The strong dollar trend, with the won-dollar exchange rate hovering above the 1,470-won range, is having a two-sided effect on Korea's military authorities and the defense industry. While it is expected to boost profitability in the defense sector, such as through exchange gains, analysts say it could be a burden for the military authorities, which have to purchase U.S.-made weapons.
According to the defense industry on the 3rd, weapons systems are typically traded in dollars. As the won-dollar exchange rate rises (the won weakens), the won-converted sales of export contracts increase. The higher the localization rate of a company, the greater the likelihood that profitability will improve.
Hanwha Aerospace opened an era of 10 trillion won in sales and 1 trillion won in operating profit last year for the first time in the domestic defense industry, thanks decisively to exports in the ground defense sector such as the K9 self-propelled howitzer and the Chunmoo multiple launch rocket system.
Of Hanwha Aerospace's 7.0056 trillion won in ground defense sales last year, exports were 3.8847 trillion won. The average exchange rate last year was 1,363.98 won per dollar, up more than about 60 won from 2023, supporting improved results.
On the back of K2 tank deliveries, Hyundai Rotem also posted record results last year. Annual sales in the defense institutional sector were tallied at 2.3652 trillion won, with operating profit at 563.2 billion won. Those figures were up 49.8% and 254.1%, respectively, from a year earlier. Defense institutional sector exports were 1.5917 trillion won, up 133% from the same period a year earlier (682.6 billion won). A Hyundai Rotem official said, "When the exchange rate rises, there is an aspect in which profitability improves."
With the won-dollar exchange rate higher than last year and deliveries set to expand, the securities market expects domestic defense companies' profitability to improve further. The average exchange rate from January to November this year was 1,418 won per dollar, 54 won (4.0%) higher than last year's annual average. Hanwha Aerospace is increasing the number of countries to which it exports weapons systems, and Hyundai Rotem must begin shipping the second batch under its contract with Poland starting next year.
Lee Han-gyeol, senior researcher at Kiwoom Securities, said, "The high exchange rate in the 1,400-won range is likely to continue next year," adding, "Companies with high localization rates will keep tracing an upward curve in their results." The localization rate of the K9 self-propelled howitzer produced by Hanwha Aerospace is 86%, and the Chunmoo's is 90%. The localization rate of the export model of Hyundai Rotem's K2 tank is known to be 84%.
On the other hand, if the high exchange rate trend continues, it is likely to be a burden on the Korean government, which must purchase U.S.-made weapons systems. The U.S.-Korea joint fact sheet released last month, reflecting the agreements from the summit, included language that said, "Korea has decided to spend $25 billion (about 37 trillion won) on purchases of U.S. military equipment by 2030."
As of Oct., the military authorities have a total of five projects planned under the government-to-government Foreign Military Sales (FMS) transaction method. The scale of these projects is about $5.43 billion (about 8 trillion won. Of these, two projects, including the second Patriot missile performance upgrade project, are scheduled to sign contracts by the end of this year, totaling $1.97 billion (about 2.9 trillion won). Because FMS projects typically involve paying a set amount monthly over several years, they can be partly affected by exchange rates.
If the military's weapons acquisition projects proceed under a "commercial purchase" method, in which foreign companies participate in the military authorities' process of purchasing specific weapons systems, the impact of exchange rates is expected to be greater.