Korean armys medium-term defense plan for 2023-2023

ITA CODE: PR DFN

Overview                                                     

As of 2022, South Korea spends a defense budget that is the world’s 10th largest in size and is the world’s 10th largest defense exporter. South Korea, which has traditionally been heavily reliant upon the United States in supplying defense equipment to support its military forces, has become a major defense manufacturer over the past decades. Being able to develop and grow its domestic defense industry, South Korea has further transformed itself into a global exporter of defense articles. Nevertheless, South Korea continues to be the United States’ 3rd largest country for arms exports after Saudi Arabia and Australia based on the total export volume from 2009 to 2021, thus a substantial market for U.S. defense contractors.

Table: Military Expenditure by Country for 2021

Rank

Country

Defense Budget

[$ Billion]

Percentage of GDP [%]

World share [%]

Source: Stockholm International Peace Research Institute [SIPRI Fact Sheet, April 2022]

To complement its national defense strategy, South Korea has been pursuing force modernization programs for some years, and the most updated program is known as Defense Reform 2.0. One of the goals of the program is to build an effective and capable force that is able to meet emerging security threats while limiting reliance on foreign defense technology. It also encourages the development of homegrown technology, as well as the local production of weapons systems both in the form of parts or components, and complete systems. South Korea thus prioritizes the acquisition of locally developed and manufactured defense articles. Lately, the government is putting greater focus on growing the volume of its indigenous defense exports.

South Korea’s Defense Budget Trends 2018-2022

Table: South Korea’s Defense Budget Trends 2018-2022

2018

2019

2020

2021

2022

Change [%]

2021-2022

Unit: USD Million, Source: Ministry of National Defense Data. Exchange rate: 2021 USD 1 = KRW 1,144.6, 2020 USD 1 = KRW 1,179.6, 2019 USD 1= KRW 1,165, 2018 USD 1= KRW 1,110, 2017 USD 1= KRW 1,131, 2016 USD 1= KRW 1,16o. English translation of the subcategories of the budget breakdown comes from the official English translation of the 2020 Republic of Korea [ROK] Defense White Paper.              

South Korea allocated $47.712 billion or 13 percent of its government spending to its 2022 defense budget. This was a $1.547 billion or 3.4 percent increase compared to the previous year. The 2022 defense budget contained $33.129 billion for force operations which includes expenditure for military logistics, facilities, and education and training of military forces. Another $14.582 billion was dedicated to force enhancement, an expenditure used for securing advanced weapon systems to enhance and maintain defense capabilities in preparation of all kinds of possible security threats. Compared to the previous year, the budget for force operations and force enhancement each represent a 5.8 percent increase and a 1.8 percent decline, respectively.

In particular, the 2022 budget for force enhancement reflects a total of 32 key weapon system programs including the light aircraft carrier program, microsatellite program, low-altitude missile defense [LAMD] interception system, mass production of light armed helicopters [LAH], F-35A performance improvement program, and large-sized transport aircraft program. During the past 5 years, South Korea’s defense budget has been growing at an average rate of 6.3 percent per year.

South Korea’s acquisition of weapons systems from overseas are administered through foreign procurement programs either in the form of Foreign Military Sales [FMS] or Direct Commercial Sales [DCS]. South Korea’s purchase of foreign defense equipment has continued to grow since 2018 with the government pursuing large scale programs such as the F-35A next generation fighter jets, and high-altitude aerial systems [HUAS].

According to the latest data from the Defense Acquisition Program Administration [DAPA], the total volume of weapons South Korea acquired through foreign purchases from 2016 to 2020 was about $11.807 billion and more than half of it was acquired through FMS programs valued at $6.281 billion. Meanwhile, the total volume of weapons South Korea acquired through foreign DCS programs during the same period was about $5.526 billion in value and 53 percent [$2.928 billion] of it was purchased from the United Sates. 

