New Wind for South Korean Defense Exports

South Korea’s defense industry export successes in a troubled Europe

By Louis Martin-Vézian, originally published in Global Korea Working Paper Series Vol.2

South Korea's defense industry has experienced significant growth in recent years, emerging as a competitive exporter of advanced weaponry. This article examines the key factors contributing to South Korea's success in the global arms market and explores the future prospects for its defense industry. The analysis highlights South Korea's ability to provide high-performing and cost-competitive alternatives to market leaders, as well as its strategic positioning amidst changing dynamics in the global defense sector. With a focus on land systems and advancements in technology, South Korea has capitalized on opportunities arising from failed defense-industrial policies in Europe and increased tensions in the East. Furthermore, the country's industrial competitiveness, demonstrated by efficient production and delivery timelines, has given it an edge in capturing export orders. However, as export demands increase, potential challenges such as delivery bottlenecks may arise. Nevertheless, with its continued investments in cutting-edge projects like the KF-21 fighter and indigenous submarine program, South Korea is poised to prove itself as a major player in the global arms industry.

South Korea's defense industry has witnessed remarkable growth in recent years, becoming a notable exporter of advanced weaponry worldwide. The country's share of global arms exports experienced a staggering 177% increase between 2017 and 2021, establishing South Korea as a significant player in the international defense market. This success can be attributed to several key factors, including the development of high-performing and cost-competitive alternatives to established market leaders. In the past, South Korea heavily relied on imports of American equipment to meet its defense needs. However, driven by the constant challenge posed by its northern neighbor, South Korea made strategic investments to develop its own indigenous defense industry. Over time, the country has successfully replaced foreign imports in various domains, including land, naval, and air systems. Notable achievements include the introduction of the K2 tanks, K9 howitzers, KVLS shipboard system, KF-21 fighter, and KUH-1 helicopter. South Korea's recent successes in the European defense market can be attributed, in part, to failed defense-industrial policies in Europe. These policies resulted in a slowdown of production lines and delayed fulfillment of new orders, creating a demand for suppliers with shorter turnaround times. Additionally, the escalating tensions in the East and the ongoing War in Ukraine have incentivized European armies to seek alternatives with similar technological capabilities. As a result, South Korean suppliers have become viable options for many defense systems, alongside American counterparts. The strategic focus on land systems has also contributed significantly to South Korea's comparative advantage. The combination of the peace dividend and the war on terror in Europe influenced defense budgets and the industrial base. The peace dividend led to a reduction in European defense budgets, which was followed by a decline in the industrial capacity to produce heavy armor. In contrast, South Korea's investment in land systems has allowed it to maintain a robust industrial base and emerge as one of the few producers of heavy armor. The recent order of 180 K2 Black Panther MBTs by Poland, as a complement to its existing fleet of M1A2 Abrams and Leopard 2A6PL, serves as an example of countries seeking to diversify their suppliers and mitigate oversight from other nations. South Korea's industrial competitiveness has been a crucial factor in its export success. Having recently undergone its own ground forces modernization, South Korea has replaced its previous-generation equipment with advanced systems such as the K2 MBT, K9 SPH, and K21 IFV. This has opened up opportunities for new export orders, as South Korean production lines remain relatively unburdened. However, as export demands continue to grow, the industry may face challenges in meeting delivery timelines, potentially creating bottlenecks. Nevertheless, the maturity of South Korean systems, coupled with incremental upgrades, has ensured that they remain at the forefront of military technology. South Korea's defense industry is well-positioned to capitalize on the current global trends and emerging opportunities. With its unique competitive advantages, including the ability to offer high-performing alternatives, strategic positioning amidst changing dynamics, and industrial competitiveness, South Korea is on track to establish itself as a major player in the global arms industry. By continuing to invest in cutting-edge projects to stay competitive in a booming defense sector, South Korea can further solidify its position and build from its accomplishments.

Part 1. South Korea’s road to defense industrial self-reliance.

