Saturday, January 23, 2016

States and Defense Contractors over Rolls Royce Nationalization

Britain announced that it was considering nationalization of Rolls Royce to save the company from a foreign takeover. The government sources said that they would either nationalize Rolls Royce, or lead some or all of this company to merge with BAE systems. Rolls Royce suffers from plunging share price since 2014 due to sluggish performance in the maritime and aero engine sectors. It is rumored that Pratt & Whitney of the United States and Siemens of Germany are buying Rolls Royce’s aero engine division (“Britain would consider nationalizing Rolls Royce's submarine business – FT”; Reuters; December 14, 2015). The Cameron administration has posed a critical question to national security policymakers about the relationship between the state and the defense industry, as corporate nationalization is quite un-Conservative, and furthermore, it is a failed policy of Old Labour. Margaret Thatcher would have been startled to hear this, because it is she who privatized this company in 1987.

This news has drawn my attention, in view of a recent commentary by Japanese Member of the House of Councillors Masahisa Sato, that raises some questions about the Japanese defense business. Sato argues that Japan needs the will and specific efforts to help Japanese defense contractors make profits in a small domestic market as it is unrealistic to nationalize them. He is concerned that Japanese defense procurement is squeezed by rising costs of imported weapons such as F-35 and V-22 (“Save the Foundation of Japanese Defense Industries and Indigenous Technology”; Giron Hyakushutu; December 2, 2015). Defense contractors are of high strategic values, and unlike civilian industries, some sort of mercantilist policies are inevitable.

I am talking about Rolls Royce, because this company has a lot in common with Japanese defense contractors, and I believe that careful observation of it would be of much help to defense planners in Japan and the rest of the world. Like Japanese defense companies, Rolls Royce is not so big, but technologically advanced among renowned defense contractors. According to the defense industry ranking for 2015, Rolls Royce is the 15th, and its revenue from defense accounts for 22.60%. Meanwhile, Japanese contractors like Mitsubishi Heavy Industries ranks the 36th with 5.60% defense dependence, and IHI ranks the 91st with 4.30% dependence on defense. Such low dependence on arms is in sharp contrast with those of big contractors heavily relying on defense, like Lockheed Martin that ranks the 1st and 88.00%, BAE Systems raking the 3rd with 92.80%, Raytheon ranking the 4th with 97.40%, General Dynamics raking 5th with 60.20%, and Northrop Grumman raking 6th with 76.70% (“Top 100 for 2015”; Defense News).

However, both Rolls Royce and the above Japanese contractors win high reputation with venerable achievements. In case of Rolls Royce, their brand and advanced technology make a substantial contribution to their maritime and aerospace engine sectors, and even to the nuclear reactor area. Without mentioning British-made weapons, some brand new foreign arsenals use also Rolls Royce engines, for example, gas turbines for the Zumwalt class destroyers of the US Navy. Also, some of South Korea’s indigenous stealth fighter KF-X will use the same Rolls Royce engines as those for the Eurofighter Typhoon. Meanwhile, Mitsubishi’s stealth fighter ATD-X draws worldwide attention. Quite remarkably, IHI that provides engines for this Mitsubishi fighter, has succeeded in developing the HSE (High-power Stream Engine) which outperforms the same sized engines made by American and European manufacturers, in terms of thrust-to-weight ratio and fuel efficiency, and that ultimately helps Japan’s quest for indigenous fighter F-3 (“Japan’s Next Generation Fighter Engine is Superior to American One”; Sankei Biz; March 17, 2015).

On the other hand, small companies are vulnerable to the turbulence of the increasingly globalized world market. Also, their high quality brains are good targets for the hands of foreign and even hostile takeovers. Occasionally, the market mechanism is so ruthless that it does not give any consideration to national and public interests. However, should the state nationalize strategic industries? In the Westland affair from 1985 to 1986, Prime Minister-then Margaret Thatcher admitted Sikorsky of the United States to merge Westland Helicopter in accordance with the market principle, while Defence Secretary-then Michael Heseltine insisted on maintaining the company’s ownership within a European framework. As widely known, Thatcher won the dispute in her cabinet, and Heseltine stepped down.

