France wins $39 billion Australia submarine deal as Japan snubbed

Canberra/Sydney: Australia snubbed a bid from Japan to award one of the world’s biggest defence deals to France’s DCNS Group, opting for a contract that will generate jobs in Australia and minimize a backlash from its major trading partner China.

The French offer for the A$50 billion ($39 billion) contract to build 12 submarines trumped those by Japan’s Mitsubishi Heavy Industries Ltd., Kawasaki Heavy Industries Ltd., and Thyssenkrupp AG of Germany.

DCNS will build the fleet in Adelaide and the project should create about 2,800 jobs, a point Prime Minister Malcolm Turnbull made in announcing the winner Tuesday ahead of an election expected in July.

The outcome is a double loss for Japan, which saw the contract as a step toward opening up its defence industry two years after the government lifted a decades-old ban on arms exports. Prime Minister Shinzo Abe has also sought to boost ties with Australia, a fellow US ally, as China asserts its military ambitions in the region.

“The geopolitical advantages of strengthening the relationship with Japan were not sufficient to overcome whatever commercial and technical advantages the French bid had,” said Mark Thomson, a defence economics analyst at the Australian Strategic Policy Institute in Canberra. Australia must now “find some way of preserving a constructive, strategic relationship with Japan.”

Sea tensions

As a military ally of the US but an economic partner of China, Australia has walked a line between the two countries. Tensions in the western Pacific are increasing as China asserts its claim to more than 80% of the South China Sea, where it has built artificial islands and runways. China also has territorial tensions over islands in the East China Sea claimed by Japan.

The frictions over territory are contributing to an arms build up in Asia, with an Australian Defense White Paper in February estimating that half the world’s submarines will be based in the Indo-Pacific region by 2035. In the paper Australia affirmed its commitment to build 12 new submarines, which will likely enter service in the early 2030s.

“The French offer represented the capabilities best able to meet Australia’s unique needs,” Prime Minister Malcolm Turnbull told reporters in Adelaide. “The project will see Australian workers building Australian submarines with Australian steel.”

French wooing

France pulled out all the stops to win the contract, with defence minister Jean-Yves Le Drian spending nearly a week in February touring Australia and President Francois Hollande set to host a state dinner for the nation’s governor-general Tuesday night. Defence is one of France’s biggest industries, providing about 165,000 jobs.

The Shortfin Barracuda submarine designed by state-controlled DCNS will replace Australia’s aging Collins Class vessels and will be diesel-electric powered.

“They are going to dump jobs into Adelaide as hard as hell and that is really going to drive up the price,” said Richard Bitzinger, a senior fellow at the S. Rajaratnam School of International Studies in Singapore. “The French must have come up with a really good way of helping the Australians build the submarines.”

The French bid “included superior sensor performance and stealth characteristics, as well as range and endurance similar to the Collins Class submarine,” Australian defence minister Marise Payne said.

The head of Japan’s Acquisition, Technology and Logistics Agency, Hideaki Watanabe, told reporters the outcome was “extremely regrettable.” Mitsubishi Heavy Industries said it was a shame that Japan’s proposal “had not been fully understood.”

Shares in the company were down 3.6% in Tokyo, while Kawasaki Heavy Industries dropped 2%. ThyssenKrupp, based in Essen, Germany, fell as much 5.1% and was down 2% as of 9:49 a.m. in Frankfurt.

“We are naturally disappointed but we stand ready to provide support for Australia’s future submarines project with our unrivaled experience, leading technology and track record in building submarines in the customer’s own country,” Thyssenkrupp Marine Systems Australia chairman John White said in a statement. Bloomberg