Asia’s defense awakening: Higher domestic spend, more exports

Hello, and welcome to Global Research Unlocked, where we discuss what's rising from growth industries to rising risks and opportunities in global markets. I'm T.J. Thornton, Head of Product Marketing at BofA Global Research, and we're recording this episode on Monday, March 30th, 2026.

If you look across in Asia, there's a renewed focus on defense by governments, and I think this is a structural shift that's going to be with us for many years to come. Many think of Asia as a region that buys defense systems. For decades, that was the case.

Asia is rapidly becoming something very different, though. A global manufacturing powerhouse, a defense innovator, and an increasingly essential pillar in U.S. and European security supply chains. Asia's defense spending hit $573 billion in 2025.

That was up 6% year on year. But the story isn't just about budgets going up. Asia's shifting from being the world's largest arms importer to a significant producer and exporter.

Its share of global imports has already dropped from 42% a few years ago to 31% today. Our global defense team published a primer on this topic a few weeks ago, and today we're going to be discussing some key takeaways. Joining us from BFA Global Research are Chris Oberoi, head of Asia Pacific Equity Research, KJ Hwang, who covers Korean autos and industrials, and Ron Epstein, who covers America's aerospace and defense.

Thanks for joining us. Thank you. Great to be here.

Thanks, TJ. Chris, Ron Epstein has been on the podcast before talking about the many countries across the globe spending a higher portion of GDP on defense. Is the same true across U.S. allies in Asia?

In the intro, I mentioned a focus on exports by Asia defense companies. Is that coming from one to two countries within the region, like, say, South Korea, or is it broader than that? TJ, thank you.

It's a mix of both. Exports are up, but also defense spending is up. I'd like to just highlight what we're seeing in defense in Asia seems to be a very structural shift.

It compromises scale. There is cost effectiveness in manufacturing. Asia in part does have industrial depth.

And given the change circumstances in the world, it has, after many years, geopolitical motivation to focus on this. Let's just go through some of the main U.S. allies or main countries in Asia. If you look at South Korea, it's now one of the fastest growing arms exporters on the planet, with exports up about 24 percent in recent years.

The K-9 Harvester, the K-2 tank, or the rocket systems, all now in service across Europe, Middle East, and Asia. Add to that Korea's layered missile defense systems, the MSAM and the LSAM, and there's an entire industrial machine behind it, the Changwon Defense Cluster, home to 17 major defense companies, more than 2,500 suppliers, making it one of the world's most concentrated defense manufacturing hubs. Japan, a really major U.S. ally, is undergoing a significant rethink of its defense capabilities.

Defense spending is climbing towards 2 percent of GDP, with the potential to go even higher. I don't know where it's going to go, but it's likely to go higher. It's not just spending.

Tokyo is relaxing decade-old restrictions on exporting equipment and ramping up production of long-range standoff missiles, advanced naval frigates and submarines, and is working on new unmanned systems. Going down further south in Asia to India, India is also undergoing a profound defense transformation. For decades, India was one of the world's biggest arms importers.

Today, India is localizing productions, and its industrial base is broad and maturing quickly. Singapore, in Southeast Asia, a small country, but with one of the highest per capita defense budgets in the world. Singapore is a global MRO hub, handling nearly 10 percent of the world's aerospace maintenance, and thanks to AUKUS, Australia is also expanding its naval and EW capabilities.

If you look across in Asia, there's a renewed focus on defense by governments, and I think this is a structural shift that's going to be with us for many years to come. KJ, how much of the exported Asia equipment is currently going to the U.S., and do you see a limit to how much the U.S. will be willing to take, given that the U.S. probably wants to source much of its defense needs domestically? Both for security and economic reasons?

At the current stage, there's nearly zero export exposure to the U.S., but we see growing potential for selective exporters in Korea to increase their revenue growth pillars in North America over the coming years. Just a few hours ago, actually, there was news out that one of Korea's leading companies in the shipyard just put out a filing related to their first order from U.S. Navy's NGLS program, Next Generation Logistics Ships.

This follows the MAP, Maritime Action Plan, which was released by the U.S. government about six weeks ago. For the first time, it documented a bridged strategy for the U.S. allies to build the commercial and the naval ships at home for the initial construction phases. We do believe that Korea can be involved in these naval, including NGLS, and some strategic commercial fleet projects, and there's about $2 trillion-plus investment that's already scheduled by the U.S.

