Heavy machinery and electronics manufacturers have seen a higher-than-expected surge in orders for defense equipment, such as missiles and radar systems, since the government shifted Japan’s security policy last year.
Under the plan of Prime Minister Fumio Kishida’s administration, Japan’s defense spending over the five years through fiscal 2027 will total 43 trillion yen ($290 billion), 1.5 times the previous level.
Some companies in the defense industry say the financial windfalls have already exceeded expectations.
“I had conservative prospects but, as it turned out, we received more orders than we ever imagined,” Seiji Izumisawa, president of Mitsubishi Heavy Industries Ltd., said Nov. 6 at a briefing on the company’s mid-term financial results.
Orders received by MHI’s aircraft, defense and space segment over the first half of fiscal 2023 reached a record 999.4 billion yen, a fivefold year-on-year increase.
The rise is due partly to MHI’s agreement signed with the Defense Ministry in April on development work related to long-range standoff missiles.
MHI raised its forecast for orders accepted by the segment by 800 billion yen for fiscal 2023, mainly because of growth in defense-related orders, company officials said.
Kawasaki Heavy Industries Ltd. expects about 460 billion yen in orders for the company’s defense arm in fiscal 2023, up 200 billion yen year on year.
The forecast for the defense arm’s revenue is slightly more than 280 billion yen, up about 40 billion yen from last fiscal year.
NEC Corp. saw a year-on-year rise of 40 percent in orders taken by its “aerospace and national security” department in the first half of this fiscal year.
“We are receiving orders with considerably large sums,” Osamu Fujikawa, an NEC board director, said.
Contractors are increasing personnel and capital investment with the rise in orders for defense equipment.
Mitsubishi Electric Corp. said in May it was assigning 1,000 additional workers to its defense and space business and investing 70 billion yen in plant and equipment there.
The company also released a plan in October to build eight new manufacturing buildings at its three plants for radar and other equipment.
MHI said on Nov. 23 that it will increase personnel by 20-30 percent at its design and other departments to deal with the surge in orders.
The profit margins for defense contractors have averaged only 8 percent in Japan, compared with more than 10 percent for some companies in overseas nations.
One study said the corresponding profitability level in Japan was only 2 to 3 percent in real terms.
Many companies in Japan, including major manufacturers, have reduced their defense operations or even withdrawn from the business in recent years.
To change the situation, the Defense Ministry in October started setting contractors’ profit margins at a maximum of 15 percent in the order-placement stage, up from the previous level of around 8 percent.
The ministry adopted a new mechanism to increase profitability levels depending on the contractor’s business efforts, such as implementing quality control and meeting delivery deadlines.
“(Our profit margin levels) used to be low, but they are beginning to improve in our new projects,” NEC’s Fujikawa said. “I hope to ensure our company will win a near-maximum profitability level.”
Some Japanese contractors are beginning to engage in joint development work with overseas partners.
Mitsubishi Electric said in October that it will draw on its laser technology to jointly develop surveillance equipment with the Australian Department of Defense.
Source : The Asahi Shimbun
