Defense Industry Requiring Moss Bowling Strategy

[Professor Kim Hoseong, Department of Business Administration, Korea Army Academy at Yeongcheon] In the global defense industry, giant corporations centered in the United States and Europe continue to emerge. The birth of these giants is related to a strategy aimed at increasing their share of the global defense market by leveraging the "Economy of Scale." A common characteristic of these giants is their pursuit of specialization and concentration.

First, let us examine the case of the United States. In the early 1990s, companies engaged in the defense industry underwent restructuring to grow larger and increased their focus on the defense sector. The defense division sales of Lockheed Martin, the most representative U.S. defense company, deepened its specialization and concentration in defense from 64% in 1998 to 93% in 2010.

The situation in Europe is no different. Although corporate integration occurred later than in the U.S., Europe began following a similar path from the late 1990s. Before restructuring began in Europe, the defense industry looked quite different from today. Due to the excessive number of companies and equipment types compared to the high-cost R&D programs, economies of scale were not achieved. In other words, the unit cost of developing and producing a single weapons system was too high. To improve efficiency in the defense sector under these circumstances, integration began in 2000 with the establishment of the European Aeronautic Defence and Space Company (EADS) through the merger of France’s Aerospatiale and Matra, Germany’s DASA, and Spain’s CASA. Subsequently, the missile specialist company MBDA was established through the integration of five European missile-related companies, and in 2015, KNDS (KMW + Nexter Defense Systems) was formed by merging Germany’s KMW (Krauss-Maffei Wegmann) and France’s Nexter Systems. In 2019, there was further integration of companies related to ground weapons systems in Europe. The UK’s BAE Systems Land UK and Germany’s Rheinmetall merged to form Rheinmetall BAE Systems Land Limited.

Then, what strategies should countries like South Korea, whose domestic markets are small and thus unable to ride the "Economy of Scale" trend, choose? Let us look at the defense development strategies of Singapore and Norway, which have similar conditions to ours. Singapore’s representative defense company, ST Engineering, has reportedly achieved good results by expanding its market in defense niche sectors such as MRO (Maintenance, Repair, and Overhaul), realizing economies of scale in niche markets. Norway’s case is somewhat more advanced. Centered on two national flagship companies, Kongsberg Gruppen and Nammo, Norway has pioneered niche markets emphasizing "high quality" and "high performance" rather than cost competition in the global market. Additionally, Norway participates as a Tier 3 partner in the U.S. F-35 program and has chosen Germany as a strategic partner for submarine procurement to realize economies of scale. In summary, they have chosen to realize economies of scale either through specialized niche markets or by forming strategic partnerships.

Now, South Korea has reached a point where, to compete in the global defense market, it must realize economies of scale through specialization targeting niche markets or by selecting strategic partners in weapons system development and production, focusing on selection and concentration. However, such selection and concentration in specific fields lead to concerns about how to maintain overall defense industry capacity in preparation for contingencies, a special situation like ours. The simplest alternative would be to import equipment or parts that do not achieve economies of scale from abroad, which is the most straightforward and simple solution. However, this approach is likely to face public criticism in terms of cost, time, and unforeseen circumstances. Therefore, an alternative to this is the mothballing method. The dictionary definition of mothballing is "to maintain and preserve equipment or facilities for future use or sale." In other words, it is a strategy to keep defense facilities idle but maintained for future production. While this seems attractive, it also requires consideration of maintenance costs and incurs significant expenses in reproducing skilled labor.

Concerns about the mothballing method are issues that countries other than major advanced defense nations like the U.S. or key Western European countries, which have realized economies of scale, will need to address in the future. Although the timing cannot be precisely determined, I believe that soon, in any sector without realized economies of scale, it will become difficult to guarantee the sustainability of defense industry activities. Among Augustine’s Laws, the 16th law states: "By 2054, due to rising unit equipment costs, the entire defense budget will only be able to purchase a single aircraft." Considering the actual rising costs of weapons systems, the time to seriously consider the mothballing method is certainly not far off.

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