Geopolitical instability feeds S. Korea’s growing arms industry, leaving bitter taste for some

Posted on : 2022-02-28 17:28 KST Modified on : 2022-02-28 17:28 KST
Korea recently concluded multiple deals to export its domestically made K9 howitzer, a trend that’s likely to continue amid the outbreak of conflict in Europe
The Korea-made K9 howitzer (provided by Hanwha Defense)
The Korea-made K9 howitzer (provided by Hanwha Defense)

Hanwha Defense announced on Wednesday that it had confirmed the site in Australia where it will build a large plant capable of manufacturing self-propelled howitzers and armored vehicles. The announcement attracted notice not only because military tension between Russia and Ukraine had nearly reached the breaking point, but also because this was the first time a Korean defense company had acquired a production facility outside the country.

Hanwha Defense, which is a subsidiary of the Hanwha Group, is moving forward with a 1 trillion won supply contract reached with Australia in December that involves the on-site manufacture of the AS9 Huntsman (the Australian name of the K9 self-propelled howitzer) and ammunition support vehicles.

As one of Korea’s best-known arms exports, the K9 self-propelled howitzer was also the focus of conversation after Hanwha Defense concluded an export contract worth 2 million won, or roughly US$1.7 billion, with Egypt on Feb. 1. That was the most valuable contract reached since the K9 was developed, worth twice that of the contract with Australia. It was also the first time a Korean self-propelled howitzer has been exported to Africa, after earlier deals in Asia, Europe and Oceania.

Boom in arms sales is a mixed blessing

The first deal involving the record-setting K9 was reached back in 2001. That contract, which was reached with Turkey, was the first time Korea exported a domestically produced weapon system. Since then, the K9 has been sold to Poland (2014); Finland, India and Norway (2017); and Estonia (2018), along with Australia and Egypt.

It’s notable that this weapon system was already being exported to countries in Northern Europe (Finland and Norway) five years ago.

“They’re buying our weapons because of the threat of Russia,” explained Eom Hyo-sik, CEO of GOTDA, a communication and consulting firm specializing in national defense and the arms industry.

As a colonel in the reserves, Eom has built a distinguished career in the defense industry. His comments bring to mind the conflict that’s currently heating up between Russia and Ukraine.

As Korea racks up more arms deals for the K9 and other weapon systems, one media outlet has even claimed that the country’s arms sales were worth more than its arms purchases for the first time last year.

The report quoted a government official who spoke anonymously, and the claim doesn’t appear to be accurate. It’s harder to categorize figures in the arms industry as precisely as with overall imports and exports, and arms sales may have been exaggerated by treating long-term contracts as completed deals.

“Even if the contract was reached this year, the time frame for delivery will be different, as will the time frame for developing and producing [for export]. That makes it hard to say definitively that there’s a surplus,” said Kim Mi-jeong, an analyst at the Korea Institute for Industrial Economics and Trade (KIET) specializing in the machinery and defense industry.

“It might be going too far to say that exports have exceeded imports, leading to a surplus [in the arms trade].”

Another basic consideration, Kim added, is that “the stuff coming in from the US [Korea’s main weapons supplier] is generally high-end, while the K9 and other export products are more mid-to-low end.”

Kim is regarded as an expert in this area as a co-author of a KIET report titled “Likely National Destinations for Defense Industry Exports in 2020.”

While it might be rash to conclude that Korea has achieved a surplus in the arms trade, international analysts have confirmed that Korea’s arms sales have recently surged and that the defense market is growing.

According to figures released last year by the Stockholm International Peace Research Institute, or SIPRI, a policy think tank in Sweden, Korea’s arms exports between 2016 and 2020 were worth US$3.8 billion, which made up 2.7% of the world’s arms sales of US$140.16 billion. That was three times the value of Korea’s arms exports between 2011 and 2015 — US$1.22 billion, or 0.9% of the global total.

Korea’s arms imports increased from US$3.82 billion (2.7%) in 2011-2015 to US$6.07 billion (4.3%) in 2016-2020. That is, arms exports are increasing at a faster rate than imports.

Surging arms exports evoke a mixture of emotions, forcing Koreans to reconcile the economic reality of being an export-dependent country with their discomfort about profiting from weapon sales.

One factor that’s pushing toward hard-headed economic considerations is that the defense sector has a big impact on domestic industry as a whole. That’s illustrated by the fact that nearly a thousand primary and secondary suppliers are involved in the production of the K9 alone. That’s enough to sway the overall economy in Changwon, South Gyeongsang Province, the K9’s production base.

Another consideration is that Korea’s defense industry is still in its infancy, lagging far behind its global competitors. The world’s biggest defense firm Lockheed Martin has yearly sales of around 80 trillion won (US$65.40 billion in 2020), while the combined sales of the four defense affiliates in the Hanwha Group (Korea’s industry leader) amounted to 5 trillion won.

That’s barely enough to register as a competitor on the global stage. The underdog status of Korean defense firms is sometimes cited to justify government subsidies, along with the jobs the industry creates.

Korea’s arms exports were still growing last year, and the prevailing view is that they’ll continue to do so in the future. There are two grounds for that prediction — the saturation of domestic demand at home, and the growth of geopolitical instability abroad.

That second factor is neatly illustrated by the ongoing crisis in Ukraine. The formation of a neo-Cold War between Russia, the US and Europe is driving a bull market in the arms industry.

“The countries of Eastern Europe had been working to modernize their weapon systems since before the Ukraine crisis, and demand continues to grow in the Middle East as well,” said Sim Soon-hyung, an assistant analyst at KIET.

Sim said it’s “likely that exports will increase given the geopolitical mood” even though various countries have cut their defense budgets because of the COVID-19 pandemic.

Neo-Cold War creates opening for more exports of Korean weapons

The K9 offers a glimpse of the saturation of domestic demand. By 2019, the South Korean armed forces — by definition, the only arms buyer in the country — had received delivery of the full complement of around 1,100 howitzers. If only domestic demand were in consideration, the manufacturer wouldn’t need to keep its assembly line running.

“The military is buying large numbers of cutting-edge weapon systems from overseas and is also sourcing a fair amount domestically. That leaves the domestic industry with no choice but to seek export markets,” said Eom Hyo-sik, the GOTDA CEO.

With both domestic and international factors expected to drive more arms exports, change is afoot in the industry.

“I think we’ll move from exporting mostly to middle powers and latecomers like Egypt and the Middle East to accessing the NATO region through cooperation with the US or direct cooperation with NATO members,” said Kim Mi-jeong, the KIET analyst.

That’s grounded in the foreign policy line adopted by US President Joe Biden, who places a premium on American alliances. Given the growing frequency of allied countries supplying each other with weapon systems, Kim said, Korea may see its export markets change even as its export volume goes up.

By Kim Young-bae, senior staff writer

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