The Report Card of the Moon Jae-in Administration's Defense Industry

President Moon Jae-in boarding the Black Eagles at the opening ceremony of 'Seoul ADEX' on October 17, 2017. In his congratulatory speech that day, President Moon emphasized strengthening defense industry competitiveness and advancing it as an export industry.

[Kim Min-wook, Editor-in-Chief of Monthly Defense and Technology] When the Defense Acquisition Program Administration (DAPA) was launched in 2006, defense export sales amounted to only $250 million. However, by 2012, exports reached $2.35 billion, and in 2013, they recorded $3.416 billion, surpassing the $3 billion mark for the first time. In 2014, exports hit an all-time high of $3.61 billion, and in 2015, maintained a $3.541 billion export performance in the $3 billion range.

From the early 1970s, when Korea first celebrated exporting rifle-type firearms and ammunition fuzes abroad, the range of export items has advanced and diversified to include warships and aircraft. In 2011, Indonesia purchased 16 T-50 aircraft and 3 Type 209 submarines; in 2012, four naval support ships were ordered from the United Kingdom, the birthplace of the shipbuilding industry. Subsequently, in 2013, Norway acquired one naval support ship, and Thailand purchased one frigate. In December 2013, a contract was successfully signed to export 24 FA-50 aircraft to Iraq, and in April 2014, 12 FA-50s were ordered by the Philippines.

The growth factors behind defense exports include the fact that all systems have been fully deployed by the Republic of Korea Armed Forces, proving their excellent performance globally. Additionally, active government support, quality assurance, stable follow-up logistics support, reciprocal defense cooperation policies, and the proactive entrepreneurial spirit and passion of defense companies have all contributed simultaneously.

However, Korea’s defense export volume remains quite modest on the global stage. Even at the record high in 2014, Korea held only about a 1% share of the world defense export market. To support robust national defense capabilities and contribute to the national economy through job creation, it is necessary to establish global industrial competitiveness and continuously enhance defense exports based on that foundation.

▲ 2017?2018, Signs of Change= At the start of 2017, most forecasts predicted only ‘crisis’ and no ‘opportunity’ in the defense sector. The aftermath of the impeachment turmoil unsettled the entire nation and economy, and with the inauguration of a new government, defense issues were overshadowed by other core government agendas. Despite the considerable efforts of defense industry personnel, the defense environment in 2017 was more unfavorable than ever, with all indicators plummeting toward the bottom.

Fortunately, the defense environment began to gradually improve from the fourth quarter of 2017. This was likely influenced by continuous efforts from the government, defense companies, and defense personnel to correct distorted perceptions about defense, emphasizing that defense is a pillar of national security and a future growth engine industry, which positively affected public opinion to some extent.

The most significant turning point was President Moon Jae-in’s congratulatory speech at the opening ceremony of the Seoul International Aerospace and Defense Exhibition (Seoul ADEX 2017) on October 17, 2017. President Moon, who had consistently emphasized eradicating defense corruption, highlighted the urgent need to rapidly deploy advanced weapon systems to overcome security crises on the Korean Peninsula and establish peace. He stressed strengthening defense industry competitiveness, domestic production of advanced weapons, and the leap toward an export industry, mentioning the positive aspects of defense development.

Furthermore, on September 14, 2018, at the launching ceremony of the 3,000-ton-class submarine Dosan Ahn Changho, built purely with Korean technology at Geoje Daewoo Shipbuilding & Marine Engineering, President Moon presided over the ‘Defense Industry Promotion Meeting.’ He encouraged defense industry stakeholders and reviewed the development status of the defense industry, particularly how 4th Industrial Revolution technologies are being utilized and integrated.

At this event, Wang Jung-hong, Administrator of DAPA, announced a defense industry development plan, predicting future warfare patterns and changes in national defense due to technological advancements. He signaled a major policy framework shift to transform the rigid, domestic-market-focused, closed defense industry into a challenging, export-oriented, and open defense industry.

Hanwha Defense signed a contract on December 20, 2017, to export 24 K9 self-propelled howitzers and 6 K10 ammunition resupply vehicles to Norway by 2020. Since the K9 self-propelled howitzer was first exported to Turkey (280 units) in 2001, it has achieved export results totaling over 500 units, including Poland (120 units), Finland (48 units), and India (100 units), with a business scale reaching 1.45 billion USD. The K9 self-propelled howitzer, independently developed with domestic technology by Hanwha Defense and the Agency for Defense Development in 1998, has a range of 40 km and has been deployed domestically since 2000. The photo shows the K9 self-propelled howitzer undergoing test evaluations locally ahead of the export to Norway. Photo by Hanwha Defense.

▲ Urgent Need to Strengthen Defense Competitiveness in Response to the 4th Industrial Revolution= As the 4th Industrial Revolution emerges as a global topic, a major paradigm shift is expected to transform industries worldwide. Although the definition of the 4th Industrial Revolution remains unclear, it is anticipated to significantly enhance overall industrial efficiency and productivity by enabling the smartification, platformization, and servicification of existing products through concepts such as ‘hyper-connected intelligent society’ and ‘online-offline convergence,’ moving beyond the computer and internet-based 3rd Industrial Revolution era.

The defense industry is a future industry with high potential as a new source of national security and economic growth, involving large-scale investments and the convergence of various advanced technologies. Historically, major countries have developed technologies such as the internet, GPS, unmanned aerial vehicles, and robots for military purposes through the defense industry, then diffused them into civilian sectors, using the defense industry as a test bed for nurturing new national industries and economic growth.

