Debate over monopoly concerns in the defense industry has intensified over Hanwha Group's move to raise its stake in Korea Aerospace Industries (KAI). At a parliamentary audit of government agencies on the 20th, lawmakers raised concerns that a combination of the two companies could undermine competition in the domestic aerospace and defense industries. At the same time, expectations are high that merging aircraft engine and avionics capabilities with complete-aircraft development and production could strengthen global competitiveness.
The Export-Import Bank of Korea currently says it has no plan to sell its KAI stake. But because this issue could shape the future of Korea's aerospace and defense industries, it needs to be approached dispassionately from a national strategic perspective.
First, KAI's revenue has grown slowly while Hanwha Aerospace, Hyundai Rotem and LIG D&A expanded through exports. Its revenue rose about 33% from 2.7869 trillion won in 2022 to 3.6964 trillion won last year. Critics also note that after failing to win four major domestic aerospace contracts last year, KAI withdrew in April this year from a U.S. Navy next-generation advanced trainer program it had been pursuing jointly with Lockheed Martin. The company urgently needs growth drivers that link the technological capabilities built through the successful KF-21 development to next-generation large-scale research and development programs and expanded exports.
KAI has also seen repeated controversy over the appointment of its chief executive with each change of government, and it went without leadership for about eight months from last year through early this year. Establishing accountable management that prioritizes expertise and business performance is essential.
Against this backdrop, the case of Britain's BAE Systems, created in 1999, offers important lessons. British Aerospace, the country's leading aerospace company at the time, combined with Marconi Electronic Systems, the defense electronics arm of the GEC group, to launch BAE Systems. It was a strategic choice by the British government to integrate aircraft development and production with radar, avionics, naval vessel and combat system capabilities in order to compete with large U.S. defense firms.
The results after the combination were striking. According to the Stockholm International Peace Research Institute (SIPRI), British Aerospace ranked fourth in the world in 1998 and, after the combination, expanded its global business to become the world's largest defense company in 2008 under the name BAE Systems. Its defense revenue reached $32.4 billion at the time. In 2024, it acquired Ball Aerospace of the United States, moving into space and advanced sensors. That growth came from technological innovation and the integration of business capabilities through the merger, combined with entry into the U.S. defense market and a sustained strategy of global mergers and acquisitions.
The British government allowed the combination but attached conditional undertakings in March 2000 to ensure fair access by competitors to key production capabilities and to prevent restraints on competition. It also monitored compliance through a compliance officer. As market conditions changed, most of the conditions were lifted in 2007, and the government has recently begun reviewing whether to lift the remaining ones.
The British case is also useful in assessing a possible combination of Hanwha and KAI. KAI holds what is effectively an unrivaled position in developing and producing domestic military fixed-wing aircraft, including the KT-1, T-50 and FA-50, and the KF-21. Hanwha Group's core capabilities lie in aircraft engines, avionics and weapons systems rather than complete aircraft. If the two were combined, therefore, it would be more vertical in nature, linking complete aircraft with core components, than a horizontal combination of competitors in the same business. That has raised expectations that the merger could strengthen localization of core components, performance upgrades and follow-on logistics support, and could offer integrated export packages spanning development, production, exports and maintenance, repair and overhaul (MRO).
On the other hand, some point out that concentrating both core component supply and the complete-aircraft business in a single company risks limiting market entry by competitors. Areas where the two companies could compete, such as unmanned aircraft and space, warrant particularly careful review.
Policy direction is therefore needed to achieve both stronger global competitiveness and guaranteed fair competition.
First, global competitiveness should be built up while monopoly and unfair competition are firmly blocked. In reviewing the merger, the government should closely assess market structure and the potential for restraints on competition product by product, covering aircraft engines, avionics, unmanned aircraft and satellites. It should in particular prepare effective remedies to prevent discriminatory supply between affiliates and non-affiliates, refusal to supply core components, and leaks of competitors' trade secrets.
Supplementary measures are also needed so that the government's bargaining power in acquiring and pricing weapons systems is not weakened as defense firms grow larger, including stronger cost verification, alternative supply chains and wider competitive bidding. The possibility of introducing a golden share to protect technologies, assets and management control critical to national security also needs to be examined in legal and institutional terms.
Second, Hanwha's acquisition of KAI should proceed on the premise of concrete investment and cooperation commitments for shared growth across the defense ecosystem. In pursuing the acquisition, Hanwha should present an industrial development plan that supports KAI's medium- to long-term research and development investment, maintains its independent technological capabilities, and helps suppliers enter global supply chains. It should in particular spell out plans to nurture "super suppliers" in core materials and components and to help startups in artificial intelligence, drones and space grow into defense unicorns. Principles on KAI's managerial autonomy, employment continuity and non-discriminatory personnel practices should also be put in writing.
Third, a system of conditional approval and independent annual compliance assessment should be established. Remedies grounded in law should be imposed in areas where restraints on competition are confirmed, and an independent compliance monitoring system should be built. Commitments on research and development investment, supplier cooperation, startup development and job security should be set out in a separate industrial development agreement, with performance assessed each year.
Ultimately, the discussion should focus on a direction that guarantees fair competition and an innovative defense ecosystem while achieving the national policy goal of ranking among the world's top four defense exporters in the 2030s.
The author is:
- Head of the Department of Advanced Defense Industry, Jeonbuk National University
- Former director of the Defense Industry Research Division, Korea Institute for Industrial Economics and Trade
- Former visiting fellow, Center for Strategic and International Studies (CSIS), U.S.