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Will Korea Aerospace Industries Be Privatized?

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Will Korea Aerospace Industries Be Privatized?

The debate surrounding the possible privatization of KAI represents fundamental questions about the future of “K-Defense.”

Will Korea Aerospace Industries Be Privatized?

Korea Aerospace Industries (KAI) has played a pivotal role in developing South Korea’s domestic technical capacity for aircraft manufacturing. KAI has license-produced F-16 fighter jets since the 1980s and jointly developed the T-50 Golden Eagle training jet with Lockheed Martin. It also has collaborated with General Electric to develop and produce jet engines.

In 2022, the South Korean defense industry celebrated new global recognition by achieving $17.3 billion in arms exports, doubling figures from the previous year. Although the limelight focused on howitzers and tanks, South Korean planes made remarkable progress as well. KAI’s KF-21 fighter jet, developed over two decades, successfully completed a test flight, placing South Korea among the few countries with advanced supersonic fighters. Poland also purchased KAI’s KA-50 light combat aircraft as part of a $12 billion arms deal signed on the sidelines of the 2022 NATO Summit.

The South Korean government — through the Export-Import Bank of South Korea — owns the majority stake in KAI. Privatization of the partly state-owned company has been a recurring topic for over a decade as various conglomerates express interest in an acquisition deal. Firms like Korean Air, Hyundai Motor and Hanwha Defense have previously floated acquiring KAI, to much public interest.

The latest rumor once again surrounds Hanwha, especially after it acquired Daewoo Shipbuilding and Marine Engineering in December 2022. Hanwha — as South Korea’s largest defense firm — has vowed to be the “Korean version of Lockheed Martin” and seeks to build on a successful year exporting howitzers and tanks to Egypt and Poland.

Not all are supportive, however. KAI President Kang Ku-young notably shared that 99 percent of senior executives oppose any acquisition deals, stating that “KAI has the organization and capabilities to walk the path of independent survival.”

There is a good reason why there is so much prolonged attention on privatizing KAI: the debate surrounding the KAI acquisition represents the fundamental questions about the future of “K-Defense” as it comes off its most commercially successful year.

Export Profit Pressure

Chae Woo-suk, the president of the Korea Defense Industry Association, stated that “KAI, which is bound by public corporate restraints, cannot make large investments with a long-term perspective like its competitors in developed countries.” Privatization is considered a viable solution to reduce the inefficiencies of a quasi-state-run firm and to enhance international competitiveness. For example, KAI has witnessed changes in management personnel with every presidential succession. Private ownership could bring greater stability to KAI with leadership and longer-term stewardship of its competitiveness. With the KAI acquisition, Hanwha would further establish itself as one of the largest defense companies in the world that could allocate more resources to its redoubled aerospace division. 

South Koreans consider their defense industry as — in former President Moon Jae-in’s words — the “future economic lifeline” of the country. 2022 marked a landmark year that demonstrated the growth and export potential of the South Korean defense industry. There now is immense pressure to not only sustain but build on recent gains, as the incumbent Yoon Suk-yeol administration vowed South Korea will become the world’s fourth largest arms seller by 2027.

Privatization will not be a panacea for KAI to overcome large technological hurdles to become a leading military aircraft manufacturer in the world. Some argue that the government should support KAI further until it attains greater technical capacity. The defense aerospace industry has a notoriously long time to recoup investments; private firms, faced with profitability concerns, may reduce investment.

The privatization of state-run firms, in general, has been a politically fraught subject in South Korea. Labor unions have already come out in opposition to KAI privatization. Further, Hanwha’s acquisition would raise concerns about monopoly control of South Korea’s defense industry. Competition breeds innovation and new technology in the defense industry. A smaller firm, LIG Nex1, reportedly is also bidding to acquire KAI, although questions remain whether it has sufficient capital to sustainably invest in KAI.

How Much to Indigenize?

In the 1970s, President Park Chung-hee jump-started the South Korean defense industry under the mantra of “self-sufficient defense” as a response to the Nixon Doctrine. The domestic industrial base could allay alliance abandonment fears and ensure a seamless weapons supply for the South Korean military. The strength of the South Korea-U.S. military alliance and South Korea’s alliance abandonment fears have since ebbed and flowed. Much of the alliance debate today centers around the strength of U.S. extended nuclear deterrence in light of redoubled North Korean ballistic missile and nuclear weapons program.

Indigenization, however, remains an important goal. The Yoon administration started the “component localization development support project” that provides state support for domestic firms developing core weapons components. This pursuit has particular significance to KAI because the most inchoate area of South Korea’s indigenous development has been military aviation. The Korea Defense Industry Association pinned South Korea’s overall defense indigenization rate at 77.2 percent in 2021; for aerospace, the rate is slightly over 50 percent. Further, indigenously developed planes constitute a smaller portion of the South Korean defense industry, which has historically focused on developing land-based systems and ships. Defense aerospace is thought to be the next frontier for domestic development and production.

KAI has been the main firm indigenously developing military aircraft, including next-generation fighter jets, helicopters, and unmanned aircraft. It also set benchmark indigenization rate goals for core components and developed advanced radar technology that countries, such as the United States, were unwilling to share. There are doubts about whether a private aerospace firm will direct sufficient support toward domestically developing and producing military aircraft. Skeptics of privatization notably argue that the KF-21 project would not have happened without active state involvement in KAI operations.

However, this raises the fundamental question of how much indigenization is desirable (or even technologically attainable). South Korea risks developing an inefficient autarkic defense industry if it places undue emphasis on indigenization. A large amount of capital and sophisticated technology is required to catch up to advanced producers. Intense fixation on increasing the indigenization rate — especially in areas like avionics where South Korea is far behind other countries — risks colossal costs and inefficiencies.

Stigma of Defense Corruption

Highly publicized investigations in the 1990s that implicated top military and political leaders revealed excessive waste and fraud in the South Korean defense industry. Reports of unexplained acquisitions spending and contractor malfeasance in the 2010s further ignited concerns about the ongoing challenges of transparency and accountability in the South Korean defense industry. The legacy of defense-related corruption continues to weigh on the public consciousness. Deep suspicions have generated intense public scrutiny and misunderstanding about the arms industry.

Today, general euphoria has taken over the South Korean defense industry due to monumental sales figures from 2022. Support and interest in the industry from bipartisan political leaders and the public remain high. However, future technological hurdles and research cost overruns may reignite public suspicions and media speculations as the stigma of defense-related corruption remains in the public consciousness.

KAI has been at the center of dealing with the fallout of the defense corruption investigations. Its executives recently were investigated for inflating costs as scrutiny piled on the firm’s heavy research spending amid technological hurdles. Most executives were acquitted, as the case appeared to be based on a spurious understanding of the defense industry. 

Proponents of KAI privatization argue that a private firm — free from strings to the government in power — could avoid unnecessary scrutiny and more effectively deal with these issues. Company leadership that lasts more than the five-year presidential term and is unconnected to the incumbent administration could provide a more prudent public face through business downturns and technological hurdles.

The KAI acquisition debate raises fundamental questions about the future of the South Korean arms industry and the growth of its domestic defense industrial base. As South Korea looks to cement recent gains in the global arms market, political leaders in Seoul and defense manufacturers will have to balance competing priorities while facing an increasingly competitive international arms market.