With too many defence programmes chasing too little cash, Japan's aerospace industry could be on the verge of major restructuring
Military aircraft production in Japan has always been inefficient, but considered necessary to maintain domestic manufacturing capabilities. Strict regulations, such as a ban on exports and the exclusion of multi-year buys, give manufacturers no choice but to charge the government exorbitant prices for new aircraft.
But new budget constraints and a changing environment are forcing the Japan Defence Agency (JDA) to re-examine its acquisition strategy. The JDA can no longer afford to fund more than 15 aircraft programmes simultaneously and must close at least one of its nine dedicated aircraft assembly lines or introduce more liberal policies to help cover the cost of a new ballistic missile defence (BMD) system.
Aircraft production rates have hit all-time lows in Japan, resulting in slumping defence sales for the country's big three aerospace manufacturers - Fuji Heavy Industries (FHI), Kawasaki Heavy Industries (KHI) and Mitsubishi Heavy Industries (MHI). For the year ending 31 March 2004, aircraft-related sales by members of the Society of Japanese Aerospace Companies (SJAC) to the JDA generated revenues of ¥550.1 billion ($5.03 billion) - 10.8% down on the previous year. Only 10 fixed-wing aircraft and 21 helicopters were manufactured for the JDA during the year, translating into an average production rate of fewer than four aircraft per assembly line. One civilian helicopter was also manufactured.
So far Japan's aerospace industry has avoided the major consolidation and restructuring that many say is long overdue considering the changes aerospace companies in Europe and North America have undergone. All of Japan's big three manufacture fixed- and rotary-wing aircraft, as well as supplying large components for foreign commercial aircraft manufacturers. Some of these companies may have to consider mergers or focusing their product line exclusively on fixed- or rotary-wing aircraft as the JDA cuts spending.
"Three helicopter manufacturers for an industry that can't export aircraft is too much," says a Japanese representative of a Western helicopter manufacturer. "They are in the mood for drastic measures and the budget calls for that."
Survival strategy
Possible solutions under speculation include a Fuji-Kawasaki tie-up to counter Mitsubishi, the largest of the three, or the closure of Fuji's helicopter product line.
"Fuji's longevity has been questioned for years," says a representative of another Western helicopter manufacturer. "Is there really enough to sustain three heavy industries? If not, Fuji is by far the smallest one."
Fuji has two helicopter assembly lines - the Boeing AH-64D and the Bell UH-1J, which is based on the Fuji/Bell 205B civilian helicopter. Kawasaki has three helicopter assembly lines for the JDA - the AgustaWestland EH101, the Boeing CH-47J and the indigenous OH-1 - and builds the Eurocopter Bk117 for civilian operators.
Mitsubishi has just one military helicopter line - the Sikorsky UH-60 - and is struggling to sell the indigenous MH2000 to civilian operators. The UH-60 is the strongest of the JDA's rotary-wing programmes, with different variants in production for the air force (UH-60J search and rescue), army (UH-60JA utility) and navy (SH-60K anti-submarine warfare). The navy also operates UH-60Js.
On the fixed-wing side, the JDA is now paying for five programmes spread across four manufacturers - the Fuji T-7 trainer, Kawasaki C-X transport and P-X maritime patrol aircraft, Mitsubishi F-2 fighter, and the ShinMaywa Industries US-1A amphibious search and rescue aircraft. The C-X and P-X will not enter service until 2011 and are not yet in production. The F-2, T-7 and US-1A are the only fixed-wing aircraft currently in production in Japan. A new version of the US-1A, called the Kai, is now being flight-tested and is expected to enter service in 2007.
"The industry is very minute," says a Japanese industry official. "They [the government] don't care about us like the US and Europe. With such a limited market, why do you need three major companies?"
The official points out that the industry represents only 0.02% of Japan's gross domestic product, compared with a 2.2% share for Canada's aerospace industry. The Japanese industry's total annual output has remained relatively steady in recent years at ¥1.35 trillion with about 30,000 employees including the space products sector, or ¥1 trillion with 24,000 employees excluding space products. That puts Japan's industry just behind Canada's and about half the size of France's or the UK's.
Following the Second World War, Japan's aerospace industry was reopened in 1952, initially maintaining US Air Force aircraft and later expanding into indigenous production with the Kawasaki C-1 military transport, the NAMC YS-11 commercial transport and the ShinMaywa PS-1 amphibian. Defence sales have been relatively flat since the mid-1980s but still account for 60% of total output, excluding space. In recent years Japanese companies have steadily increased their reliance on commercial contracts to fuel growth.
"We anticipate defence sales will continue to be flat or even reduced, so we have to rely on commercial aircraft growth for overall industry growth," says an official with Japan's Ministry of International Trade and Industry (MITI).
