[Defense Commentary] The Defense Industry Cooperation Quota System is a 'Double-Edged Sword'

[Associate Professor Lee Jung-gon, Department of Defense Acquisition, Graduate School of Industry, Konkuk University] The word "Quota" is officially defined in English dictionaries as a limited number or amount of people or things that is officially allowed. In other words, it can be understood as an allocated amount distributed in a certain quantity. A well-known example is the screen quota system, which is a mandatory system that requires domestic films to be screened for a certain number of days according to institutional standards. This system serves as a protection and promotion measure to secure the domestic film market and prevent excessive market encroachment by foreign films. The essential purpose of quota systems is to protect the relevant industry of the importing country, and various quota systems are applied by product and industry according to each country's market environment.

In the defense industry, the industrial cooperation quota system is a concept where, when purchasing weapon systems from abroad, foreign proposing companies are required to apply a certain percentage of domestically produced components for the weapon system parts. Recently, the United States announced that it will strengthen the Federal Acquisition Regulation (FAR) under the Buy American Act (BAA) by raising the domestic production component ratio from the existing 55% to 60% starting this October, and gradually increasing it to 75% by 2029. This can be interpreted as a strong policy shift aimed at ultimately strengthening domestic manufacturing and securing a stable supply chain. Within this international change, the Defense Acquisition Program Administration (DAPA) is also applying the industrial cooperation quota system to overseas procurement projects for military aircraft, requiring foreign proposing companies to apply Korean products to meet the quota requirements in the request for proposal. Domestic defense companies expect a virtuous cycle effect that can secure domestic demand through the quota system and expand opportunities for overseas exports.

Here, the author would like to raise some concerns. First, from the perspective of foreign proposing companies, it is essential to carry out design verification, additional testing, and certification processes to apply domestic products to the proposed weapon system. During this process, additional NRC (Non-Recurring Cost) will occur, and an overall increase in the proposed weapon system cost is expected. In terms of schedule, the procurement lead time is also expected to increase due to these additional processes.

For example, assuming a weapon system acquisition budget of 1 trillion KRW and a mandatory quota of 10%, the foreign proposing company must source at least 100 billion KRW worth of components from domestic companies. In this case, the foreign proposing company may limit proposals to larger companies capable of manufacturing aircraft airframes rather than various small and medium-sized enterprises (SMEs) in Korea to reduce cost and schedule development risks. From the perspective of domestic defense companies, design changes and separate additional certifications will be required to meet the application standards of the foreign proposing companies’ weapon systems, necessitating individual investments. This could be a financial burden, especially for SMEs, depending on their scale.

Second, foreign bidding participants have already identified business opportunities several years ago, and the number of expected bidders for large projects is very limited. Most foreign proposing companies are well aware of our government's weapon system acquisition procedures and policies and have extensive experience proposing and executing offset trades in the past. If the quota system is expanded as a mandatory requirement in the proposal, foreign proposing companies will face dilemmas during the bidding review process. They may request budget increases to cover the additional mandatory costs or even consider withdrawing from the bidding. This could pose a risk that threatens the essential objectives of meeting deployment schedules and fostering defense industry growth, which should not be overlooked.

Ultimately, for the stable introduction of the industrial cooperation quota system, the Defense Acquisition Program Administration, which promotes projects from the user side, and preliminary research institutions should conduct realistic cost estimations, gather voices from domestic companies in the field, collect opinions from domestic and international defense experts, and create an environment where flexible long-term options can be proposed to foreign proposing companies. They should also consider the impact on deployment schedules and the ripple effects on the domestic industry, allowing sufficient time for prior review and consultation. Additionally, if this is a pilot project for the stable establishment of the system, it would be worthwhile to first select a project of appropriate scale and proceed flexibly with risk analysis, gradually expanding the project scale.

In particular, for domestic SMEs that require additional certification and self-investment, considering the linked use of existing offset trades and the quota system could minimize the burden on domestic companies and encourage diverse proposals from foreign companies. Furthermore, ways to reflect the future value of export expansion and overseas joint investment, which small and medium defense companies are struggling with, in proposal evaluations should also be discussed.

The introduction of the new quota system should be recognized correctly and reasonably by domestic and foreign companies as an efficient and flexible policy direction for transitioning to industrial cooperation, beyond merely considering a quantitative 50% application ratio linked to existing offset trades. The industrial cooperation quota system can be a double-edged sword. Considering our environment and economies of scale, to establish it as an efficient system, we should once again reflect on the meaning of compromise (折衷)?accepting different opinions without bias and selecting the appropriate measures to achieve the best outcome.

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