talks with Canberra up to now, according to Japanese Defence Ministry officials - is in contrast to Germany's ThyssenKrupp Marine Systems.

ThyssenKrupp, along with France's state-controlled naval contractor DCNS, have both expressed interest in the tender and said they would build in Australia.

Delegations from ThyssenKrupp have visited Canberra in recent months.

A ThyssenKrupp spokesman said the company would be represented at the conference. The event's leading corporate sponsor is Siemens AG, which makes electrical engines and fuel cells for ThyssenKrupp's submarines.

Abbott has also thrown open the tender, which he has called a "competitive evaluation process", to ASC.

"The sense I'm getting from Australia is that the competitive evaluation is weighted in Japan's favor, but it requires a proactive industrial approach," said a defense industry source who will attend the Adelaide meeting. "It's Japan's to lose unless they wake up to the opportunity."

MISGIVINGS

Dismantled by the United States after World War Two, Japan's defense industry re-emerged as a patchwork of manufacturers. At Mitsubishi Heavy, the biggest, defense accounts for just a tenth of revenue.

Corporate misgivings were on show at a Defence Ministry seminar in Tokyo in July to explain the end of the arms export ban three months earlier.

"Defence managers don't have much influence. Risky projects aren't going to make it past the board," one participant told Reuters at the event.

"No company has defense sales of more than 10 percent of overall revenue, there is a lot of resistance to doing anything new," said another.

Such reluctance has already stalled one potential breakthrough export deal.

Mitsubishi Heavy at the start of 2014 entered a tentative agreement with Britain's BAE Systems PLC, which is helping build Lockheed Martin Corp's F-35 stealth fighter, to supply rear fuselage components.

Unwilling to risk losing money on a tightly priced deal Mitsubishi withdrew, sources familiar with the talks told Reuters at the time.

"We need to get one or two successful deals done," said the Japanese Defence Ministry official.

(Additional reporting by Matt Siegel in SYDNEY and Georgina Prodhan in FRANKFURT; Editing by Dean Yates and Alex Richardson)