Indonesia’s Betrayal: $440M Deal Fallout Shakes South Korean Defense Industry

Indonesia delays payments
Poland’s second arms deal faces difficulties
South Korean defense companies face European opposition

Recently, South Korean defense companies have been in a tight position with foreign containment and contract changes. Some have reacted by saying, “South Korean defense isn’t a pushover,” and “The arms market is fierce.”

Last year, Korean defense companies did not achieve the same level of export performance as in 2022, but the number of countries conducting export transactions increased from four to twelve.

It is assessed as leaping forward by achieving qualitative growth, such as diversifying the number of exported weapon systems from six to twelve.

From early 2024, defense companies, starting with a $3.2 billion Cheongung-Ⅱ export agreement with Saudi Arabia, are operating major procurement projects worldwide in Europe, the Middle East, North America, and South America.

Defense Acquisition Program Administration

Also, due to concerns about a possible full-scale conflict between Israel and Iran, the Middle East is emerging as a new export region for K-defense.

The Middle East, a region with high threats of terrorism due to the nuclear-armed Iran and the long-standing conflict between Israel and Palestine, has seen an increase in weapons demand as security concerns have reached a peak.

An industry insider said, “Middle Eastern countries account for 30% of the world’s weapons imports, and they have mainly imported weapons from the United States. But now they turn their eyes to South Korean companies, known for their precise delivery dates.” He added, “The government is also taking an active stance on financial support related to exports, so we expect a level-up by diversifying exports.”

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However, not everything has been good for Korean defense, such as arms exports to the Middle East.

According to the industry on the 6th, Indonesia, which had agreed to pay KF-21 shared costs to our government, unilaterally informed us that they would pay an additional approximately $220 million on top of the existing $220 million, totaling about $440 million, by 2026.

Initially, the KF-21 development shared cost scheduled between Korea and Indonesia was about $1 billion 245 million, which was later reduced to about $1 billion 171 million. Considering the situation in Indonesia, the Korean government has understood and accepted a reduction of about $70 million.

Indonesia promised to pay all the installment money by June 2026, when the KF-21 development is completed, with the help of South Korean technology.

However, citing domestic economic conditions, they have postponed payment, paying only $220 million, less than a third of the total. In this process, it was revealed that they proposed to pay the shared cost in-kind, such as palm oil, or requested to extend the payment deadline from 2026 to a later date.

If the government accepts Indonesia’s proposal, the South Korean government is expected to bear an additional cost of nearly $732 million out of the total KF-21 development cost of about $6.5 billion.

The South Korean government is reportedly considering Indonesia’s proposal, which involves a significant investment.

Previously, Indonesia had announced plans to produce 48 units locally after receiving one prototype and technical data in return for joint development of the KF-21 with South Korea. To commemorate the cooperation, the South Korean and Indonesian flags were simultaneously painted on all six prototype KF-21s.

However, if the scale of Indonesia’s shared cost decreases, the benefits from joint development are expected to shrink significantly.

Meanwhile, in February, Indonesian engineers dispatched to Korea Aerospace Industries (KAI) were caught trying to move a portable storage device (USB) containing internal data related to the KF-21 secrets and were investigated by the authorities.

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In addition, K-defense is struggling with its deal with Poland.

The newly inaugurated Polish government threatened in December last year that they could not execute the second arms contract with South Korea without financial aid from the government, citing a lack of funds.

South Korea, which has almost completely used the Export-Import Bank’s policy finance limit, proposed financial support through commercial banks as an alternative but faced difficulties as Poland persistently requested financial support at the government level, including the Export-Import Bank with a low procurement interest rate.

Furthermore, Europe is checking K-defense. French President Emmanuel Macron argued in a speech to European Union (EU) parliamentarians and others at the Sorbonne in Paris on the 25th of last month (April) that “We need to buy more European military equipment to strengthen Europe’s autonomous defense.” He pointed out, “Currently, Europe has been responding to defense by purchasing American and South Korean weapons, which threatens European defense.”