The conventional threat posed by Seoul’s Northern neighbor has kept Korean defense spending comfortably above the 2% of GDP mark, totaling 57.1 trillion Won ($43.8 Billion USD) and the force structure in Korea consistently maintained more than 550’000 active personnel (conscripts and enlisted) ever since the end of the cold war. South Korea’s underwent multiple phases of defense reforms, from the ‘Jaju gookbang’ (Self-Reliant Capability) in the 1970’s to the DR2020 and DR307 in the mid and late 2000’s.[1] Often reactive to changes in the U.S.-R.O.K. alliance, those reforms oscillated between increasing self-reliance and strengthening interoperability with the U.S. With those defense policies, South Korea nurtured a defense industry that successfully developed from maintenance contracts for foreign-supplied equipment to being able to design and produce their own designs on par with foreign offering. South Korea has more recently displayed expertise and ambitions to also lead defense development, with its R&D budget already the ninth largest in the world as of 2015.

The nature of the threat posed by the Democratic People’s Republic upon South Korea has remained existential for the Republic. Initially threaten by conventional means, Seoul being well within range of North Korean artillery and the DPRK multiplying provocative and escalatory moves, South Korea required both U.S. presence and to maintain a large standing army. Therefore, the shadow of a large conventional war never left the political landscape in South Korea. One of the results of this threat has been a long-standing investment in economic and political capital into the defense industry. Initially based on US license-built hardware, South Korea’s defense industry -just like the rest of the country, has pursued a strategy of market substitution followed by heavy investments in research in development. In 1968, after the assault on the blue house, South Korea engaged in talks with the U.S. to kickstart its defense industrial program.[2] This initial agreement lays out the modest beginnings of South Korean defense industry’s successes: South Korea began the domestic production of M16 rifles, 81-mm mortars and 3.5-inch rockets between 1971 and 1972, the list quickly grew to more than a dozen articles by 1975. Those initial investments quickly bear fruits and grew in all sectors of the industry, from land systems with the M48A3K MBT upgrade kit in 1978, the K55 SPH in 1985 and the KM900 APC in 1977 most in collaboration with international industrial partners like the U.S. and Italy. Korea subsequently made headway towards defense industrial independence with two key programs: the K1 main battle tank and the KF-16 fighter jet. Both were the result of license production and development upon foreign technology giving Korean defense industry the necessary technology transfers, production capacity and technical knowhow to successfully bear large programs to fruition. In 2023, South Korean defense industry has proven expertise in small arms, ground vehicles, fixed and rotary wing aerospace programs, missile and air defense systems, ships, and vertical launching systems. This industrial base provides South Korea with a rare degree of self-sufficiency for its national defense needs. This variety of systems and platforms since the 1990’s occupies a growing share of the armed forces of the country, starting with the ROK Army, ROK Navy and ROK Air Force. With the threat of large-scale ground war remaining the center of gravity of the national defense strategy, the ground platforms offering is particularly pronounced, while those systems remained tailored for domestic defense needs and appeared in an era where every other western nation had a robust defense industry, there was therefore only limited interests in marketing those defense articles on the global markets. With the modernization program undertaken in 2005 and 2010 however, the level of maturity of the land systems of the south Korean defense industry became apparent as it developed new systems for every single main component of the ROK Army with minimum foreign input, the K2 tank, the K21 armored fighting vehicle and K9/K10 self-propelled howitzer and ammunition resupply vehicle. The next logical step, therefore, was arms exports. As South Korean defense industry reached maturity, and the presence of KAI or Hanwha booths at international defense exhibition became much more common, so was the participation of the FA-50 Golden Eagle demonstration team at air shows around the world.

More recently, Seoul embarked on even more ambitious programs centered on cruise missiles and aviation: the nuclearization of the peninsula has led South Korea to seek conventional means of deterrence in the form of the Strategic Strike System, resulting in increased investments in long range cruise missiles and self-reliance in 5th Generation fighter aircraft, as well as space-based surveillance platforms, each of those items are at the leading edge of global defense industrial capabilities, with only 3 countries having been able to produce 5th Generation fighters as of 2023. South Korea’s defense industry has therefore been investing heavily in the future to ensure its continued relevance on global defense markets and its own hedge relative to the U.S. commitment, similar to the initial motivations for the defense-industrial self-reliance.

