HD Hyundai Heavy Industries, led by Chung Ki-sun and seeking to expand its defense business as a future growth engine, suffered a setback in the bid for the detailed design and lead-ship construction project for the Korean Next-Generation Destroyer (KDDX). Industry sources say the company had outperformed rival Hanwha Ocean in the technical evaluation, but failed to win the final contract after security penalty points were applied. Despite its technical edge, losing the project to Hanwha is expected to place a significant burden on Chung's strategy to expand the company's shipbuilding and defense businesses.
The Defense Acquisition Program Administration (DAPA) recently selected Hanwha Ocean as the preferred negotiator for the KDDX detailed design and lead-ship construction project, which carries a total budget of 7.8 trillion won. The KDDX program aims to secure six 6,000-ton next-generation destroyers and is regarded as a key effort to strengthen the Republic of Korea Navy's combat capabilities. In particular, the project has drawn close attention from the domestic naval defense industry because it could lead not only to the lead ship, but also to follow-on ship construction.
The project drew attention as a head-to-head contest between Hanwha Ocean, which handled the concept design for KDDX, and HD Hyundai Heavy Industries, which was responsible for the basic design. The two companies had been locked in conflict for more than two years over how the project should proceed. HD Hyundai Heavy Industries argued that, as the company that carried out the basic design, the project should be awarded through a sole-source contract or a joint procurement arrangement. Hanwha Ocean, meanwhile, maintained that the project should follow competitive bidding principles. The dispute escalated into legal battles and public opinion campaigns, making KDDX one of the biggest issues in South Korea's defense industry.
From the early stages of the project, many inside and outside the industry viewed HD Hyundai Heavy Industries as the leading contender. The company has built all of the major destroyer classes currently operated by the Republic of Korea Navy, including KDX-I, KDX-II destroyer, and KDX-III destroyer. It also carried out the basic design for KDDX, earning praise for its continuity of experience and accumulated technical expertise.
The KDDX project proceeds in the order of concept design, basic design, detailed design, and lead-ship construction. One of the key variables in this bid was the security penalty. The penalty was imposed in connection with an incident in which HD Hyundai Heavy Industries employees illegally photographed KDDX concept design materials. The employees involved were later convicted of violating the military secrets protection law. DAPA applied the security penalty to HD Hyundai Heavy Industries in accordance with state contract rules.
HD Hyundai Heavy Industries had the upper hand in the technical evaluation. According to DAPA's assessment, the company scored 0.6425 points higher than Hanwha Ocean in the technical review.
The final result, however, was different. HD Hyundai Heavy Industries received a 1.2-point security penalty, and Hanwha Ocean ultimately came out ahead by 0.5867 points to win the preferred negotiator status. Industry observers say that, given how defense contracts are often decided by margins of only a few decimal points, the security penalty effectively determined the outcome.
HD Hyundai Heavy Industries also expressed disappointment with the result. A company official told Sportschosun, "We are disappointed that we were not selected despite having a large lead in the technical score."
The outcome carries considerable weight for HD Hyundai Heavy Industries. KDDX is seen as a highly symbolic project in South Korea's shipbuilding sector, and it is closely tied to Chung Ki-sun's strategy of expanding naval exports and strengthening the company's defense competitiveness. However, HD Hyundai Heavy Industries failed to secure the final contract because of the security penalty, despite its technical advantage. The company said it regrets the result but will accept it. Industry sources note that the disappointment is likely to be especially strong, since HD Hyundai Heavy Industries had been widely expected to handle both the detailed design and lead-ship construction after completing the basic design.
The builder of the KDDX lead ship will gain access to detailed design data, test and evaluation data, and operational experience. Those assets could later be used as competitive advantages not only in follow-on ship construction, but also in overseas naval export projects.
Attention is also turning to how the company will respond. HD Hyundai Heavy Industries had filed for an injunction after the security penalty period, originally set to end in December last year, was extended through December this year, but the request was rejected. The company then filed an appeal and recently submitted an objection to DAPA regarding the KDDX evaluation results.
Separately from this result, HD Hyundai Heavy Industries said it will continue pursuing its strategy of expanding naval exports and defense business. Industry observers expect the company to keep focusing on overseas ship exports and defense expansion regardless of the KDDX outcome. Moon Ji-yeon, Sportschosun, lunamoon@sportschosun.com
