Key Japanese defense contractors, citing low profitability margins and export curbs, are pulling out of the industry even as the government forges ahead with a historic increase in spending to bolster national security.

Prime Minister Fumio Kishida has ordered defense spending to rise to 43 trillion yen ($312 billion) over the five years through fiscal 2027 to bring such outlays to the equivalent of 2 percent of gross domestic product, about double the current figure.

Shimadzu Corp. is among major players considering an exit from the sector.

“We are, unfortunately, struggling in the defense business,” Shimadzu President Yasunori Yamamoto told a news conference to announce the company’s settlement of accounts in November. “I don’t believe there will be a dramatic rebound leading to a vigorous growth in sales.”

At Shimadzu’s aircraft equipment business arm, defense-related sales account for 80 percent of the total.

The manufacturer classifies the business arm as one “for reorganization,” where the lowest priority is assigned with regard to the allocation of management resources.

The company supplies flight-deck displays for Self-Defense Forces aircraft, among other products. Its proceeds from the defense arm have stalled at around 20 billion yen annually in recent years.

Yamamoto said the company will be “considering all options” and is not ruling out a business handover or a tie-up with other companies.

Finance Ministry figures and other data show the defense industry market is worth about 3 trillion yen a year in Japan. Thousands of subcontractors, in the words of a Defense Ministry official, are operating under the umbrella of major businesses, also called “prime companies.”

Among those exiting, KYB Corp. has been manufacturing hydraulic equipment used for the domestically produced C-2 transport aircraft. Yokogawa Electric Corp. provided measuring instruments, such as flight-deck displays. Daicel Corp. supplied emergency evacuation systems for pilots.

Mitsui E&S Shipbuilding Co. built Maritime SDF vessels. Sumitomo Heavy Industries Ltd. supplied machine guns to the Ground SDF. The companies all said in 2020 or afterward they were exiting from, or handing over, their defense business operations.

Low profitability was cited as the reason.

A senior official of one major company that is pulling out explained how restrictions that are peculiar to defense equipment items presented an obstacle to continuation of production.

“Business viability requires a certain scale, but we only have a limited range of potential purchasers,” the official said. “We have received an inquiry from overseas, but we are not allowed to export our products at will.”

The official griped that a private company cannot afford to continue in a business that does not pay.

Companies that are staying the course are not without complaints of their own, however.

“More Japanese companies will continue to leave unless steps are taken to secure stable demand for defense equipment items and prices are raised,” Yasuhiko Hashimoto, president of Kawasaki Heavy Industries Ltd., told a Dec. 6 explanatory meeting on his company’s business plans.

The company manufactures transport aircraft and submarines.

“I have been telling my colleagues in the defense industry that the situation must improve immediately so we can ensure a certain level of profitability,” Hashimoto said.

A senior official of another major manufacturer offered a different perspective.

The official cited, among other things, concerns about information leaks and argued the lineup of businesses that have a hand in the defense industry might as well be limited to a certain extent.

“The more individuals that are involved, the more risk that entails,” the official said. “This sector would be better served by having a vertical depth rather than a horizontal width.”

ALARM BELLS RINGING

The government, not surprisingly, is growing increasingly alarmed by the situation.

“The defense industry is nothing but defense capability,” a government panel of experts said in a recent report. “Issues related to the defense industry should be reviewed comprehensively to aggressively foster and strengthen competitive Japanese companies so they will be able to supply, among other things, superior equipment items and digital technologies.”

The government is weighing plans to review its implementation guidelines on its Three Principles on Transfer of Defense Equipment and Technology, which sets a number of conditions for arms exports, to bolster such trade.

Tokyo is also weighing steps to provide assistance to facilitate defense business handovers from exiting companies.

The Finance Ministry’s Fiscal System Council noted in a report in autumn last year that a cost management and review system had yet to be developed.

The government is under growing pressure to devise ways to ensure the profitability of businesses that receive orders. Steps under consideration include reviewing the way that orders are placed in small lots for parts that have original specifications, and also making the cost structure more reasonable.

(This article was written by Satoru Eguchi, Fumiko Kuribayashi and Ayumi Sugiyama.)