Seoul seeks fresh export markets for defence hardware

South Korea’s export sector is better known for cars and smartphones than fighter jets and helicopters.

Yet the country’s defence exports have grown at one of the fastest rates in the world over the past few years, led by aerospace. The sector is seeking further expansion, with enthusiastic government backing.

Defence exports were a record $3.4bn last year, having risen steadily from $250m in 2006. “As the South Korean defence industry has grown and matured, every year it acquires more capability,” says Mark Burgess, director of Honeywell Aerospace’s defence business in Asia. “I don’t think they’re taking market share from western companies yet, but they will.”

A key driver of investment in the defence industry has been the threat of conflict with North Korea, with which South Korea remains technically in a state of war. With a huge standing army across the border – estimates put North Korean troop numbers at about 1.2m – as well as Pyongyang’s extensive if outdated array of heavy weaponry, South Korea has been forced to invest heavily in its military capacity.

Last year’s defence budget of $31.7bn was the world’s 12th biggest, according to the Stockholm International Peace Research Institute.

Much of South Korea’s defence hardware has been procured from the US, a crucial military partner that still has about 28,500 troops in the country. Seoul has been unusually aggressive in insisting on “offsets” that have forced US arms suppliers to co-operate with South Korean companies, helping the latter gain valuable technological knowledge.

Current rules oblige the seller in any deal worth more than $10m to offset at least half the cost through building products in South Korea, sourcing components from domestic companies, or transferring intellectual property.

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In one of the most important examples of this strategy, Samsung Aerospace built 72 F-16 fighter jets in the mid-1990s, under licence from Lockheed Martin of the US. Such agreements have helped Korea Aerospace Industries (KAI) – formed from a 1999 merger of Samsung Aerospace, Daewoo Heavy Industries and Hyundai Space and Aircraft – become the spearhead of South Korea’s defence exports drive.

The pride of KAI’s export offering is the T-50 fighter-trainer jet, developed in partnership with Lockheed. Last month KAI delivered the last of 16 T-50 aircraft ordered by Indonesia in a $400m deal. A few weeks earlier, the company had agreed to supply Iraq with 24 jets in a deal worth $1.1bn, with added services that could take the total value to $2bn. The company is negotiating with the Philippines, which has provisionally agreed to buy 12 of the aircraft.

KAI hopes to sell T-50 jets to the US, which wants to replace its ageing trainer jet fleet. This would help address the South Korean industry’s low profile, says Choi Sang-yeol, a senior executive at the company. “So far, although Korea has great technology and great products, many customers still don’t have 100 per cent confidence in our aeroplanes,” he says. “But if the US chooses the T-50, it is a great opportunity for it to become a best-seller.”

KAI’s other flagship programme is the Surion helicopter, developed in collaboration with Airbus Helicopters, for which it is targeting exports of least 300 units by 2020.

Industry executives and analysts say KAI’s growing success in the export market owes much to strong support from the South Korean government, building on diplomatic ties with countries in southeast Asia and the Middle East. Jon Grevatt, an analyst at the consultancy IHS, says: “They don’t just sell military equipment, they back it up with a host of strategic deals in areas including construction and shipbuilding.”

KAI is able to rely on support from some of the country’s leading industrial groups: Samsung Techwin, a sister company of Samsung Electronics, provides jet engines, while LIG Nex1, owned by LG Corporation, supplies radar systems.

South Korea’s efforts to move to the top end of the value chain by developing a stealth fighter with Indonesia, have been dogged by disagreement over whether the programme is a worthwhile investment.

Even optimists do not expect that jet to enter service for more than a decade, so South Korea remains reliant on foreign groups for now to provide its most advanced aircraft. In November it agreed to buy 40 F-35 stealth jets from Lockheed Martin in a deal estimated at $6.6bn, says Yang Uk at the Korea Defence and Security Forum.

As it seeks to maintain its export momentum, KAI is targeting regions such as South America: it signed a $208m deal with Peru in 2012 to supply 20 basic trainer aircraft. Such efforts are crucial if South Korea is to raise exports of defence aerospace. “They have to find new markets,” says Mr Grevatt. “They can only do so much with southeast Asia.”