A U.S. Perspective on Korea's Defense Industrial Business Sector
This article was published in Korean in the monthly Defense and Technology Magazine by the Korea Defense Industrial Association (KDIA), April 2023.
“How has Korea reached such an advanced state in defense industry development and production in just one generation?”
This is a question that I have been asked countless times throughout my professional career both in the U.S. Army and in the private sector as I was involved with nascent efforts involving Korea’s defense industry development up to its present state as one of the world’s leading aerospace and defense industrial powerhouses. I am writing this article based on my experience, to share my take on Korea’s defense industrial development and key success factors that contributed to its growth and to suggest future direction. Overview of Korea’s Defense Industrial Development and success factors First, the role of the ROK Government – Policies that focus on production of home-grown weapon systems for its military forces and consistent export growth. Much of the credit should be given to the Korean Government in its effective policies focused on defense industrial development to include production of systems for its military forces and a more self-reliant defense posture coupled with the promotion of consistent export growth. The Ministry of National Defense, Agency for Defense Development (ADD) and the Defense Acquisition Program Administration (DAPA), all play a vital role in carrying out national defense policy. The development of a number of fixed winged aircraft starting with the KT-1 Basic Trainer, followed by Korea Aerospace Industries (KAI) T-50 Advanced Jet Trainer, FA 50 Light Combat Fighter and presently the KF-21 development are excellent examples of the role that the ROKG has played in advancing defense industrial policy.
There are many other organizations involved in these efforts, but the consistent national defense industrial policy promoted by the ROK Government, regardless of the political party in power has been a key to this success resulting in a strong national defense posture. Finally, I would be remiss in not mentioning the role that the U.S. Government has played in its decades long alliance with Korea in supporting its numerous initiatives to improve defense industrial capabilities. In the case of Korea’s trainer development, the U.S. government approved technology transfer of the US technologies needed for the development of a KT-1 Basic Trainer, shared know-how, and provided training. In short, both the government of Korea as well as its citizens should be justifiably proud of the current state of Korea’s robust aerospace and defense industry.
Second, diverse economic development – Diverse economic development in multiple sectors – heavy industries, automotive, chemical, electronics, aerospace – enabled by innovative manufacturing techniques and dual use technology development served as key factors in the successful creation of a diverse aerospace and defense industrial sector. Much of Korea’s defense systems are based on U.S. origin equipment and U.S. standards given the initial historical reliance of U.S. procured systems either through the U.S. Government Foreign Military Sales (FMS) program or through Direct Commercial Sales (DCS) programs. A positive result of adopting of western standards and practices is Korea’s designation as a NATO plus partner and Korean Defense Industry becoming a major contributor to the NATO alliance.
Third, the role of Korean industry – commercial roots. Equally important is the role that Korean industry has played in supporting government policies and in securing partnerships and agreements not only with U.S. companies but with other international companies as well. Aerospace & Defense conglomerates with commercial roots such as Hanwha, Hyundai Rotem, Korea Aerospace Industries, have all graduated to become world-class defense system developers and systems integrators and today are supported by several thousand small and medium sized company suppliers. Recent sales of major Korea defense systems to European countries to include the K-2 Main Battle Tank, K-9 Thunder Self-Propelled Howitzer, Chunmoo Multiple Rocket Launcher and the T-50 / FA-50 point to the success of Korea becoming one of the world’s leading suppliers of defense systems. Most notably, outside of Korea, Australia, Egypt, Estonia, Finland, India, Norway, Turkey, have all procured the K-9 SPH. In fact, as of November 2022, Korea recorded some $17 Billion in defense export sales; $10 billion more than 2021.
Korean government officials can no longer claim that protective measures are needed to ensure that its domestic defense industry remains competitive. If one compares the costs of Korean defense systems to those of its foreign competitors, it is readily apparent that similar defense systems produced in Korea are upwards of one third less in cost than that of foreign counterpart systems. Korea maintains a high degree of self-sufficiency in producing its own defense systems. It can easily be argued that even the United States relies on international sourcing in fulfilling its defense needs particularly as it relates to economy of scale. In other words, understanding economy of scale is an important factor in discussions related to self-sufficiency. Tools Employed in Korean Aerospace and Defense Development Korea has reached such an advanced state in defense industry development and production in just one generation through the key role that the Korean government played, diverse economic development, and the role of the Korean Industry. Now, I I will discuss what key factors have contributed to Korea’s defense industrial growth and why questions of protective measures and self-sufficiency are increasingly less important.
Diverse industrial development – dual-use technologies and innovative manufacturing It is well known that major Korean defense companies initially developed as subsidiaries of large Korean commercial companies often referred to as Chaebols. Whether it be in ground systems, aviation or shipbuilding industries, commercial practices, efficiencies and know-how were effectively employed in Korea’s defense industrial development. Defense production capability and capacity has now enabled the mass production and delivery of large numbers of defense systems as compared to other countries. Korean companies applied their on-going international marketing and export know-how, commercial processes in both production and assembly to generate efficiencies that are not easily matched by other countries.
