South Korean defence industry rides global order wave

When South Korean arms companies secured a package of deals from the Polish government last year worth almost $14bn, it heralded a new era for the country’s defence industry.

Decades of preparation for war with North Korea have helped the East Asian country to emerge as one of the world’s top 10 defence exporters, with artillery producer Hanwha Aerospace, tank producer Hyundai Rotem and fighter jet producer Korea Aerospace Industries leading the charge.

“We are one of the few companies in the world that can deliver conventional weapons systems quickly and efficiently,” said Hanwha Aerospace executive vice-president Kim Dae-young.

Russia’s invasion of Ukraine had driven demand for Korean arms not only from western countries, but also from countries in Asia looking to reduce their dependence on Russian armaments.

South Korea, was the world’s ninth-largest seller of arms in 2022 up from 31st place in 2000, according to the Stockholm International Peace Research Institute.

“We see ourselves as major players in the global defence industry to meet the urgent demands of key regions,” said Kim.

Investor interest in international defence companies, including Hanwha Aerospace, has surged since Russia’s invasion of Ukraine in February 2022 on expectations of higher military spending by western governments. Shares in Hanwha have more than doubled over the period.

Because South Korea produces armaments at a larger scale than many of its western competitors, it can offer better value for money on assets such as tanks and howitzers and lower-end fighter jets.

Korean exporters are also assisted by the government, including its willingness to step in and place orders so as to keep production lines “hot” in the absence of orders from abroad.

“Since our own security situation is grave, we are always ready to produce at scale and at speed,” said Moon Seong-mook, an analyst at the Korea Research Institute for National Strategy.

“Many of our weapons are also based on US systems, so they can be used by western countries and their partners,” he added.

The export push comes as Korean exports have been hit by the downturn in the chip sector. The country’s trade surplus has been eroded.

“South Korea is used to having a trade surplus, but with the recent downturn in the chip sector it has spent the last year in deficit,” said Chae Woo-seok, who heads the Korea Association of Defence Industry Studies. “From the government’s perspective, weapons exports can play a big role in filling the gap.”

Yang Uk, a defence expert at the Asan Institute for Policy Studies in Seoul, added that South Korea has also been “much more generous than other weapons exporters in terms of funding”, with state export credit agencies offering comprehensive financing packages on attractive terms.

Seoul has devised a “niche marketing strategy for countries newly seeking to invest and develop their own defence industrial bases”, setting up production in the buying country while offering generous terms on tech transfer, said Haena Jo, research analyst at the International Institute for Strategic Studies (IISS) in London.

Of the 1,000 K2 tanks Warsaw ordered from Hyundai Rotem last year, 180 are to be produced in South Korea and the rest are due to be produced under licence in Poland.

Unsurprisingly, Seoul’s rapid rise as a player in the global defence industry — and particularly its entry into the European defence market — has provoked mixed feelings among some western defence officials and executives.

“They’ve challenged the competition on price and delivery schedule, and they’ve taken business from us as well,” said an Asia-based executive from a leading US defence firm.

Some European defence executives are also concerned about the impact of South Korea’s state-backed push on the region’s plans to shore up industrial sovereignty in the wake of the Ukraine conflict.

“State subsidised companies coming into Europe, setting up factories and pushing for volume production is not a concern in the short-term and is helpful to Ukraine,” said one executive. “But in the long term, there is a risk these companies could outcompete domestic players with less strong balance sheets.”

However, back in Korea, some analysts and industry executives are wondering whether the limits of the country’s aggressive push to expand its global market share are starting to be exposed.

After the fanfare around the Polish deal, talks between Warsaw and Hanwha and KAI have dragged on amid disagreements over financing and technology transfer issues.

Korean companies are now concerned that a new Polish government expected to be formed next month will conclude the orders were “too big”. The Korean government is also struggling to persuade Indonesia to honour its financial commitments to a joint fighter jet development programme.

Analysts point out that the situation in both Poland and Indonesia reflects short-termism on the part of the Korean government and the defence contractors.

“Rather than winning contracts on unfavourable terms, the country needs to think about weapons exports in the long term — but the government is preoccupied instead with winning individual deals,” said Seoul-based defence expert Ahn Sung-bum.

Eon Hwang, a Seoul-based defence industry analyst for Nomura, said that while South Korea was more generous on technology transfers than many competitors, it needed to be careful not to give too much of its technology away in its eagerness to gain entry into new markets.

“There are still limits,” said Hwang, citing the example of Turkey’s Altay battle tank, which was co-developed with Hyundai Rotem in the late 2000s, and has since emerged as a rival to the Korean company’s flagship K2. “Korea has experience of a buyer becoming a competitor, so it has to be cautious.”

But if the Korean export push into Europe has provoked anxiety in some quarters, western exporters that specialise in high-end components stand to benefit from Korea’s ability to make inroads into other markets where western companies have traditionally struggled.

“Countries like the Philippines and Vietnam may not be able to buy a [US-made] F-35 fighter jet, because the US wouldn’t allow it,” the western defence official added. “But they could buy a [Korean-made] KF-21, which has British and American kit on it. That way, everybody wins.”

The Korean model can benefit both Korea and the importing country, point out other analysts. Should the deal between Korea and Poland move ahead as planned, Siemon Wezeman, senior researcher at Sipri, believes that it would be positive for both sides.

A substantial part of the contract value would remain in the European country where much of the work will be done, said Wezeman. “On paper, so many billions [of] US dollars are Korean exports, but in reality much of that is Polish value, supporting the Polish defence-industrial base.”