Non-military sales
Boeing accounts for most of the country's non-military sales and Japan's 35% stake in the new 7E7 programme promises to bring a critical new revenue stream later this decade. Japan already builds 21% of the Boeing 777 and 15% of the 767, but a drop in sales of these aircraft since September 2001 has been a financial blow to Japanese manufacturers. Mitsubishi, for example, blamed lower commercial aircraft sales for contributing to a 22.6% decline in aerospace revenues for the year ending 31 March to ¥392.2 billion. With the 7E7 not yet in production, Japanese manufacturers are facing a critical three to five years that could shape their future for decades.
"It will be a very difficult four to five years that will fundamentally shake the industry," says a Japanese industry official. "Keeping the domestic industry at any cost is no longer justified."
The JDA is now working on a new mid-term budget plan for the period 1 April 2005 to 30 March 2010. At the end of last month, the JDA submitted its 2005 fiscal year budget plan, proposing the acquisition of 24 locally built helicopters and 12 fixed-wing aircraft, but the full five-year Mid-Term Defence Programme will not be submitted until the end of this year.
The agency is also drafting a new overall strategy under the Defence Posture Review Board, which will be completed towards the end of this year. Both documents could lead to major industry changes. "They [JDA officials] have to make some hard decisions by December," says an industry official. "The big missile defence programme is sucking all the funds at this point."
The five-year budget could call for the termination of at least one aircraft assembly line, with the AH-64D and F-2 considered the most likely targets. The army is studying several possible changes to its fleet mix because current budget constraints may not allow it to continue procuring five separate aircraft types. Kawasaki is proposing an attack variant of the OH-1 as a cheaper alternative to the AH-64D. The JDA has so far acquired four AH-64Ds, plans to acquire two more this fiscal year, and has included a further two in its fiscal 2005 budget.
In the new five-year plan, the JDA is also studying terminating F-2 production up to 50 aircraft short of the initial requirement (Flight International, 17-23 August). The cost of the F-2, co-developed with Lockheed Martin and based on the F-16, has increased in recent years because the optimum rate of eight aircraft a year is no longer being acquired. Sources say fighters are no longer considered a top priority in the JDA budget given the new threat environment.
Mitsubishi's F-15J upgrade programme is at risk of being reduced or scrapped. This fiscal year, Japan plans to acquire the first two F-15J upgrades, which will initially include a new radar and mission computer and later an electronic warfare system. Mitsubishi thinks there is a need for 80 to 100 of the upgrades, but how many will be acquired in the new five-year plan is being questioned.
"With the addition of BMD to the Japanese budget, we're concerned the F-2 and F-15 modification programme can be reduced or cut due to budget constraints," says a Mitsubishi official. "We co-ordinate with the JDA so they can procure more F-2s and more F-15Js in the mid-term defence plan, but it's a very severe situation."
However, it appears both programmes will survive at least the first year of the new five-year plan. The JDA proposes to acquire six F-15J upgrades and seven F-2s in fiscal 2005, although this request must be approved by the cabinet and parliament.
Programme delays
The five-year budget may also delay the start of new programmes, such as replacements for air force and navy UH-60Js and air force Mitsubishi/McDonnell DouglasF-4s. Japan was expected to select a new search and rescue (SAR) helicopter and a next-generation fighter in the upcoming five-year plan. But sources say competitions for UH-60J and F-4 replacements may be delayed until at least the start of the following five-year plan in 2010.
"How much money will be left for a new-generation search-and-rescue helicopter?" asks one of the Western helicopter representatives, pointing out that much of the budget will be allocated to BMD and the start of C-X and P-X production. "My impression is it will move out a couple of years."
Sources believe the Kawasaki-built AgustaWestland EH101, selected last year for a 14-aircraft requirement, may be the last new aircraft programme for several years and would not have been added under the current budget environment. But sources say the EH101 programme should survive the upcoming restructuring, although follow-on sales may be slow.
The EH101, already being acquired for mine countermeasures and Antarctic support missions, is considered the early favourite in the likely-to-be-delayed navy competition for a new SAR helicopter. Mitsubishi, which has already begun planning a new SAR variant of the UH-60, is the early favourite for the air force SAR competition. A totally new aircraft type - such as a Mitsubishi-built Sikorsky S-92 - is considered unrealistic given the current budget situation.
"We think the H-60 upgrade helicopter is a cost-effective solution for the JDA budget," says a Mitsubishi official. Mitsubishi has already completed development of a new H-60 variant for the navy's anti-submarine warfare requirement. The first SH-60K, featuring a new Mitsubishi-designed rotor blade, will be delivered next August.
By contrast, delivery of the first Apache is still two years away and is still considered cancellable. Delivery of the first US-1A Kai, C-X and P-X are even further down the road, but because these are indigenous programmes, sources believe the Japanese will not cancel them for fear of losing face.
