Moves Underway to Overhaul Defense Cost-Calculation System, Including “Mandatory Use of Import Prices for Domestic Parts”

[Financial News] DAPA has begun work to improve the institutional framework for its defense cost-calculation system, aiming to strengthen the global competitiveness of South Korea’s defense industry and create a safer manufacturing environment. Developing systematic measures to ensure that the meeting on these improvements leads to stronger competitiveness across the domestic defense-industry ecosystem is expected to emerge as a key task going forward.
DAPA will hold a cost-work meeting on the morning of the 5th at Kia’s Gwangju plant, with about 20 executives and employees from six major defense companies in the maneuver and firepower weapons systems sector in attendance, including Kia, Poongsan Corporation, Hanwha Aerospace, Hyundai Rotem, LIG D&A and Korea Defense Industry.
The meeting was organized to discuss ways to improve defense costs and develop the cost system to foster a safe defense manufacturing environment, and to hear about the industry’s difficulties and suggestions.
The key agenda item presented by DAPA at the meeting is a “shift in the cost-calculation method for localized parts.” Under current rules, companies are allowed to use the previous import price when calculating the cost of localized parts. DAPA is pursuing a revision that would make applying that price mandatory going forward. The aim is to establish a defense cost-calculation system that expands companies’ autonomy while strengthening their accountability.
Practical ways to compensate for costs incurred to ensure worker safety will also be discussed from various angles. Reflecting the characteristics of the maneuver and firepower sector, which has many high-risk manufacturing processes, participants will share a range of views on reasonably compensating companies through the cost system for expenses needed to expand safety facilities and improve working conditions.
A representative of a defense company attending the meeting said, “Investments in safety equipment and automation improve a company’s competitiveness and worker safety over the long term, so it is important to have an institutional environment that enables companies to anticipate the effects of their investments,” and expressed hope that voices from the field would be reflected in improvements to the cost system.
Park Jeong-eun, head of DAPA’s Force Support Program Support Division, stressed, “We will make the defense cost-calculation system more efficient and continue incorporating voices from the field into the system so that investments in the safety of defense companies lead to tangible improvements in working conditions.”
Experts in the defense industry say the benefits of these cost-system improvements must reach beyond large companies serving as first-tier prime contractors to small and midsize component suppliers farther down the vendor chain if the domestic defense supply chain as a whole is to be strengthened. If the cost-compensation structure remains centered on large companies, the fundamental goal of shared growth across the ecosystem could be diluted.
In this regard, the United States, a leading military power, has structured its “defense cost and supply chain management system (DFARS)” to ensure that cost calculations and safety-management expenses for small and midsize subcontractors, as well as prime contractors (large companies), are legally linked to compensation. The approach aims to protect the resilience of the entire supply chain by ensuring that cost reimbursements and incentives provided to large companies flow systematically to small component suppliers as well.
For K-defense to grow sustainably, DAPA’s revision of its cost regulations is expected to expand beyond a system tailored to large companies and develop into a “supply-chain partnership cost model” that lower-tier suppliers can also experience in tangible ways, following the advanced U.S. example.
[email protected] Lee Jong-yoon Reporter