🚨 Explosive Growth in Defense Industry: K-Defense Leading Export Boom, Surpassing Textile and Steel as New Growth Engine
Today Korean Economic News | 2025.04.15
📌 K-Tanks and Artillery Create 'Explosive Performance'... Defense Industry Surpasses Textile and Steel
💬 Last year, the domestic defense industry's sales surpassed the textile and fashion industry for the first time. Operating profits were more than double that of the steel industry, placing it in the manufacturing 'top 5'. With the surge in demand for conventional weapons following the Ukraine war, a robust supply chain with 80% localization rate and strong exports to the Middle East and Europe are the main factors. As exports increase rapidly, not only companies related to K-2 tanks and K-9 self-propelled howitzers, but also small and medium-sized parts suppliers are enjoying the trickle-down effect.
1️⃣ Easy Understanding
South Korea's defense industry has achieved explosive growth, emerging as a new leader in the Korean economy. Let me explain in simple terms how the defense industry has surpassed the textile and steel industries and why this growth has been possible.
In 2024, the Korean defense industry achieved its best performance ever. Sales exceeded 30 trillion won, surpassing the textile and fashion industry (28 trillion won) for the first time, and operating profit reached 3.2 trillion won, more than double that of the steel industry (1.5 trillion won). This has elevated the defense industry to the fifth largest manufacturing sector, following semiconductors, automobiles, petrochemicals, and shipbuilding.
The biggest factor behind this growth is the change in the global security environment. The Ukraine war, which began in 2022, has led to a surge in demand for conventional weapons worldwide. In particular, Korea's K-2 tanks, K-9 self-propelled howitzers, counter-artillery radars, and air defense missile systems have been recognized for their performance and price competitiveness, receiving large orders from various countries including Poland, Norway, and the United Arab Emirates (UAE).
Korea's defense competitiveness also lies in its high localization rate. The average localization rate of major weapon systems reaches 80%, enabling stable production even during global supply chain crises. For example, the K-2 tank has been developed with domestic technology, including engines and transmissions, significantly reducing dependence on foreign sources.
This defense export boom is benefiting not only large corporations but also small and medium-sized enterprises. The 1,200 partner companies doing business with Korean defense giants are increasing employment and expanding technology investments based on stable orders. Small companies in advanced technology fields such as precision machining, special materials, and optical sensors are experiencing significant growth.
The Korean defense industry has now established itself as a major growth engine for the national economy, beyond simply being a security industry. As global security uncertainties continue, K-defense's growth trend is expected to continue. This will greatly contribute to job creation, technological innovation, and export growth.
2️⃣ Economic Terms
📕 Defense Industry
The defense industry researches, develops, and produces weapons, equipment, and facilities for military purposes.
- It is a core element of national security and a concentration of advanced technology with significant economic ripple effects.
- It is heavily influenced by government policies and international affairs, characterized by long-term R&D and large-scale investments.
📕 Localization Rate
The localization rate refers to the percentage of domestically produced parts among the total components of a product.
- A high localization rate reduces foreign dependence and contributes to strengthening the domestic industrial ecosystem.
- In the defense sector, securing a high localization rate is particularly important from a security perspective.
📕 Trickle-down Effect
The trickle-down effect is a phenomenon where the growth of large corporations spreads to subcontractors or partners, positively affecting the overall economy.
- It explains the process by which increased exports from large corporations lead to increased sales and employment expansion for small and medium-sized partner companies.
- It forms the basis of a virtuous cycle that leads to the overall growth of the industrial ecosystem.
📕 Weapon System
A weapon system is a comprehensive system that includes weapons and the equipment, parts, and software needed to operate them.
- It consists of platforms (tanks, fighter jets, etc.), armaments (missiles, shells, etc.), electronic equipment, and support systems.
- Modern weapon systems are a fusion of cutting-edge technologies, incorporating various technologies such as IT, materials, and artificial intelligence.
3️⃣ Principles and Economic Outlook
💡 K-Defense's Global Competitiveness and Success Factors
Let's analyze the background and competitiveness that have led to the rapid rise of Korea's defense industry in the global market.
