South Korea's tank-and-artillery defense darlings stumble as drone wars rewrite the playbook

South Korea's defense champions are taking fire — from the stock market, not the battlefield. The combined market value of the country's top four defense firms — Hanwha Aerospace, LIG D&A, Hyundai Rotem and Korea Aerospace — has tumbled from a 52-week peak of 170 trillion won to about 62 trillion won ($46.18 billion) as of end-October, according to South Korean broadcaster SBS. That's a bruising retreat for a sector that spent two years riding a global rearmament boom.

The rally was built on Russia's invasion of Ukraine, which sent European military budgets soaring. Korean manufacturers won buyers with weapons that were cheaper than Western rivals and could ship fast — tanks, artillery, missile systems. Now the mood has flipped, and investors are asking a blunter question: are these companies built for the wars of the future or the ones of the recent past? Ukraine has shown how cheap drones can stalk expensive armor, and Iranian drone strikes have drained the costly air-defense missile stockpiles of the U.S. and its Gulf allies.

The pain is not purely about drones. KB Securities' Peter Kim pointed to disappointing earnings, a stronger won and export orders stuck in limbo, plus money rotating into semiconductors. Governments have also been slower than promised to turn spending pledges into signed budgets and actual orders, he said. Bank of America's KJ Hwang agreed procurement priorities are shifting toward drones, counter-drone systems and air defense.

The numbers back up the gloom. Hanwha Aerospace's third-quarter operating profit dropped more than 46% year over year, which the company blamed on delivery-schedule adjustments and one-off costs. Its shares are down more than 28% this year. Hyundai Rotem posted an operating profit decline of over 11.1% and its stock has shed almost 60%. Korea Aerospace Industries was the outlier: sales and operating profit rose about 52% and 32% respectively, keeping its share slide to just over 8%.

The bulls aren't folding. Hwang said Korean firms keep deepening ties with partners in Western Europe and the Middle East on air-defense systems, and fresh K9 howitzer orders show conventional platforms still matter. Among this year's wins: about 546 million euros in K9 orders from Spain, a $922 million K239 rocket system deal with Norway, and LIG D&A's $94 million K-SAAM naval missile agreement with Malaysia — the system's first export ever. Kim said the sector remains attractive, with long-term growth still expected in the teens.

Quantum Strategy's David Roche told CNBC that AI and drone tech are drawing more emphasis in military orders as major powers digest Ukraine's lessons. But he drew a line: drones cannot capture and hold terrain, so infantry and tanks stay essential on any mobile battlefield. Korean defense companies are pouring money into drones and unmanned systems anyway — though meaningful exports will take time while overseas buyers wait for a proven track record, with Kim expecting more concrete results possibly soon.