[K-Defense Industry Myth] (Part 2) Essential Conditions for Becoming a Strong Defense Export Nation

Securing Core Material Supply Chains, Need for SoBuJang Development
Active Export Finance Support Policies Must Be Introduced

What is required for the continuous growth of the ‘K-Defense Industry’? First, various policies are needed. Defense exports are largely characterized by government-to-government contracts. The scale is also large, and typically, weapon-exporting countries provide policy financial support to purchasing countries. The export of weapons to Poland is currently at risk of collapse. Poland, facing financial difficulties, has requested low-interest financial support from our government. The problem lies in the ‘Export-Import Bank Act.’ It limits the credit provision to specific individuals or corporations to 40% of the bank’s own capital. The scale of the defense contract with Poland has already exceeded the supportable amount. Although there is a ‘syndicated loan’ (a collective loan with common conditions from multiple banks) through commercial banks, the interest rates are high, making it unattractive to the counterpart country.

Appearance of the Polish K2 tank arriving at the Gdynia port in Poland

The amendment to the Export-Import Bank Act, which increases the policy support capital limit of the Export-Import Bank from the existing 15 trillion won to 25 trillion won, has already passed the National Assembly. However, the Ministry of Economy and Finance has not provided the necessary capital for financial contracts to the Export-Import Bank, delaying the effective date of the contracts repeatedly. Even when the amendment takes effect, there are issues. The amendment plans to sequentially increase the capital limit by 2 trillion won per year over five years. This essentially means that lump-sum funding support is difficult.

The immediate impact has fallen on defense companies. Hanwha Aerospace’s deadline for signing the financial contract related to the second contract for 152 units of the 3 trillion won-class K9 self-propelled howitzers with Poland, signed last December, is this month. If the export finance support contract is not concluded, the execution contract will lose its validity. The 72 units of Chunmoo multiple rocket launchers worth about 2.2 trillion won, secured in that contract, could also be nullified if a separate government-to-government contract is not signed by November. Hyundai Rotem is also in discussions for a second contract with Poland. After signing a basic contract for the export of 1,000 K-2 tanks in 2022, the first contract included 180 units, and the remaining 820 units are pending contract. If this contract fails due to insufficient financial support, it could affect the decision-making of other weapon purchasing countries, deepening concerns within the domestic defense industry.

A defense industry official said, "We are discussing various measures internally to prepare for the possibility of contract failure, but there are limits to what companies can do alone. We expect active government negotiations."

Urgent Need for Supply Chain of Core Weapon System Materials... 78% of Procurement Amount Imported

To become a strong defense export nation, securing the supply chain of core defense materials is also necessary. The core materials of weapon systems produced by domestic defense companies have a high dependence on imports. According to the report ‘Analysis of the Status of Self-Reliance in Core Defense Materials and Supply Chain Strengthening Measures’ published by the Korea Institute for Industrial Economics and Trade, 80.4% (650 billion won) of the 808.6 billion won procurement amount for eight types of metal materials and 47.5% (18.4 billion won) of the 38.7 billion won procurement amount for two types of non-metal materials were imported.

Jang Won-jun, a research fellow at the Growth Engine Industry Research Division of the Korea Institute for Industrial Economics and Trade, said, "The concept of defense materials should be redefined at the same level as defense parts, and a foundation for self-reliance in core defense materials should be established during the weapon development system process."

Development of Materials, Parts, and Equipment (SoBuJang) Brings Smooth Follow-up Support and Cost Reduction Benefits

Investment in the development of SoBuJang (materials, parts, and equipment industries) is also crucial, not just core materials. SoBuJang corresponds to the basic strength in defense. The domestic defense industry relies heavily on imports for many parts of SoBuJang when developing finished weapon systems. If domestic SoBuJang development is activated, the supply of parts necessary for follow-up logistics support (operation and maintenance) will be smooth. This will not only reduce the total life-cycle cost of weapon systems but also allow exports to avoid control by other countries.

Dr. Cho explained, "While multiple defense companies participate in the bidding for weapon system development, a few companies monopolize the components, making it inevitable for development costs to increase."

Accordingly, the government has decided to invest 400 billion won this year in the development of advanced defense materials and parts. It is also considering measures such as establishing a 36 billion won industrial technology fund for the first time in the defense sector this year and adding the defense sector to specialized SoBuJang complexes. In particular, it focuses on strengthening basic capabilities by annually training more than 2,000 professionals in defense-based industries such as robotics, aviation, and semiconductors, and supporting the introduction of manufacturing process innovation models incorporating artificial intelligence (AI) in defense manufacturing companies.

Experts call for systematic support. Considering budget constraints, it is necessary to identify and prioritize the SoBuJang technologies that must be secured and proceed accordingly. It is also possible to identify imported materials and parts used in exported weapon systems and prioritize their development.

Kim Jong-ha, a professor at the Graduate School of Defense Strategy at Hannam University, said, “Investment in materials, parts, and equipment development can overcome problems such as the complexity of weapon acquisition systems and procedures and cost increases experienced so far,” adding, “It is especially important to focus on the rapid integration of new technologies into combat capabilities.”

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