First, battle-proven technology and excellent cost-effectiveness are key competitive advantages. Korean defense products are recognized for having world-class performance while maintaining price competitiveness. For example, the K-9 self-propelled howitzer offers similar performance to products from advanced countries like the US and Germany, but is 20-30% cheaper. This stems from Korea's manufacturing base and efficient production systems. The fact that these weapon systems have been verified through actual operation by the Korean military also gives confidence to foreign buyers. In particular, Korea's defense technology, developed in the face of confrontation with North Korea, is optimized for real combat environments, making it an attractive option for countries facing similar threats.
Second, an efficient defense ecosystem and high localization rate enable stable supply. The Korean defense industry has built a robust ecosystem with 1,200 small and medium-sized companies collaborating around large corporations. This ecosystem allows for the domestic procurement of more than 80% of core components, ensuring stable production and delivery even during global supply chain crises. For example, the K-2 tank initially used German engines and transmissions, but through continuous technological development, it now incorporates domestically produced engines from Doosan Infracore and transmissions from SNT Heavy Industries. This high localization rate is significant not only in improving export competitiveness but also in terms of technological self-reliance.
Third, the government's strategic support and public-private cooperation form the foundation for defense exports. The Korean government has made 'K-Defense Globalization' a national task and is expanding institutional and financial support. In particular, the government is actively supporting it, with the President directly engaging in sales diplomacy for defense exports. In 2023, a fund of 1 trillion won was created to support defense industry exports, backing overseas expansion and technology development for small and medium-sized defense companies. The government is also enhancing contract stability and reliability by activating government-to-government (G2G) transaction methods and strengthening competitiveness through package deals including finance, education, and infrastructure.
The global competitiveness of the Korean defense industry is the result of a combination of excellent technological capabilities, efficient production systems, high localization rates, and strategic government support. It is particularly noteworthy that technology and know-how accumulated in the civilian manufacturing sector have been successfully applied to the defense sector. Based on these competitive advantages, Korea is emerging as a global defense power, standing shoulder to shoulder with traditional defense powers such as the United States, Russia, France, and Germany.
💡 Economic Ripple Effects and Industrial Relevance of the Defense Industry
Let's examine the ripple effects of the defense industry on the national economy and its connections with other industries.
First, the defense industry creates high added value and quality jobs. As a technology-intensive industry, the defense industry has a value-added rate of 32.8%, higher than the manufacturing average (25.3%). It has a particularly high proportion of R&D personnel, creating significant employment for highly skilled workers. According to the Korea Defense Industry Association, every $100 million in defense exports creates about 500 jobs, which is higher than other major industries such as automobiles (350) and semiconductors (250). Last year's defense exports of $18 billion are estimated to have created about 90,000 jobs. Additionally, the average wage of defense sector workers is more than 15% higher than the manufacturing average, contributing to the provision of quality jobs.
Second, the defense industry plays a role in driving advanced technology development. Technologies developed in the defense industry spread to the civilian sector, contributing to raising the technological level of the entire industry. For example, military radar technology is being used in the development of sensors for autonomous vehicles, and military communication technology is being applied to the development of 5G networks. In particular, defense R&D plays a leading role in advanced technology fields such as artificial intelligence, robotics, unmanned systems, and new materials. The R&D investment in the Korean defense industry as of 2024 is about 4.5 trillion won, which is 15% of sales, much higher than general manufacturing (3-4%). This intensive research and development leads to improved technological competitiveness for the entire country.
Third, the defense industry has significant linkage effects with various industries. The defense industry is connected to various industries such as machinery, electronics, materials, chemicals, and IT, resulting in widespread ripple effects. According to the Bank of Korea's inter-industry analysis, the production inducement coefficient for the defense industry is 2.35, higher than the manufacturing average (2.10). This means that a 100 million won increase in production in the defense sector induces an additional 235 million won of production across all industries. It is particularly driving the concurrent growth of foundation industries such as precision machinery, special steel, composite materials, and electronic components. Recently, it has been expanding into new industrial fields such as space, maritime, and cyber security, creating new growth engines.
The defense industry has established itself as an important growth engine for the national economy beyond being a simple security industry. It has a positive impact on the overall economy through high added value and quality job creation, driving advanced technology development, and wide-ranging industrial linkage effects. In particular, as it emerges as a new export star industry for the Korean economy, which has pursued export-led growth, it shows the potential to develop into the fourth major export industry following semiconductors, automobiles, and shipbuilding.
💡 Future Growth Prospects and Challenges
Let's look at the future growth prospects of the defense industry and the challenges for sustainable development.
