As global defense spending surges, South Korean arms makers look like a clear winner

South Korea is known for many things. K-pop, K-dramas and Korean food have made their way across the world.

Now, a new facet from South Korea is poised to make a splash in investors' portfolios — defense stocks.

Shares of these military manufacturing firms have been surging this year, powered by massive arms orders from other nations.

Most of the leaders in this space, namely, Hanwha Aerospace, Korea Aerospace Industries, Hyundai Rotem and LIG Nex1, have recorded stellar gains so far this year.

Statistics from the Stockholm International Peace Research Institute showed that world military expenditures increased for the ninth consecutive year in 2023, up 6.8% year-over-year and reaching a total of $2.44 trillion. This was the steepest year-on-year rise since 2009, and pushed global spending to a record, the institute added.

Sang Hun Seok, who is an Indo-Pacific visiting fellow at the Royal United Services Institute, a U.K.-based policy think tank, explained to CNBC that a steady increase in global expenditure, combined with growing geopolitical uncertainties has provided South Korean arms makers with larger global markets.

"South Korea's position as a defense industrial powerhouse is backed up by real numbers," an April report by the Italian Institute for International Political Studies stated, pointing out that the country's arms exports continually increased from $2 billion to $3 billion in the late 2010s, to $7.3 billion in 2021.

Exports then further climbed to $17.3 billion in 2022, and despite a slight dip to $14 billion in 2023, South Korean arms exports are set to exceed $20 billion in 2024, according to an August report from media outlet Chosun Ilbo.

Furthermore, more countries were importing defense products from Asia's fourth largest economy. Chosun Ilbo said that just four countries were importing South Korean arms in 2022, but this number rose to 12 in 2023.

The appetite for South Korean arms can be explained by the mantra of "cheaper, better, faster." Basically, analysts told CNBC South Korean arms are seen as lower in cost with faster production, and are almost as good as their top-tier counterparts from other countries.

The first reason, of course, is cost. RUSI's Seok said simply: "South Korean exports are highly cost-efficient." For example, a PAC-3 intercept missile, used by the U.S. Patriot surface-to-air missile system, reportedly costs around $4 million each.

The South Korean Cheon-gong intercept missile, made by LIG Nex1, is known to offer similar performance to the PAC-3 and costs a third of that, he noted.

The prohibitive cost of such weapons has been brought into stark focus during the Russia-Ukraine war, when Moscow launched numerous drone and missile attacks against Ukraine, some strikes consisting of over 100 unmanned aerial vehicles.

A report from the Center for Strategic and International Studies in 2022 highlighted this disparity: "Shooting $4 million missiles at $250,000 Russian cruise missiles might be justified if those missiles would hit sensitive targets. Shooting a $4 million missile at a $50,000 Iranian Shahed-136 drone would probably not."

While U.S. weapon systems are renowned for their top-tier performance, Bruce Bennett, senior defense analyst at U.S. think tank RAND Corporation, said that due to the high cost of U.S.-made weapons, most countries can't afford them. "And so, the Korean approach of offering a much less expensive weapon that's almost as good, that was very attractive to a lot of countries," he said.

A cost-effective weapon is great, but weapons orders don't defend a country. Only when a weapon arrives and is operational in a country can it contribute to its defense.

Hoshik Nam, assistant professor in the department of sociology and political science at Jacksonville State University, told CNBC that South Korea has constantly invested heavily in its defense industry, due to the country still being formally at war with North Korea, and was well prepared to meet the increase in demand when orders surged after the Russian invasion of Ukraine.

As such, "this sustained investment has allowed the industry to maintain robust production capabilities, unlike some Western countries that scaled down their military production lines after the Cold War."

For example, Poland placed an order for 48 FA-50s, made by KAI, in 2022 to replenish its fighter platforms after the country donated some of its ex-Soviet fighters to Ukraine.

The FA-50 was chosen due to KAI's ability to deliver the aircraft quickly, Poland's Deputy Prime Minister and Minister of Defense Mariusz Blaszczak reportedly said in an interview with Polish media.

12 FA-50s were reportedly delivered by the end of 2023 from South Korean stocks, while the remainder will be built to Polish specifications and be delivered starting from 2025.

The FA-50 is also highly compatible with the U.S.-made F-16 fighter, which Poland also operates, making it an attractive option for countries seeking cost effective alternatives with faster procurement timelines, JSU's Nam said.

South Korean arms are, by and large, not the cream of the crop, but in addition to their cost effectiveness, their compatibility with many systems, and their high reliability make them attractive to buyers.

JSU's Nam said that due to South Korea's regular joint military exercises with the U.S., South Korean weapon platforms have high compatibility with U.S. and NATO systems, allowing countries to simplify their logistics when acquiring South Korean weapons.

Nam also added that compared to Russian or ex-Soviet weapon systems, South Korean systems have significant reliability advantages, as having a wider base of clients also means a broader support network for servicing systems.

RUSI's Seok said South Korean defense companies have also been giving very generous terms in other areas, such as technological cooperation, local production and financing. Companies also are very proactive in adapting to buyers' changing requirements and providing extensive after-sales support, he said.

RAND's Bennett pointed out the case of India, which signed an agreement with South Korea to domestically produce the K9 Thunder (locally known as the K9 Vajra-T) in 2015.

He said that India had traditionally bought Russian weapons, but Russia was unable to provide support for the systems that were sold, such as maintenance and spare parts.

"So the Korean approach was, from the very beginning, let's make sure we have a viable supply chain. Let's provide maintenance. We'll send people out wherever it is around the world to help you get your maintenance capabilities, your supply chain, your spare parts," Bennett said.