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Jets, Submarines Lead Korea Push to Triple Defense Exports

Jets, Submarines Lead South Korea Push Defense Exports
An undated file photograph shows Korea Aerospace Industries Ltd.'s T-50 trainer jet. In May, Indonesia agreed to buy 16 of South Korea’s T-50 trainer jets for $400 million, the first sale of the aircraft overseas. Photographer: Yonhap News via Bloomberg

Armored vehicles, trainer jets and weapons will be on display this week at South Korea’s biggest aerospace and defense exhibition, as the nation works to triple annual military exports by the end of the decade.

Daewoo Shipbuilding & Marine Engineering Co. will promote submarines that are key to South Korea’s biggest defense-export deal, while Korea Aerospace Industries Ltd. will display its T-50 trainer jet. The country plans to boost military exports to $4 billion a year by 2020 as it challenges contractors like ThyssenKrupp AG and Alenia Aermacchi SpA in Southeast Asia, the Middle East and Eastern Europe.

“The European and American defense industries are facing increased competition from players like South Korea that have emerged in the last 10 to 15 years,” said Tim Huxley, executive director of International Institute for Strategic Studies Asia in Singapore. The Korean defense sector “has developed competences in a number of areas such as armored vehicles, naval vessels and increasingly in aircraft,” he said.

The Seoul event, which officially opens tomorrow, will have 95 aircraft and other military equipment on display. That includes overseas models such as Boeing Co.’s F-15C fighter, as South Korea moves toward ordering new planes for its air force.

The show organizer, the Korea Aerospace Industries Association, predicts $500 million in deals, up from $340 million the last time the event was held in 2009. About 90 defense officials from nine countries will attend, the group said in an e-mail statement.

“South Korea is aiming to compete in niche markets for defense orders,” Yoon Cha Young, the head of the exhibition, said in an interview. “The event will provide an opportunity for companies to showcase their products.”

Indonesia Deal

South Korea is developing its own line of products to reduce its dependency on the U.S. on Western countries and to boost overseas earnings.

The government is targeting arms exports of $1.6 billion this year, an increase from $1.2 billion in 2010. The country aims to boost annual weapons sales overseas to $4 billion and expand total production to $10 billion in 2020, creating as many as 50,000 jobs, according to the presidential office.

Submarine Deal

The country is close to winning its biggest overseas defense order. Seoul-based Daewoo Shipbuilding is in discussions with Indonesia to build three 1,400-ton submarines worth about 1.2 trillion won ($1 billion).

In May, the Southeast Asian country also agreed to buy 16 South Korean T-50 trainer jets for $400 million, the first sale of the aircraft overseas. Korea Aerospace will deliver them by 2013.

Doosan Group, which builds armored vehicles at its Doosan DST unit, also signed a memorandum of understanding last month to develop 22 tanks under a joint production program with Indonesia’s PT Pindad, according to the Indonesian government. PT Palindo and Daewoo Logistics Corp. separately signed an agreement to develop warships, the government said.

Korea Aerospace, the country’s only planemaker, developed the T-50 trainer together with Lockheed Martin Corp. and may sell it to the U.S. Air Force. The company is also developing the KUH-Surion helicopter to sell overseas under a venture with Eurocopter, and it plans to export the FA-10 jet fighter, which goes into production next year. The fighter is based on the T-50.

Fighter Jets

“The development of fighter jets is a challenging project but I think there is a gap,” Huxley said. “A number of developing countries’ air forces wish to re-equip but existing western projects are very expensive. There is a market for a relatively inexpensive but sophisticated combat aircraft.”

The Sacheon, South Korea-based company has already sold its KT-1 propeller training aircraft to Indonesia and Turkey.

The planemaker announced today a provisional agreement to supply $600 million of parts for Airbus SAS A320 planes. Korea Aerospace gained 13 percent, the biggest rise since it started trading shares on June 30, to close at 38,250 won in Seoul trading. Daewoo Shipbuilding, the world’s third-largest shipyard, climbed 1.5 percent.

The shipbuilder, the first South Korean company to make submarines, is also bidding to supply vessels to the Canadian Navy and Coast Guard. The company teamed up with Upper Lakes Group Inc., a Toronto-based shipyard, and SNC-Lavalin Group Inc. in July to complete for a C$35 billion ($34.4 billion) deal.

Not Big Enough

“We are looking at exporting more of our naval products because the local market isn’t big enough,” Daewoo Shipbuilding, which also makes commercial vessels, said in an e-mailed response to Bloomberg News. “We are putting all efforts to increase exports to increase the usage of our facilities.”

Daewoo Shipbuilding’s first submarine, delivered in 1994, was built using technology from Howaldtswerke-Deutsche Werft GmbH, part of ThyssenKrupp. Almost two decades later, the shipbuilder may beat German, French and Russian bids for the Indonesian order. Daewoo and Hyundai Heavy Industries Co., owner of the world’s biggest shipyard in Ulsan, South Korea, build submarines and warships for the navy.

South Korea’s military will still look to Lockheed Martin, Boeing and other major contractors to cope with regional threats, primarily from North Korea. Kim Jong Il’s regime shelled a South Korean island in November, killing four people, and is also blamed for the torpedoing of a South Korean warship in March 2010 that claimed the lives of 46 sailors. The peninsula has technically been in a state of war since the 1950-53 Korean war ended in a cease-fire, not a peace treaty.

Jet Fighter Tender

President Lee Myung Bak’s government may issue a tender for about 60 jet fighters in the first quarter of next year, Boeing said in June, adding that it may propose its F-15 Silent Eagle fighter for the contract.

South Korea, which ordered 61 F-15Ks from Boeing in 2002 and 2008, is aiming to become the world’s seventh-largest arms exporter. The Asian nation raised $1.18 billion in overseas sales last year, ranking it 18th-biggest, according to the Defense Acquisition Program Administration.

“The best case scenario is that South Korea moves beyond the very limited niche achieved by all the other countries that went down this path and becomes a world class second-tier aerospace producer, like Italy,” said Richard Aboulafia, vice president of the Teal Group, a Fairfax, Virginia-based aviation consulting firm. “But that would take a huge increase in research and development money.”

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