South Korea aims to become defence powerhouse

November 6, 2013 2:29 am

South Korea aims to become defence powerhouse

By Simon Mundy in Ilsan, South Korea

As potential customers from Botswana and Peru milled around their tanks and howitzers last week, South Korean defence industry executives brimmed with confidence about a growing area for the country’s exports. Weapons made by several of the nation’s biggest conglomerates – from Samsung Techwin’s artillery systems to Hyundai Rotem’s battle tanks and Hanwha Corp’s precision missiles – were on display at an annual defence show in Ilsan north of Seoul.At $2.6bn for the first 10 months of the year, the value of South Korean arms exports is still far below that of the electronics and automobiles for which Samsung andHyundai are best known. But that is a tenfold rise from the total of $250m for the whole of 2006, and reflects technological advances and a strong government-led international marketing drive.

This makes South Korea one of the world’s fastest-growing defence exporters, albeit from a low base and with sales so far concentrated in southeast Asia.

The US and Europe still dominate the list of the world’s biggest arms exporters, although China’s recent exports to Pakistan have pushed it into the top five. From 2008 to 2012 South Korea was the world’s 16th largest arms exporter and accounted for less than 1 per cent of deliveries, according to the Stockholm International Peace Research Institute. Meanwhile in that period, South Korea was the world’s 4th largest arms importer, accounting for 5 per cent of deliveries, Sipri data show.

South Korea has used those military imports to help it develop a domestic industry. Investment in arms technology has been a long-standing priority for Seoul in the face of the North Korean threat. The development of this field has benefited for decades from a close military alliance with the US – helped by an assertive“offset” policy, through which South Korea has secured technology transfers from US defence groups.

Under the current rules, companies seeking arms deals worth more than $10m must offset at least half the cost through technology transfers, sourcing parts from South Korea or manufacturing the products in the country.

“The Koreans have set their stall out – they want to secure an ever-increasing share of the trade in defence technology, and that has the full backing of the Korean government,” says Mark Burgess, director of Honeywell Aerospace’s defence business in Asia.

Last month President Park Geun-hye signed a defence industry cooperation pact with Philippine President Benigno Aquino that moved the countries closer to a deal on Manila’s purchase of 12 modified T-50 trainer fighter jets, developed by Korea Aerospace Industries.

This would be just the latest of a series of in southeast Asia, including Thailand’s order of a $500m frigate from Daewoo Shipbuilding & Marine Engineering in August. Indonesia has been by far South Korea’s best customer. In September it took delivery of the first of 16 T-50 planes and has committed to buy three submarines from DSME for $1.1bn.

The South Korean government’s enthusiastic participation has been a big factor behind such deals in southeast Asia, says Jon Grevatt, an analyst at IHS. But to sustain growth in defence exports, South Korea will need to gain a foothold in new markets beyond southeast Asia, he warns.

The T-50 jet is well-equipped to help achieve this, says Choi Sang-yeol, a senior executive at KAI, which was formed in 1999 from the merger of the aerospace divisions of Samsung, Hyundai and Daewoo. Mr Choi cites talks on possible T-50 sales to countries including Iraq, Poland, Botswana and Peru. But the T-50’s reputation would get a key boost if it is chosen by the US Air Force to replace some of its ageing trainer jet force, he adds, claiming this could help the aircraft to win up to half the anticipated global demand for 2,000 trainer and combat jets over the next 20 years.

South Korea has already broken into a developed western market in the naval sphere with DSME’s deal last year to supply four tanker vessels to the British navy. But it has still to prove its competitiveness in land vehicles, Mr Grevatt says, noting delays in the production schedule of Hyundai Rotem’s K-2 battle tank – commissioned as the main fighting vehicle for the South Korean army.

Lee Seok-ung, managing director of the global defence business at newly listed Hyundai Rotem, dismisses such concerns. He says the K-2 matches the specifications of US and European-made competitors at a lower price, thanks to lower labour costs and synergies gained from its links with major shareholder Hyundai Motor. The K2 can find markets from Latin America to Africa, he predicts.

“Back in the 1980s, no one expected that Samsung or LG could be as big as this [in electronics],” says Yang Wook, a researcher at the Korea Defence and Security Forum. “Now the Korean defence industry has a similar challenge.”