Introduction

South Korean defense stocks have experienced significant gains in the past year, with one stock soaring more than 60% amid escalating tensions on the Korean Peninsula. The demand for arms, driven in part by Russia’s invasion of Ukraine, has led to an increase in global military spending, which reached $2.1 trillion as of 2021, according to the SIPRI Arms Transfer Database.

Hanhwa Aerospace, a subsidiary of South Korean conglomerate Hanhwa Group, has seen a remarkable 66% rise in its stock since the beginning of the year and a nearly 90% surge in the last 12 months. The company specializes in manufacturing air defense systems, armored fighting vehicles, and artillery systems.

Morgan Stanley analysts have highlighted that South Korea has benefitted from the global increase in military expenditure and is now among the top 10 defense export countries in the world. Tensions on the Korean Peninsula have also fueled interest in South Korean weapon platforms, leading to their adoption in markets like the Middle East and Europe.

Morgan Stanley reports that South Korea has emerged as a major exporter of military and defense equipment, with exports reaching 22.9 trillion South Korean won ($17.9 billion) in 2022, more than doubling the figure from 2021. The rising demand from Europe and Asia for Korean manufacturers to supply military/defense equipment, including tanks, artillery, and airplanes, has significantly contributed to the increase in export volumes.

Notable weapons systems manufactured by South Korea’s defense industry include the K9 Thunder self-propelled howitzer from Hanhwa, the K2 main battle tank from Hyundai Rotem, and the FA-50 light attack aircraft produced by Korea Aerospace Industries.

Poland recently placed an order for 672 K9 units for $2.4 billion and 1,000 K2 main battle tanks for $3.34 billion, as replacements for arms donated to Ukraine during the Russia-Ukraine war. Additionally, Poland signed deals for 48 FA-50 light attack aircraft and 288 multiple launch rocket systems. These contracts highlight South Korea’s growing presence in the European arms market.

In February, Malaysia also ordered 18 FA-50 aircraft for $920 million.

Morgan Stanley is optimistic about the future of the South Korean defense industry, noting potential growth in chip-makers, EV value chains, defense, and energy enablers throughout 2023.

South Korea, under the current administration, aims to become a major arms exporter worldwide. The country’s strong industrial and tech base positions it well for defense industrial capability. South Korea is not only proficient in conventional military equipment and vehicles but also seeks to expand into areas such as drones, unmanned aerial vehicles, and undersea vehicles.

In combination with U.S. defense companies, South Korea is expected to excel in these areas.