Lockheed Stealth Jet May Win Japan Deal

Lockheed Martin Corp. (LMT), the world’s largest defense company, is counting on stealth technology to beat Boeing Co. (BA) and Eurofighter GmbH in a Japanese fighter contest that may be worth more than $4 billion.

The F-35 Joint Strike Fighter has better anti-radar capabilities than Boeing’s F-18 Super Hornet and Eurofighter’s Typhoon as it was specifically designed in a shape that would be hard to detect, said Craig Caffrey, a London-based analyst at IHS Jane’s DS Forecast, which advises defense suppliers. That may give the plane an edge as Japan previously tried to buy stealth fighters that can be used for spying as well as combat.

‘Stealth capabilities are clearly an area of focus for the Japanese,’’ Caffrey said. “It’s a key advantage for the F-35 over the rest of the competition.”

Japan will accept bids this month to supply about 40 fighters as it bolsters air defenses to counter military developments in China and North Korea. The contest comes as Lockheed sheds jobs because of projected cuts in U.S. defense spending, which may include a reduction in F-35 orders, and after the Bethesda, Maryland-based company missed out on an $11 billion Indian order for fighters this year.

Decision This Year

Japan likely will choose a jet by year-end, said a Ministry of Defense spokeswoman, who declined to be identified, citing government policy. Deliveries are due to begin in 2016.

The order is unlikely to be affected by Prime Minister Yoshihiko Noda’s new government, said the spokeswoman. Noda announced today that Yasuo Ichikawa will be the new defense minister.

The new aircraft will replace Boeing F-4s, which were last assembled in Japan in 1981. Japan had a total of 362 fighter jets as of March 31, according to the defense ministry’s website.

Japan, which has the world’s sixth-largest defense budget, is upgrading its air defenses as both Russia and China develop stealth fighters and as North Korea works on improving its ballistic missiles and developing nuclear weapons.

China will boost defense spending about 13 percent to 601.1 billion yuan ($93 billion) this year, Li Zhaoxing, spokesman for the National People’s Congress, said in March.

“China continues to rapidly expand and modernize its military forces and the activities that it conducts in the waters surrounding Japan are growing larger in scale and more intense,” according to the latest Ministry of Defense annual white paper.

‘Stalking Horse’

Japan’s Self-Defense Force has traditionally relied on U.S. military hardware and that history has aided Lockheed and Boeing in the current fighter contest by causing rival suppliers to sit out the competition. Dassault Aviation SA (AM), the French maker of Rafale fighters, declined to participate because it didn’t want to play “the role of a stalking horse,” according to Stephane Fort, a spokesman.

The Rafale and the Typhoon were shortlisted in April for India’s contract to buy 126 fighters. Eurofighter is a venture between BAE Systems Plc (BA/), Finmeccanica SpA and European Aeronautic, Defense & Space Co.

Japan signaled its interest in stealth by trying to buy Lockheed’s F-22, IHS Jane’s Caffrey said. That failed because of a U.S. export ban. The Super Hornet and Typhoon have features that reduce their radar visibility to a lesser extent than the F-35, which was designed with a greater focus on hitting targets on the ground, he said.

Tsunami Damage

A handicap for Lockheed may be that development phase for the F-35 has been extended by four years to 2016. Japan may want aircraft sooner because 18 of its F-2s were damaged by the March 11 earthquake and tsunami, said Richard Aboulafia, vice president at Teal Group, a Fairfax, Virginia-based consultant.

“The F-35 is the leader in Japan, but with a big caveat,” he said. The tsunami “has raised the prospect of an earlier buy,” which may favor Boeing, he said.

Lockheed is “confident” of being able to deliver the jet in 2016, said John Balderston, director of the project to sell F-35s to Japan.

Yesterday, the U.S. Defense Department’s testing office said that two of three F-35 models have a “design flaw” that reduces the expected life of a wing structure to 1,200 hours from an expected 8,000 hours. The F-35 program office and Lockheed have conducted a safety assessment and concluded that a failure of the part would not lead to wing failure, F-35 program spokesman Joseph DellaVedova said in an e-mail.

“This is not considered a serious issue,” DellaVedova said. The program office and Lockheed have developed retrofits and new production improvements designed to extend the beam’s life and correct “durability deficiencies,” he said.

U.S. Cuts?

Lockheed may also be hindered in Japan by possible cuts in a U.S. order for more than 2,440 F-35s as the nation tries to reduce its deficit. Changes to the $382 billion deal, the Pentagon’s biggest procurement program, could affect the F-35’s price, Lockheed CEO Bob Stevens said in a July 26 conference call.

By contrast, Boeing is able to offer a fixed price for the Super Hornet, which entered service in 1999, the Chicago-based company said.

“We’re going to give them a price, and they know that’s the price they’re going to pay,” said Phillip Mills, a Boeing director who has worked on selling F-18s to Japan for six years. He declined to name that price.

Boeing last year said it would offer F-18 Super Hornets to the U.S. for $49.9 million each, down from $68 million in 2000. The F-35, which has also been ordered by the U.K., Italy, Netherlands and Turkey, costs about $133 million each in today’s dollars, according to the U.S. Government Accountability Office. Typhoons cost about 59 million euros ($84 million), according to Eurofighter.

Local Production

An advantage for Eurofighter may be the chance for Japan to pare a reliance on U.S. suppliers, said Douglas Barrie, a senior fellow for military aerospace at the International Institute for Strategic Studies in London. More work on the Typhoon and the Boeing fighter can also be subcontracted than on the F-35, which could benefit Japanese companies, he said.

“You could basically have them licensed, built and assembled in country,” Barrie said. “Industrial participation is more of a challenge on the F-35” because the program wasn’t designed with outsourcing in mind, he said.

Mitsubishi Heavy Industries Ltd. (7011) has built F-4s and F-15s for Boeing. The Tokyo-based company, Fuji Heavy Industries Ltd. (7270) and Kawasaki Heavy Industries Ltd. (7012) have also worked with Lockheed to supply F-2s, according to Lockheed’s website.

Boeing Outsourcing

Boeing may offer as much as 80 percent of the work on its planes to local suppliers, Mills said. Eurofighter will offer assembly work and the opportunity to make high-technology parts, which often are restricted in overseas defense deals because of security concerns.

“There will be no ‘black boxes’ on the Typhoon,” said Andy Latham, a vice president at London-based BAE Systems, which is leading Eurofighter’s sales efforts in Japan. “Japan will be able to build, modify, upgrade and support all elements of the aircraft.”

Lockheed will allow Japanese companies to assemble jets, Standridge said in June without elaborating. Coupled with the F-35’s stealth capabilities that may be enough for Lockheed to win the deal, said Isaku Okabe, an author of seven books on Japan’s military and security.

“The Self-Defense Force have their eyes on the F-35,” said Okabe. “They’ll buy it if they can stand the wait.”

To contact the reporters on this story: Chris Cooper in Tokyo at ccooper1@bloomberg.net; Sabine Pirone in London at spirone@bloomberg.net; Kiyotaka Matsuda in Tokyo at kmatsuda@bloomberg.net

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net

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