Japan's Defence Industry Not Competitive in the Indonesian Market

The cooperation in defence between Indonesia and Japan has recently entered a new phase with the signing of the Defence Cooperation Agreement (DCA) by Indonesian Defence Minister Sjafrie Sjamsoeddin and Japanese Defence Minister Shinjiro Koizumi in Jakarta not long ago.

The existence of the DCA is inseparable from changes in Japan’s internal political policies in recent years, which have begun to shed the policy of pacifism in response to developments in the strategic environment in the Indo-Pacific region.

As part of discarding the pacifism policy that has been adhered to since the post-World War II era, Tokyo last month abandoned its long-standing policy prohibiting the export of lethal weapons abroad.

The DCA agreed upon by Indonesia and Japan could serve as an entry point for efforts to export Japanese defence equipment to Indonesia, considering that until now the country could only sell weapons to nations that already have defence cooperation agreements.

One part of the DCA is cooperation in the defence industry on a broad scale. However, because geopolitical optics dominate, the perspectives of those observing the defence cooperation between the two countries naturally focus more on the possibility of defence trade in the form of exports of Japanese war equipment to Indonesia.

In theory, defence trade between the two countries has a high potential to occur, but there are still several challenges for Japan’s defence industry in competing with manufacturers from Europe, South Korea, and Turkey in the Indonesian market. Why has Japan’s defence industry thus far not been competitive in Indonesia compared to its competitors?

Before answering that question, it is worth first examining the profile of Japan’s defence industry. The tier 1 defence industry consists of Mitsubishi Heavy Industries, Kawasaki Heavy Industries, and Subaru Corporation, which in the past adopted the name Fuji Heavy Industries.

Mitsubishi Precision, Mitsubishi Electric, Shimadzu Corporation, Yokogawa Electric, NEC Corporation, Toshiba Corporation, Japan Aerospace Corporation, Kokusai Electric, and Tokyo Aircraft Instruments are some manufacturers grouped as tier 2 in Japan’s defence industry.

According to data, Japan’s defence industry’s contribution to the Japanese government’s needs ranges from 75 percent to 80 percent. In addition, Japan’s defence industry is also part of the global defence industry supply chain, particularly for aerospace and defence factories in the United States.

The strength of Japan’s defence industry lies in land systems and sea systems, where the needs of the Ground Self-Defence Force and Maritime Self-Defence Force are almost entirely supplied by domestic manufacturers. Meanwhile, the needs of the Air Self-Defence Force are partly supplied by the United States, particularly fighter aircraft, because the cost of developing indigenous domestically produced fighter jets is very expensive.

This strength is also contributed by the defence electronics sector, which is not surprising as Japan has long been known to excel in the global commercial electronics market. Returning to the initial question, why is the competitiveness of Japan’s defence industry in Indonesia lacking compared to competitors?

First, economies of scale. Since the United States allowed Japan to produce defence equipment for domestic needs in the early 1950s, Japan’s defence industry has produced various defence products with the Japanese government as the sole consumer.

The value of war equipment acquisition contracts borne by the Japanese government not only covers production costs but also includes expenses for establishing production lines, due to production activities that do not meet economies of scale for manufacturers.

Referring to cases of several defence equipment items offered by Japan to Indonesia since decades ago, price competition remains the main weak point for Japan’s defence industry in competing against weapons system producers from other countries.

Second, business practices. Until now, there has been a tendency for Japan’s approach to trading defence equipment to be too rigid and inflexible, meaning it is difficult to find win-win solutions that satisfy both seller and potential buyer.

For example, can Japan export warships that fully adopt various domestically produced subsystems, as France and Italy do? Can Japan sell high-quality defence equipment on one hand while still meeting the desired needs (customised) of candidate consumers?

Third, export variants. It is natural for weapons system producing countries to have export versions of products sold abroad with quality below similar equipment used by that country. The question is whether Japan will develop export variants for war equipment exported to other countries? If the answer is yes, how much impact will the cost of developing those variants have on the selling price of the weapons systems sold?

Fourth, product marketing. For several years up to now, efforts to campaign for marketing Japanese-made weapons systems have been entirely in the hands of the Defence Attaché at the Japanese Embassy in Jakarta.

Meanwhile, defence industry representatives in Jakarta do not have the freedom to conduct independent and simultaneous marketing campaigns. Referring to the marketing campaign practices undertaken by several countries such as France, Italy, and South Korea in Indonesia, defence manufacturers from those three countries have the freedom to conduct independent marketing campaigns, although still coordinating with their Defence Attachés in Jakarta.

Among Japan’s advantages