First, the global defense market is expanding, and Korea's growth opportunities are increasing. According to the Stockholm International Peace Research Institute (SIPRI), the global defense market is expected to grow from $2.1 trillion in 2021 to $2.5 trillion by 2025. Defense spending is increasing in various countries due to the Russia-Ukraine war, Middle East conflicts, and rising tensions in the Indo-Pacific region. European countries, in particular, are actively seeking to secure conventional weapons, setting a goal to invest more than 2% of GDP in defense. In this environment, Korea's defense market share is expected to expand from 6% in 2023 to 10% by 2030. Currently, Korea's main export markets are Poland, UAE, Australia, India, and the Philippines, with plans to further expand into Western Europe, Northern Europe, and Southeast Asia.
Second, development and integration of new technologies are needed to respond to future battlefield environments. As the paradigm of future warfare changes, the defense industry is expanding into new technological domains. Technologies such as artificial intelligence, unmanned systems, space, cyber, and new materials are becoming increasingly important. Korean defense companies are focusing on developing future weapon systems such as AI-based command and control systems, unmanned combat systems, and space surveillance systems. Hanwha Aerospace is developing AI-based air defense systems, and LIG Nex1 is developing autonomous unmanned combat vehicles. They are also strengthening capabilities in cyber security and big data analysis through collaboration with civilian IT companies. The development of these cutting-edge technologies is expected to not only secure competitiveness in the future defense market but also have significant technology diffusion effects to the civilian sector.
Third, strengthening the defense ecosystem and nurturing talent are challenges for sustainable growth. For the continued growth of defense exports, it is necessary to build a healthy ecosystem where large corporations and small and medium-sized enterprises coexist. A division of labor is desirable where large corporations focus on exporting finished products, and small and medium-sized companies specialize in developing core components and software. The government is actively supporting the overseas expansion of small and medium-sized enterprises by fostering specialized industries by region through the creation of 'Defense Innovation Clusters'. Nurturing defense specialist talent is also an important task. It is urgent to secure talent in new technology fields such as AI, space, and cyber, which are necessary for the development of advanced weapon systems. To this end, 'defense-specialized talent development programs' linking universities and companies are being expanded, and systems to support the employment of discharged military personnel in the defense sector are being strengthened.
The Korean defense industry is expected to continue growing due to changes in the global security environment and advances in cutting-edge technology. It is expected to further strengthen its position in the global market based on battle-proven weapon systems and a robust supply chain. However, it also faces challenges such as overcoming technology gaps with advanced countries, becoming a global defense company, and building a sustainable industrial ecosystem. To overcome these challenges, a comprehensive approach including consistent government support policies, strengthening industry-academia-research cooperation, and attracting global talent is needed.
4️⃣ In Conclusion
The Korean defense industry has emerged as a new growth engine, surpassing traditional manufacturing powerhouses such as the textile and fashion and steel industries. In 2024, the defense industry recorded sales of 30 trillion won and operating profit of 3.2 trillion won, entering the manufacturing 'top 5'. The key factors behind this growth are the changed global security environment following the Ukraine war and the strengthening of Korean defense competitiveness.
Korean weapon systems, including K-2 tanks and K-9 self-propelled howitzers, have received large orders from various countries including Poland, UAE, and Australia, recognized for their performance and price competitiveness. In particular, with a high localization rate (80%), they have secured a competitive advantage even in global supply chain crisis situations by having stable supply capabilities.
The defense industry plays an important role as a growth engine for the national economy beyond being simply a security industry. It shows a higher value-added rate (32.8%) and employment creation effect than the manufacturing average, drives advanced technology development, and has significant linkage effects with various industries. In particular, the ecosystem formed by large corporations and 1,200 small and medium-sized companies is injecting vitality into the entire industry through trickle-down effects.
Looking ahead, the global defense market is expected to grow to $2.5 trillion by 2025 due to the Russia-Ukraine war, Middle East conflicts, and rising tensions in the Indo-Pacific region. Korea plans to expand its market share from the current 6% to 10% by 2030, utilizing these market opportunities.
For sustainable growth, challenges remain, including the development of new technologies such as AI, unmanned systems, space, and cyber fields to respond to future battlefield environments, along with building a healthy defense ecosystem and nurturing specialist talent. The Korean defense industry is now establishing itself as a new growth engine driving economic growth, job creation, and technological innovation, beyond being a core element of national security.