Insight: Inside South Korea's race to become one of the world’s biggest arms dealers

Korea Aerospace Industries

29/05/2023 02:00

By Joyce Lee and Josh Smith
       SEOUL, May 29 (Reuters) - South Korea is using a $13.7
billion arms deal with Poland - Seoul's biggest ever - to lay
the groundwork for a military-industrial juggernaut that the two
nations' defence companies hope will feed Europe's hunger for
weapons far into the future.
    South Korea's arms sales jumped to more than $17 billion in
2022 from $7.25 billion the year before, according to its
defence ministry, as Western countries scrambled to arm Ukraine
and tensions rose in other hot spots such as North Korea and the
South China Sea.
    The arms deal with Poland, a key NATO member, last year
included hundreds of Chunmoo rocket launchers, K2 tanks, K9
self-propelled howitzers, and FA-50 fighter aircraft. The deal's
value and the number of weapons involved made it stand out even
among the world's biggest defence players.
    South Korean and Polish officials say their partnership will
help them conquer the European arms market even beyond the
Ukraine war, with Seoul providing high-quality weapons faster
than other countries and Poland offering manufacturing capacity
and a sales pipeline into Europe.
    Reuters spoke to 13 company executives and government
officials, including those directly involved in the deal, who
said the arrangement provides a blueprint for using
international public-private partnerships and consortiums to
extend Seoul's reach and achieve its ambition to be one of the
world's biggest weapons suppliers. 
    "The Czech Republic, Romania, Slovakia, Finland, Estonia,
Latvia, Lithuania, and others were thinking of buying defence
products only in Europe, but now it is more well known that you
can buy at a low price and have it delivered quickly from Korean
companies," said Oh Kyeahwan, a director at Hanwha Aerospace who
was involved in the Poland deal.
    South Korean companies do not disclose the unit prices for
their weapons, which are often sold with support vehicles and
spare parts.
    Hanwha Aerospace already had a 55% share of the global
howitzer market - a number that will rise to an estimated 68%
with the Poland deal, according to research by NH Research &
Securities. 
    The deal established consortiums of South Korean and Polish
companies that will build the weapons, maintain the fighter jets
and provide the framework to eventually supply other European
states, said Lukasz Komorek, director of the Export Projects
Office at the state-owned Polish Armaments Group (PGZ).
    That will include building South Korean arms on license in
Poland, officials in Seoul and Warsaw said. Plans call for 500
of 820 tanks and 300 of 672 howitzers to be built in Polish
factories starting in 2026.
    "We don't want to just play the role of subcontractor,
technological transfer provider and the purchaser," Komorek
said. "We can both create the synergy and use our experiences to
conquer the European markets."
        Sash Tusa, a defence and aerospace analyst at
Britain-based Agency Partners, said that although both countries
have well-established defence industries, the long-term plans
will face hurdles. Political winds could shift, he said,
reducing demand for weapons such as howitzers and tanks.
        Even if production and demand hold up, European
countries might want deals of their own with South Korea along
the lines of what Poland has - co-production agreements that
could create jobs and stimulate industry, Tusa said.
        "It may work for some countries at very, very low
volume," he added of Polish-brokered South Korean weapons sales,
discussing challenges the joint operation might face.        

