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Sunday, February 13, 2011

Strategies for Korean defense exports

By Stephen T. Ganyard
Korea’s defense exports reached a record $1.19 billion in 2010. Along with this remarkable performance, the Presidential Council for Future and Vision ambitiously announced last October a plan to accomplish defense exports of $4 billion by 2020 and recommended pan-government support to achieve this goal.

For Korea to accomplish this national objective, there are several important issues and potential strategies the Korean government and the defense industry should consider.

At a macro level, several key developments are driving global aerospace and defense spending. There are major changes in military operational planning. For instance, counterinsurgency and stability operations have become as important as planning for conventional warfare in many international defense markets.

Furthermore, “homeland security” is becoming an important business area in global defense and security markets. India, the Middle East and Europe in particular are increasingly concerned with homeland security, such as securing their borders and acquiring capabilities to augment their internal security, including immigration management systems, counterterrorism technologies and cyber security solutions.

In terms of business opportunity, there are currently four major areas of focus in the global defense market.

First, air and missile defense will remain a critical area of importance particularly in Asia, the Middle East, and in Europe.

Second, homeland security, including providing the physical security, infrastructure, and technologies to protect borders will be an area of increasing importance.

Third, related to homeland security is maritime surveillance, with the use of sensors and radar to counter the threats of maritime rivals.

Finally, the need for integrated solutions for the command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR) system is occurring worldwide, as more sophisticated sensors and integrated solutions are developed.

There are also some new trends in the international defense markets that Korean firms will need to take note of and carefully consider. First, it is the changing nature of defense offset requirements.

The most successful firms take the initiative in their approach to offset requirements such as technology transfer and joint ventures, seeking to leverage their offset plans into their overall country plan and to fulfill their obligations in ways that not only satisfy the overall program intent, but also build good will, thus improving their competitive positions over the longer term.

Second, there is a more indigenous focus to the defense market by many countries, which suggests that technology transfer and intellectual property rights protection will become an increasing part of the calculus of selling abroad for Korean defense companies.

Finally, there is increased competition beyond the traditional U.S. and European market leaders.

To effectively compete in the fierce international defense markets, bringing in executives who may have no background in defense and security but a lot of experience in international business may be required as one of the first steps.

Outside experts with both global and country specific experience will need to be engaged as most global defense companies do. For large firms with broader and more diverse offerings will be required to take a more resource-intensive and committed approach.

“Badged” local employees and a full time in-country presence are often necessary, especially in key countries with large and growing defense budgets. For instance, firms will need to ensure that appropriate human resources, legal, and other internal processes are put in place to vet, hire, and train personnel in foreign countries.

And legal teams must be expert in both local and foreign laws and export control regulations, which are fundamental to navigating complex acquisition procedures and avoiding costly, and potentially embarrassing, fines and penalties.

More nuanced strategies will be required of small and medium enterprises. International success for firms with smaller scale offerings typically means taking a more tactical route, and pursuing sales with shorter lead times and greater chances of success.

For these firms an international footprint that is predicated on local agents and commission-based sales representatives may offer sufficient international capability.

As for the Korean government, Reciprocal Defense Procurement arrangements could be considered to increase defense trade with foreign countries including the United States.

Considering the sensitivity of defense products to national security, it is unlikely that recently agreed Korea-U.S. Free Trade Agreement (KORUS FTA) would have any direct impact on increasing bilateral defense trade.

So far, 21 nations have already signed the memorandum of understanding (MOU) with the United States. It will not only alleviate America’s national defense trade restrictions but also remove the restriction of the Buy American Act, allowing Korean firms to bid on U.S. defense contracts with the same competitive
status of U.S. firms by eliminating preferential pricing differentials and allow duty free delivery of goods to satisfy contracts.

While the international defense and security arena will present new challenges for many South Korean defense firms, it represents an exciting and lucrative opportunity for new revenue and export growth.

Success in these markets will require a combination of factors including: understanding the market trends and opportunities, developing a strategic approach to succeed in response to emerging procurement trends, and developing the right international processes and teams.

With forethought, proper preparation, and long-term commitment the South Korean defense and security sector can become a new leader among the nation’s export sectors.

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