But deployment of these new aircraft types could be delayed and the ultimate size of the buys could be reduced. Japanese-US talks over potential co-operation between the P-X and US Navy Boeing 737-800ERX Multi-mission Maritime Aircraft programmes may also result in the import of some equipment for the P-X. "We are very concerned about new defence spending programmes this year that will affect our production," says a Kawasaki official.
Kawasaki was contracted earlier this year to begin building static test articles for the C-X and P-X. The JDA has requested ¥78.3 billion be spent in fiscal 2005 on another contract that would include prototype aircraft for both programmes. Static tests will begin in 2006 followed by first flight in 2007. A model of the static articles will debut next week at the Japanese Aerospace 2004 exhibition in Yokohama.
Missile defence
The new five-year budget will also decide how Japan acquires its new BMD capability - expected to cost more than $1 billion a year over the next few years. Japan is acquiring the system from the USA through foreign military sales channels. But Mitsubishi and Kawasaki hope to expand their missile defence product line over the next few years to help offset the fall in aircraft sales to the JDA and expect the new five-year plan to clarify what, if any, role they are given. The JDA is paying just over ¥100 billion this fiscal year on the new BMD system and has proposed spending a further ¥144 billion in fiscal 2005.
Meanwhile, the new defence policy being drafted by the JDA could give manufacturers some relief by authorising multi-year procurements and the export of some defence aircraft. The industry has been lobbying for these changes for years and believes they could help generate critical new sources of revenue for some defence products, such as the new US-1A Kai, C-X and Ishikawajima-Harima Heavy Industries (IHI) XF7, a new indigenous engine slated to power the P-X.
Multi-year deals could generate efficiencies and replace a system that results in inefficient annual procurement of small batches of aircraft. Contracts are typically for between one and 10 aircraft, depending on the type.
The proposed revision of the export ban would allow Japanese manufacturers to export aircraft that are classified military but do not have offensive systems or attack capabilities. "The policy needs to be changed to let us sell cargo aircraft to other countries. This is a hope," says the Kawasaki official. "The Japanese government now sees the C-X as a weapon. But the C-X is just a cargo aircraft. It's not offensive. We believe it's quite similar to airliners or cargo aircraft."
ShinMaywa seeks to sell the US-1A Kai for firefighting missions and as a civilian transport for niche operations to remote islands without runways (Flight International, 17-23 February 2004). The JDA proposes to acquire the first two of a projected 15 US-1A Kais in fiscal 2005 and ShinMaywa is eager to extend the limited production run through export sales.
IHI also believes the XF7, developed for the JDA, could potentially power commercial transport aircraft. Japan has already acquired five XF7s for testing but has not yet formally selected it as the P-X powerplant. The Japan Aircraft Development Corp (JADC) is also studying whether technology from the C-X or P-X can be adapted for use in future commercial aircraft programmes. The JADC says the study will not be concluded for a few years because the C-X/P-X technology is not yet finalised.
Currently, all technology developed for JDA programmes remains strictly outside the civilian domain. As a result, there is a virtual wall between the defence and civilian divisions of Japan's aerospace powerhouses, with absolutely no sharing of information. "Of course that is a political issue," says a JADC official.
But he says the current system in Japan "is not so inefficient", pointing out how all the heavies partner each other for major programmes. For the C-X and P-X, Fuji and Mitsubishi are both subcontractors under Kawasaki. For the F-2, Kawasaki and Fuji are subcontractors under Mitsubishi.
Contract negotiation
For the 767 and 777, the big three plus ShinMaywa and Kawasaki subsidiary Nippi are grouped together as a single subcontractor known as the Commercial Airplane Company (CAC). These five companies also back the JADC, a non-profit company that negotiated contracts with Boeing for the 767 and 777 before handing them over to CAC. JDAC is now in the process of negotiating with Boeing a master executive contract for the 7E7 that should be completed by the year-end.
Fuji, Kawasaki, Mitsubishi, Nippi and ShinMaywa are also united under an informal association known as Japan Aircraft Industries (JAI). After this group of companies, there are dozens of smaller firms, mainly performing small subcontract roles for JDA programmes and for overseas commercial aircraft manufacturers. For example, 18 companies provide parts for the new Airbus A380, and at least that number of Japanese companies are likely to be involved with the 7E7, for which Toray Industries has already been selected to supply composite materials.
Other smaller Japanese aerospace companies include such niche providers as windshield maker Fujiwara, cabin interior equipment supplier JAMCO and flap manufacturer Showa Aircraft Industry. Avionics - represented by NEC, Toshiba, Yokogawa and others - is a relatively small sector in Japan with high growth potential. SJAC, which represents all the smaller aerospace companies in Japan as well as the heavies, has 73 members producing equipment, components or parts and 18 members supplying materials.
Japan aerospace will be held from 6-10 October at Pacifico Yokohama
BRENDAN SOBIE / TOKYO
Source: Flight International