Part 2. Europe’s dwindling defense industrial base.

On the other side of Eurasia, as South Korea was inching towards defense-industrial maturity, the end of the cold war saw sweeping budget reduction across Europe. the existential threat across the iron curtain dissolved and large land armies suddenly were seen as redundant. Defense budgets became an easy target for cuts, reducing government debt and stabilizing transfers payments across Europe. A large part of the inventory was no longer staffed nor seen as a justifiable expense and was transferred in storage as military service shrunk and most nations in Europe exited the conscription model in favor of the professional force. The number of European tanks in Service fell from 15’000 in the year 2000 to 5’000 in 2020.[3] Concurrently, large swath of developmental programs and prototypes were either heavily cut or cancelled outright, with the expected consequence on Defense firms’ financial health[4]. Defense acquisition programs are now planned for a few hundred systems rather than the usual several thousand in the cold war era. The abruptness of the demobilization of the arms industry resulted in numerous and repeated cuts and rising unit costs in European defense programs. 1987 was the high-water mark in defense spending during the cold war,[5] a mere ten years in 1998 the peace dividend saw employment in the defense industrial sector fall by 50% in Europe.[6] It further decreased between 2014 and 2020, with a 4% decrease in direct employment in the industry, falling from 500’000 in 2014 to 463’000 in 2020[7]. Particularly impacted were the manufacturers of heavy vehicles required for large scale peer to peer conflicts: main battle tanks, infantry fighting vehicles and self-propelled howitzers.[8] Such conflicts were deemed unrealistic in Europe at the turn of the century, the post-Cold War optimism was however quickly replaced by the shadows of the New Wars and counter-insurgency operations in distant theatres. Inflexible technical requirement for future programs and the push for lightweight systems optimized for counter insurgency resulted in an increased failure rate for those programs.[9] The moderate increase in defense spending that those conflicts brought in some countries did not affect the aforementioned legacy platforms, rightly deemed too heavy and impractical for COIN operations. The Global Financial Crisis in 2008 and the following European Debt Crisis swung a last blow to Defense spending in Europe. According to SIPRI’s yearbook, the GFC was followed by 5 years of decreasing defense spending across Europe[10]. This combined with the two previous eras of underinvestment in heavy systems for land warfare had a destructive effect on most of the industry. To survive, the industry attempted to cater to foreign customers but often found hurdles, form German public opposition to arms sales to the Gulf to French initial failure to find buyers for its Rafale fighter, indeed targeting exports meant competing with U.S. firms that had maintained larger productive capacity and economies of scale. Europe was additionally hampered by the diversity of its defense industry: there were 11 ground vehicle programs across Europe[11], yet far from resulting in ‘overcapacity’, it resulted in a large number of factories that needed to stretch their production lines to the maximum to ensure the labor force could remained employed. This produced particularly low incentives to invest and kept profits margins low. As an example, since the end of the cold war Europe produced four different new MBTs, each with a specific industrial supply chain and minimal overlap. But also, two competing multirole helicopters (Augusta/Westland EH101 and Airbus/Leonardo NH90) two fourth generation fighter programs (Dassault Rafale, BAE/Airbus/Leonardo Eurofighter). This diversity is an important setback for European defense integration and consolidation. While competition is important at the prototype phase, two competing designs at the production stage impact unit and maintenance cost negatively. Indeed, European fighters have to compete among each other and against American platforms, as such the American F-16 was the most common fighter in Europe throughout the 1990’s is due to be overtaken by the F-35 rather than either the Rafale or Eurofighter. The two European developed and built fighters have had troubles securing a sale to other European states not part of the defense industrial supply chains as costs are sometimes much higher than American alternatives. Without the benefits of an industrial participation, most states opt instead for cheaper American options, this was true for the F-16 program, and is still true for the F-35 despite its advanced features. In the case of the Polish and Swiss fighter programs, Lockheed Martin was able to provide fighters with a reduced or similar unit cost compared to the Rafale or Eurofighter. The absence of industrial participation is not the only hurdle facing European programs, however. Competing design requirements, diverging operational needs, as well as the absence of a common purchasing and lifetime cycle, resulting in uncoordinated entry and exit into service of platforms. This is particularly glaring when looking at the proportion of joint European projects in the share of procurement programs from member states; in 2020, only 11% of total defense procurement was part of a joint European program[12]. As opposed to the U.S., and despite NATO standardization, Europe remains home to a diverse fighting force with different historical and strategic culture shaping its acquisition programs. One such example is the case of the EH-101 and NH-90 helicopters. Both are the result of cooperation between all or most of Europe’s helicopter manufacturing supply chains, yet they both face rising operating costs and unsatisfied clients. The different stakeholders during the design specification phase compete for their specific requirements, however unique. The EH-101 and NH-90 fulfill slightly distinct roles for rotary wing missions, yet still largely overlap. The U.S. Navy, Army and Air Force are sharing a single helicopter model for dozens of unique missions, yet the European anti-submarine helicopter fleet is composed of two new helicopter types with limited commonality, not to mention a large pool of older platforms awaiting replacement. The result of this industrial competition within Europe are that both helicopters suffer from the same ailments when it comes to cost per flight hour and availability, both Australia and Norway abandoned the NH-90, in 2021 and 2022 respectively, both citing similar issues to cancel the contract[13].

