BMI's Executive Summary

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Q407 saw continued gradual reduction in tension between North Korea and South Korea. In early October 2007, North Korean leader Kim Jong-il and South Korean President Roh Moo-hyun held a summit meeting: this was on the second such summit to take place in 62 years. The summit was followed, in November, by meetings between the two countries' Defence Ministers and Prime Ministers. The long term consequences of these meetings will depend, basically, on two factors. One is the willingness of Kim Jong-il's regime to undertake agreed actions. The other is the policy vis-à-vis North Korea of (likely) future South Korean President Lee Myung-bak of the Grand National Party. Mr Lee has traditionally been a hardliner, openly critical of the 'Sunshine Policy' of constructive engagement with North Korea. In practice, though, the policy options of whomever is the new President may well be constrained by the costs to South Korea of a potential and sudden collapse of the regime in North Korea.

As we explain in this report, South Korea's foreign policy may change following the presidential election. There are essentially three options open to the new President. One is to maintain the status quo, in which South Korea follows an independent line on North Korea. The main problem with this is that it implies accelerated defence spending. In Q307, the Ministry of National Defence said that it hopes to increase the defence budget by 10% in 2008 (and this includes a 17% increase in spending on arms procurement and development). The second option is to move closer to the US, especially as Japan is perceived to have increased its influence in North East Asia as a result of the collaboration by former Prime Ministers Junichiro Koizumi and Shinzo Abe with the Bush Administration. The main problem with this approach is that it may antagonise North Korea. The third option is to make China the key major ally. However, a number of policy-makers are worried by the possibility of South Korea being completely dominated by a much larger and undemocratic neighbour. On balance, we believe that a continuation of the status quo is the most likely outcome.

Unlike other East and South East Asian countries that have achieved spectacular economic growth over the last 40 years, the development of South Korea has been driven significantly by government decisions as to what are the export industries in which the country should compete. One such industry is defenceaerospace. In late October 2007, Lee Jung-won, the Director of the industry promotion bureau of the government's Defence Acquisition Programme Administration, said that the country aims to be one of the world's top 10 weapon manufacturers by 2020. The government's goal includes exports that year of US$2 billion. Currently, South Korea is the 19th largest arms exporter worldwide.

As with other advanced manufacturing industries in which South Korea has become a major player, a key to the planned march to leadership in defence-aerospace is increased spending in research and development. The DAPA intends to increase the government's budget for defence research and development until it reaches 10% of total defence spending. Exports of armaments amounted to US$1.1bn – a record – in the first nine months of 2007. This compared with export sales of around US$250mn in all of 2006.

Key deals during the first nine months of 2007 included: contracts with Turkey for the KT-1 Woongbi basic trainer aircraft (US$400mn) and XK2 Main Battle Tanks (MBTs) (US$250mn); sales to the Philippines of K-3 rifles, ammunition and military vehicles (US$25n); a service contract with the USA to maintain the main wings on the A-50 combat jet (US$1.5mn), and; supply of small arms ammunitionmaking equipment to Pakistan.

At the Seoul Air Show, which took place in mid-October 2007, Korea Aerospace Industries (KAI) said that it is hopeful of selling around 130 units of the T-50 supersonic trainer jet, in deals worth over US$1 billion, to the armed forces of the United Arab Emirates, Greece and Singapore. KAI hopes to secure around 30% of the global market for jet trainers with the T-50 and variants thereof, over the long-term. Aside from the T-50s, the South Korean defence industry is focusing on five products: the KT-1 basic trainer; the XK2 MBT; the K-21 infantry fighting vehicle; the K-9 self-propelled artillery guns, and; the Cheonma air-defence artillery guns.

KAI is working in collaboration with subsidiaries of the European Aeronautic Defence and Space Company (EADS). In mid-October 2007, KAI said that it had signed a US$400mn contract with Airbus to supply wing-top panels and frameworks for Airbus' A320 airliner until 2015. Press reports also indicated that KAI has signed a Memorandum of Understanding (MoU) with Eurocopter to form a Joint Venture that will export the Korean Utility Helicopter (KUH). The KUH is a military and utility helicopter that is already being developed. The South Korean army is expected to buy in excess of 200 KUHs from 2012. The new JV will be responsible for selling the KUH outside South Korea. EADS expects that it will be possible to sell 300 or so KUHs to export customers.

Chapter 1 - Executive Summary

Chapter 2 - SWOT Analysis

South Korea Security SWOT

South Korea Defence Industry SWOT

South Korea Political SWOT

South Korea Economic SWOT

South Korea Business Environment SWOT

Chapter 3 - Political Overview

Internal Political Outlook

External Political Outlook

Chapter 4 - Security Risk Analysis

BMI’s Security Ratings

Risk Ratings

Table: Regional Security Ratings

Table: State Terrorism Vulnerability Index

Regional Security: North And South-West Asia

Overview

Inter-State Conflicts

Internal Conflicts

South Korea Conflict Risk

South Korea Terrorism Risk

South Korea Physical Safety Risk

Chapter 5 - Security Overview

Internal Security Situation

Refugees

External Security Situation

South Korea-North Korea Relations

South Korea-US Relations

Chapter 6 - Military Structure & Defence Industry

Armed Forces

Table: Regional Armed Forces (including conscripted) 2006

Table: South Korea Deployments

Weapons of Mass Destruction

Market Structure

Recent Changes

Arms Trade Overview

Imports

Exports

Industry Trends & Developments

KMH Project

KDX-3 Project

R&D

Indigenous Aircraft Manufacture

Galileo Project

Procurement Trends & Developments

E-X Programme Re-Launched

AH-X Procurement 2008

VH-X VIP Helicopter Programme

Procurements Budget Distribution

Chapter 7 - Industry Forecast Scenario

Industry Future

Table: South Korea Defence Sector – Historical Data & Forecasts

Key Risks To BMI’s Forecast Scenario

Chapter 8 - Macroeconomic Forecast

Domestic Boost

Table: GDP, Output & Population

Chapter 9 - Competitive Landscape

Table – Key Players: South Korea Defence Sector

Chapter 10 - Company Profiles

Doosan Heavy Industries & Construction

DSME

Korea Aerospace Industries

Samsung Thales

Chapter 11 - BMI Forecast Modelling

How we generate our industry forecasts

Defence Industry

Sources

Chapter 12 - Appendix A: Risk Ratings Methodology

Conflict Risk Methodology

Terrorism Risk Methodology

Physical Safety Risk Methodology

Overall Risk Rating

State Vulnerability Index

Competitive Landscape for Asia Defence & Security: Sample of  
Companies Ranked

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Rankings and Competitive Landscapes by production and sales; market share and change on previous year; number of employees, ownership structure and year established. Also includes analysis of company expansion, export and investment strategies.

Network of Defence & Security Sources

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BMI's Asian Defence & Security Reports are based on an extensive network of multilateral organisations, government departments, automotive industry associations, chambers of commerce and company reports. Information sources include: