South Korea weapons makers must think beyond Ukraine

Russia’s ongoing invasion of Ukraine is adding momentum to global demand.

South Korea’s location — placing it under pressure from both North Korea and China — has driven it to assume a more powerful defense posture. Previously focused on cars and chips, the nation has also harnessed its manufacturing prowess to become the world’s ninth-largest weapons supplier. Seoul should press its case for becoming an even larger part of the international arms market, while ensuring it doesn’t lose sight of its own tech expertise.

Russia’s ongoing invasion of Ukraine is adding momentum to global demand, with neighbours bolstering their defenses as a counter to Moscow’s aggressive stance. That’s helping South Korean suppliers, including Hanwha Aerospace Co., which makes land-based artillery for a growing list of European clients. Escalating tensions closer to home — with North Korea and in the Taiwan Strait — as well as conflicts like Israel’s war in Gaza, drove global military spending 9 percent higher last year to $2.2 trillion.

Poland is one of Hanwha’s most important customers with Estonia, Finland, and Norway also buyers of the company’s K9 self-propelled howitzers capable of hitting targets 60 kilometers (37 miles) away. These relationships date back well before Russian troops crossed into Ukraine in 2022, with many European nations boosting defensive procurement following Moscow’s 2014 annexation of Crimea.

Romania, shaken by Russia’s attack on its northern neighbour, may be next in line to buy artillery from South Korea. Bucharest is in talks to buy 54 K9s at a cost of more than 1 trillion won ($750 million), the company said in a filing last month.

Years of product development, foreign relationship-building, and Russia’s expansionism have driven Hanwha’s sales of land-based systems, which include tanks and rocket launchers. Revenue for that division doubled to 4.1 trillion won ($3.1 billion) last year. While those figures were boosted by domestic orders and a merger with its munitions affiliate, overseas sales are set to continue growing. Its backlog of export orders jumped 10-fold from 1.7 trillion won in 2021 to 20 trillion won at the end of last year, according to a February financial presentation.

Hanwha also makes space launch vehicles, satellites, aircraft and surveillance cameras. Yet it’s the land systems that drive profit, accounting for 42 percent of sales and 81 percent of operating income. Poland is crucial to that long-term growth and last year signed deals totaling more than 30 trillion won with South Korean suppliers including Hanwha and Hyundai Rotem Co.

But the commercial relationship between Warsaw and Seoul hit some snags in the past few months. First there are concerns that Poland’s new government under Prime Minister Donald Tusk, which took office Dec. 13, may cancel or even roll back foreign procurement deals signed by its predecessor. Just prior to Tusk’s swearing-in, the outgoing administration signed a 3.45 trillion won ($2.6 billion) deal to purchase K9 self-propelled howitzers over eight years. The new government has signaled it will honour earlier contracts, but will look to more local procurement to feed its defense needs, industry publication Defense News reported.

The other hiccup is funding. The weapons were to be bought with the help of loans from state-backed Export-Import Bank of Korea. The bank, however, hit its statutory limit in lending to a single borrower (Poland), curbing further purchases. That problem was finally solved last week with South Korea’s parliament raising Kexim’s capital limit, providing a boost to arms exporters.

Even amid the political and financial uncertainties, the trend toward buying more weapons, including ammunition, from South Korea is likely to continue. North Korea may have already become involved in the Ukraine war, shipping containers to Russia that could hold millions of military shells, a South Korean official said last week. That should embolden Seoul to further boost production for both domestic and foreign use.

In November, Hanwha announced a $134 million deal to supply charges — the propellant used to send an artillery shell — to the UK. Significantly, those supplies meet North Atlantic Treat Organization standards for 155mm shells, opening the prospect of Hanwha providing much-needed ammunition to Ukraine via NATO and its member states.

Those weapons won’t go direct, however. South Korean law prohibits arms sales to a conflict zone. The workaround is for companies to sell to allies such as the US, which send their own ammunition to Ukraine and use the South Korean supplies to replenish their stock. That approach was demonstrated again in January when NATO announced a $1.1 euro ($1.2 billion) contract to purchase 155mm shells to aid Ukraine in its defense. In this case Belgium, Lithuania and Spain pooled money to buy from French and German weapons makers, according to Reuters. Yet a global shortage of ammunition-production capacity, and no sign of a let-up in the Ukraine war, makes it likely South Korea will be called upon to help meet demand.

Yet Seoul’s strength in the arms sector is largely based on price, an advantage that may not last if tensions cool. Beyond the military, the nation’s upper hand lies in its technological prowess and an ability to marry manufacturing with precision electronics. That should be the basis on which the country pivots its weapons industry, including toward dual-use items such as surveillance systems, drones and ships.

If conflict continues to drag on, South Korea’s expanding production capacity and growing reputation as a reliable supplier will elevate its position in the global weapons trade. But it must also prepare for peace, and ensure it has developed a sector that can persist without war.

Tim Culpan is a Bloomberg Opinion columnist. Views do not represent the stand of this publication. 

Credit: Bloomberg