During the Cold War era, the borderless economy was almost within the Western alliance. Today, businesses act beyond such political boundaries. For example, Haier Group of China has acquired the laundry sector of Western companies such as Sanyo and General Electric. However, the defense industry is not the home electric appliance industry. Once home country loses control a defense contractor to a foreign hand, even if it is a company of an ally or a friendly nation, the sold company could be resold to the enemy. From this point of view, it is understandable that the Cameron administration is dedicated to defending Rolls Royce from foreign acquisition. Particularly, their nuclear sector is sensitive for British national security for its deep involvement with Trident missile submarines.

Reuters columnist Robert Cole argues that the problem can be resolved through the market system, as their business recovery is expected though it is weak. If it does not work, BAE Systems can acquire some or the whole sector, which is more preferable to nationalization. BAE can diversify their business into civilian sectors to lessen their dependence on defense contracts of Britain, the United States, and Saudi Arabia (“BAE deal beats Rolls-Royce nationalization”; Reuters; December 14, 2015). This idea is better than nationalization, but still, it is not a good idea to split Rolls Royce, if BAE were to merge this company, since its technology in motor cars, aero and maritime engines, and nuclear reactors is intertwined. Furthermore, Jeremy Warner of the Daily Telegraph, argues that Rolls Royce can satisfy various requests from their customers as an independent and specialized manufacturer of engines. Once blended into a big company, Rolls Royce will lose advantages in specialty to meet tailor-made demands. That would appear unattractive to its best customers like Pentagon (“BAE in Rolls Royce merger? Let’ not go there”; Daily Telegraph; 16 January, 2015).

In an increasingly globalizing economy, it is a tough question to keep innovative instinct and high morale of a small but strategically important company, while saving it from savage competition, and even from hostile investors. The Westland affairs may help us learn some lessons, but the past is in the past. In case of Japan, if corporate performance of Mitsubishi Heavy Industries or IHI deteriorates, there is no gigantic defense contractor like BAE Systems to act as a white knight against adversarial investors. Should the Japanese government take administrative guidance to have them merged with Kawasaki Heavy Industries, NEC, etc, ranking 46th and 66th respectively, when they face the threat of foreign takeover? But Japanese companies are heavily civilian oriented, as Kawasaki depends 11.20%, and NEC does 3.50% of their revenues on defense. In view of this, most of the Japanese businesses are not likely to have much incentive to follow the Ministry of Defense.

The defense industry is too strategic to apply text book market economy principles. In order to help their business and save the national interest, I would suggest that the government give special preferences to defense contractors even in civilian public projects. Typically speaking, I wonder why the Cameron administration accepted the bid of CGN (China General Nuclear) to rebuild Hinkley Point and Bradwell nuclear plants, despite this company’s notorious tie with the PLA (People’s Liberation Army), if they are so serious to defend Rolls Royce even by resorting to nationalization. They should have given a special preference to Britain’s iconic company, instead. Currently ongoing Rolls Royce affair deserves attention from defense planners all over the world, because this company is far beyond a manufacturer of luxury toys for the rich.

Sunday, January 10, 2016

Rubio’s Four Measures against North Korea

The “hydrogen bomb” test, which North Korea conducted on January 6, has inflicted a tremendous impact on the world ("World Powers Unite In Condemnation of North Korea's H-Bomb Test Claim"; Buzz Feed News; January 6, 2016). Since they test nuclear bomb so repeatedly, it has become apparent that the global community needs to take more effective measures than those up to now. In view of this, Republican Senator Marco Rubio who is the most well-versed with national security among US presidential candidates of this election, suggests four measures ("Here Are Four Things Marco Would Do to Take On North Korea"; Marco First, he argues that the United States put North Korea back on the list of terrorist sponsoring states. Second, he insists on tightening economic sanctions. Furthermore, his third idea is to rebuild the alliance with Asia Pacific nations and re-strengthen the US navy. Fourth, he suggests building up missile defense capability.

