Foreign firms bid for $2 billion chopper deal

Defense Ministry seeks lower per-unit costs with major project

by Tim Kelly and Nobuhiro Kubo

Reuters

The government is in early talks with top global helicopter makers and their Japanese partners on a deal worth around $2 billion to build transport aircraft for the Self-Defense Forces and for sale overseas, sources said.

The talks, which began in earnest over the past two months, represent another milestone in Prime Minister Shinzo Abe’s bid to nurture a domestic weapons export industry that would also bring down Japan’s defense procurement costs at a time of rising tensions between Tokyo and an increasingly assertive China.

Abe has eased decades-old restrictions on arms exports and is looking to give the SDF a freer hand in conflicts by changing the interpretation of the pacifist Constitution.

The project, dubbed the UH-X, is meant to replace around 150 of Japan’s aging fleet of troop-carrying Huey helicopters, which predate the Vietnam War and were designed by Bell Helicopter, a unit of industrial conglomerate Textron.

The project is likely to run for at least a decade, and cost as much as $2 billion, one of the sources said.

Airbus Helicopters, a division of the European aerospace giant, has joined with defense contractor Kawasaki Heavy Industries, while Bell Helicopter is partnered with Fuji Heavy Industries, the maker of Subaru cars, the two sources said.

AgustaWestland, part of Italy’s Finmeccanica S.p.A., is looking to sell Japan helicopters through trading company Mitsui & Co., which would be assembled by Fuji Heavy, they said.

By creating a market beyond Japan for the UH-X project, officials hope to bring down the per-unit costs of the helicopter for the SDF, part of a bid to keep pace with China’s expanding military.

“The aim is to keep costs down,” said one of the people with knowledge of the project, who asked not to be named because the discussions remain private.

The government sent out an early “request-for-information” from the bidders over the past two months. Officials hope to move quickly to the next stage, in which the bidding companies would be asked to submit detailed proposals, including costs, the sources said.

While the UH-X project was public knowledge, the involvement of Airbus Helicopters, AgustaWestland and Bell Helicopter and their local partners had not been previously reported.

Airbus and Bell declined to comment on their intentions in Japan, while AgustaWestland did not respond to a request to discuss its business in Japan. Kawasaki and Fuji Heavy declined to comment, while no one from Mitsui was immediately available for comment.

Japan and China have been mired in the dispute over ownership of the Senkaku Islands in the East China Sea, with tensions spiking last month when Japan said Chinese aircraft had come within a few dozen meters of its warplanes.

In the 20 years to 2012, Japan was the sixth-biggest defense spender in the world, according to the Stockholm International Peace Research Institute. China jumped to second place from seventh after it hiked its defense spending more than fivefold over the same period.

Japan said last year that it would raise its defense spending by almost 3 percent over five years. But with spending constrained, Japan’s defense planners have turned to ways to increase the efficiency of programs to counter China.

Industry analysts say the Defense Ministry often pays two to three times more for military equipment than comparable countries because defense contractors are limited to fabricating small lots for the SDF.

Selling the new helicopter overseas should lower the cost paid per unit by widening the production base. Including foreign companies would also help spread development costs.

In a related move, the government plans to create an arms procurement agency to streamline spending and promote military exports that merge spending by the three SDF branches, according to people involved in the planning.

Kawasaki and Airbus Helicopters, formerly Eurocopter, which are already partners on the successful BK117 utility transport that first flew 35 years ago, are offering a new design for the UH-X, according to the sources.

The Defense Ministry awarded Kawasaki Heavy the UH-X contract in 2012 but canceled the contract in March 2013 after two SDF officers said they had helped the company win the deal by leaking information on the bid.

Bell and Fuji Heavy are proposing an aircraft based on the Bell 412 utility helicopter, military versions of which are used in countries ranging from Britain to Colombia, Ghana and Thailand.

AgustaWestland is offering its 10-seat twin-engine AW169, the prototype of which first flew in 2012. Using Mitsui as its partner in Japan, the company has told the Japanese government it would recruit Fuji Heavy to assemble the aircraft under license.

A partnership of Sikorsky Aircraft, which is owned by United Technologies Corp., and Japan’s biggest defense contractor, Mitsubishi Heavy Industries, had initially shown interest in the UH-X but did not respond to requests for information from the Defense Ministry, according to one of the sources. Mitsubishi Heavy and Sikorsky declined to comment.