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The corporations profiting from North Korean belligerence

North Korean aggression is a drain on South Korea’s economy, but it’s a boon for the defense contractors looking to flood the peninsula with new weapons systems. As Seoul awaits a possible North Korean missile launch this week, the country is watching its benchmark KOSPI become Asia’s worst-performing index this year. At the same time, ...

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North Korean aggression is a drain on South Korea’s economy, but it’s a boon for the defense contractors looking to flood the peninsula with new weapons systems.

As Seoul awaits a possible North Korean missile launch this week, the country is watching its benchmark KOSPI become Asia’s worst-performing index this year. At the same time, stocks for defense contractors with existing business ties with Seoul are surging.

These firms are currently vying to equip South Korea with a mix of radar systems, fighter jets, drones, and missile defense systems, and include everyone from Boeing to Lockheed Martin to Northrop Grumman to Raytheon to BAE Systems. While the South’s major acquisition decisions are made with a long-term view, Pyongyang’s apocalyptic rhetoric doesn’t exactly hurt the efforts of silver-tongued weapons salesmen. We took a quick glance at the market valuation of the firms we’re talking about on Thursday.

Not bad. And how about the stock peformance since Pyongyang’s belligerence began in March?

Even better. The below graph features a blue line representing the above defense stocks and a red line representing the S&P 500. Despite the fact that the S&P is having a record-breaking month, it’s no match for surging investor interest in defense stocks in the wake of Pyongyang threats:

So what do these companies have to gain? Here’s a breakdown of the existing and future bids these firms are trying to lock down with South Korea:

Fighter Jets

Currently the biggest names in defense contracting are vying to provide Seoul with 60 new fighter jets in a global competition worth billions of dollars. Last week, the Pentagon approved the potential sale of Lockheed Martin’s F-35 stealth fighter and Boeing’s F-15 Silent Eagle fighter to Korea. But Lockheed and Boeing don’t just have themselves to compete with: The pan-European aerospace and defence corporation EADS and BAE Systems are also offering the Eurofighter Typhoon. To get a sense of the kind of coin we’re talking about, the Pentagon says the proposed sale of Lockheed’s F-35 fighters would be worth as much as $10.8 billion. On Tuesday, Dave Scott, a senior Lockheed executive, renewed his pitch for the F-35 in light of Pyongyang’s belligerence, saying the actions of the regime “have reinforced the need to be strong and to be recognized.”

According to Reuters, Seoul will announce the winner of the competition sometime between June and November.

Drones

Though a proposed deal between Seoul and Northrop Grumman for a fleet of $215 million Global Hawk drones is still at an “early stage,” the contract could pay off hugely for the Virginia-based contractor. The drone is the size of an airliner and, according to weapons expert David Axe, could become a lynchpin of the “burgeoning robotic alliance” between Tokyo, Washington, Seoul, and Canberra. It’s also quite a valuable contract: In December, the Pentagon pegged the proposed sale of four Global Hawks by Northrop at a cool $1.2 billion.

Radar

Hot off the presses, Massachusetts-based contractor Raytheon announced the sale of its Raytheon Advanced Combat Radar (RACR) to South Korea on Thursday. The radar, an “active electronically scanned array system,” is built specifically for use on F-16 Fighting Falcons, and is part of a planned $1.1 billion upgrade to South Korea’s fighter jet fleet. “RACR will keep the Republic of Korea’s KF-16 combat-relevant in a constantly evolving threat environment,” said Raytheon Space and Airborne Systems President Rick Yuse. Previously, South Korea has also made large purchases of radar equipment from Israel Aerospace Industries.

Missiles and Missile Defense

In terms of raw missiles, Raytheon also benefits from a South Korean defensive buying spree. Seoul is a major customer of Raytheon’s newest incarnation of the Advanced Medium-Range Air-to-Air Missile (AMRAAM). As recently as December, South Korea ordered AMRAAM missiles from Raytheon, although the shipment was delayed because the missiles were missing their motors. Additionally, the Israeli defense firm Rafael has expressed a strong interest in selling its sometimes vaunted, sometimes pooh-poohed Iron Dome technology to South Korea. But as Kevin Baron reported on Monday, previous deals have met with resistance due to the system’s steep price tag among other things: Each Iron Dome battery costs an estimated $50 million and the interceptor rockets cost between $50,000 and $80,000 each. In sum, there’s a lot of money to be made on the Korean Peninsula.

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