U.S. Markets close in 3 hrs 17 mins

Northrop Grumman Plans to Battle Lockheed for Japan's Stealth Fighter Program

Lou Whiteman, The Motley Fool

Northrop Grumman (NYSE: NOC) is reportedly laying the groundwork to compete against Lockheed Martin (NYSE: LMT) for Japan's planned next-generation fighter, a chance to refight a battle Northrop lost almost 30 years ago and potentially open a new line of business for the company.

Northrop, according to Reuters, has responded to a Japanese request for information on the proposed F-3 fighter and has held preliminary talks with local defense officials. The company later confirmed to IHS Jane's that it had responded to the Ministry of Defense's request. What does this mean for both companies?

A challenge to Lockheed's fighter dominance

Northrop and Lockheed fighters have done battle before, with the plane that became Lockheed's F-22 Raptor beating out Northrop's Black Widow concept in a Pentagon tactical fighter bakeoff back in the early 1990s. Lockheed Martin has been the dominant U.S. player in fighter jets in recent decades, with its F-22 and F-35 joining 1970s designs including the Boeing F-15 and F-18 as well as the F-16, which is now made by Lockheed, in the U.S. arsenal.

An F-22 Raptor flying over land and water.

A Lockheed Martin F-22 Raptor, the fighter Japan had hoped to buy. Image source: Lockheed Martin.

Reuters said Tokyo has also encouraged Boeing, which lost out to Lockheed Martin's F-35 in the Joint Strike Fighter competition, to get involved in this competition, and it would like to hear from European defense contractors as well. Japan is seeking a stealth fighter to replace its aging jets in a program that is likely to top $40 billion in spending, though it wants at least some of that money to flow to Japanese companies, including defense electronics vendor IHI Corp.

Lockheed Martin is expected to propose a hybrid design based on its F-35 and F-22 models. The company already works with Mitsubishi Heavy Industries Ltd., another Japanese company almost certain to be involved in the eventual F-3 winning bid, with Mitsubishi responsible for assembling the 42 F-35 fighters Japan has ordered.

Cautious combatant

A Northrop Grumman F-3 bid would be unexpected, in part because while the company does have expertise in drones and sophisticated bombers, including the forthcoming B-21, it has no recent fighter experience. Northrop has also been among the more choosy of the defense primes when it comes to new product competitions, over the last year backing out of a number of bids where it was considered among the favorites after concluding that its resources were better spent elsewhere.

Lockheed Martin should be considered a heavy favorite for the F-3. The company has forged extensive relationships in Japan through the F-35, and Japan is only running the competition because its preferred jet, the F-22, is banned from export. Assuming Lockheed Martin can navigate U.S. government approvals to export an aircraft similar to the F-22, and one that shares common characteristics with the F-35s Japan is already buying, that plane will likely be a very attractive option.

For all of the setbacks Lockheed Martin has had bringing the F-35 to production, the finished product is largely winning positive reviews from Pentagon officials. And the knowledge and experience Lockheed has gained from the growing pains should give the company an advantage in future competitions.

So, what's Northrop up to? It's possible the company is just trying to get its foot in the door to pitch its advanced electronics and avionics offerings for the F-3. While Japan is insistent it wants IHI to handle those lucrative components, the Japanese military is also said to be worried about project costs and eager to move quickly as its existing fleet of F-2 fighters heads toward obsolescence. Northrop Grumman, perhaps working with IHI, could offer a ready-made suite of electronics without the expensive R&D costs that a new system would require.

All positive for Northrop

This feels like a win-win for Northrop, investing a relatively small amount to explore a bid that, if successful, could vault the company into the fighter arena and potentially build a new line of business for the company. Even if Lockheed Martin wins, as expected, any business Northrop Grumman can secure on the F-3 would likely be new sales of existing technologies and products the company has already developed, and would not require a massive R&D spend.

For Lockheed Martin, the entry of Northrop -- or Boeing, for that matter -- is a negative because competition could force it to go conservative on margins when formulating its bid. But given Japan's focus on costs and the considerable spending required to finalize design plans and bring a new jet into production, Lockheed was likely already thinking rationally about the potential bid.

High-tech fighter competitions are few and far between, so it's no surprise that a number of major contractors are poking around, looking for ways to get involved. It's possible there will be multiple beneficiaries from the F-3 program.

More From The Motley Fool

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.