Among Rubio’s ideas, we can expect that the fourth measure of bolstering deterrence, notably building up missile defense, is very effective and relatively quick to carry out. The third measure of naval expansion is necessary and effective, but it cannot be done soon. It takes a long time to build war ships. Above all, we must enforce means stronger than economic sanctions, and tell North Korea that they shall never win in a victory over us. Moreover, the Chosun Ilbo insists that US forces in South Korea redeploy tactical nuclear weapon, which was withdrawn in early 1990s (“America Should Redeploy Tactical Nukes in Korea”; Jiji Press; January 7, 2016). The Korea Herald, an English language paper in South Korea, argues furthermore that the IAMD (Integrated Air and Missile Defense: See "US Army's Integrated Air and Missile Defense System Defeats Cruise-Missile Target"; Defense News; November 13, 2015) be build, among the United States, Japan, and South Korea ("U.S. likely to step up efforts to build IAMD with Seoul, Tokyo"; Missile Defense Advocacy Alliance; January 7, 2016). We must demonstrate our defensive and offensive capability like this way, and never make them overconfident as to believe that they are stronger than us.

There is no doubt that economic sanctions are important. However, we must keep in mind that the global community has imposed sanctions on North Korea again and again. Also, it is inevitable that there are loopholes in economic sanctions, however strict they are. Above all, people who are already accustomed to poverty will hardly feel pains, even though we tighten sanctions. Past cases show that it takes a long time to see the effect of economic sanctions. When the Soviet Union invaded Afghanistan in 1979, mainly the Western alliance imposed sanctions on them, but that did not urge the Red Army to withdraw from there. Rather, it was military buildup of the Reagan administration like the 600 ship navy and the SDI (Strategic defense Initiative) that led the Soviet Union to adopt perestroika, as they found themselves incapable of keeping up with arms race with the United States. In another case, South Africa was imposed a sanction of oil embargo by Arab nations during the Apartheid era, but they managed to overcome it by coal liquefaction. Rather, South Africa in those days was the richest nation in Africa. Moreover, the United States and Britain regarded South Africa as buffer against communism, in view of strategic importance since the British imperial rule, as a geographic connecting link of Asia and Europe, and they were reluctant to join international sanctions.

Reviewing history as I mention above, I can hardly imagine that we can lead North Korea to yield to us simply by economic sanctions. After all, it is necessary to go into negotiations with North Korea through power-oriented diplomacy. Also, while China is a critical stakeholder in the Six-party talk, we should rather not over-evaluate their influence on North Korea. Even though India and Pakistan conducted nuclear tests each other to heighten tensions in the 1990s, they have already stopped the test now. Only North Korea continues nuclear tests in the 21st century, and they do not care any persuasion by China. We can no longer expect that conventional measures will take effect to stop North Korea’s outrageous behavior. If we continued to leave North Korea overconfident, Iran would also act like this way, as they repeat clashes with the United States and Saudi Arabia from the very beginning of this year.

Tuesday, January 05, 2016

New Year Question: Is Our Failure to Manage Post-Soviet Russia the Primary Cause of World Disorder Today?

As the new year begins, I would like to raise a question, whether our failure to manage post Soviet Russia is the primary cause of global instability today. If so, what is the consequence of it? We were so naïve as to believe that the end of communism was the end of history, which would ultimately lead to the end of world conflicts. In reality, Russia fell into confusion, and the world is turning more and more destabilized since then. In my view, it is not the change in the balance of power among nations, but disillusionment with Western values that really matters today.

After the collapse of the Soviet Union, we had almost no doubt that democracy and the free market system would prevail in the nations liberated from communist autocracy. Our expectation was so naïve that we, the winners of the Cold War, did not make a sufficient commitment to help socioeconomic transitions in Russia and the rest of former Soviet republics. This is starkly in contrast with the behavior of World War II winners. The Allied Forces were devoted to disarm and democratize Japan and Germany, and invested a tremendous amount of resource and manpower for stability and prosperity of former enemies. The result of these efforts was “excessively” successful, as reconstructed Japan and West Germany even grew to become formidable economic rivals to the United States and Britain. But I do not regard this as a “natural decline” of America in those days. Rather, I would regard it as “The World America has Made” as Robert Kagan’s latest book is entitled, because both countries have become indispensable stakeholders of the Western alliance, notably, as shown in their membership to the G7. This success is a historical landmark of US foreign policy.

