Ambition and Ambiguity: South Korea’s Defense Industry Reform

South Korea’s defense industry ambitions have increased significantly over the past couple of years as part of President Moon Jae-in´s wider Defense Reform 2.0. The program aims to support defense sector growth as well as the general economic development, with a focus on manufacturing high quality weaponry for the ROK Armed Forces and elevating South Korea to becoming a top-tier arms producer.

Background: Rise in Spending

Over the past several years global military expenditure has witnessed a massive surge. In 2018 it reached over 1,822 billion USD, a figure 5.4 percent higher than 2009’s total. Alongside increased military spending, the international transfer of major arms has grown substantially, with arms exports up 7.8 percent from 2014-18 compared to the period of 2009-2013. The increase in expenditure and growth of arms exports can be largely attributed to countries in Asia, a region which has seen a surge in military activity and security disputes. With five representatives among the top 15 nations for military spending (China, India, Japan, South Korea and Australia), Asia accounts for over 28 percent of global military expenditure and over the last decade has witnessed the largest increase in spending of any region by a large margin (46 percent).

Of the Asian nations prioritizing military expenditure and defense development, South Korea has displayed one of the strongest growth trajectories. Having invested 43.1 billion USD in 2018, a 28 percent increase from 2009, South Korea is now ranked 10th by SIPRI for military expenditure and accounts for 2.4 percent of global shares.

Renewed Ambition: Defense Reform 2.0 & Recent Accomplishments

This prioritization of defense industry investment is a core objective of President Moon Jae-in’s Defense Reform 2.0 launched in July, 2018. This updated initiative is driven by Moon’s desire to create a slimmer, yet more efficient South Korean military, with a greater focus on exporting power of the defense sector. The growth of this industry could not only yield benefits for the South Korean economy, but could also help establish a more independent South Korean military that is less reliant on foreign (U.S.) defense technology in the wake of faltering U.S. commitment to its regional allies. Coupled with the rise of China and increased aggression in regional security infrastructure, Moon has cited defense reform as a chief priority. A key to the success of this program is to emerge as a top contender in the arms export market, a sector where South Korea already has an established pedigree.

South Korean ranks 11th overall for arms exports, with an increase of 94 percent over the past 10 years, a spike only exceeded by Turkey (170 percent) during the same period. This growth is largely credited to platform-based products, such as aircraft, artillery, ships, which is notable for a country of South Korea’s size. The technologically advanced weaponry is aimed at providing quality alternatives to the likes of American and European equipment. Examples of successful weapon-platform exports include the KAI 50 jet trainer, K9 155mm self-propelled howitzer, recently purchased by Estonia, Finland and Norway, and the K2 battle tank, which is under review by several foreign militaries for purchase. Additionally, in 2012 and 2013 Daewoo Shipbuilding and Marine Engineering (DSME), one of the “Big Three” South Korean shipbuilders, signed contracts with two highly competitive clients in the British Royal Navy and the Norwegian Navy to produce refueling tankers.

Risk Factor: Setbacks and Pitfalls

While acquiring some impressive sales throughout the 2010s, it has not been completely smooth sailing. The largest recent setback was a failed bid in late 2018 for the U.S Airforce to purchase 350 KAI jet trainers, which have sold well in the past. Instead, the contract went to Boeing, who had teamed up with SAAB. The South Korean defense industry stock plummeted after the loss, with the valuation of the sale at 16 billion USD.

Furthermore, while South Korea’s substantial investment in military R&D (only outspent by Israel according to UNESCO Institute Statistics) and platform-based development could yield the desired defense expansion results, this avenue of approach does have its obstacles. There are several other nations competing for the same tier of defense contracts as South Korea, such as Turkey, India and Japan, not to mention the pre-established defense export giants in the U.S., Russia, France, etc. As a result, the competition for big-ticket contracts from foreign governments has become extremely fierce, and a nation of South Korea’s stature could struggle to break into the aforementioned group of top-tier exporters. As more and more of these types of big-ticket contracts usually are government to government contracts, in order to be successful, the entire South Korean apparatus need to embrace this policy.

In addition, the implications for the United States Force Korea (USFK) will have to be addressed in order to push for a successful South Korean domestic defense growth which does not threaten the stability of the alliance. One such aspect is a focus on combined command and control, and high-readiness. To achieve these two objectives any defense equipment must be interoperable for combined forces. If the ROK military utilize a larger portion of South Korean produced arms, this interoperability with U.S. forces may be at risk.

Outlook: Opportunity for Further Growth

Despite these potential pitfalls and failures, the industry has been able to show resilience thus far, mainly due to the renowned South Korean shipbuilding industry, a sector where the nation will continue to be a competitive exporter. Recently, a bumper deal was signed between DSME and Indonesia for the production of three additional Bogo-class diesel-electric attack submarines to add to the three they have already acquired. A contract valued at over 1 billion USD. This is not the only major ship-building project being undertaken by South Korea at current, as Hyundai Heavy Industries (HHI) is also producing two missile frigates for the Philippine Navy, which are expected for delivery in 2020 and 2021.

If the ambitious objectives of South Korea for its defense industry materialize, the country’s exports will exceed its predicted SIPRI Trend Indicator Value (1.1 Billion USD), which is a statistic based on the unit cost of weapon systems to help analyze a nation’s arms export potential. In order to achieve this, South Korea hopes to introduce its next-generation combat system platforms currently under development. The two main projects are the Sejong Daewong-class destroyer and the KAI KFX-50 4.5 generation fighter jet, both of which are earmarked as competitive export product. Variants of the Sejong are already in service in the South Korean Navy and KAI KFX is to be rolled out by 2026. The South Korean defense sector has come a long way in terms of growth and development potential over the past decade and has shown the ability to overcome notable challenges. As these next-generation products are further developed, it will provide a litmus test for South Korea’s defense industry aspirations, and may establish the nation as a leading provider of high-grade military products.