Underbidding and Innovation: How South Korea's Defense Industry Became the World's Largest

Undoubtedly, the success of the South Korean defense industry did not happen overnight.

11/08/2023 - 23:27
Source: Nikkei Asia
Source: Nikkei Asia

In early August, South Korean Defense Minister Lee Jong-Sop visited Uzbekistan. The Korea Herald, citing sources in the government, linked the defense minister's trip to Uzbekistan to the search for a new market for Korean weaponry, particularly in Central Asia.

The South Korean defense industry is experiencing an unprecedented boom. In 2022, Korea exported weapons worth $17.3 billion, doubling the previous year's figures.

The recent highlight of South Korea's defense achievements has been the contracts signed for supplying armored vehicles to Australia and tanks to Poland. This has solidified South Korea's position as a major player capable of competing with traditional arms suppliers to these countries – European and American companies.

Reasons for Success

Certainly, the success of the South Korean defense industry did not happen overnight.

For decades, South Korea lacked indigenous developments, and at most, it engaged in the production of military equipment under American licenses. The modern company Hanwha, formerly known as Korea Explosives, produced dynamite, grenades, and mines in the 1970s. Today, the company is engaged in the development of radars, jet engines, and UAVs.

In 2006, the government of President Roh Moo-Hyun established the Defense Acquisition Program Administration (DAPA) to centrally manage the defense industry and enhance its global competitiveness. Exports were seen as a necessary revenue stream to support South Korea's defense industry base.

However, initial attempts by Koreans to export high-tech weaponry met with failure. For instance, Korea Aerospace Industries' efforts to sell T-50 training fighters to Singapore and the United Arab Emirates failed miserably in 2010.

After these setbacks, Seoul conducted large-scale reforms of its defense industry to boost its competitiveness. The Korean government relaxed offset deals for foreign defense companies, attracting foreign investors and intensifying competition between Korean conglomerates and smaller and medium-sized defense companies. In the ensuing years, South Korea's reforms allowed not only its major defense integrators to reduce prices but also enabled smaller companies to enter global defense supply chains.

Technological innovations and export strategies of South Korean weapons manufacturers have contributed to rapid growth in arms exports.

Underbidding and Innovation

Thanks to extensive defense cooperation with the United States, especially through licensed production and thoughtful design, South Korean weaponry is highly compatible with U.S. systems. For example, the K2 assault rifles can use standard American rifle magazines and NATO-standard cartridges, and the military equipment is compatible with American ammunition.

With such high compatibility, manufacturers offer their weapons at competitive prices. The medium-range anti-tank missile AT-1K Raybolt has the same range and warhead power as the American Javelin missile but is estimated to be three times cheaper. K9 howitzers, having the same capabilities as NATO models, are sold at a much lower price. Subsequent purchases of these systems are made according to fast delivery schedules: Poland received the first batch of K9 howitzers just five months after concluding an agreement with South Korea.

Equally important for the success of the South Korean defense industry was its technical ability to produce complex military equipment. This became possible because South Korea had spent a significant portion of its GDP on technology and innovation for many years. For instance, the percentage of GDP allocated to research and development ranked second in the world after Israel. For example, Israel annually spends up to 5% of its GDP on research and development, while South Korea has allocated 3.9% to 4.7% from 2015 to 2020.

Another factor driving South Korea's export boom is the growing instability in the world. From the mid-2010s, global tensions escalated – over the past decade, North Korea launched more than 150 missiles, with just over a third occurring this year alone. Tensions increased between China and its neighbors, with whom it has territorial disputes and Russia's invasion of Ukraine. Tensions rose against the backdrop of defense spending cuts in classical arms-producing countries such as the United States, Germany, and the United Kingdom. As a result, countries from Southeast Asia to Eastern Europe sought to strengthen or, in some cases, completely rebuild their military capabilities. Seoul's timely defense industry reforms allowed it to capitalize on this new demand.

Strong support for arms sales further reinforces South Korea's position in export competitiveness. The country's government conducted "sales diplomacy," using high-level meetings to seek new markets for arms sales. Former President Moon Jae-In stated that arms exports would become a "lifeline" for the South Korean economy.





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