It is common for most advanced weapons systems with a U.S. origin to be acquired through FMS programs due to strict U.S. government regulations. Nevertheless, the number of weapons procurement cases administered through DCS programs has been steadily increasing in recent years. In particular, the South Korean government has shown a tendency to procure some weapons systems through DCS programs in lieu of FMS programs which would oftentimes entail a rather complex and lengthy process for purchasing and approval.

South Korea’s Arms Purchases from Overseas

Table: South Korea’s Arms Purchases from Overseas

2016

2017

2018

2019

2020

Source: DAPA, Unit: USD Million.

Figures are based on contract amount. FMS figures are based on the ROK government’s acceptance of new offers each year. Exchange rates: 2021 USD 1 = KRW 1,144.6, 2020 USD 1 = KRW 1,179.6, 2019 USD 1= KRW 1,165, 2018 USD 1= KRW 1,110, 2017 USD 1= KRW 1,131

Market Access and End Users

With a mission to improve defense capabilities and foster the defense industry, the Defense Acquisition Program Administration [DAPA] of the Republic of Korea [ROK] was established in 2006 as the central administrative body for defense acquisition. Consolidating the defense acquisition function previously administered by each of the military branches, DAPA plans, executes, and oversees the procurement of arms, military equipment and supplies on behalf of the Ministry of National Defense [MND] across all domains. Furthermore, DAPA negotiates the requirements of the defense products and services, authorizes offset credits, dictates the terms and conditions, and makes changes to delivery schedules or required deliverables. DAPA controls all formal negotiations on the price, technology transfers, local work share, and offset packages.

The principal points of contact for major defense projects are the respective military service branches which includes the ROK Air Force, ROK Army, ROK Navy. These military branches, however, procure most of the military equipment and systems through DAPA. To participate in government programs that require local co-production or co-development, foreign defense contractors would oftentimes form a consortium with leading Korean defense firms such as the Korea Aerospace Industries [KAI], Korean Air, Hanwha, LIG NEX1, Hyundai and others.

Most foreign defense contractors seeking to participate in local defense bids and government programs work with their in-country partners which may include distributors, sales agents, or commission-based sales representatives. Working with local partners is considered essential for foreign defense contractors in order to overcome language barriers, secure networks with key decision-makers, gain local market intelligence, and navigate the administrative and logistical challenges related to the procurement processes.

Market Challenges

Offset Trade Policy

Offset programs were first introduced in South Korea in 1982 with the objective to develop the ROK’s domestic aerospace industry. However, it gradually became an important means to acquire core technologies to develop the local defense industry. DAPA, as the central government agency, administers the offset policy, while technology and reliability assessments are conducted by the Defense Agency for Technology and Quality [DTaQ], an organization under DAPA.

An offset obligation may arise for a foreign contractor should the value of the defense program contract exceed $10 million. According to the latest guidelines, a minimum 50 percent or more of the estimated value of the main contract would be allocated for an offset for contracts with competing suppliers. For sole source contracts, a minimum 30 percent or more of the estimated value of the main contract would be applied to an offset.

According to the latest DAPA data published in 2021, about 62 percent of the offset programs valued at $497 million were administered in the form of exporting parts and components of weapons systems. Other types of offset transactions included acquisition of equipment, and technology transfers. Furthermore, foreign companies from a total of 8 countries had partaken in South Korea’s offset programs from 2016 to 2020. The total value secured through those offset programs during the same period were recorded at $796 million. Out of a total 42 offset program transactions, U.S. defense suppliers participated in a total of 15 programs which were valued at $254.7 million.

Offset Program Suppliers by Country from 2016 to 2020

Table: Offset Program Suppliers by Country from 2016 to 2020

Country

No. of programs

Program ratio [%]

Value

Value ratio [%]

Unit: cases, million USDs

DAPA revised its offset policy guidelines and renamed it industrial cooperation in 2018. With aims to expand the exporting power of the defense sector, South Korea has been encouraging foreign defense contractors to pursue co-development and co-production with local defense manufacturers. However, foreign companies are oftentimes finding it challenging to commit to offset programs due to the number of liability terms and conditions stipulated by the Korean government under its policy guidelines.

