Defense Industry

The ROK government has supported the creation of an indigenous South Korean defense industry since the early 1970s. Three government decrees put Seoul's policy into motion: A 1973 Law on the Defense Industry, a 1974 Force Improvement Plan for the buildup of ROK armed forces, and a 1975 Defense Tax Law that was designed to finance the development of the defense industry. This support of the defense industry was also largely based on the Government's general policy during the 1970s of nurturing investment in the shipbuilding, steel, and the electronics industries. The growth of these sectors helped established links to defense production as the production of armaments became interwoven into the manufacture of ships and heavy machinery.

In 1990 South Korean industries provided about 70 percent of the weapons, ammunition, communications and other types of equipment, vehicles, clothing, and other supplies needed by the military. The Defense Procurement Agency (DPA) of the Ministry of National Defense (MND) is responsible for more than 95 percent of all defense procurement activities in Korea. The DPA handles everything from the initial specification work to payments to contractors. Its major functions include: procurement of defense materials for the Korean military forces; construction of military facilities; sources of supply management; acquisition of price information and cost management; offset negotiation and management; military specification and standardization management.

Korea depended completely upon military aid and equipment from the United States until the mid-1960's. In 1971, the Ministry of Defense set up the DPA as an integrated procurement agency. The DPA has since contributed to the modernization of military equipment used by the country's armed forces and strengthened the nation's war potential by streamlining the process of acquiring war materiel. The DPA currently manages a four trillion won defense budget.

Weapons production for the army began in 1971 when the Ministry of National Defense constructed a plant to assemble United States-designed Colt M-16 rifles. The memorandum of agreement between the United States and the Republic of Korea authorized production of enough rifles to supply South Korean army units. However, the agreement prohibited the production of additional M-16s without the permission of Colt Industries and the United States government. In the mid-1970s, South Korea signed agreements to begin licensed production of many types of United States-designed weapons, including grenades, mortars, mines, and recoilless rifles, with the same stipulations as those for the M-16 rifle. South Korea also began to manufacture ammunition for the weapons it produced for the army.

By 1990 South Korean companies had army contracts to produce tanks, self-propelled and towed field guns, two types of armored vehicles, and two types of helicopters. A division of Hyundai produced the 88 Tank (commonly called the K-1 tank) at Ch'angwon. The K-1 was the result of a joint United States-South Korean design. The K-1 Tank's 105mm gun was an improved version of the same caliber gun that was standard on South Korea's M-48A5 tanks. Although a few components of the tanks' fire control and transmission systems were imported, Hyundai and South Korean subcontractors manufactured most of the systems. One of the Samsung Group's businesses produced 155mm M-109 self-propelled howitzers. KIA Machine Tool was the manufacturer for the KH-178 105mm and the KH-179 155mm towed field guns. The KH-178 and KH179 guns were derived from United States-designed artillery but were considered indigenously designed. Daewoo Industries and Asia Motors had a coproduction agreement for an Italian-designed wheeled, armored personnel vehicle.

Bell Helicopters Textron of the United States and Samsung coproduced UH-1 helicopters. Sikorsky Aircraft Corporation, also of the United States, had a contract with Daewoo to coproduce H-76 helicopters. Korean Air used its depot maintenance facilities at Kimhae to overhaul most types of aircraft in service with the South Korean air force. Additionally, the United States Air Force contracted with Korean Air for the maintenance of its F-4, F-15, A-10, and C-130 aircraft stationed in South Korea, Japan, and the Philippines.

During the 1970s and 1980s, South Korea became a leading producer of ships, including oil supertankers, and oil-drilling platforms. The country's major shipbuilder was Hyundai, which built a 1-million-ton capacity drydock at Ulsan in the mid-1970s. Daewoo joined the shipbuilding industry in 1980 and finished a 1.2-million-ton facility at Okp'o on Koje Island, south of Pusan, in mid-1981. The industry declined in the mid-1980s because of the oil glut and because of a worldwide recession. There was a sharp decrease in new orders in the late 1980s; new orders for 1988 totaled 3 million gross tons valued at US$1.9 billion, decreases from the previous year of 17.8 percent and 4.4 percent, respectively. These declines were caused by labor unrest, Seoul's unwillingness to provide financial assistance, and Tokyo's new low-interest export financing in support of Japanese shipbuilders.

