[Yang Nak-gyu's Defence Club] This Year's Defense Industry Report Card... Will It Be Reflected Next Year?

Although This Year’s Defense Export Target Was Not Achieved, Diversification Efforts Show Results

This year, the domestic defense industry experienced a golden era. Defense exports reached approximately $13 billion. Although this is $4.3 billion less than last year ($17.3 billion), it is regarded as laying the foundation for entering the top four defense exporters by 2027. While the export amount decreased, the number of export destination countries increased to 12, and the number of major exported weapon systems rose to 12, both up from last year's 4 countries and 6 systems, which is hopeful. Notably, success in launching a domestically developed Synthetic Aperture Radar (SAR) satellite marked a leap toward becoming a space power.

▲First Entry into the AUKUS Advanced Market= Hanwha Aerospace exported Redback vehicles to Australia. The supply scale is 129 units, amounting to $2.4 billion (3.15 trillion KRW). This project is the largest in the history of the Australian Army, and Redback was selected as Australia's next armored vehicle after competing against European equipment. With this order, Redback became the second ground equipment exported by a domestic defense company to Australia, following the K-9 self-propelled howitzer. This contract is significant as it marks the full-scale entry of K-Defense into the advanced AUKUS (Australia, United Kingdom, United States security alliance) market.

It is especially regarded as the first success case of the 'K-Defense export system,' optimized for planning, design, and supply chains targeting overseas countries. Hanwha Aerospace is currently constructing the Hanwha Armored Vehicle Advanced Center (H-ACE) in Geelong, Victoria, Australia, aiming for completion in the second half of next year. All 129 Redback units contracted will be produced there, with all factory personnel being local, and a significant portion of raw materials such as steel and major components also procured locally, implementing a 'localized export strategy.'

The Key to First Entry into the AUKUS Market: ‘Localized Export Strategy’

▲The Space Era Approaches Rapidly= Hanwha Systems launched a domestically developed Synthetic Aperture Radar (SAR) satellite aboard the military’s ‘Korean solid-fuel launch vehicle.’ SAR is a radar technology that sequentially emits radio waves to the ground and ocean and analyzes the returning waves to map terrain, enabling precise observation regardless of weather conditions. This launch also opened the door to businesses utilizing SAR imagery, such as automatic fusion and analysis of satellite image information.

Specifically, there are plans to sequentially launch four more reconnaissance satellites by 2025, securing a total of five. Among the five reconnaissance satellites to be secured by 2025, the first will be equipped with EO (Electro-Optical) and IR (Infrared) equipment, while satellites 2 through 5 (four in total) will carry high-performance imaging radar (SAR). The four SAR-equipped satellites create images by synthesizing signal data reflected from ground targets after emitting electromagnetic waves, allowing observation of North Korean areas regardless of weather. EO/IR satellites can capture clearer images than SAR satellites but are affected by weather, limiting surveillance when cloud cover is heavy. Once all five reconnaissance satellites are secured, it is known that specific points in North Korea can be monitored and reconnoitered every two hours.

[Image source=Yonhap News]

▲Strong Performance in Southeast Asian Markets= Efforts to penetrate the Southeast Asian market were active. Korea Aerospace Industries (KAI) signed an export contract for 18 domestically produced FA-50 light attack aircraft with the Malaysian Ministry of Defense at the end of May. The contract is worth about 1.2 trillion KRW, and Malaysia plans a second phase to acquire an additional 18 units, potentially increasing exports to a maximum of 36 aircraft. LIG Nex1 has been achieving continuous export success in Indonesia. In April this year, it signed a contract worth 198.4 billion KRW to supply helicopter parts to the Indonesian National Police. It is also pursuing exports of guided weapons such as ‘Cheongung-II’ and ‘Hyeongung.’ LIG Group Chairman Koo Bon-sang has visited Malaysia several times. Malaysia is known to be building new weapon systems amid repeated security crises such as South China Sea conflicts and armed group infiltrations in the Philippines. Due to the dense forests characteristic of Southeast Asia, ultra-precision and high-power weapons are needed to counter terrorist groups hiding in jungles.