Government-driven Development of Homegrown Technology and Defense Exports

South Korea was the 9th largest arms exporter during years from 2016 to 2021 accounting for 2.7 percent of the world’s defense exports. During those years, South Korea’s defense exports to the world were recorded at $4.3 billion in value. South Korea’s major defense exports has been centered on its platform systems which includes aircraft, artillery, and ships. Traditionally reliant upon the United States in supplying defense equipment and systems to its military forces, South Korea’s strong government-led initiative to develop the local defense industry has enabled South Korea to grow into a manufacturer and an exporter of defense articles. The government continues to pursue policies that protect and prioritize local technology and products over foreign defense technology. Recent South Korea’s major defense exports includes items listed as below.

• 6 patrol corvettes to Malaysia [$1.2 billion]
• 12 FA-50 [Light combat aircraft] to Philippines [$420 million]; FA-50 was co-developed with Lockheed Martin
• 16 T-50s [Advanced trainer] to Indonesia [$4 billion]; T-50 was co-developed with Lockheed Martin
• 12 T-50s to Thailand [$110 million]
• Military vehicles to the Philippines [$345 million]
• K-9 Thunder [Self-propelled howitzer] to India [100 units], Turkey [280 units], Finland [48 units], Norway [24 units], and Poland [120 units], Egypt [200 units, $1.7 billion], Australia [30 units, $730 million]
• Cheongung II [Mid-range surface-to-air-missiles] to UAE [$3.5 billion].

South Korea’s indigenization of defense technology has been steadily increasing. According to the Korea Defense Industry Association’s data announced in 2021, the overall indigenization rate of South Korea’s defense industry has grown from 70.7 percent in 2015 to 75.5 percent in 2019. Those weapons systems with a strong domestic technological base, such as communications and electronics, guided systems, as well as chemical, biological, and radiological [CBR] arms, demonstrated a relatively higher indigenization rate compared to those in the aerospace domain which traditionally relies heavily on foreign suppliers for its core components.

South Korea’s Indigenization Rate of Weapons Systems

In August 2021, DAPA revealed a new industrial policy, known as Korea Defense Capability, which prioritizes the sourcing of Korean made defense articles over foreign-produced defense products linked to defense procurement contracts. This new policy requires that all defense procurement to adopt an 80 percent to 20 percent quota between local and foreign products, respectively.     

The United States and the ROK Defense Industry

The United States maintains a total of 28,500 troops on Korean soil in support of its commitment under the U.S.-ROK alliance to help secure the peace and stability on the Korean peninsula. The alliance serves as a powerful deterrent against the rising and evolving threat of North Korea, as well as the rapidly changing security dynamics in the Asia-Pacific region. Thanks to the 69 years old alliance which serves as a cornerstone for U.S.-ROK security relations, most Korean defense systems and equipment have a U.S. origin and are thus based on American standards. This is a key factor that affects South Korea’s defense procurement decisions.

While the U.S. continues to be a primary supplier of defense articles and weapons systems to South Korea, stringent requirements under the U.S. export control regimes, and competitive price points offered by other European and Israeli competitors pose market challenges for American firms seeking entry into the Korean market. 

Best Prospects and Opportunities

• Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance [C4ISR]
• Aircraft upgrades
• Avionics, high-tech sensors, radars, and missile system
• Support for combat equipment
• Anti-terrorism products

Resources

Trade Shows

• Defense Expo Korea [DX-Korea], September 21-25, 2022
• Seoul International Aerospace and Defense Exhibition [ADEX] 2023, October 17 - 22, 2023
• International Maritime Defense Industry Exhibition [MADEX] 2023, June 7-9, 2023

Key Contacts

• Defense Acquisition Program Administration [DAPA]             
• Ministry of National Defense [MND]

Local Contact

U.S. Commercial Service Korea   
U.S. Embassy Seoul
188 Sejong-daero, Jongro-gu
Seoul 03141, Korea
Tel: 82-2-397-4535

www.trade.gov/south-korea