    SPEEDY DELIVERY
    At a Hanwha Aerospace factory on South Korea's southern
coast, six huge automated robots and more than 150 production
workers are churning out 47-ton K9s destined for Poland.
    The self-propelled guns use NATO-standard 155mm ammunition,
have computerised fire-control systems, are designed to easily
integrate into command and control networks, and offer
performance comparable to more expensive Western options. Major
powers such as Australia and India operate them.
    To meet demand, the company expects to add about 50 more
workers and more production lines, production manager Cha
Yong-su said during a recent tour. The robots handle about 70%
of the welding work on a K9 and are key to expanding capacity,
he said. They operate an average of eight hours per day but can
work around the clock if needed.
    "Basically, we can meet any amount of order you want," Cha
said.
    South Korea’s offer to provide weapons faster than almost
anyone was a key consideration, Polish officials say. The first
shipment of 10 K2s and 24 K9s arrived in Poland in December,
just months after the deals were signed, and at least five more
tanks and 12 additional howitzers have been delivered since.
    By contrast, Germany, another major arms manufacturer, has
yet to deliver any of the 44 new Leopard tanks Hungary ordered
in 2018, said Oskar Pietrewicz, senior analyst at the Polish
Institute of International Affairs.
    "Countries' interest in South Korea's offer may only grow
considering the limited production capacity of Germany's defence
industry, which is a major arms supplier in the region," he
said.
    Executives in South Korea's arms industry say that will be a
selling point for future clients.
    A close relationship between South Korea's military and its
arms industry allows them to rearrange domestic orders to make
room for export production and expand production in the
country's highly industrialized manufacturing base, officials
said.
    "They put things together in weeks or months that would take
us years," a European defence industry executive said, speaking
on condition of anonymity because of the sensitivity of the
matter.
    Constant tensions with North Korea mean the South's military
production lines are running and its weapons have been
developed, tested, and upgraded in high-pressure situations,
said Cho Woorae, global business and strategy vice president at
Korea Aerospace Industries.
    South Korea had promoted its weapons to Poland before the
war, but the invasion of Ukraine - which Russia calls a "special
operation" - increased Poland's interest, said Kim Hyoung Cheol,
deputy director at the Defense Acquisition Program
Administration (DAPA).
    After the Polish defence minister's visit in May 2022 to
observe South Korean weapons, and Yoon Suk Yeol met with Polish
President Andrzej Duda on the sidelines of the NATO summit in
June that year, the stage was set for the huge deal that was
finalised a month later, Kim said.
    South Korea's weapons are designed to be compatible with
U.S. and NATO systems - another selling point. The country is
the third-largest supplier of weapons to NATO and its member
states, accounting for 4.9% of arms purchases, according to the
Stockholm International Peace Research Institute (SIPRI). 
    That is far behind the United States, which accounts for
65%, and France at 8.6%.  
    
    JOINT PRODUCTION
    Officials in Seoul told Reuters that they pitched Poland on
producing South Korean weapons there to make it easier to
deliver to European customers.
    "The Korean government is promoting military diplomacy and
defence cooperation so that the relationship with the purchasing
country can develop into various partnerships beyond just a
seller-buyer relationship," South Korea's Defense Ministry said
in a statement.
    Poland's Ministry of National Defence did not respond to a
written request for comment.
    Oh said Hanwha Aerospace operates successful
technology-sharing arrangements in India, Egypt, and Turkey.
    "Because of that, I don't think there's much to worry about
regarding capacity," he said.
    The 2022 arms deal began with South Korean companies signing
a framework agreement with the Polish government. Those
companies formed consortiums with PGZ and its subsidiaries,
which signed the final deal with the Polish government, he said.
    "We have the one entity only, one big consortium that is
representing the whole project from the perspective of the
industry," Komorek said, noting that the deal encompassed many
projects.

    'AGENDA FOR A DECADE'
    In the past year, South Korea has launched its first
home-grown space rocket, saw the maiden flight of its
domestically designed KFX fighter, and announced billions of
dollars in deals. 
    "For most other countries, that would be an agenda for a
decade," one executive at a European defence firm told Reuters,
speaking anonymously because of the sensitivity of the matter.
"We’ve underestimated Korea for a long time."
    Yoon told Reuters last month that South Korea might extend
its support for Kyiv beyond humanitarian and economic aid if
Ukraine comes under a large-scale civilian attack. 
    Seoul has since approved at least some South Korean weapons
components for use in Ukraine. 
    The country's sales in Asia - which accounted for 63% of its
defence exports from 2018-2022, according to SIPRI - come amid
regional arms build-ups driven by security concerns and the
U.S.-China rivalry.
    South Korea is developing its KFX fighter jet with
Indonesia, and Polish leaders have signalled interest in that
project. Malaysia this year bought nearly $1 billion in FA-50s,
and Seoul is in the running to win a $12 billion deal to supply
Australia's next infantry fighting vehicle. 
    "Asian countries see us as a very attractive partner for
defence deals as we all seek to hedge against the rising
tensions," a diplomat in Seoul said. "We're a U.S. ally, but not
the U.S."

 (Reporting by Josh Smith and Joyce Lee. Writing by Josh Smith.
Editing by Gerry Doyle)
 ((JoshSmith1@thomsonreuters.com;))