[Defense Column] We Must Protect the Neighborhood Markets of Defense Companies

[Jun-gon Lee, Defense General Manager, Thales Korea Branch] The recently concluded TV show Baek Jong-won's Alley Restaurant features restaurant industry managers visiting local alley restaurants to identify problems and suggest solutions, showcasing the process of enhancing the competitiveness and self-sustainability of struggling alley restaurants.

Within the defense industry ecosystem, numerous small and medium-sized enterprises (SMEs) are seeking various ways to achieve sustainable growth in their respective fields. As of the end of December last year, among 85 domestic defense companies across eight weapon system sectors, 59 companies?accounting for 70%?are classified as SMEs, playing a crucial role.

However, according to the 2021 Defense Industry Business Analysis report published by the Korea Defense Industry Promotion Association (KDIPA), the total sales revenue of SMEs in the defense sector was 1.7 billion KRW, which is about 13% of the 13.5 trillion KRW total sales revenue of large corporations in the defense sector.

For the sustainable growth of SMEs, large corporations not only play key roles such as system integration and main government contract management but also implement various internal support measures to promote coexistence with SMEs. The Defense Acquisition Program Administration (DAPA) operates a system called the “Priority Selection of SMEs for Designated Items,” which allows SMEs to be given priority when selecting research and development lead organizations or prototype manufacturers for weapon systems and core technologies, based on items designated and announced by the DAPA Administrator.

Additionally, through the “Weapon System R&D Project Proposal Evaluation Guidelines,” proposal companies receive additional points based on the number of participating companies, including SMEs and mid-sized companies, according to the project scale (e.g., projects over 300 billion KRW with more than 25 participating companies), thereby encouraging opportunities and joint growth.

Recently announced initiatives by DAPA, such as the “Defense Innovation 100 Project” and the “Defense Venture Company Incubating Project,” are fresh plans aimed at fostering SMEs and venture companies to promote a healthier growth of the defense industry ecosystem, generating high expectations.

While reviewing various business models with domestic defense SMEs for offset trade and industrial cooperation, the author found SMEs with sufficient international competitiveness in fields such as detectors, sonars, and amplifiers, and was able to derive various cooperation plans. However, many SMEs expressed realistic concerns about the limitations in expanding domestic market channels due to the vertical business structural relationships with existing large domestic clients.

In the relatively small defense market, some SMEs have disappeared. Notably, Dodam Systems, a specialized simulator manufacturer, spun off from Korea Aerospace Industries (KAI) 20 years ago and grew into a specialized SME in aviation simulators, but is no longer visible in the field. Although metaverse technologies utilizing AR, VR, and MR are emerging as new markets, it is regrettable that there are no domestic SMEs specializing in integrated simulator systems.

To overcome the limitations of the domestic defense market size and the reality of large corporation-centered contract competition, and to strengthen competitiveness in defense materials, parts, and equipment (SoBuJang), it is essential to emphasize the importance of strategic cooperation between large corporations and SMEs and joint growth strategies aimed at global market expansion within various government policy environments.

Just as local commercial districts are protected, business sectors that need to be nurtured as SMEs should be newly reorganized under the strategic support of large corporations and actively reviewed at the government level. Meanwhile, SMEs need new strategies to strengthen self-sustainability through their own efforts and investments to explore export channels at the component level. Although the structural vertical relationship with large corporations is a significant factor in the domestic market, SMEs must take a long-term perspective to enter the global market by leveraging technological competitiveness and actively collaborating with overseas companies.

Korea’s defense market has evolved from being merely a sales market to a market environment where cooperation with domestic defense companies is essential and required by overseas weapon system companies from the U.S. and Europe. According to the Global Aerospace Industry Attractiveness Index published annually by PwC Consulting, Korea ranked 4th globally in 2021.

However, in the labor and industry sectors, Korea ranked 45th and 26th respectively, showing lower competitiveness compared to the top 10 countries. Strategic win-win cooperation between domestic large corporations and SMEs, along with diverse and flexible policy implementation and execution by the government, should induce a global partner strategy that mutually influences overseas weapon system companies.

Article 1 of the “Framework Act on Small and Medium Enterprises” states that its purpose is to support the creative and autonomous growth of SMEs, further advance industrial structure, and promote balanced development of the national economy. In the new year of the Year of the Black Rabbit, we look forward to a defense industry version of Baek Jong-won's Alley Restaurant that expands its steps beyond the domestic market to the global market.

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