International Cooperation - partnering and license and co-production agreements Agreements between Korean defense firms and U.S. and European firms, provided a mechanism for Korean counterpart companies to co-produce both systems – ground vehicles, and aircraft – as well as associated subsystems and – engines and transmissions for domestically produced military vehicles and jet engines to name but a few. There are a number of programs in the key defense sectors involving naval systems, ground vehicle systems and aviation systems that have benefited from such agreements. During the 1980’s, I visited Samsung Heavy Industries Manufacturing facility, which at the time was partnered with the US company BMY in producing M109 Self Propelled Howitzers replacing older artillery systems in the ROK Army. Samsung produced the vehicle carriage, and BMY produced the turret containing the artillery cannon. The knowledge gained from this program helped to enable the design, development and production of the K-9 Self Propelled Howitzer.
Co-production programs often enable aerospace and defense firms to understand how defense systems are produced and integrated. As an example, co-production programs for both helicopters and fixed wing aircraft were typically agreed to in phases starting with the receipt of full-up systems secured from foreign firms, followed by phases designed to produce aircraft structures and component sub-systems, and finally, full-up production and assembly of aircraft. Co-production and similar cooperative efforts have led to domestic programs involving production of ground vehicles, military aircraft, submarines and other types of naval systems. The KF-16 Fighter program is just one such example of a successful co-production program. Oher earlier aircraft programs mentioned include MD-500 Helicopters, F-5 Fighter Aircraft and UH-60 Helicopters.
Maintenance Programs Ground Systems and Aircraft Korean aerospace and defense firms have participated in high-level maintenance programs for U.S. Forces in Korea as well as for regional U.S. Forces for a number of decades. Often referred to as “depot maintenance,” such programs involve the complete refurbishment and upgrades of already deployed systems in order to bring them to an “as new” state. It’s important to understand that with programs such as these, defense systems are often disassembled, refurbished and upgraded via an assembly line process resulting in systems returned to service in a “as new” state. In the 1980s, Daewoo Heavy Industries conducted a complete overhaul of M113 Armored Personnel Carriers in service with the U.S. Army forces stationed in Korea. Having personally visited the Daewoo factory during this program, it is fair to say that knowledge learned during this upgrade program directly contributed to the development and manufacture of Korea’s home-grown K-200 Infantry Fighting Vehicle, which became the backbone of the ROK Army mechanized forces.
Offset Programs Early on, the Ministry of National Defense adopted an offset policy program related to the purchase of foreign weapon systems as part of its national defense strategy. Simply put, when a foreign supplier sells a system to Korea as opposed to the procurement of a domestically produced system, the foreign supplier is required to provide a return by regulatory policy in such forms as domestic production of parts; technology transfer coupled with technical assistance and training; overseas training, maintenance support, or other forms of an offset. Offset programs historically have been integral in acquiring know-how needed by both the ROK military, government agencies and private defense sector firms particularly as it relates to core technology, sub-systems or key components. Numerous successful examples can be cited related to multiple domains – aircraft, maritime systems, armored vehicles, air defense systems, artillery systems, etc. – where Korean government agencies and defense firms have directly benefited from defense offset programs and projects.
Many other factors have also contributed to the success of the Korean defense industry. Indigenous research and development efforts coupled with technology transfer as part of offset programs have both directly contributed to self-sufficiency and indigenization of Korean domestic weapon system programs, resulting in 80% local content and beyond. Korean defense firms’ flexible technology transfer terms and concessions to expand their presence overseas, and technically advanced, highly capable and reliable and yet affordable Korean defense systems, such as K2 tanks, K9 self-propelled Howitzers, T-50 and FA-50 jet aircraft, are also key factors that make Korean defense systems attractive to arms buyers.
Today, there are several thousand suppliers that support the large system integrators such as Hanwha, Hyundai Rotem and KAI. They are typically referred to as “1st and 2nd tier suppliers.” Domestic companies have also been integrated into the global aerospace and defense value chain as suppliers. Taken together, this provides an overview of how the Korean aerospace and defense industry is now recognized as one of world’s leading defense sectors alongside that of the U.S. and Europe. One need only refer to the many ongoing news articles involving record sales of defense systems by Korean companies in all key domains to understand Korea’s current position as a world supplier of sophisticated defense systems. Next Steps – Future Direction So far, I have explained how Korea has reached such an advanced state in defense industry development and production in just one generation, and several key factors contributing to its growth. The current structure and mechanism of Korea’s defense industry led by the Korean government worked well when Korea’s defense industry was growing. However, over time, the very system that served ROK’s goal so well is now generating problems rather than generating solutions, becoming an obstacle for Korea to be a global leader in the defense industry. In this section, I would like to offer some suggestions for near-term and future consideration as the Korean Aerospace and Defense Industry continues its impressive on-going expansion:
From Government’s ownership preference to privatization Private aerospace and defense companies are in the best position to determine international cooperation and collaboration. National policy should encourage industry-to-industry cooperation by providing mechanisms and incentives to ease regulatory policies that dissuade such cooperation. Innovation and entrepreneurship should be supported at all government levels through policies that unleash the power of the private sector.