Although xenophobic isolationists in America, and some in Britain, fear mongered re-rise of former enemies when their economy was stagnant, that turned out to be utterly wrong. As seen in the case of a notorious presidential candidate Donald Trump in the United States, and UK Independence Party leader Nigel Farage in Britain, people who are mesmerized by such an idea are liable to be those of the poorest quality in tastes, in opinions, in morals and in intellect. The crème de la crème are naturally internationalists, and well-aware of the role of their countries in the world.

It is regretful that the winners of the Cold War failed to provide such generous help to Russia, nor did they disarm the old enemy. Simply, the winners preached capitalism, while Russians were struggling with a bitter socioeconomic transition. New born capitalism in Russia simply widened economic inequality without the Calvinist spirit. Oligarchs behaved hedonistically, and took the idea of “winner takes all” capitalism for granted. There is no wonder that Russians were disillusioned with Western capitalism and freedom. Actually, Western capitalists are not necessarily role models for the public, and they often spend a hedonistic and luxurious life. However, they bring innovation to business and service. On the other hand, Russian oligarchs simply exploit old Soviet industries to accumulate their own wealth. Unlike postwar Japan and West Germany, capitalism in Russia has not created competitive industries on the global stage. Heavy dependence on the export of energy resource like oil and gas implies that Russia has not even reached the “take off” stage, and it is still a third world economy. Though Russia has a cabal of world renowned scientists and engineers, they are disproportionately working in defense industries since the Soviet era. None of these aerospace industries have made a civilian aircraft that is competitive in the global market.

It seems that the collapse of the Soviet Union happened at the worst timing, as neoliberal thoughts of naïve belief in laissez faire economic globalization prevailed in those days, which was catastrophic to people were still in socialist mindset. Instead of preaching competitive capitalism, we could have led Russia into a Scandinavian styled welfare state as a soft landing from communism. We failed to make Russia a Big Sweden, which is a friendly and democratic nation to us. As a result of the failure of neoliberal capitalism in Russia, the dream of the Common European House from Vancouver to Vladivostok had been shattered completely. Russia failed to become a new Japan or Germany, nor a Big Sweden. History did not end, but restarted.

The consequence of this has inflicted critical damage on global security. Western ideal of capitalism and freedom faded, not only in Russia, but also in the rest of the world. They had begun to defy Western-centered world order and values. During the 1990s, South East Asian nations held out Asian values to fend off Western criticism on human rights abuse. The spillover effect of our failure to manage post-Soviet Russia prevails around the world like this way. The threat of rising China could have been lessened, had we succeeded in making Russia a friendly democracy. We would have been overwhelmingly advantageous to help Chinese citizens stand against the Beijing communist rule, and geostrategically, we could have counted on this northern giant to counterbalance and to contain Chinese expansionism. Furthermore, the global public would have been more willing to resonate the neo-conservative idea of installing democracy in the Middle East through toppling anti-Western autocracies as the Bush administration did in the war in Iraq and Afghanistan. Then, local terrorists and insurgents would have been less rampant, because they are inherently a weak military power, and heavily dependent on propaganda to fight against the global society. The world would have been better off, as we would not have to be swayed by reluctant leadership of Obama and xenophobic bigotry of Trump. Both isolationists are by-products of war weary emotions since the Iraq War.

Postwar democratization of Japan and Germany was so good for both winners and losers. Regretfully, this was not the case with the Cold War, because the winners of this war were not devoted to helping the loser reform herself. We, Cold War winners, did not act according to a Japanese samurai proverb, “Keep well-armed even after the victory”. The impacts of this failure have prevailed globally, as many nations and non-state actors have grown defiant or even antagonistic to us, in view of fading Western values. But sooner or later, Putin’ era will end as he is not immortal. We should learn lessons from the experience in the post-Cold War era, to make preparation for the future. This is the first step to rebuild the world that we envisioned shortly after the fall of Communist autocracy. Therefore, I am raising this question at the dawn of the New Year.

Friday, January 01, 2016

Happy New Year

I wish everyone happy new year. Good luck for all of you. And good luck for Global American Discourse. For this year of monkey!

Photo: Yeti