[Defense Brief] The Role of Korea's Defense Industry Leader

The Defense Acquisition Program Administration (DAPA) has declared its intention to take the lead in defense exports. In his inaugural address last month, DAPA Commissioner Lee Yongcheol stated, "In line with national policy objectives, we aim to achieve $20 billion in defense exports and a 5% share of the global export market."

The ambition is well-founded, considering the sales performance of the Korean defense industry. The combined cumulative operating profit of the nation's four largest defense companies for the first three quarters of this year reached 3.4928 trillion won, significantly surpassing last year's annual operating profit of 2.6589 trillion won. There are even forecasts that this year's operating profit will exceed 4 trillion won. Hanwha Aerospace, the leading company in the defense industry, posted cumulative sales of 18.2816 trillion won and an operating profit of 2.2816 trillion won through the third quarter. Hyundai Rotem has shown similar results. Based on exports of the K2 tank, its defense division recorded annual sales of 2.3652 trillion won and an operating profit of 563.2 billion won last year, representing increases of 49.8% and 254.1%, respectively, compared to the previous year. Defense exports surged by 133% year-on-year, reaching 1.5917 trillion won compared to 682.6 billion won in the same period last year, accounting for more than half of total sales.

The strong dollar trend has further boosted sales for Korea's defense industry. The won-dollar exchange rate has surpassed the 1,500 won mark, and there are even projections that it could reach 1,600 won next year. While manufacturers are lamenting, defense companies are celebrating. Weapons systems are typically traded in U.S. dollars. As the won-dollar exchange rate rises, the value of export contracts converted to won increases. This year's average exchange rate stands at 1,418 won per dollar, which is 54 won (4.0%) higher than last year's annual average. If the strong dollar trend continues into next year, the positive impact will be even greater, as the defense industry's order backlog is close to 100 trillion won. The higher the localization rate, the greater the profit for companies. The localization rate of the K9 self-propelled howitzer produced by Hanwha Aerospace is 86%, and for the Cheonmu multiple rocket launcher, it is 90%. The export model of Hyundai Rotem's K2 tank boasts a localization rate of 84%.

However, the new DAPA Commissioner has overlooked certain aspects by focusing solely on defense exports, particularly the dual nature of the strong dollar trend. Commissioner Lee remarked, "We must reflect on whether the agency is still too focused on the domestic market and acquisition-centered organizational structure and work inertia." He appears to have underestimated the importance of acquisitions.

If the strong dollar trend continues, it will inevitably increase the burden on Korea when purchasing U.S.-made weapons. The joint fact sheet released last month, reflecting agreements from the Korea-U.S. summit, included the statement, "Korea will spend $25 billion (approximately 37 trillion won) on the purchase of U.S. military equipment by 2030." The military authorities are currently preparing a total of five projects, with a combined value of about $5.43 billion, to be pursued through Foreign Military Sales (FMS), which are government-to-government transactions. In addition, there is increasing pressure from the Trump administration regarding the additional procurement of airborne early warning and control aircraft, heavy attack helicopters, aerial refueling tankers, and the presidential helicopter project.

If the military's weapons acquisition projects are carried out through "commercial purchase" methods, where foreign companies participate in the acquisition process of specific weapon systems, the impact of exchange rate fluctuations is expected to be even greater.

Commissioner Lee highlights that he served as DAPA's Deputy Commissioner when the agency was established 20 years ago. The current defense market is different from back then-it's highly unpredictable. It is also uncertain how long the United States will continue to cooperate with Korea's defense industry. If the ruling Republican Party loses in the U.S. midterm elections in November next year, the legislative environment could change. President Trump could also become a lame duck earlier than expected. While fulfilling the government's national policy task of boosting defense exports is important, it is also the leader's responsibility to look for any potential blind spots.