S.Korea to benefit from rising global defense spending

South Korea is expected to log another year of record defense exports in 2023 thanks to growing military budgets across the world as local major arms manufacturers have already secured order backlogs of more than 100 trillion won ($77.4 billion).

Defense makers are predicted to win major orders again as countries worldwide raise their defense spending, with the US and Germany increasing theirs 10% and 17%, respectively. India ramped up its military budget by 13% and Japan increased its by 26%.

South Korea set a defense exports target of higher than the record $17 billion last year on surging demand from Europe in the aftermath of Russia’s invasion of Ukraine. Seoul aims to develop the sector as a new growth engine for Asia’s fourth-largest economy.

“K-defense’s competitiveness through low cost and good quality has already been confirmed,” said Choi Gi-il, a military science professor at Sangji University in South Korea, adding that the country is likely to meet the export target.

South Korean defense makers accounted for an average 2.4% of the global market in the 2018-2022 period, about double the 1.3% in the previous five years, according to the Stockholm International Peace Research Institute.

The order backlogs of South Korea’s five major defense makers – Hanwha Aerospace Co., Korea Aerospace Industries Ltd. (KAI), LIG Nex1 Co., Daewoo Shipbuilding & Marine Engineering Co. and Hyundai Rotem Co. – totaled 100.5 trillion won, according to their annual reports for 2022.

Most of the defense makers enjoyed healthy earnings last year with Hanwha and LIG Nex1 reporting record operating profits.

RECORD EARNINGS

Hanwha, which inked a deal with Poland to supply the K9 self-propelled howitzer last year, logged an operating profit of 375.3 billion won on a consolidated basis, up 36% on-year, as sales grew 18% to 6.5 trillion won. LIG Nex1’s profit also surged 84.3% to 179.1 billion won with sales up 21.9% to 2.2 trillion won as it exported a surface-to-air missile system to the United Arab Emirates.

Korea Aerospace Industries Ltd. (KAI), the country’s sole military aircraft manufacturer, saw an operating profit of 141.6 billion won, more than double the profit in 2021. It aims to increase sales by 37.3% to 3.8 trillion won this year.

KAI last month won an order to export 18 FA-50 light fighter jets to Malaysia for a sum of $920 million, about five months after the company signed a deal with Poland to sell the aircraft.

EASTERN EUROPE, SOUTHEAST ASIA

South Koran defense makers are eyeing new markets with cheaper prices, good quality and quick delivery. Hyundai Rotem Co. delivered five units of the K2 Black Panther, a next-generation main battle tank, to Poland about three months earlier than scheduled.

Such practices are likely to attract new customers in Eastern Europe such as Hungary and Bulgaria, which are increasing defense spending and accelerating their modernization of weapons systems, industry sources in Seoul said.

Hanwha plans to set up a unit in Warsaw in the first half, while the Korea International Trade Association is considering opening additional branches in the Polish capital to support companies that start businesses there.

Southeast Asia is another emerging market for the South Korean defense sector as the-once largest arms supplier Russia is losing customers in the region due to quality issues, analysts said.

“Russian arms have fewer takers in Southeast Asia. South Korea looks set to become the region's new weapons-maker of choice,” The Economist reported on Thursday.

China is trying to capture the market but its arms exports to the region dropped 40% as of 2021 compared to five years earlier, according to the magazine.

South Korea is competing with military powerhouse Germany in some markets. Hanwha is vying with Germany’s Rheinmetall AG for Australia’s $4.6 billion project to buy new infantry fighting vehicles (IFVs).

Write to Seo-Woo Jang at suwu@hankyung.com
 
Jongwoo Cheon edited this article.