[Defense Commentary] Why Domestic Defense Companies Hesitate on MRO

Jun-gon Lee, Head of Defense, Thales Korea Branch

[Jun-gon Lee, Head of Defense at Thales Korea] Defense MRO (Maintenance, Repair and Overhaul) is an activity that requires a high level of experience and knowledge for wartime readiness. It can also be considered the pinnacle of comprehensive military logistics art, including logistics support and integrated maintenance planning. Through this, perfect operation of weapon systems and maintenance of combat readiness are possible, and it is also a field expected to have scalability as an industry.

Domestic defense company A is converting the close-in weapon system for naval vessels operated by the Navy to domestic maintenance and is conducting overhaul projects in Korea. Domestic defense company B is reviewing the overhaul project for dipping sonars of maritime operational helicopters directly imported from overseas. The common point of these two companies is that they enable maintenance domestically by cooperating with overseas defense companies for equipment directly imported from abroad. Domestic maintenance can bring positive effects such as reduced repair time, increased efficiency, and budget savings. Furthermore, as domestic maintenance capabilities expand, there is an opportunity to export maintenance technology overseas.

For this, domestic defense companies must be designated as defense materials by the Defense Acquisition Program Administration (DAPA). In the case of companies A and B, designation as defense materials is possible after passing the military acceptance test. The reason why designation as defense materials is important is that the cost calculation method for labor costs differs between defense materials and general materials. For general materials, labor costs apply the ‘market wage rate,’ which is the market standard price. However, for defense materials, the ‘actual cost reimbursement method’ is applied, which recognizes the actual working hours spent based on the wage rate. Defense companies secure business economic feasibility only when the maintenance items are recognized as defense materials and the labor unit price for domestic maintenance is settled by actual cost reimbursement.

However, in the revised “Regulations on Designation of Defense Industry Materials and Defense Industry Entities” as of September 30, the clause on “Review of Localization Rate for Defense Material Designation” stipulates that foreign-imported materials maintained domestically must have a localization rate of 50% or higher.

However, it is practically very difficult to meet the 50% localization rate with domestic parts for finished products already developed by overseas original manufacturers. It is also unreasonable for overseas original manufacturers to request a review to meet the 50% localization rate for domestic maintenance transfer.

As a result, it becomes realistically difficult for domestic defense companies to be designated as defense materials for maintenance. This is why domestic defense companies hesitate in the MRO business.

Company A has invested in overseas training for domestic maintenance technology transfer and has been conducting domestic overhaul projects for over five years, but since it has not yet been designated as defense materials, it applies general material cost standards and suffers economic losses in labor costs every year.

The military still relies heavily on weapon systems directly imported from overseas. The Ministry of National Defense promotes domestic maintenance capability development through the “Directive on Overseas Maintenance Parts Domestic Maintenance Capability Development and Management,” but it is still insufficient.

It is a critical time to urgently reconsider the localization rate so that domestic defense companies can maintain overseas weapon systems. Promotion of domestic MRO maintenance should be recognized not only as an activity for perfect combat readiness of the military but also as a pillar of the industry. This means that awareness and systems are needed to induce investment and efforts from domestic defense companies.