Improving Highly bureaucratized and overly regulated industrial cooperation/offsets Korea’s Industrial Cooperation / Offset Policy Guidelines have a reputation of being overly restrictive, especially given the state of Korea’s advanced defense industrial development. Implementation costs for both foreign contractors – the obligors – and in-country domestic participants – the recipients – tend to be burdensome, costly, time consuming, and overly complex. Such guidelines are typically put in place by countries requiring support of emerging industries or to protect industries deemed critical to national defense. On the other hand, given Korea’s true position as an advanced defense industrial economy, simplified policy guidelines that encourage industry-to-industry cooperation, support of domestic defense SMEs, and promoting inclusion in the Global Value Chain will serve to increase cooperation.
Reporting requirements on executed contracts are extensive, complicated, and time consuming for both obligors and recipients, requiring allocation of resources and manpower that increase overall costs of contract implementation and execution. The Guidelines themselves are some 350+ pages, translated in both Korean and English. Approximately one third of the guidelines are devoted to reporting. Rather than extensive and unnecessary reports, the obligor should issue a certificate of completion based on the content of the contract, scope of work, and deliverables, which in turn is confirmed by the recipient. Audits should be performed by independent world-class accounting firms. The United Arab Emirates utilizes five such accounting firms to conduct audits of their industrial cooperation programs, resulting transparency and openness.
Korea still uses offset trade as a leverage for fostering the defense industry and exports, but the value given to offset trade is only three times the maximum. This is not an attractive incentive for overseas defense companies that are obliged to trade off-the-shelf. Global defense companies say they can't make significant investments because the value multiplier is only 3x at most. Therefore, the fact that the value multiplier is low is also a factor that does not increase the offset trade performance rate of overseas companies. In order to attract the desired level of active investment in the fields the Korean government wants, it will need to present an attractive value multiplier. In Canada, the maximum value multiplier is a multiple of 9. Thanks to this, Canada is attracting diverse and active investments from global defense companies. If Korea wants to receive investment in high-quality technologies and industries through offset trade, it is proposed to increase the value multiplier to 7 or 8 times.
Acquiring Core Technologies Through government-to-government cooperation and joint R&D During the past 40 years, I would submit that the Korean Government and the private sector have done an excellent job in acquiring core technologies related to complex weapon systems given an overall indigenization percentage of approximately 80%. When one takes a wholistic view of how this has been accomplished you need only look to my second article where I explained the various tools applied. It is true that some core technologies are off-limits because of license restrictions imposed by both U.S. and European governments. That said, there are specific and legitimate reasons for such restrictions being in place either for reasons of direct government funding or security. Increased government-to-government cooperation and joint R&D can enable the continuing release of core technologies. I need only take a time machine back to the 1980’s when I served as the U.S. Liaison Officer to Ministry of National Defense. At that time even munitions and older weapon systems were subject to controls that were imposed by the U.S. government. In addition to government-to-government dialogue, enhance cooperative R&D programs can serve as key enablers to increasing availability of core technologies. Signing a reciprocal defense procurement agreement can help overcome Buy American Act requirements and promote joint research, development and production between the two countries.
Privatizing Maintenance Programs Korea is a relatively small country with great capabilities in diverse business sectors. A key question to considered is, “What is the best approach to maintaining defense systems, and where should Maintenance, Repair and Overhaul (MRO) be located?” It’s a given that operational maintenance should always be performed by military units that operate their systems. However, when it comes to higher levels of required maintenance, private sector defense companies are better equipped to perform such activities given their existing capabilities. Leverage the strength of private companies by moving maintenance beyond the operational level into the private sector. Exceptions can be applied to ensure secrecy is maintained. That said, major aerospace and defense firms all maintain facilities that protect sensitive information.
Participating in Global Value Chain Foreign contractors should be incentivized to participate in defense cooperation programs. U.S. and European defense firms expect to employ the services of SMEs that have experience in defense part and component manufacturing. Consequently, given the state of its advanced defense industrial development, the Korean Government may consider playing a continuing role in supporting the several thousand SMEs specializing in defense services with such organizations as the recently established Korea Research Institute for Defense Technology Planning and Advancement (KRIT) taking a leading role.
Frustration occurs on the part of international aerospace and defense companies when they are introduced to companies that have little or no practical defense manufacturing experience. Rather the focus should be on those SMEs that have experience and can benefit by working with international companies that use such benchmark factors as quality, cost and delivery in vetting potential suppliers. Closing remarks My hope in writing this article is that it results in a better understanding on the part of the Korean public at large regarding Korea’s impressive defense industrial capabilities while dispelling misconceptions that tend to provide a narrower view. Dialogue is key on the part of the government and industry to ensure the continued success and growth of its aerospace and defense industry. In conclusion, I further hope that this series of articles will result in continuous and a robust dialogue between Korean and U.S. counterparts, whether they represent respective governments or private sector entities. I am certain that the Republic of Korea will continue to successfully grow its aerospace and defense sector and serve as an excellent partner in advancing the cause of international peace and security on both the Korean peninsula and throughout the world. And finally, the people of the Republic of Korea should be justifiably proud of their country and the transformation that I have personally witnessed over the past 50 years. [The End]