From Tanks to Rockets: Hyundai Rotem Bets K2 Export Cash on Aerospace Mass Production

[Korea Financial Times, Jung Jina] Hyundai Rotem is channeling the cash it earned from K2 tank exports back into its aerospace business. The company aims to move away from its reliance on a single product and transform itself into a comprehensive defense contractor that designs, builds and sells its own guided missiles and space launch vehicle engines.

Its adoption of Hyundai Motor Company's artificial intelligence (AI) smart factory technology is the first step toward turning that vision into actual production. To move an aerospace business that has remained at the R&D stage into mass production, the company must first secure safety and quality in propulsion processes, where the risk of accidents is highest.

AI-Driven Automation of Propulsion Processes... Ahead of the "Muju Base"

Hyundai Rotem recently signed a comprehensive technology cooperation memorandum of understanding (MOU) with Hyundai Motor to improve safety through automation at production sites. The two companies will cooperate on introducing automation systems at Hyundai Rotem's aerospace facilities.

The centerpiece of the aerospace restructuring is Muju in North Jeolla Province. In March, Hyundai Rotem signed an investment agreement with North Jeolla Special Self-Governing Province and Muju County to build an integrated aerospace production base on a 760,330-square-meter site (about 230,000 pyeong) in Muju County, investing about KRW 300 billion in phases through 2034.

The Muju base is planned as a facility that handles the entire process in one place, from R&D and prototype production to testing, verification and mass production. Production buildings, equipment, dormitories and a training center will be built on the site. The project was designated a government "investment-leading district" in June, making it eligible for up to KRW 10 billion in state funding for infrastructure development.

The latest agreement was also pursued with the Muju base in mind. However, Hyundai Rotem said the cooperation is still at an early stage and that the Muju base will not be completed for several years, so the scope of application may be expanded depending on circumstances.

A smart factory is a plant in which AI and automated equipment monitor and control production processes on their own. Hyundai Rotem plans to apply this technology to the highest-risk tasks in producing aerospace products, including ducted ramjet engines, hypersonic engines and methane engines for reusable launch vehicles.

A ducted ramjet is an engine that flies at supersonic speed, taking in air to burn fuel, and is regarded as a next-generation propulsion system for guided missiles.

Hyundai Rotem is testing the performance and manufacturing processes of its ducted ramjet engines at its propulsion test facility in Seosan, South Chungcheong Province. Until now, the engines were being verified at test facilities. The company now needs a production system that can build them repeatedly.

Safety is the top priority the company wants to secure through this adoption. "Aerospace products involve many risky processes such as combustion testing, so safety was the foremost consideration in this agreement," a Hyundai Rotem official said. Rather than automating the entire process, the company will apply smart factory technology only to certain hazardous processes to protect on-site workers. It also took into account that a safety accident could disrupt the development and production schedules of advanced aerospace products.

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Exports Account for 70.6% of Defense Segment Sales... Reinvestment in Aerospace

Behind Hyundai Rotem's push to invest in aerospace is an earnings structure concentrated in ground weapon systems such as the K2 tank.

Of Hyundai Rotem's consolidated operating profit of KRW 456.6 billion in the first half of this year, the AD&RH (Aerospace, Defense, Robotics and Hydrogen) segment accounted for KRW 444.8 billion, or 97.4%. The segment's main product is the K2 tank, and 70.6% of the segment's sales came from exports.

Aerospace remains at the domestic R&D project stage, and the hydrogen business is focused on building domestic infrastructure, so export revenue effectively comes from ground weapons such as the K2 tank. According to IBK Investment & Securities, the defense segment's operating margin rose from 5.1% in 2021 to 25.6% in the first half of this year, following the K2 exports to Poland.

Dependence on a single product means earnings and corporate value can swing depending on the timing of export contracts. That pattern is visible in recent quarterly results. In the third quarter of last year, Hyundai Rotem posted revenue of KRW 1.6196 trillion and operating profit of KRW 277.7 billion, its best quarterly results since its founding. Operating profit rose 102.1% from a year earlier.

The growth rate of operating profit then slowed quickly. In the fourth quarter of last year, revenue was KRW 1.6256 trillion and operating profit was KRW 267.4 billion, with operating profit up 65.4% year on year. In the first quarter of this year, revenue was KRW 1.4575 trillion and operating profit was KRW 224.2 billion, a rise of only 10.5%. In the second quarter, revenue grew 13.3% to KRW 1.606 trillion, but operating profit fell 9.7% to KRW 232.4 billion.

IBK Investment & Securities attributed the decline in operating profit to the high base effect from the highly profitable first Poland K2 contract and to a growing share of domestic business. The AD&RH segment's order backlog also fell by nearly KRW 700 billion in six months, from KRW 10.5181 trillion at the end of last year to KRW 9.8197 trillion at the end of June.

Still, the company has ample capacity to reinvest. As receivables from Poland were collected, cash and cash equivalents at the end of June stood at KRW 2.5273 trillion, up by more than KRW 1.6 trillion from KRW 908.4 billion at the start of the year. Hyundai Rotem plans to invest more than KRW 1.8 trillion in defense facilities, unmanned technology and new aerospace ventures.

The direction is also evident in its organizational restructuring. This year, Hyundai Rotem reorganized its previous three-division structure of defense, rail and plant into AD&RH, RS (Rail Solutions) and EP (Eco Plant), placing "Aerospace" at the very front of the defense segment's name.

Growing Space Market... Korea AeroSpace Administration Budget Up 47.2%

The market is also expanding toward aerospace. Hyundai Rotem said interest in future industries such as aerospace, along with unmanned systems, is growing at home and abroad, and it expects technological advances and rising market demand in the defense industry.

Government investment is also increasing rapidly. The Korea AeroSpace Administration's proposed budget for next year is KRW 1.6491 trillion, up 47.2% from this year and the largest since the agency's launch. Of that, the budget for next-generation launch vehicle development, including reusable launch vehicles, more than doubles from KRW 120.4 billion this year to KRW 291.6 billion next year.

Having built up aerospace engine technology for nearly 30 years since taking part in developing Korea's first liquid-propellant rocket in the 1990s, Hyundai Rotem plans to use the Muju base as a hub to move beyond ground-weapon-centered defense and become a comprehensive defense contractor that also covers aerospace.

Jung Jina (urzinnie@fntimes.com)