K-9, Redback, and Cheongung-II Possessing Nation Korea... Companies Sitting on Tens of Trillions in Profits [K-Defense Industry Myth] (Part 1)

Analysis of Quarterly Reports from Four Domestic Defense Companies
Record High Backlog and Operating Profit Achieved
Leading Positions in Each Sector Within Reach with Continued Exports

The K-defense industry is thriving. The defense export amount in 2023 is approximately 13 billion dollars. This is 4.3 billion dollars less than in 2022 (17.3 billion dollars). However, the number of export destination countries increased to 12, and the number of major exported weapon systems rose to 12, compared to 4 countries and 6 systems in 2022. This is evaluated as laying the foundation for entering the top 4 in defense exports by 2027. The export target for this year is 20 billion dollars, and the likelihood of achieving it appears high. This is because the operating profits and order backlogs of defense companies in the second quarter of this year are promising.

Additionally, exports to Romania have been virtually confirmed. On the 17th, Defense Minister Shin Won-sik visited Romania and was scheduled to announce the signing of a 'K-defense' export contract. The export volume includes 54 K9 self-propelled howitzers, 36 K10 ammunition carriers (worth 1.4 trillion won), and 54 portable surface-to-air guided missiles Shingung (123 billion won). However, since the Romanian government's final review remains, the contract announcement is expected to be postponed to early next month at the earliest.

Analyzing the disclosures, the company that stands out in terms of performance is Hanwha Aerospace. According to the quarterly reports disclosed last month by the four domestic defense companies, Hanwha Aerospace's defense division had an order backlog of 77.2838 trillion won in the first quarter. Operating profit is also strong. Hanwha Aerospace's operating profit forecast for the second quarter of this year is 206.2 billion won, more than double the 82.9 billion won recorded in the same period last year. Hanwha Aerospace has consecutively signed large-scale export contracts with countries such as Poland and Australia. This year, it plans to deliver more than 60 K9s and over 30 Chunmu multiple rocket launchers to Poland. Since Polish government officials visited defense factories in April, additional exports of the K239 Chunmu and K2 tanks are also expected. Mirae Asset Securities, based on data from the British military intelligence company Janes, forecast that Hanwha Aerospace's K-9 self-propelled howitzer will hold a 63.8% share of the global defense market in the self-propelled howitzer sector by 2032. Holding over 50% market share would make it the world's number one.

Hanwha Aerospace Hits the Mark with ‘Locally Customized Export Strategy’

Hanwha Aerospace's exports are regarded as the first successful case of the ‘K-defense export system,’ which optimizes planning, design, and supply chains targeting specific countries. A representative example is the export of the Redback to Australia. After competing with European equipment, the Redback was selected as Australia's next-generation armored vehicle. 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. They plan to produce 129 Redbacks there. The ‘locally customized export strategy’ involves sourcing a significant portion of manpower, steel, raw materials, and key components locally.

The export scale is also large. The 129 units amount to 2.4 billion dollars (3.15 trillion won). This is the largest weapon procurement project in the history of the Australian Army. With this order, the Redback became the second ground equipment exported by a domestic defense company to Australia, following the K-9 self-propelled howitzer. It also signifies that K-defense has officially entered the advanced AUKUS (Australia, United Kingdom, United States security alliance) market.

Hyundai Rotem Pursues Local Production in Poland

Hyundai Rotem also played a role in ground weapon exports. Hyundai Rotem's defense division had an order backlog of 6.9091 trillion won in the first quarter of this year. Operating profit increased by 19.9%, from 67.2 billion won in the second quarter of last year to 80.6 billion won in the second quarter of this year. The first quarter order backlog reflects overseas orders secured since the second half of last year. Hyundai Rotem also increased sales by delivering 18 K2 tanks to Poland in the first quarter. Tank deliveries to Poland are expected to continue after the second quarter, likely increasing the order backlog further.

[Image source=Yonhap News]

Hyundai Rotem is also developing a Poland-customized K2PL model and is pursuing local production there. If this trend continues, the market share of the K-2 tank in the global tank market is expected to rise. Hyundai Rotem's K-2 is projected to hold a 19.2% market share by 2032, ranking second, following General Dynamics, the manufacturer of the Abrams tank. Success continues in the South American market as well. Hyundai Rotem signed a contract this year to export 30 K808 ‘Baekho’ wheeled armored vehicles to Peru. This is the first export of Hyundai Rotem's wheeled armored vehicles and the first case of domestically produced combat armored vehicles entering Latin America.

LIG Nex1 Forecasted to be World No.1 in Defense Missile Sector by 2032

In the missile sector, LIG Nex1 is dominant. LIG Nex1's order backlog in the first quarter was 19.2876 trillion won. Operating profit in the second quarter of this year was 55 billion won, a 36.8% increase compared to 40.2 billion won in the same period last year. Last November, LIG Nex1 signed a 4 trillion won export contract for the Cheongung-II with Saudi Arabia. With escalating instability in the Middle East, Saudi Arabia is reportedly considering additional purchases. LIG Nex1 also signed a memorandum of understanding (MOU) last year with Romania's state-owned defense company Romarm in the surface-to-air missile sector, making exports of Cheongung-II to Romania highly likely. Exports of Shingung, Cheongung-II (Romania), Bigung (United States), and the second batch of Cheongung-II (Saudi Arabia) are expected to continue. Next-generation products such as L-SAM, LAMD, and Fleet Air Defense Guided Missile-II are also under development, suggesting long-term orders.

Mirae Asset Securities forecast that Cheongung-II could capture a 27.5% market share in the medium-range surface-to-air missile sector by 2032, ranking first globally. This surpasses the United States' Patriot missile share of 24.9% (second place) and Russia's S-400 at 20.6% (third place).

KAI Challenges Next-Generation Projects Including Multi-Purpose Transport Aircraft and 6th Generation Fighter

In the aviation sector, Korea Aerospace Industries (KAI) is the leader. Its order backlog in the first quarter of this year was 21.2718 trillion won. Operating profit in the second quarter was 55 billion won. This increase is due to rising demand for weapon systems, especially in European and Middle Eastern countries, following Russia's invasion of Ukraine and the war between Israel and the Palestinian militant group Hamas. KAI exported the domestically produced supersonic advanced trainer T-50 to Indonesia in 2011. Although it was the first export, it was worth about 400 million dollars and marked the starting signal for ‘K-defense’ exports.

Since then, KAI has exported over 220 aircraft worth 8.8 billion dollars overseas. In 2022, it signed a contract to export 48 FA-50s to Poland. Last year, it also exported 18 FA-50s to Malaysia. Additional FA-50 exports and Surion helicopter orders are expected this year.

KAI is also developing future growth engines, including a domestically produced multi-purpose transport aircraft with the project name ‘MC-X.’ KAI estimates that about 100 transport aircraft will be needed domestically and about 800 overseas. KAI forecasts that the FA-50 will hold a 10.0% market share in the light combat aircraft sector by 2032, ranking second, aiming to chase Lockheed Martin's F-16 (25.1%).

Experts evaluated that the rise in K-defense export order backlogs and operating profits was possible because prepared plans aligned well with international circumstances.

An Sang-nam, head of the Defense Industry Promotion Headquarters at the Defense Industry Promotion Association, said, “With the three elements of facilities, manpower, and production technology in place, and international situations such as the Ukraine war aligning, domestic defense exports have increased,” adding, “We must prepare for the future by developing next-generation weapon systems following conventional weapons.” A defense industry official said, “As diplomatic and security situations change, a niche market for defense exports has opened wide for South Korea,” and “It is time to set long-term goals and policies to sustain defense export achievements.”