Hanwha upsets HD Hyundai's advantage, brings destroyer project back to square one

The nation’s arms procurement agency’s decision to have the country’s two largest shipbuilders compete for a next-generation destroyer project is drawing mixed responses.

HD Hyundai Heavy Industries, which had expected to win the project through a sole-source contract, expressed disappointment, while Hanwha Ocean welcomed the opportunity.

The Defense Acquisition Program Administration (DAPA) said Monday that the Defense Project Promotion Committee under the Minister of National Defense approved a plan to select a contractor through a competitive bidding process for the detailed design and construction of the lead vessel of the Korean Next-Generation Destroyer (KDDX) project. The final contractor is expected to be chosen late next year, extending a process that had already been delayed for two years.

For HD Hyundai, the prolonged selection process is disadvantageous, as the company lost points under a security penalty system used in bid evaluations, with the demerit expected to remain in effect until next November. The penalty followed court rulings in 2023 that confirmed HD Hyundai employees had illegally obtained confidential KDDX-related materials, including concept design data. Those rulings delayed the government’s selection of a KDDX contractor until DAPA’s latest decision to introduce a competitive bidding process for the project.

"While we respect the committee’s decision, we regret that the principles and regulations upheld thus far have been undermined," a HD Hyundai official said.

A business insider said President Lee Jae Myung’s remarks earlier this month criticizing DAPA's plan to sign a sole-source contract with "a firm penalized for breaching military secret" for the KDDX project could have influenced the committee’s decision to shift its contractor selection plan from a sole-source award to a competitive process.

The demerit is expected to remain in place until Nov. 19 next year but the official said it has not been decided yet. The period, extended from a previous November deadline, was set by DAPA in September, when the agency determined that a data breach involving HD Hyundai officials constituted two separate offenses rather than a single violation.

DAPA said on Monday it is currently considering as to until when HD Hyundai's demerit should be in effect.

Hanwha Ocean, by contrast, is poised to take advantage of the newly leveled playing field. The company has won 23 submarine construction contracts — the most among Korean shipbuilders — and has delivered 17 of them to their operators. While its portfolio of surface vessels is smaller than their competitors, Hanwha hopes to narrow the gap with the KDDX project.

“By winning the KDDX project, we will contribute to strengthening the Korean Navy and claim leadership in Korean maritime defense starting in 2030,” a Hanwha Ocean official said.

HD Hyundai is equally determined to pursue the project, which the conglomerate sees as key to consolidating its position in the global maritime defense industry.

Concerns have been raised over the decision to adopt competitive bidding for the project. Experts say the additional year before a final contractor is selected could force the two shipbuilding giants to devote significant time and resources to competing against each other that could otherwise be used in a more coordinated manner to expand in global markets and strengthen Korea’s overall position in the industry.

Preparing a bid proposal requires the work of dozens of engineers over the course of several months, driving up research, development and labor costs for the companies. Critics also argue that holding competitive bidding runs counter to the government’s long-standing message that the country should pursue export expansion as “one team,” rather than through competition among selected firms.

DAPA is also taking on added uncertainty, as it has traditionally awarded most government defense projects through sole-source contracts. Of the 19 warship design projects outsourced by the agency, 18 were awarded on a sole-source basis. The shift now requires DAPA to introduce new evaluation criteria to assess bids.