In 1990 South Korean shipbuilders were building two indigenously designed naval vessels, and they had coproduction agreements with United States, Italian, and German companies for several other types of ships. During the 1980s, Korea Tacoma, a South Korean-owned subsidiary of the United States Tacoma Boatbuilding Company, produced one class of patrol gunboat and one class of landing ship for the navy. In the late 1980s, production of submarines designed by the Federal Republic of Germany (West Germany) was initiated. Three 150-ton submarines designed by the Howaldswerke Shipbuilding Corporation were in service with the navy in 1990. In the late 1980s Howaldswerke had plans to provide technical assistance for the construction of three Type 209 submarines, about 1,400 tons each. South Korean military planners were interested in using submarines to protect critical shipping lanes from North Korean submarines in wartime. By the late 1990s South Korea possessed one of the largest domestic defense industries in the world, spending more than $14 billion per year on defense-related activities. A handful of large corporations in the ROK manufactured the majority of South Korea's weapons systems. These companies continued to lead in both the research and development, and production of new systems. Many of the smaller companies in the South Korean defense industry continued their role as subcontractors to these chaebols.

The success of Korea's financial and corporate-sector restructuring was essential to encourage a high pace of productive domestic and foreign investment. Under the terms of the 1998 IMF agreement, Korea largely opened its financial and corporate sectors to foreign investment, and reduced or removed controls on overseas capital transactions. Since 1998, President Kim's government was instrumental in reforming and opening Korea's economy to foreign investment and reducing trade barriers. Wide-ranging reforms have accelerated the evolution of Korea's financial and corporate sectors away from the previous state-led economic model toward a commercial free-market model. In corporate restructuring, about half of the top 30 business groups ("chaebol" or conglomerates), including Hanbo, Daewoo, Dong-A, Haitai, and Sammi, were removed from the market.

The Republic of Korea Ministry of National Defense (MND) reformed its acquisition process in early 2001 and implemented many of these changes in 2002 in its pursuit of new major defense acquisitions. In addition to effectively demonstrating the benefits of its streamlining of the process, MND has shown a willingness to explore new acquisition options that incorporate the best aspects of both the direct commercial contracting and United States Foreign Military Sales methods of acquisition. New hybrid acquisition approaches such as the one being considered for the SAM-X program permit greater cost transparency and benefits for the Republic of Korea while providing increased flexibility by the United States Government and industry to work more effectively together in responding to Korea's defense and industrial offset needs. Opportunities continue to exist to improve the decision making process and make it less susceptible to the influence of Korean representatives and political forces inherent in multinational competitions although much progress has been realized this past year in this difficult area.

The Daewoo Group bankruptcy in 1999 and the Hyundai Engineering & Construction (HEC) liquidity crisis during 2000 and 2001, posed considerable challenges to the government's program of financial reform and Korea's continued financial stability. With around $80 billion in debt, Daewoo's demise was by far the largest corporate bankruptcy in modern history. Moving swiftly to restore investor confidence and avoiding any hint of a bail out, the Korean government facilitated agreements between the stricken company's affiliates and Daewoo's domestic and foreign creditors. Huge financial losses and associated loss of investor confidence hit hard Korea's investment trust industry, a heavy buyer of Daewoo bonds, as investors rapidly withdrew their funds. Buyers for corporate paper of any description all but disappeared and the bond market almost ceased to function, causing serious problems for companies that needed to raise money. The government's handling of the Daewoo collapse ended the myth that certain companies were "too big to fail" and served as a warning for companies to pursue sound financial policies and for investors to more carefully assess risk, serving to move the Korean economy in a more market-oriented direction. The government sent a much less clear signal to individual investors in Daewoo paper, and used public funds to shield them from suffering any appreciable loss.

