[K Defense Industry Analysis] Explosive Growth with the No.1 Self-Propelled Howitzer ‘K9’

①Hanwha Aerospace
Strength in Diverse Pipelines... K9 World No.1
Must Overcome Excessive Dependence on ADD Technology

Editor's NoteThe world is paying attention to Korean weapons, which boast price competitiveness and rapid supply capabilities. The major U.S. investment bank Goldman Sachs has identified K-defense stocks as promising investment destinations this year. Goldman Sachs introduced, "Considering the strong position Korean defense stocks hold in the global military market, defense stocks are a good investment to avoid geopolitical risks." Earlier, CNN stated, "Korea has become a major player in the defense industry," and Forbes mentioned, "Korea has quietly become one of the world's largest arms suppliers." Since the outbreak of the Russia-Ukraine war, the global defense industry environment has undergone rapid changes, increasing attention to K-defense. Will interest in K-defense end as a 'flash in the pan,' or does it have sustainable growth competitiveness? We analyzed the strengths, weaknesses, threats, and opportunities of K-defense leading companies Hanwha Aerospace, LIG Nex1, and Hanwha Systems.

Hanwha Aerospace is a company at the forefront of K-defense. With an order backlog of 53.3 trillion KRW (as of Q3 2023), it ranks first among domestic defense companies. Its flagship product, the K9 self-propelled howitzer, holds over 50% of the global export market share, ranking first. It maintains a monopoly in domestic military aircraft engines and is the largest shareholder of Hanwha Ocean (formerly Daewoo Shipbuilding & Marine Engineering), which is capable of building naval vessels. It is recognized for having established a 'defense value chain' encompassing land, sea, and air. As the first private company to become a 'system integrator,' it has participated in Korea's space launch vehicle project, 'Nuriho,' demonstrating prominence in the aerospace business as well.

Hanwha Aerospace started in 1977 as Samsung Precision Industry and was acquired by Hanwha Group in 2015. After going through Hanwha Techwin, it changed its name to the current one in 2018. As of 2022, its sales were 6.54 trillion KRW, with an operating profit of 377 billion KRW. The sales composition consists of aerospace (19.6%), ground defense (29%), Hanwha Systems (30.9%), Hanwha Vision (14.1%), and others (6.4%). Sales for 2023 are projected at 8.68 trillion KRW (operating profit 658 billion KRW). It has a vision to become a 'Global Defense Top 10' by 2030.

Strength in Diverse Pipelines... 'In-house Technology' Likely to Determine Scale-up

Hanwha Aerospace's greatest strength lies in its diverse pipeline. From the K9 self-propelled howitzer, Redback armored vehicle, Chunmoo multiple launch rocket system and ammunition propellants, to aircraft engines and Korea's space launch vehicle. Na Seung-doo, a researcher at SK Securities, evaluated, "It has a business model with no weak links." Especially, the pride of Hanwha Aerospace, the K9, has been exported to eight countries so far and holds over 50% market share in the self-propelled howitzer export market, ranking first. Thanks to the strong sales of the K9, Hanwha Aerospace's order backlog has more than doubled in six years, from 22.8 trillion KRW in 2017 to 53.3 trillion KRW as of Q3 2023. Although domestic supply of the K9 has ended, exports have entered a stable trajectory, and stable sales growth is expected through 2030.

However, in-house technological capability is lacking. Korea's defense industry heavily relies on the Agency for Defense Development (ADD) for technology. Former Hanwha Defense (a subsidiary of Hanwha Aerospace) executive Um Hyo-sik said, "Most companies produce products based on blueprints made by ADD, and the K9 is no exception," adding, "Although the brand is 'Hanwha,' it is essentially an original equipment manufacturer (OEM) model." Since the K9 was developed under ADD's leadership, Hanwha Aerospace pays ADD a 'technology fee' akin to royalties each time it exports. This structure has continued for decades in the defense industry.

Recently, there have been encouraging results in independent technology development. The infantry fighting vehicle 'Redback,' developed from scratch without a single blueprint, is a representative case. Hanwha Aerospace led all aspects from planning, design, to supply planning. In 2023, it achieved a remarkable export contract worth 3.1 trillion KRW (129 units) with the Australian government. It is said that an ADD official was surprised upon learning about the development later. Former executive Um said, "To achieve Hanwha Aerospace's long-term goal of becoming a global defense 'Top 10,' it needs 3 to 4 more lineups at the level of the K9 that can compete overseas," adding, "Now is not the time to rest on current successes but to sincerely devote to technology research and prepare for the 'post-K9' era." Whether Hanwha Aerospace can produce several more 'premium K9s' will determine its 'scale-up.'

Thanks to Geopolitical Risks... 'Jackpot' Made in Korean Defense Export History

Hanwha Aerospace is considered one of the companies benefiting from global geopolitical risks. The export boom of conventional weapons, including the K9, was driven not only by excellent performance but also by some degree of 'luck.' Kim Ho-sung, a professor at Changwon National University’s Graduate School of Advanced Defense Engineering, said, "Conventional weapons were neglected due to the focus on advanced weapons, but after Russia's invasion of Ukraine, the perception that 'quantity warfare is still important' spread, leading to renewed importance," adding, "Only a few countries, including Korea, properly produce conventional weapons, which created an opportunity for K-defense to flourish." In 2022, the year the Russia-Ukraine war broke out, global defense spending reached a record high of 2.24 trillion USD, a 3.7% increase from the previous year.

In particular, Poland, feeling a significant security threat due to the war, signed an agreement with Korean defense companies including Hanwha for weapons procurement worth about 20 trillion KRW. It was an unprecedented 'jackpot' in defense export history. Among the agreement items were Hanwha Aerospace's K9 (672 units) and Chunmoo (288 units). Currently, the first execution contract supplying 212 K9 units to Poland and the second execution contract adding 152 units have been completed, and efforts are underway to convert the remaining 308 units into actual contracts.

Financial Support-Linked 'KEXIM Act' Is the Biggest Issue... Direct Hit If Not Amended

However, due to financial support issues for Poland, amending the Export-Import Bank of Korea Act (KEXIM Act) has emerged as a pressing issue. Professor Kim said, "Because arms deals are so large, it is customary for the exporting country's bank to lend to the importing country, which then pays the exporter with that money," adding, "The Export-Import Bank of Korea (KEXIM), responsible for financial support, is currently unable to provide additional financial support to Poland due to the 'credit extension limit.'" KEXIM can provide financial support within 40% (6 trillion KRW) of its statutory capital (15 trillion KRW). The limit was nearly exhausted during the first execution contract for the K9. Therefore, financial support for the second execution contract was procured through a 'syndicated loan' involving the government and commercial banks. Although the immediate crisis was averted, the political sphere is discussing amending the KEXIM Act to increase KEXIM's statutory capital to continue follow-up contracts.

A Hanwha Aerospace official said, "If the law is not amended, follow-up orders will be significantly reduced, and even the second execution contract could be canceled, so this is the biggest issue," adding, "We are closely monitoring the situation." The movement among European countries to 'produce conventional weapons domestically' is also a negative factor for Hanwha Aerospace. For example, Germany has started producing armored vehicles again in earnest. In defense, diplomatic relations play a crucial role in transactions. Former executive Um said, "It is natural for NATO (North Atlantic Treaty Organization) allies to purchase each other's weapons first," adding, "The approximately three years needed for their domestic production systems to stabilize is the 'grace period' given to us."