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MHI Is Riding the Wave of Japan’s Boom in Defense Spending

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MHI Is Riding the Wave of Japan’s Boom in Defense Spending

Japan’s biggest defense firm expects annual sales from its defense business to double by FY2026.

MHI Is Riding the Wave of Japan’s Boom in Defense Spending

An artist’s concept image of a sixth-generation fighter jet, a joint project undertaken by Italy, Japan, and the U.K.

Credit: Japanese Ministry of Defense

Japan’s biggest defense company, Mitsubishi Heavy Industries (MHI), has outlined plans for future growth through development investment in new major national defense projects, including standoff missiles and a joint next-generation fighter program with Britain and Italy.

In a rare move, on November 22, MHI held a defense business briefing session at its Tokyo headquarters, inviting dozens of market analysts and journalists as well as online participants. 

At the briefing, the company announced that it now expects annual sales from its defense business to double from the current level of about 500 billion yen ($3.4 billion) to 1 trillion yen during the fiscal years (FY) 2024-2026, and then reach over 1 trillion yen during FY2027-2029. 

This bullish outlook came after the Japanese government in December 2022 decided to boost its defense spending to a total budget of an unprecedented 43.5 trillion yen for FY2023-2027. That number is about 2.5 times the previous plan of 17.2 trillion yen in the 2019-2023 period. This whopping budget increase aims to fundamentally reinforce Japan’s defense capabilities, including counterstrike abilities, in the face of China’s increasing military strength, North Korea’s unstoppable nuclear and missile development, and Russia’s ongoing aggression against Ukraine.

MHI is well placed to benefit from the increased spending. The firm has traditionally dominated defense contracting in Japan, with a market share of 21.2 percent in 2022.

Speaking to market analysts and journalists at its Tokyo headquarters on November 22, Eguchi Masayuki, head of Integrated Defense & Space Systems, said the company aims to have a profit margin of about 10 percent on its contracts for the next few years, up from the current profit margin of 7.7 percent. 

Western defense companies such as Britain’s BAE Systems and Lockheed Martin of the United States have sales equivalent to several trillion yen from their defense businesses alone, and the operating profit margins of both BAE and Lockheed exceed 10 percent.

In contrast, in Japan, even the largest company, MHI has defense-related sales of just about 475 billion yen, which is only 10 percent of the company’s total sales.

In response to the expanding defense business, Eguchi said the firm plans to increase the number of personnel in the defense sector by 20 to 30 percent, from the current number of 6,000 to 7,000 people, with a focus on hiring information technology engineers, electrical equipment engineers, and electrical designers.

He also said MHI will increase capital investment from the current billions of yen to an unspecified amount, but possibly up to tens of billions of yen if the situation calls for it. 

As an example, he cited the company’s plan to establish an additional development facility at its Nagoya Aerospace Systems Works Komaki Minami Plant in Aichi prefecture to prepare for the full-scale development of a sixth-generation fighter jet in what is now known as the Global Combat Air Program (GCAP). Along with MHI, BAE systems and Leonardo of Italy are involved in this project as the prime contractors of each country. Italy, Japan, and the United Kingdom seek to develop the future fighter by 2035.

On this joint next-generation fighter jet project, Eguchi said MHI is currently in the process of basic design and remains at the paperwork stage.

Asked about business costs for the next fighter jet, Eguchi said, “Work sharing [between the three nations] has not yet been decided. It has not been decided which part Japan will be responsible for. Thus, the exact amount required for development has not been figured out. However, in the early stages of development, things such as a building for engineers and computers to perform various calculations are required.”

Eguchi also revealed the firm is currently developing a new vertical launch system for Japan Maritime Self-Defense Force (JMSDF) vessels, based on the existing the Mark 41 VLS. 

In Japan, it is very rare for any company to hold a defense business briefing session. This is because, reflecting on its militarism before and during World War II, Japan’s defense industry has not dared to highlight its a military-related activities in the nation. Even companies like MHI prefer to highlight a non-military, family-like company image. 

Asked why MHI held the defense business briefing session this time, Eguchi said, “The Japan Self-Defense Forces’ successful activities in the Great East Japan Earthquake [in 2011] has significantly changed the public’s view of the defense business. It’s been 35 years since I joined this company, and in the past, the atmosphere for defense business was much severer than it is now. However, the Japanese government is currently strengthening its defense business.”

He continued: “Our company occupies an important position in the defense industry. We need to be proactive and send positive messages to society. For this reason, we had the opportunity to provide this explanatory session.”