South Korea's 'Big Four' Defense Giants Hit 52-Week Lows, Erasing 108 Trillion Won

Shares of South Korea's defense industry, which once soared and shook up the business community's market capitalization rankings, have turned uniformly blue with losses. Yesterday (October 30), stock prices of the "Big Four" K-defense companies—Hanwha Aerospace, LIG D&A, Hyundai Rotem, and Korea Aerospace Industries (KAI)—either touched or hovered right above their 52-week lows. The combined market capitalization of the Big Four at their 52-week highs stood at 170 trillion won, compared to a combined 62 trillion won as of yesterday. In less than a year, a staggering 108 trillion won has vanished into thin air. If the market cap declines of other major defense companies are factored in, as much as 200 trillion won has evaporated.

Following the Yoon Suk-yeol administration, the Lee Jae-myung administration also proclaimed a goal to "enter the world's top four in defense exports," giving the impression that K-defense was invincible. Intoxicated by the misleading rhetoric of hyper-nationalist commentators claiming that "K-defense is sweeping the global arms market," "K-defense has no rivals," and "countries are regretting missing out on South Korean weapons," people were oblivious to time slipping away. In the meantime, the market cap of K-defense has been slashed to one-third of its peak.

With the resurgence of the European and Japanese defense industries, K-defense's cost-effectiveness edge is fading rapidly. South Korea now possesses virtually no weapons systems with a definitive competitive advantage. The expansion of K-defense has stalled after reaching a few peripheral countries, raising further concerns. These are common challenges facing the entire K-defense industry, on top of which individual companies are saddled with specific, compounding problems. Unless the industry wakes up and tackles these issues, K-defense stocks, already down to one-third, could easily be halved yet again.

KAI's closing stock price yesterday was 96,400 won, just 1,300 won shy of its 52-week low of 95,100 won. Its 52-week high of 215,500 won is now a midsummer night's dream. By all accounts, KAI's perpetual headwind is political patronage appointments. Many expected the Lee Jae-myung administration to resist the temptation of patronage appointments and place an aviation expert at the helm of KAI, but it proved no different from past administrations. The damage wrought by political appointees at KAI cannot be described in just a few lines of an article; it would fill several volumes.

Appointees with little connection to aviation take the CEO position at KAI backed by political power, and these patron CEOs, to repay their political debts, accept politically connected hires and plant them throughout the company. The labor union knows better than anyone the lack of legitimacy and expertise of these appointees. To keep the union happy, the patron leadership joins hands with labor. Naturally, the wages and welfare benefits of KAI employees have risen to the highest levels in the industry. As a result, KAI is known among defense contractors for having the highest proportion of labor costs in its products.

With Korea Eximbank holding a 26% stake, giving KAI the character of a state-run enterprise, generous salaries keep coming in like clockwork, leading KAI employees to favor preserving the status quo under the patronage system. They build fighter jets that are domestic only on the surface, and exports yield only losses, but chauvinistic hype around K-defense blinds public opinion. It resembles a socialist state-owned enterprise.

At this rate, KAI will inevitably wither away. KAI's only path forward is privatization. A university professor teaching defense studies diagnosed: "KAI stands at a crossroads between making privatization its corporate motto and pursuing voluntary privatization, or being subjected to forced privatization by outside forces."

Facing legal risks over an unprecedented defense procurement scandal, LIG D&A closed yesterday at 409,000 won. That is down by nearly two-thirds compared to its 52-week high of 1,118,000 won. A further drop of about 10% would bring it to its 52-week low of 360,000 won. The defense industry cites personnel overhaul as LIG D&A's most urgent task. While LIG D&A is a private company controlled by a chaebol owner, it carries a strong whiff of patronage appointments. Former Air Force officials and former legislative aides frequently occupy key positions and climb the promotion ladder.

Kim Sung-il, the 29th Chief of Staff of the Republic of Korea Air Force, is known to have opened the gateway for retired Air Force personnel to join LIG D&A. He served as an outside director at LIG Nex1 and reportedly acted as a gatekeeper facilitating entry for retired Air Force officers even after leaving the company. Current CEO Shin Ick-hyun is also a retired Air Force brigadier general. After joining LIG Nex1 as a senior specialist in 2017, he rose to the CEO position in just seven years.

There are many other former Air Force personnel as well. Two LIG D&A executives indicted on charges of offering bribes are also reportedly from the Air Force. The Defense Acquisition Program Administration (DAPA) official accused of accepting bribes from them is a former Air Force member as well. The unprecedented defense procurement scandal involving LIG D&A and DAPA has sparked jokes in the industry that it is "an affair of Air Force veterans."

Former National Assembly aides have also nested in LIG D&A and expanded their influence. Most are former aides from the conservative People Power Party close to Chairman Koo Bon-sang's ownership circle. Traditionally, many former officials from the Agency for Defense Development (ADD) and the Defense Agency for Technology and Quality (DTaQ) have also been hired by LIG D&A.

An executive at LIG D&A pointed out: "Seeing Air Force and political aide appointees swoop in like eagles to snatch top positions, rather than genuine LIG D&A employees who devoted their youth to the company, leaves many staff feeling demoralized," adding, "LIG D&A can only survive if it becomes a company where the dream of working hard to become an executive can actually come true." It is hoped that a virtuous cycle will be established at LIG D&A, where top talents who succeed through fierce competition take on vital responsibilities.

Hanwha Aerospace closed yesterday at 682,000 won. Its intraday low of 662,000 won marked a new 52-week low. Its 52-week high was 1,713,000 won, meaning its price has plummeted to nearly a third. Hyundai Rotem closed yesterday at 75,100 won after touching a 52-week low of 75,000 won during the session. That is down to roughly a quarter of its 52-week peak of 282,000 won.

Hanwha Aerospace's flagship export products are the K9 self-propelled howitzer and the Chunmoo multiple launch rocket system, while Hyundai Rotem's main export is the K2 main battle tank. The lineup is identical to what it was a decade ago. There are no notable new offerings in sight for next year or the year after. Self-propelled howitzers, tanks, and rocket launchers are systems that most Eastern European nations can develop as well. Moreover, they are vulnerable to drone attacks, making their long-term outlook dim.

Hanwha Aerospace is pushing aircraft engine development, and Hyundai Rotem is pursuing next-generation tank development as their respective future growth engines. Yet these developments cannot be carried out solely by individual corporate will and internal funds. They are only feasible if the government provides massive financial support, and it remains uncertain whether the government will make such a commitment.

The key issues facing K-defense can be summarized as rapid shifts in the global arms market and security environment, juxtaposed with the stagnation or falling behind of South Korean players. K-defense is confronting a major crisis. The Big Four plunging near their 52-week lows is decisive proof. While it would be ideal for companies to make all-out self-help efforts to bounce back, realistically, external support is urgently needed.

In particular, defense-related agencies and organizations, such as DAPA and the Korea Defense Industry Association (KDIA), must immediately map out a master plan to overhaul K-defense's fundamentals and enhance its competitiveness. Before the stock bubble fully deflates and triggers public backlash, they must proactively devise and execute strategies to restore K-defense's competitive standing. Until then, rosy political trial balloons—such as "entering the world's top four in defense exports" or "elevating DAPA to a ministry-level National Defense Resources Administration"—should be cast aside.

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