Navy. That implies about $70 billion per annum. We are seeing about 10-15% market share potential from this plan because Korea will not be involved in these aircraft carriers or submarine projects for the time being.

We think there is a growing potential that the export contribution can grow from here. We don't think U.S. Army or Air Force need much supplement from Korea at this stage, but there are a few projects pending.

The self-propelled howitzer modernization program, which is ongoing right now, and some local production of the MCS, Modular Charger System, these upstream materials for the advanced system products. Korea has a partnership with the General Atomics in the U.S. for these next-generation drone local production. There is also a trainer jet supply that's already been worked by the Korea plus U.S. companies consortium scheduled for the RFP by next year.

We think it is coming. At this stage, there is no meaningful contribution, but we do believe that the U.S. exports will continue to serve as a next earnings revision catalyst beyond 2030. KJ, where are the exports going?

We know a greater portion of what's produced is exported now. Where are they primarily headed? About 80% of the exports are now going to Europe.

Out of that 80%, more than half of that is Poland. Given these landmark orders that were secured after 2022, we can pretty much assume that the Ukraine war and the inventory shortage situations in Europe has been prompting a lot of the urgent export orders for South Koreans. At this stage, the current order pipelines are mainly centered around Eastern Europe and the Middle East.

These include the discussions related to the phase three of the Poland orders, Romania infantry fighting vehicle, and tank orders as well. More importantly, after this outbreak of the recent conflict in Iran, there's about $50 billion order potentials being discussed in the press related to the interceptors and air defense together. Our base case assumption here is that the combined order book of the major defense exporters in Korea could nearly double in a single quarter.

For the next three to five years, we're looking into a stronger order book expansion potentials from the Middle East, Eastern Europe, and also Western Europe as well. Last week, Spain has ordered their first ever howitzer orders to Korea. This was actually the first ever penetration to Western Europe, where the margins are higher and the tan growth is happening much faster.

We do expect this to create a snowball effect across all other Western Europe countries. Generally, we're talking about 25% of the export revenue without the U.S. penetration impact. Generally, Europe and Middle East will be the key levers here.

Strong growth in exports, strong growth in domestic spend as well, something we covered. Where are these stocks trading, especially relative to global defense peers, on a PE basis? Generally, the historical discount that we saw was about 25%.

But recently, after this unrest situation in the Gulf area, we started to see the valuation gap narrow, which is starting to reveal how Korean exporters can start to take more market share in these air defense side outside the European market. Generally, we're seeing the trend of the regional diversification for South Korea, which is prompting these valuation re-rating versus the peers. We expect this order growth visibility arising from non-Poland regions to be the key catalyst for the Korea defense.

Ron, we've talked about labor constraints before, the need for more employees to address this backlog of submarine orders, certain munitions are in short supply. Is Asia defense a solution to some of these shortages? Is that part of the attractiveness for the U.S.?

It depends on the end market you're looking at. For example, in the marine end market, countries like Korea are very experienced shipbuilders, particularly with commercial ships. As the U.S. maritime industry tries to ramp up volume, essentially learning how to do it again from a nation that knows how to do it will be really helpful.

Part of that is teaching a workforce. Part of that is some level of automation, although that's hard in shipbuilding. In the maritime end market, working with allies and friends that are good at it already can help a lot.

Now, in other places where we're seeing tight labor, we don't source a lot from Asia. When you look at things like wheeled vehicles, munitions, missiles, areas where we're having some critical shortages already, we don't source a lot. Having an ability to ramp that, one part of it is more labor.

Another part of it is some industrial automation. Now, from an industrial automation perspective, nations like Japan that are on the forefront of that can help a lot in terms of robotics and factories and so on and so forth. I would say on a second order effect, Asia could really lend a helping hand there.

When you think about buying fighter aircraft and a lot of the stuff that we buy, U.S. defense is very vertically integrated. You mentioned sourcing from Asia. How much U.S. defense demand is currently being met by Asia?

What sort of growth do you expect in U.S. demand for Asia product going forward? From Asia, not a lot. There might be some electronics, but outside of that, really not a lot going forward.

You have to sweep to one side political considerations because if you think about any nation, most nations get very supportive of their defense industries, one, because it's part of their national security posture, but also they tend to be high-tech jobs. However, as the U.S. tries to ramp, I think it's a rational and reasonable assumption that the U.S. could lean on allies that are capable of helping out. The rub is there's the politics of not being made in the U.S. as an example.

