Achieving 20 Billion Dollar Defense Exports This Year Seems Difficult

Achieved $6.3 Billion as of September... Half of Target
Even with Additional Surion and K2 Tanks, Only $15 Billion Reached

The government's target of achieving $20 billion in K-defense exports this year has become difficult. Exports are concentrated in four major defense companies, and inadequate export financing systems are seen as obstacles to increasing export volume.

[Image source=Yonhap News]

According to a government official on the 4th, as of September this year, defense exports amounted to $6.3 billion. Ten deals have been made, including the Cheonmu multiple launch rocket system to Poland ($1.64 billion), the K-9 self-propelled howitzer to Romania ($1 billion), and four 3,400-ton frigates to Peru ($400 million). In December last year, President Yoon Suk-yeol presided over the 'Defense Export Strategy Meeting' and set this year's defense export target at $20 billion (27.61 trillion KRW), but the current figure is less than half of that.

Additional export deals may be concluded in the second half of the year. Hyundai Rotem is negotiating the second contract for K2 tanks with Poland, and it is highly likely to be finalized within this month. The contract is expected to be signed on Poland's Independence Day, October 11. The scale is $7 billion (approximately 9.64 trillion KRW). The first export contract for the domestically produced utility helicopter (KUH-1) 'Surion' to a Middle Eastern country is also expected to be signed this month. Since early this year, the Army Aviation Commander and the Minister of National Defense have visited Korea and expressed active intentions to procure, and it is reported that an official letter for final import will be sent in mid-October. The scale is $450 million (618.6 billion KRW).

Vietnam K-9 Self-Propelled Howitzer and Additional Middle East Exports Uncertain

Negotiations are ongoing for the K-9 self-propelled howitzer to Vietnam, naval base construction in the Middle East, and Cheonmu multiple launch rocket system exports, but it is uncertain whether these will be finalized within this year. This implies that it will be difficult for defense exports to exceed $15 billion this year.

Industry insiders point out that financial policy support is necessary to achieve the $20 billion defense export target. Defense contracts are strongly government-to-government in nature, and export amounts are large, so it is an international practice for exporting countries to provide low-interest policy financing and guarantee insurance. Poland also requested financial support from our government. During the first weapons contract, the Export-Import Bank of Korea and Korea Trade Insurance Corporation supported Poland with loans and guarantees amounting to about 80% of the contract value, approximately $10 billion. Although the Export-Import Bank Act was amended at the end of this year to increase the capital limit from 15 trillion KRW to 25 trillion KRW, it is still insufficient to support exports.

Only the Four Major Defense Companies Show Strong Performance

Another issue is that exports are concentrated only in the four major defense companies. According to each company's performance disclosures, the combined operating profit of the four major defense companies?Hanwha Aerospace, Korea Aerospace Industries (KAI), Hyundai Rotem, and LIG Nex1?for the third quarter of this year is estimated at 753.8 billion KRW. Compared to the third quarter of last year (233.3 billion KRW), this is an increase of 3.2 times (223.1%). The combined estimated sales of the four major defense companies for the third quarter total 5.3602 trillion KRW, which is expected to increase by 30.9% compared to last year (4.0951 trillion KRW).

Hanwha Aerospace Operating Profit Increases Fivefold

Hanwha Aerospace's third-quarter operating profit was 477.2 billion KRW, a 5.6-fold (457.5%) increase from 85.6 billion KRW in the third quarter of last year. Sales increased by 61.9% to 2.6312 trillion KRW. Hyundai Rotem, led by the K-2 tank, saw third-quarter sales rise 18.0% year-on-year to 1.0935 trillion KRW, and operating profit increased 3.3 times (233.7%) to 137.5 billion KRW.

Korea Aerospace Industries (KAI), which produces the Korean supersonic fighter KF-21 and the multipurpose fighter FA-50, recorded sales of 907.2 billion KRW and operating profit of 76.3 billion KRW in the third quarter. Sales decreased by 9.9% compared to last year, but operating profit increased by 16.7%. LIG Nex1, a guided weapons specialist, is estimated to have third-quarter sales of 728.3 billion KRW, a 35.9% growth compared to the third quarter of last year. Operating profit is expected to increase by 52.8% to 62.8 billion KRW. LIG Nex1 is also continuing its simultaneous growth in sales and operating profit based on a stable order backlog worth 19 trillion KRW.