Accordingly, it is essential to establish development strategies to strengthen the global competitiveness of the defense industry, which has high potential as a future national competitive advantage, to maintain national security and drive sustainable economic growth. Especially with the advent of the 4th Industrial Revolution, trends toward advanced, smart, converged, platform-based, and service-oriented weapon systems are expanding in the defense sector, making it imperative to actively seek strategies to enhance defense industry competitiveness in response.

▲ Comprehensive Reorganization of DAPA and Establishment of a Practical Integrated Project Management System= As part of the core national agenda, Defense Reform 2.0, DAPA underwent a major organizational restructuring on September 17, 2019, marking the first such change in 13 years since its establishment. The previously divided structure of the Project Management Headquarters and Contract Management Headquarters was unified into project departments, improving the efficiency of defense capability improvement projects and strengthening departmental accountability.

This reorganization was driven by the increase in defense capability improvement projects and the advancement of weapon systems, aiming to enhance the efficiency and responsibility of managing defense capability improvement projects with an annual budget of 15 trillion KRW. The restructuring was implemented to integrate project and contract management within a single project department, allowing project directors to simultaneously consider both aspects and promote the entire defense capability improvement project process swiftly and consistently.

Key points of the reorganization include expanding the single Project Management Headquarters into two project headquarters (Foundation Power Project Headquarters and Future Power Project Headquarters) to align with changing defense acquisition conditions. Contract tasks previously handled by the Contract Management Headquarters are now directly performed by each project department within the project headquarters, while common support functions related to contracts, such as contract systems, are organized under the DAPA headquarters. To enhance transparency, the Defense Acquisition Inspector function was reorganized, and audit personnel for project audits were reinforced.

In practice, within just three months after the reorganization, some project execution periods were reduced by up to one month, and last year, a record-high budget execution rate close to 97% was achieved. This is a remarkable improvement compared to the average execution rate of 93% over the past five years.

▲ Introduction of the ‘Rapid Demonstration Acquisition System’ for Paradigm Shift to Rapid Acquisition= To break away from the conventional rigid and uniform acquisition methods and flexibly and swiftly utilize advanced civilian technologies, the ‘Rapid Demonstration Acquisition System’ was introduced in December 2019.

As warfare paradigms expand to space and cyber domains in the 4th Industrial Revolution era, with diversification of combat means due to unmanned and autonomous systems and changes in warfare methods toward non-lethal and asymmetric warfare, there arose a need to rapidly introduce products incorporating civilian new or superior technologies into the defense sector.

An initial budget of 30 billion KRW was allocated for pilot purchases in 2020, with plans to separately budget for future acquisitions. Eligible projects include technology innovation fields applying 4th Industrial Revolution technologies such as artificial intelligence, unmanned systems, and drones, and products must be capable of performance demonstrations in operational environments. This system is expected to reduce acquisition periods by at least five years compared to the traditional R&D process, which often took over ten years.

▲ Reform of the Defense Cost System to Induce Cost Reduction and Technological Innovation= The long-standing government cost management-centered defense cost system, which has been in place for 45 years, is being actively reformed into a new defense cost system that encourages autonomous innovative growth by defense companies, based on feedback from industry stakeholders.

The main point of improving the defense cost structure is to shift from the cost reimbursement method based on actual incurred costs, which has been used for 45 years, to a ‘standard cost application method.’ Additionally, the ‘principle of good faith estimation’ system was introduced in 2021 to fundamentally change the defense cost calculation procedures.

Moreover, the reform includes simplifying the complex defense cost and profit structure, rationalizing cost-related tasks, and ensuring appropriate cost compensation. Various policies to encourage defense companies’ exports and research and development are also incorporated. This defense cost structure reform was rapidly enacted through organic cooperation with related ministries such as the Ministry of National Defense, Ministry of Strategy and Finance, and the Ministry of Government Legislation, with significant inclusion of measures to expand exports and revitalize R&D.

DAPA stated, “We have significantly reformed the cost system that has long hindered the growth of defense companies, establishing institutional measures to fundamentally improve the defense industry’s competitiveness through technological and managerial innovation, and to expand exports.”

▲ Enactment of the ‘Defense Industry Development Act,’ a Major Step Toward Becoming an Export-Oriented Industry= At the start of 2020, the ‘Defense Industry Development and Support Act’ (hereinafter ‘Defense Industry Development Act’) passed the National Assembly plenary session on January 9. The enactment of this law is expected to contribute to establishing a solid foundation for the development of the defense industry and strengthening competitiveness by separating it from the existing Defense Acquisition Program Act.

Since the establishment of DAPA in 2006, the ‘Defense Acquisition Program Act’ has regulated procedures for defense capability improvement projects, promotion of defense science and technology, procurement and quality control of military supplies, and defense industry promotion. However, the Act focused on transparent defense project execution and procedural aspects of defense capability improvement projects, limiting detailed regulations for defense industry development. Given that the state is the sole purchaser in the defense industry, there has been a consistent call for differentiated support grounds to promote defense industry development. Accordingly, provisions related to defense industry development were separated from the ‘Defense Acquisition Program Act’ and new laws were enacted by adding various necessary systems for defense industry development.

With the enactment of the ‘Defense Industry Development Act,’ a firm foundation has been established for transitioning the defense industry from a domestic market focus to an export-oriented industry. It is expected to contribute to revitalizing the national economy through continuous competitiveness enhancement of the defense industry, laying the groundwork for self-reliant national defense, increasing the localization rate of weapon systems, boosting defense exports, and fostering small and venture defense enterprises.

This content was produced with the assistance of AI translation services.