Back to maritime. Maritime is a really good place where you could see some fundamental help for the industry. One could imagine a military ship or a military ship kit get put together in Korea, or a blank ship, if you will, get put together in Korea, brought over to the U.S., the kit put together, or the ship that doesn't have the electronics and warfare systems on it, have that installed in the U.S.

So, have the kit completed, have the blank ship completed in the U.S., and you could lean on friends and allies in Asia to help ramp the ship industrial base. As an example, will we be buying missiles from Asia? Probably not.

Will we be buying munitions from Asia? Probably not. Now, could Asia be a supplier in the supply chain for things like critical minerals and energetics and that sort of thing?

Yeah, possibly, for sure. But today, it's not a heck of a lot. I think there's a potential for a bright future here.

But probably the biggest hurdles, TJ, are more political and not-made-here considerations, as opposed to actually fundamental, where our friends and allies in the region could really help. Both for KJ and Ron, what do you expect for growth ahead, both for Asian defense contractors and U.S. contractors? Do you think growth rates are peaking now, or will they even get better in the years ahead?

If you look at the backlogs for most of the U.S. defense industry, broaden it beyond just the big defense contractors, the backlogs are growing. Backlogs are growing quicker than revenue is, because the industry just doesn't have the capacity to deliver the backlog quickly. You're seeing the backlog go up pretty meaningfully.

Even though you're seeing order activity at very high levels currently, you're not going to see revenue peak for a couple of years. To put that in perspective, even from a defense budgeting perspective, when you look at the defense budget in the U.S., the outlays from the U.S. Treasury that go to the defense industry are approximately a three-year backward-looking rolling average of consecutive-year defense budgets.

If the defense budget ramps up from fiscal 2024 to 2025 to 2026 to 2027, that rolls through for the next three years. If all else being equal, if you just said the defense budget is going to be flat here on out, which it won't, but just imagine it was, you still wouldn't see a peak in revenue for the industry probably for another at least two years. I don't think we're at peak.

As the industry ramps up its volume capacity, you'll see it burn through backlog a little bit quicker, but pretty much everybody in the industry today has multi-year backlogs. To give you a sense of the demand signal, if you look at the current U.S. military action in Iran, it's been publicly in the press that the U.S. has used on the order of 800 to 1,000 Tomahawk missiles. In the last fiscal year for the U.S., we only bought 57.

We made basically one a week last year, and we've gone through about 1,000 of them in a month just now. Those Tomahawks have to get replaced. That's going to take some time, and that's going to drive growth for multiple years.

When you look at missile systems and defense consumables, you'll probably see growth there out, I would guess, through the early 2030s. For the Koreans' perspective, it's very similar. Looking at the imminent pipeline that we're seeing from the Middle East and when the president's summit is scheduled for May, we're generally expecting this to go up to almost $176 trillion across the fighter jets, missiles, munitions, land system products, etc.

Basically, we're talking about backlog figures doubling in a single quarter. As Ron said, this is not going to directly get reflected into the two to three years of forward consensus earnings anyway, meaning there is a strong catalyst for the next four to five years of lifting the earnings for the exporters in Korea. The backlog trajectory is something that we have to look first at.

Looking at how Korea is stepping up as an alternative to supply these hardware along with the U.S. systems, we're not expecting the earnings to peak anytime soon. Chris, KJ, Ron, thanks for joining us. Thank you for having us.

Thank you, everyone. Have a good day. There are some important changes happening within Asia Defense, both in terms of willingness to spend as well as the willingness and interest in exporting.

South Korea is a country where this is a particular focus, and KJ believes that seeing orders broaden from Eastern Europe and into the Middle East and Western Europe, as well as the U.S., will boost growth and the trading multiples for these companies. That has already started to happen as the discount to global peers for some of these South Korean companies has begun to shrink. The situation with Tomahawk missiles for the U.S. helps to illustrate why the backlog is big enough to help assure years of growth ahead.

The U.S. has used over 800 of these in the Iran war, but only bought 57 of them last year. Thanks for joining. Bank of America and B of A Securities are the marketing names for the global banking businesses and global markets businesses, which includes B of A Global Research of Bank of America Corporation, lending derivatives and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America N.A., member FDIC, Securities Trading Research Strategic Advisory and other investment banking and markets activities are performed globally by affiliates of Bank of America Corporation, including in the United States B of A Securities Inc., a registered broker dealer and member of FINRA and SIPC, and in other jurisdictions by locally registered and registered entities, copyright 2026 Bank of America Corporation, all rights reserved.