Rather than to continue cold war era development programs to find modern replacements for their forces, most armies in Europe opted for service-life extension programs instead, to keep old equipment in service longer and delay a renewal of the inventories. To survive, those industries had to adapt and specialize in the export markets, and more importantly, stretch the timelines on output to keep lines open despite the small number of vehicles on order from their domestic militaries. Those stretched manufacturing lines meant that the labor force, contractors, and supplier networks were heavily impacted. It favored concentration of the industry but ultimately meant that production capacity had been severely reduced and could not be spun back without a substantial time and capital investment. Later crises revealed the precariousness of the European defense industry, and the ideal position of the South Korean industry to step in.

Part 3. Capacity gap amidst the Crimea and Ukraine crises.

Europe’s realization that peer-to-peer conflict still loomed arrived with Russia’s seizure of Crimea in March 2014 following the Euromaidan protests. NATO defense budget as share of GDP had been steadily retreating since the end of the Cold War and when excluding the U.S., the average was closer to 1.4%. with the strategic surprise in Crimea, it became clear that deterrence had failed. The NATO summit in Wales in the summer following the invasion initiated the end of winter for NATO defense budgets, and the budgets slowly inching back up again[14]. Importantly, the other NATO guideline on the percentage of budget to be spent on equipment saw rapid improvement.[15] Investment in equipment translated in an increase in imports from the traditional U.S. suppliers but were centered on ammunition, radars, aviation, and maintenance deals. For heavy armor, most countries turned to their domestic or European leading producers, notably the German KMW, and Swedish Saab saw the most success in sales, with leading products being the Leopard 2 MBT and the CV-90 AFV. Yet export successes combined with low outputs in production meant that any new order would be pushed at the back of the queue, resulting in substantial delays between signing a deal and receiving the first vehicles. This was a feature of the system rather than a bug as both the defense sector and the ministry of defenses were wary and expectative of further budget cuts. As such with the Crimea crisis and the first, temperate increase in defense budget arrived, the industry was able to absorb only a small number of orders before militaries looked outside of Europe for faster delivery times. An example of this is the massive adoption of the F-35 fighter by European air forces, the F-35 offered a better, modern package with a long life ahead of it and growth opportunity along with a resilient supply chain.[16] Similarly with the 2022 invasion of Ukraine, long lead time were one factor pushing European armies to look outside Europe for their military needs.- South Korea is and was offering mature designs, most with already close to a decade in active service with the ROKA. Furthermore, South Korean policymakers and industry leaders had clearly exhibited a certain openness to arms transfers to Ukraine: Poland had purchased Korean K9 chassis to conclude its 10 years long SPH procurement program. Combining the K9 chassis with the British AS90 turret gave Poland a capable SPH platform. From May 2022 onward, Poland transferred 18 Krab vehicles to Ukraine and in August, leaving importers of South Korean arms easily circumvent South Korea’s Article 5 of the Foreign Trade Act[17] banning direct exports to countries at war. This is in contrast to Germany which until January 2023 had prevented transfers of German-made Leopard 2 to Ukraine[18]. Poland therefore had no reservations opting for the South Korean option, with fast deliveries, no political hurdles on usage, and full range of systems from the same supplier. It signed a series of large contracts with Hanwha defense in 2022 and 2023 culminating to more than $15 billion worth of contracts with South Korea for 180 K2 MBTs, 212 K9 SPHs, 218 K239 MRLs and 48 FA-50 light fighters from South Korean production line, with a further 820 K2PL, 460 K9PL, and 36 FA-50PL. This represents 1000 modern MBTs, making Poland set to become the largest modern tank operator in Europe by 2025. As described by the Polish minister of Defense, being able to ‘deliver weapons of this quality’ from the production line in ‘such a short time and with such an extensive cooperation with Polish industry’[19]. Indeed, the first 10 K2 and the first 29 K9 were delivered to Poland within three months of signing the deal, indicating they had to be levied from production initially intended for the ROKA[20].

