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Regulations keep defense industry under siege

Sept 12,2018
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For a country where military conscription is mandatory, Korea’s defense industry isn’t doing very well.

Nearly a decade ago, in January 2009, the government removed barriers to encourage new defense businesses to enter the industry and foster greater competition. Nearly ten years later, Korea’s defense industry is still bogged down in excessive regulations with stagnant revenue and declining exports.

According to the Korea Defense Industry Association, Korea’s defense revenue rose from 7.24 trillion won ($6.43 billion) in 2008 to 14.27 trillion won in 2015. The industry has shown little sign of growth since 2015, however, with annual total revenue yet to break through the 15-trillion won threshold.

Exports are falling. Though total defense exports recorded $3.6 billion in 2014, they only amounted to $3.19 billion last year and $2.55 billion in 2016. Exports only account for 10 percent of Korean defense companies’ total revenue on average.

“As long-term investigations on defense corruption continue, the industry itself has been branded as a hotbed of corruption,” said a spokesman from an arms company. “Regulations have gotten tougher, making it difficult for us to expand overseas and develop new technology.”

In 2014, the government formed a joint investigation team made up of the prosecution, the defense ministry, police and other agencies in an effort to root out corruption in the industry.

Though the investigative team has accused dozens working in the defense industry of crimes ranging from document forgery to bribery, it has been widely criticized for making ungrounded, hasty accusations that tarnish the industry’s reputation.

According to the National Defense Ombudsman for Civil Rights, 16 out of 36, or 44.4 percent, of defendants from the defense industry who were arrested and charged for major corruption cases were found innocent on appeal, nearly 10 times higher than regular criminal cases.

As of today, there is only one Korean defense company to have acquired an ISO 37001 certification, which proves that its anti-bribery systems meet international standards.

Ineffective regulations have also been holding the defense industry back. Before doing business with foreign firms, domestic arms companies must receive permission from the government at every stage, meaning they must get approval before advertising products, bidding on projects and signing the contract.

“Though giving prompt replies to customers is critical for sales, we never know when or if [the government] will give us approval,” said a spokesman from a defense company. “This interferes with our ability to properly conduct business.”

The system of charging penalties for late deliveries is another regulation that the defense industry finds damaging. The Defense Acquisition Program Administration, the government agency responsible for defense acquisitions, charges domestic and overseas firms 0.075 percent of the goods’ value for every day that deliveries are late.

But while foreign firms only face late penalties worth 10 percent of the total value of goods, regardless of how late shipments are made, the government puts no upper limit on penalties levied on Korean companies, meaning they may have to pay exorbitant penalties for unforeseen delays.

Hyundai Rotem, a Hyundai Motor subsidiary that manufactures defense products, is now facing approximately 150 billion won in late fees for being unable to meet the deadline for a government order for K2 Black Panther tanks due to problems with the transmission system. S&T Motiv, another arms manufacturer, has recently been charged over 100 billion won in late fees for failing to fulfill orders for K-11 assault rifles on time due to technical problems.

“We need to eliminate [harmful] regulations and stop the vicious cycle of companies struggling over late fees in order for our defense industry to improve,” said Kim Hack-yong, a lawmaker from the main opposition Liberty Korea Party, during a National Assembly meeting.

“Because [the defense industry] can no longer grow by remaining in the domestic market, it needs the government to make bold changes so that defense companies can enter overseas markets,” said Ahn Sang-nam, head of the Korea Defense Industry Association’s public relations office.


BY YOON JUNG-MIN [kim.eunjin1@joongang.co.kr]