Korea’s defense sector, celebrated only recently as the country’s next great export engine, now confronts a brutal convergence of setbacks: collapsing profits, European protectionism, a bribery scandal, and a factory explosion that killed five workers. The record-breaking momentum has stalled.
The industry’s rise followed Russia’s full-scale invasion of Ukraine, when global demand for Korean armor and artillery surged. But that windfall is fading fast. Europe now favors domestic suppliers, and each major Korean contractor faces its own internal crisis.
Hanwha Aerospace absorbed roughly 30 billion won in one-time costs tied to a June 1 blast at its Daejeon plant. A labor ministry inspection uncovered 473 safety violations there. The company targets normal plant operations by the first half of 2027.
Meanwhile, LIG Defense & Aerospace received a two-year ban from government bidding in October. Prosecutors allege two employees paid a defense acquisition official 320 million won for favorable proposal scores. The Seoul Administrative Court temporarily suspended that ban until Nov. 20, with a hearing scheduled Thursday.
The numbers tell a grim story. Korea’s four largest defense firms crossed 40 trillion won ($30.2 billion) in combined revenue last year, ending 2025 with over 120 trillion won in order backlogs. Yet that cushion is thinning quickly. Hanwha’s ground defense backlog dropped about 8 percent to 35 trillion won between June and September. Hyundai Rotem’s defense backlog slipped to 9.5 trillion won over the same period.
Profitability has cratered as a result. Hanwha posted its first net loss in three years, with third-quarter operating profit plunging 46 percent to 452 billion won. Hyundai Rotem’s weaker-than-expected 236 billion won profit pushed its shares to a 52-week low on Oct. 20.
The European Union’s Security Action for Europe (SAFE) program compounds the pressure. The 150 billion euro lending initiative requires 65 percent of component costs to originate within the EU, the European Economic Area, or Ukraine. Korea has submitted a letter of intent to join SAFE but lacks an agreement, unlike Canada. A Yonsei University political science professor warned that without SAFE membership, rapid Korean expansion into Europe through the 2030s remains impossible.
Korean firms are racing to localize production. Hanwha is building a K9 factory in Romania, while Hyundai Rotem prepares K2 assembly in Poland. But negotiations over localization terms and export profit sharing have delayed Poland’s third K2PL tank contract for 210 vehicles.
The path forward hinges on whether Seoul can secure institutional participation with Brussels. Until then, every European order demands more negotiation, more complexity, and costs the industry cannot afford to ignore.