This paper has examined the contrasting defense industrial strategies of South Korea and Europe. South Korea's journey towards defense industrial self-reliance has been characterized by substantial defense spending, targeted policy interventions, and a nurturing of its domestic defense industry. In contrast, Europe has witnessed a reduction in defense budgets, a decrease in military inventory and manpower, and a growing reliance on the American defense industry. The defense sector has been heavily impacted by defense cuts, and the European model in defense industrial policy characterized by competing assembly lines and programs was poorly equipped to survive the post-Cold War drawdown. Programs that could have survived with a minimum breakeven point on order were quickly victims of cost overruns, and defense industrial productions lines turned into bespoke batch manufacturing. This is in contrast to the heavy industry consolidation carried out in North America, and the consolidation underway in South Korea; Hanwha is described as having the ambition to become the ‘Lockheed Martin of South Korea’[21].

With profound consequences for peace in Europe and a credible deterrent. Important reforms will be needed to reach the ‘strategic independence’ taunted in European capitals. It is important to note that it is a perfect storm of under-investment in Europe and a sudden crisis in Ukraine that enabled South Korean exports to be so successful. With increased defense spending in Europe and the sudden centrality of until-now unglamorous and unsuccessful European defense initiatives like the Permanent Structured Cooperation (PESCO) and the European Defense Fund (EDF). Momentum for such cooperation structures and joint procurement programs are bound to rise across Europe. As the Ukrainian crisis resorbs, emphasis on European-sourced defense hardware will make the market less friendly to prospective exports. Yet signs already show that South Korea is preparing for a tougher competition in the years ahead. Heavy investments in submarine, missile, and space systems to stay at the leading edge of defense innovation and technological progress and continue the substitution strategy as far as possible. South Korea's approach has yielded meaningful results, as evidenced by its achievements towards defense industrial maturity, export successes, and recent ambitious programs such as its 5th generation fighter jet and its space ambitions.

[1] Chun, I-b. ‘Korean defense reform: History and challenges’, Brookings Institution, 2017, https://www.brookings.edu/research/korean-defense-reform-history-and-challenges/.

[2] Shaw, W., ‘South Korean Foreign Military Sales (FMS) Program’, Federal Research Division, 1984, pp 1-2, table 1, 2. https://apps.dtic.mil/sti/pdfs/ADA323767.pdf.

[3] ‘Optimizing Europe’s Main Battle Tank Capabilities,’ European Defence Matters, Issue 14, 2017, https://eda.europa.eu/webzine/issue14/in-the-field/optimizing-europe-s-main-battle-tank-capabilities.

[4] Belin, J. and Guille, M., ‘Defence and firm financial structure in France’, 17 Review of Financial Economics, 2008, pp 46-61. https://doi.org/10.1016/j.rfe.2007.02.002.

[5] Markowski, S. and Wylie, R., ‘The Emergence of European Defence and Defence Industry Policies’, Security Challenges, June 2007, Vol. 3, No. 2 (June 2007), pp. 31-51. https://www.jstor.org/stable/26458857.