Outstanding Aerospace Sector... Pioneering New Markets

▲Active Government-to-Government Defense Activities Are Essential= With the prolonged Russia-Ukraine war and the Israel-Palestine armed conflict, geopolitical tensions worldwide are rising, and military budgets are expected to increase, presenting opportunities for domestic defense companies. This year, the Korean government concluded a Free Trade Agreement (FTA) with the Gulf Cooperation Council (GCC). The GCC is a Middle Eastern regional cooperation organization including six countries: Saudi Arabia, United Arab Emirates (UAE), Kuwait, Qatar, Bahrain, and Oman. With this FTA, tariffs on most weapon categories have been eliminated, and weapon exports are expected to continue rising.

Defense and logistics joint committee activities are also active. Recently, a defense and logistics joint committee was held with Egypt, raising expectations for defense exports to Egypt. According to the Stockholm International Peace Research Institute (SIPRI), Egypt accounted for 4.5% of global arms imports from 2018 to 2022, ranking as the world’s sixth-largest importer. In February last year, Egypt signed a package contract with domestic defense companies for the export, technology transfer, and local production of K-9 self-propelled howitzers and K-10 ammunition resupply vehicles. The weapon system with the most active export discussions is the ‘FA-50.’ The Egyptian Air Force plans to replace about 40 aging aircraft. A defense and logistics joint committee with the Netherlands is also scheduled for next year. Additionally, it was agreed that Korea will participate as an observer in the ‘JPOW’ exercise in 2025, a command post exercise for air defense and missile defense led by Germany and the Netherlands.

▲Challenging Advanced Markets Including the U.S.= Domestic defense companies plan to develop new markets and increase exports starting next year. The target is the U.S., the world’s largest market. Recently, LIG Nex1 acquired Ghost Robotics (GRC), a robotics company based in Philadelphia, USA. By acquiring Ghost Robotics, which specializes in military quadruped robot technology, LIG Nex1 secured a future growth platform and challenged the U.S. defense market. LIG Nex1’s guided rocket ‘Bigung’ was the first domestic guided weapon to pass the U.S. Department of Defense’s Foreign Comparative Testing (FCT) program in 2020, proving its performance.

Hanwha Aerospace has also taken action. This month, it is conducting a comparative performance test (FCT) of its domestically developed multipurpose unmanned vehicle Arion SMET on the U.S. mainland. This is the first time a weapon developed by Hanwha Aerospace is undergoing performance testing in the U.S. If the test evaluation is successful, the U.S. Department of Defense will decide whether to proceed with acquisition projects. This is generally considered the first step toward U.S. exports. Korea Aerospace Industries (KAI) has already expressed its intention to enter the U.S. trainer aircraft market. Through the FA-50 light fighter, it plans to compete for contracts to supply the U.S. Navy’s tactical introduction aircraft and the U.S. Air Force’s tactical trainer aircraft.

Full-Scale Entry into Advanced Markets... Defense Policy Support Is Crucial

▲Poland Will Be a Variable Next Year= Last year, exports to Poland accounted for 72% of the total, but this year, the share outside Poland reached 68%. Despite the large export scale, challenges remain. Negotiations for the second execution contract were delayed due to issues such as technology transfer of weapon systems and financial support, resulting in failure to conclude contracts for the multiple launch rocket system Cheonmu and the K2 tank as originally planned. This significantly impacted the difficulty in achieving this year’s export target of $20 billion. The remaining quantities for the K2 tank and Cheonmu are 820 and 70 units, respectively. Poland’s political environment is also a variable. In this year’s Polish general election, the ruling Law and Justice Party (PiS), which signed the basic contract last year, was defeated, and the pro-European opposition coalition took power, raising concerns that remaining contracts could be disrupted. Next year, whether the second execution contract for the remaining Polish export quantities will be signed is expected to be a major focus for the defense industry.