TOKYO -- Japanese defense contractor Mitsubishi Heavy Industries will begin discussions to buy Mitsui Engineering & Shipbuilding's warship production assets, including a historical shipyard where Japan's latest submarine hunter was built.
The two sides aim to sign the final contract by the end of the year, Mitsubishi Heavy said Friday, and complete the deal in October 2021. The acquisition price has yet to be determined.
Mitsui E&S most recently built Japan's first oceanic surveillance vessel in nearly three decades. The Aki, a SWATH catamaran introduced in January, is designed to detect submarines. The third of the Hibiki-class sub hunters will be transferred to the Defense Ministry next year.
Mitsui E&S also produces naval supply ships, and constructs and repairs civilian vessels. The Tamano Works in Okayama Prefecture, the company's sole naval shipyard, will continue current operations under Mitsubishi Heavy's ownership.
The Tamano shipyard dates back to 1917, when operations first started as the maritime unit of Mitsui & Co. Japan's first diesel-engine vessel was built there in 1924. It was also home to Japan's first postwar steel export ship, a whaler constructed in 1948.
Mitsubishi Heavy earns roughly 400 billion yen ($3.74 billion) in yearly defense sales. The contractor is involved in making military vehicles, submarines, Aegis warships and fighter jets for Japan's Self-Defense Forces.
Mitsui E&S generated 115.1 billion yen in revenue last fiscal year at its marine vessel business, including naval ships. The company won a joint military vessel contract with Mitsubishi Heavy in 2018, an occasion the brought the two companies closer together, culminating into the buyout talks.
The Japanese shipbuilding industry is facing stiff competition from Chinese and South Korean competitors, and orders have fallen to near 20-year lows. Last year, Mitsui E&S reached out to Mitsubishi Heavy for a possible tie up to consolidate operations and boost cost competitiveness.
If the Mitsui E&S deal is completed, the number of naval shipbuilders in the country will contract to three. Japan Marine United -- formed from a 2013 merger of shipbuilding assets between JFE Holdings and IHI -- makes naval vessels, while Kawasaki Heavy Industries produces submarines.
The Japanese government will spend a record 5.3 trillion yen on defense this year, but changes in the bidding process have tightened the environment for winning contracts. Some contracts have resulted in losses.
"There's a possibility that the domestic military vessel industry will be concentrated in one company in the end," said an industry source.
The business landscape for commercial vessels is also grim. Megamergers have flourished in China and South Korea, two countries that lavish financial subsidies on shipbuilding industries. Japanese peers have been squeezed by the price competition.
Earlier this month, Qatar awarded $20 billion to three South Korean shipbuilders to produce more than 100 liquefied natural gas vessels. Meanwhile, Japan Marine United and Imabari Shipbuilding, Japan's No. 2 and No. 1 players respectively, are looking to stay above water. The two companies will establish as soon as October a joint-venture company to design and sell vessels.