[Yang Nakgyu's Defence Club] Japan Eyes U.S. Navy MRO Market

Pushing for the Establishment of a National Shipyard with Private Operation Under Review
Concerns Grow Over Domestic Firms Losing Ground Amid Consecutive Large Naval Ship Orders

Japan is emerging as the biggest competitor in the U.S. Navy ship maintenance, repair, and overhaul (MRO) market. HD Hyundai Heavy Industries and Hanwha Ocean are also betting on entering the U.S. MRO market, with expectations that this will become a new "cash cow" for the defense shipbuilding industry. As a result, industry observers predict a future rivalry between Korea and Japan in this sector.

According to industry sources on June 30, the Japanese government is directly stepping in to expand the scale of its shipbuilding industry. To strengthen its competitiveness, the Japanese government and the ruling Liberal Democratic Party are even considering establishing a national shipyard to be operated by private companies. On June 20, Nikkei reported that Japan plans to include ship hulls as a designated critical material under the Economic Security Promotion Act and to establish a 1 trillion yen (about 9.4 trillion won) investment fund for facilities. Before the 1980s, Japan's shipbuilding industry operated 138 docks (shipbuilding facilities). After restructuring, this number was reduced to 46, but there are plans to expand again. If facilities are increased, it is only a matter of time before Japan regains its reputation from the 1960s, when it built half of the world's ships. Last year, the total asset value of Japanese ships was $231.381 billion (about 314.9 trillion won), ranking second globally after China ($255.236 billion).

Large-Scale MRO Underway at Key U.S. 7th Fleet Locations

If Japanese shipbuilding facilities are expanded, it is expected that they will continue to secure large U.S. Navy ship contracts. Centered around the strategic Yokosuka Naval Base, home to the U.S. 7th Fleet, Japan can take on MRO for U.S. aircraft carriers, destroyers, and submarines. Last year, Japan completed MRO for the USS Ronald Reagan, a Nimitz-class aircraft carrier, as well as the Aegis destroyers USS Milius and USS Benfold. There are concerns that Japan will monopolize the highly profitable, high value-added large ship MRO contracts, leaving only the remaining orders for Korean companies.

Japanese Shipbuilders Reinforce Technical Capabilities

Japan is also actively strengthening its technological capabilities. According to a technical report by the Japan Shipbuilders' Industry Foundation (JSIF), Mitsubishi Heavy Industries (MHI) possesses world-class ship engine and turbocharger technology. Recently, MHI has improved turbochargers to maximize fuel efficiency and reduce emissions from ship engines. Kawasaki Heavy Industries is developing technology to retrofit ships for LNG propulsion, aiming to minimize greenhouse gas emissions by converting existing diesel ships to LNG propulsion. Japan is also ahead of Korea in automated maintenance technology. Mitsubishi Heavy Industries has developed a ship maintenance system using autonomous robots, and Imabari Shipbuilding has introduced an artificial intelligence (AI)-based automated welding system to increase productivity. In addition, predictive maintenance is performed using Internet of Things (IoT) technology.

Japan Recoups MRO Costs from Defense Cost-Sharing

Japan is also leveraging its long history of U.S. Navy ship maintenance as a diplomatic card. Since the outbreak of the Korean War in 1950, the U.S. 7th Fleet, which oversees the Pacific, has conducted ship MRO at Yokosuka Naval Base near Tokyo Bay. Japan is highlighting its role in managing a key hub for U.S. naval operations in the Indo-Asia-Pacific region. The MRO costs for ships assigned to the U.S. 7th Fleet and handled by Japan are paid from the U.S.-Japan defense cost-sharing agreement. For the U.S., this means that instead of paying MRO costs directly, they can be covered by the defense cost-sharing, reducing the financial burden. This makes it easier to allocate more work to Japan. Furthermore, last year the U.S. officially promoted Japan's participation in AUKUS, the security alliance with the UK and Australia. Some experts say Japan currently holds a diplomatic advantage over Korea.

Kim Jongha, Dean of the Graduate School of Defense Strategy at Hannam University, stated, "If Korea's shipbuilding industry is to secure profits, an increase in defense cost-sharing should be considered," adding, "If Korean companies win contracts for the scheduled construction of ships (surface vessels and submarines) by year, they could achieve significant profits."

Kim Hosung, President of the Korea Defense Industry Association, said, "Since the Trump administration, the U.S. has emphasized defense cooperation with Korea, but the recent expansion of parallel cooperation with Japan appears to be fostering competition between the two countries. The U.S. Navy, by having multiple MRO partners, can expand its options and expect cost savings, making the U.S. the likely real beneficiary."