South Korea’s Export-Driven Defense Industry

Arms exports are not a simple, revenue-generating mechanism. Nor are they purely motivated by geopolitical security objectives. Rather, foreign military sales are a natural consequence of many nascent defense industries: domestic arms manufacturers utilize foreign markets to generate economies of scale, while exports are further enabled by proprietary indigenous technology. This positive feedback loop of domestic development and foreign military sales forms the linchpin of South Korea’s export-driven defense industry.

South Korea’s arms industry has grown significantly in the last two decades. The Stockholm International Peace research Institute (SIPRI) Arms Transfers Database shows South Korea’s growth from the 31st to the 7th largest global arms exporter from 2000 to 2020, with exports exceeding imports for the first time in 2021. The trend continued in 2022 with the unprecedented $14.5 billion sale of indigenous Korean military hardware to Poland, as well as deals with Egypt, Saudi Arabia, and Australia.

Exports increase the number of customers for a particular good, thereby incentivizing the provider of the good to lengthen production runs and keep factories open. Although the U.S. Air Force took delivery of its last F-15 Eagle fighter aircraft two decades ago, continued exports and updates over the 20-year gap allowed Boeing to deliver the state-of-the-art F-15EX to USAF in March 2022 without having to restart shuttered production lines. On the flip side, closure of production lines, when it does happen, often poses a prohibitive hurdle to the arms industry – in 2017, a Congressional report estimated it would cost $50 billion to restart production for the F-22 Raptor just six years after the final machine rolled off the factory line.

South Korea’s K9 Thunder self-propelled howitzer (SPH) is a prime example of export-driven economies of scale boosting indigenous industries. The Hanwha-built K9 currently represents half of the global SPH market, in no small part thanks to steady foreign sales. Even after South Korea fulfilled its initial domestic quota of some 1,100 K9s in 2020, export successes have played a vital role in profitably maintaining domestic production lines for the K9. Rather than force factories to produce K9s that the Republic of Korea Army may not need, Hanwha can make best use of its infrastructure and talent to satisfy foreign customers – ensuring the retention of technical knowhow and industrial capacity to domestically manufacture these indispensable battlespace assets.

Continued foreign demand and longer production also provides incentives to innovate, demonstrated by Hanwha’s development of the upgraded K9A2 variant not only for domestic use, but also for a major export bid to the United Kingdom.

Another key feature of an economy of scale is the inverse relationship between production numbers and per-unit costs. The reduction of per-unit costs from increased production for foreign consumption can increase the cost efficiency of indigenously developed weapons. Lockheed Martin’s F-35 Joint Strike Fighter could have been far more costly for the United States had it not been for the involvement of eight program partners and a growing list of current and prospective foreign military sales (FMS) customers. South Korea’s Korea Aerospace Industries (KAI) looks to follow a similar path for their new KF-21 Boramae fighter aircraft by collaborating with Indonesia as a program partner. On the other hand, Japanese military procurement demonstrates a domestic military industry plagued by a lack of scale: Mitsubishi’s F-2 and Type 90 have suffered from exorbitant per-unit costs due to limited domestic demand and decades of arms export prohibitions.

South Korea’s sale of nearly 1,000 K2 Black Panther main battle tanks (MBT) to Poland is a budding case study of the importance of exports for cost efficiency. Hyundai Rotem’s K2 was once infamous as the world’s most expensive MBT. Had only the South Korean Ministry of Defense (MOD) procured the K2, the high cost per unit to offset the total R&D costs would result in smaller orders, increased unit prices, and ultimately a less profitable, disincentivized MBT industry. Warsaw’s purchase of 180 finished K2s, with 800 more to be produced in Poland, could be a turning point: Hyundai Rotem can scale up production, which could decrease unit prices for customers like the South Korean MOD. South Korea has also made K2 export bids to Norway and Egypt, the success of which could further present benefits for both the Korean government and arms industry.

Just as domestic defense industries benefit from exports, so too is export success critically dependent on indigenously developed, proprietary technology. Exports were often the defining impetus for many lengthy, costly indigenization projects by South Korean arms manufacturers.

Domestically developed proprietary technology enables South Korea to freely transfer technology as an export – an attractive proposition to nations seeking to grow their own indigenous arms industries. The promise of technology transfer was decisive in Turkey’s purchase of the K2 over more established European MBTs. Egypt specifically highlighted the importance of local production and transfer of technology as key factors for choosing the K9 as their new SPH. Poland signed its $14.5 billion purchase of Korean arms with the agreement that the majority of its K2, K9, and FA-50 platforms will be built in Poland, as well as securing joint ROK-Polish development of future heavy weapons. Once the KF-21 program reaches its maturity, it is projected that the use of domestic aerospace technologies will also open further export opportunities for the KF-21, as U.S. export bans on certain strategic items such as AESA radars pose less of a hurdle for South Korea to offer sales and technology transfers to potential customers.

South Korean weapons are also often compatible with widely proliferated U.S. systems due to the importance of co-operability between U.S. and Korean forces. Therefore, proprietary technology provides South Korea with the agency to target niche markets – especially those that may not wish to directly acquire U.S. or European arms, but do not wish to procure Chinese or Russian weapons that require less reliable supply chains and supporting infrastructure. However, such unique demand has invited some questionable sales.

Despite the U.S. arms export ban on Saudi Arabia, South Korean firms were willing merchants of arms to Saudi Arabia regardless of its brutal campaign in Yemen – an understanding that culminated in a $989 million deal in March 2022. Deals with the authoritarian government in Egypt, as well as defense exchanges with Myanmar prior to its 2021 coup, have also raised questions about the ethics behind South Korea’s arms exports. As Korean-made weapons grow in notoriety and lethality, what kinds of exports fuel the South Korean defense industry will be an enduring question for South Korean polity.

Exports have been instrumental in developing economies of scale for South Korea’s nascent indigenous defense industry. In turn, the success of South Korean arms in the global market is a critical part of the reinforcing cycle that supports both Korean arms manufacturers and their continued competitiveness abroad. Understanding this mechanism is critical to understanding the exponential growth of South Korean-made weapons and their proliferation abroad.