Global instability spurs rise of S Korea as arms exporter

Published: 4:00 AM, December 10, 2016

SEOUL — In South Korea, the business of war is booming.

Military exports have soared nearly 1,100 per cent since 2009 as the nation’s arms manufacturers thrive on growing global instability, competitive pricing and the re-emergence of demand for conventional weapons of warfare — the country’s speciality.

Now, analysts believe the country is on track to overtake China as the region’s leading arms exporter by the end of the decade.

“Globally, South Korea is in a good spot,” said Mr Paul Choi, head of research at CLSA Securities Korea. “(Its) structural growth in defence equipment is already ahead of its own target. By 2020, it will pass China to become Asia’s arms powerhouse.”

The boom is being fuelled by rising geopolitical tensions in Asia and eastern Europe.

China’s increasing assertiveness in the South China Sea has prompted the region’s emerging markets, such as Indonesia and the Philippines, to devote more to defence, but with a keen eye on price. Here, South Korea’s arms exporters, including Korea Aerospace Industries and Hanwha Techwin, have proven extremely competitive, often sweetening deals with the transfer of technology.

The nation also carries little geopolitical or historical baggage and can cater to the rising demand for weaponry in the Middle East, Indian subcontinent or South-east Asia with less sensitivity than some of its nearest neighbours.

“Trucks and submarines to Indonesia, comms equipment to Iraq, ships to the UK ... South Korea has a diverse industry and is selling to a wide range of users,” said Mr Ben Moores, a senior defence analyst at IHS Markit. “China, meanwhile, is dependent on Pakistan and Sri Lanka.”

Last year, South Korea exported US$871 million (S$1.24 billion) of equipment — up from US$73 million in 2009. For this year, Mr Moores expects the total to surpass US$1.2 billion.

China’s arms exports, in comparison, declined from US$1.9 billion in 2013 to US$1.6 billion last year. IHS Markit predicts Beijing will drop out of the world’s top 10 ranking next year.

“South Korea has put its money in the right places and made investments in strategic weapons, not national vanities,” he said.

The country has booked orders worth more than US$3 billion in each of the past three years, promising flush income in the years to come, according to the official Defense Acquisition Program Administration.

Shifting attitudes back in favour of conventional armaments such as artillery — weapons that South Korea has been honing for decades in its stand-off with Pyongyang — have also played a role.

Russia’s invasion of the Crimea sparked a surge in demand, with Eastern European and Scandinavian nations now lining up to negotiate with Hanwha Techwin for its self-propelled artillery, said Mr Choi, author of a recent report on Korean defence.

“The company is very competitive (on price),” he said. “Historically, the Korean government accounted for about a quarter of artillery demand, so it has big economies of scale. The prices of its German competitors are about twice as high.”

However, for Seoul, much rests on Korea Aerospace securing an upcoming deal to provide 500 trainer jets to the United States Air Force.

The company’s T-50 jet was developed with the help of US group Lockheed Martin, strengthening its chances of winning, said Mr Choi. And if it does, US allies will likely follow suit with orders.

But there are clouds on the horizon. Shares in Hanwha Techwin, Korea Aerospace and Lig Nex1, a manufacturer of anti-missile radar equipment, all plunged in late October when a political scandal engulfed the country’s conservative President, Ms Park Geun-hye.

Investors fretted she might be replaced with a liberal leader, who would be less inclined to devote funds to the world’s 10th largest military budget.

The gloom was short-lived. The election in the US of Donald Trump, who said he could withdraw the 30,000 or so US troops in South Korea, sent shares soaring about 10 per cent.