Under the new provision the foreign contractor is required to provide assurances in advance that the proposed technologies will be approved for transfer to Korea prior to the approval of the offset contract. US technology transfer is subject to approval of the US Government, and US industry has no legal basis to provide those assurances. The has been a trend of changing offset requirements in the middle of competitions. The AH-X and F-X competitions started at 30% and were raised to 50% and 70% respectively in the middle of the competitions.

The Republic of Korea (ROK) is seeking to modernize its armed forces to a level commensurate with its economic strength. The ROK is in need of significant materiel modernization and replacements that will involve major investments. Although U.S. defense companies have been very successful in selling their products to Korea, future sales could be influenced by European competitors who are becoming increasingly significant in the market. Nevertheless, Korea should continue to be a good market for U.S. defense companies especially when competitive products and services and good offset packages are offered.

The 2007-2011 mid-term plan was developed in 2006, with an emphasis on research and development and allocating 20 percent of arms buildup expenditures to improve domestic defense technology as well as defense industry development. The Ministry of National Defense (MND) plans to steadily raise defense spending to 2.89 percent of Gross Domestic Product (GDP), from the current 2.57 percent level, by 2011. The military plans to invest about USD156 billion in force improvement programs, during 2007-2011, to acquire advanced weapons and equipment as well as change the command structure.

Interoperability has become less of a factor, when purchasing equipment, due to Korea's desire to diversify sources of supply. It is also expected that there will continue to be tension between indigenous development and cost-effective acquisition. The MND is trying to solve this dilemma by demanding a high degree of technology transfer and offsets for projects. Currently the most important elements for purchasing decisions by MND are price, technology transfer and offsets. The MND is aggressively seeking to increase competition and diversify their sources of supply. U.S. industry must closely follow any and all developments in programs and be prepared to move quickly if the need arises. The Korean government has made it clear that they will procure leading edge technologies to defend Korea, which presents opportunities for the U.S. defense industry.

By 2007, the country's defense industry was quickly leaping to match that of other economic powers. Having secured the capacity to supply all of the conventional weapons needed for its own self-defense, it was aiming to become a global market leader in arms sales. The news that South Korea has won contracts with Turkey sounded an upbeat note for the burgeoning defense industry. Turkey announced in June 2007 that it had signed a deal worth about US$450 million with South Korea's aerospace giant, Korea Aerospace Industries (KAI), to acquire dozens of KT-1 basic trainer jets. The KT-1 had been already sold to Indonesia. Turkey had also decided to purchase South Korea's technology for a brand-new amphibious battle tank equipped with an auto-loaded 120-mm cannon. The XK-2, nicknamed the "Black Panther," has the ability to combat helicopters.

"The accomplishment is attributable to joint efforts by the government and related companies to improve the quality of defense products and enhance competitiveness," said Han Seung-jae, an official at the defense industry promotion bureau at the Defense Acquisition Program Administration (DAPA). Formed in early 2006, the independent government agency is in charge of South Korea's procurement and sales of military equipment. The DAPA has been assigned the task of raising the transparency and effectiveness of the arms trade, formerly handled by a defense procurement office under the Defense Ministry.

Also on the short list of Seoul's arms export items are K-9 155-mm self-propelled howitzers, with ranges of more than 40 km, and a T-50 supersonic trainer jet, which can be converted to a light bomber. Last Friday, the Agency for Defense Development declared the successful development of an advanced infantry fighting vehicle, code-named "K21." The 26-ton vehicle is equipped with a mounted, stabilized 40-millimeter automatic cannon, a 7.63-mm machine gun and a launcher for anti-tank guided missiles. It is known for superb river-crossing ability, and is able to travel at speeds of up to 70 km per hour on land, and 7.8 km per hour in water. South Korea also showcased its ability to produce various types of high-tech missiles last year by developing the Haeseong (Sea Star) ship-to-ship cruise missile, and the portable Singung (God's Bow) anti-aircraft missile. Haeseong has been replacing U.S.-made Harpoon missiles, while Singung is an alternative to Stinger missiles.