[6] Dunne P. and Surry E., ‘Arms production’, in Armaments, Disarmament and International Security, SIPRI Yearbook 2006, Oxford, Oxford University Press, 2006, ch. 9, pp. 387-418. https://www.sipri.org/sites/default/files/YB06%20387%2009.pdf.

[7] ‘Defense industry’, Fact Sheet of the European Union, 2014, 2020, https://web.archive.org/web/20180830200521/https://www.europarl.europa.eu/factsheets/en/sheet/65/defence-industry and https://www.europarl.europa.eu/factsheets/en/sheet/65/defence-industry.

[8] Barrie, D. and Béraud-Sudreau L. et al, ‘European defence policy in an era of renewed great-power competition’, IISS, 2020, pp 2. https://www.iiss.org/globalassets/media-library---content--migration/files/research-papers/european-defence-policy-in-an-era-of-renewed-great-power-competition---iiss-research-report.pdf.

[9] House of Commons Defence Committee, ‘Obsolescent and outgunned: the British Army’s armoured vehicle capability’, Fifth Report of Session 2019–21 Report, 2021, pp 10-11. https://committees.parliament.uk/publications/5081/documents/50325/default/.

[10] Perlo-Freeman S., ‘65 years of military spending: Trends in SIPRI's new data,’ SIPRI, 2016, https://www.sipri.org/commentary/blog/2016/65-years-military-spending.

[11] Shalal, A., Young, S., and Croft, A., ‘Overcapacity stifling Europe's defense industry’, Reuters, 2015, https://www.reuters.com/article/us-europe-defence/overcapacity-stifling-europes-defense-industry-idUSKBN0P21IG20150622.

[12] ‘DEFENCE DATA 2019-2020 Key findings and analysis,’ European Defense Agency, 2020, pp. 11, https://eda.europa.eu/docs/default-source/brochures/eda---defence-data-report-2019-2020.pdf.

[13] Cherney M., ‘Australia to Buy U.S. Helicopters, Declares Existing Aircraft Unfit for Purpose,’ The Wall Street Journal, 2023, https://www.wsj.com/articles/australia-to-buy-u-s-helicopters-declares-existing-aircraft-unfit-for-purpose-11674021570.

[14] ‘Defence Expenditure of NATO Countries (2014-2021)’, NATO, 2021, https://www.nato.int/nato_static_fl2014/assets/pdf/2021/6/pdf/210611-pr-2021-094-en.pdf.

[15] See here for 2013 data: ‘Secretary General's Annual Report 2013’, NATO, 2013, https://www.nato.int/cps/en/natolive/opinions_106247.htm.

[16] Machi, V., ‘How the F-35 swept Europe, and the competition it could soon face’, DefenseNews, 2022, https://www.defensenews.com/global/europe/2022/09/04/how-the-f-35-swept-europe-and-the-competition-it-could-soon-face/.

[17] Foreign Trade Act, article 5, Act No. 13838, South Korea, 2016, https://elaw.klri.re.kr/eng_service/lawView.do?hseq=37529&lang=ENG.

[18] Ellyatt, H., ‘Germany resists intense pressure over tanks for Ukraine, saying ‘the situation has not changed’, CNBC, 2023, https://www.cnbc.com/2023/01/24/germany-refuses-to-shift-position-on-tanks-for-ukraine-despite-pressure.html.

[19] Graf J., ‘Poland will buy 1,000 tanks. Błaszczak: we plan to acquire additional F-35 or F-15 [INTERVIEW],’ Defence 24, 2022, https://defence24.pl/polityka-obronna/polska-kupi-1000-czolgow-blaszczak-planujemy-pozyskanie-dodatkowych-f-35-lub-f-15-wywiad.

[20] Lee J., ‘The three big drivers of the South Korean defense industry,’ Korea Pro, 2022, https://koreapro.org/2022/11/the-three-big-drivers-of-the-south-korean-defense-industry/.

[21] Lee, J., ‘Why a South Korean defense contractor is betting on green shipping,’ Korea Pro, 2022, https://koreapro.org/2022/12/why-a-south-korean-defense-contractor-is-betting-on-green-shipping/.