Hanwha Ocean Initiates Main Contract Procedure for Halted Frigate... HD Hyundai Heavy Expresses Regret

As the bidding war for next year's 7 trillion won 'Next-Generation Korean Destroyer (KDDX)' approaches, HD Hyundai Heavy Industries' prospects for winning the contract are becoming uncertain. This is because the provisional injunction request to confirm the status of the preferred negotiation candidate for the next frigate, filed with the court in August this year, was dismissed on the 10th, causing them to lose the chance to overturn the '1.8-point security incident penalty' clause.

The reason for filing the 'provisional injunction request to confirm the status of the preferred negotiation candidate' was to ask the Defense Acquisition Program Administration (DAPA) to reconsider the evaluation criteria, arguing that the security incident penalty system is unreasonable. With this dismissal, HD Hyundai Heavy Industries has effectively been notified by the court that their objection to the security incident penalty will not be accepted.

After being excluded from the preferred negotiation candidates for the approximately 800 billion won Ulsan-class Batch-III 5th and 6th shipbuilding project on August 11, HD Hyundai Heavy Industries filed an objection three days later and submitted a provisional injunction request against DAPA to the Seoul Central District Court. The score difference between the two companies was 0.1422 points. At the time, HD Hyundai Heavy Industries claimed, "Despite having superior technology, the preferred negotiation candidate for the next frigate project was reversed due to the security incident penalty."

Kim Dong-kwan, Vice Chairman of Hanwha Group, visited the Hanwha Ocean booth at MADEX (International Maritime Defense Industry Exhibition) held at BEXCO in Busan last June, touring the surface vessels and receiving explanations.
[Photo by Hanwha Ocean]

The security incident penalty regulation, newly established in September 2014, was revised four times from September 2019 to December last year. During this period, the application period for the security incident penalty changed from '1 year after indictment → 3 years after indictment → 3 years after sentencing confirmation.' If the '3 years after indictment' rule were applied, HD Hyundai Heavy Industries' penalty period would have ended in September this year, but due to the revision to '3 years after sentencing confirmation,' it extends until November 2025.

HD Hyundai Heavy Industries argues that the strengthening of the security incident penalty standards has undermined the principle of 'technology-centered proposal evaluation.' They claim that in December last year, DAPA added a clause without reasonable explanation, revising the regulation for cases indicted before December 31, 2021, from '3 years after indictment' to '3 years after sentencing confirmation' in the fourth amendment, retroactively applying it only to HD Hyundai Heavy Industries. HD Hyundai Heavy Industries stated, "The fourth amendment was made just one month after the verdict was confirmed for nine of our employees," and warned, "The unfavorable security incident penalty system excludes specific companies from bidding, potentially restructuring the domestic naval shipbuilding industry into a monopoly." Earlier, nine employees of HD Hyundai Heavy Industries were indicted in September 2020 on charges of illegally photographing the KDDX concept design (a level 3 military secret) created by Hanwha Ocean. After all were found guilty in November last year, HD Hyundai Heavy Industries received a 1.8-point security incident penalty.

Hanwha Ocean responded to HD Hyundai Heavy Industries' claim that they lost the contract due to the security incident penalty despite having higher technical scores by stating that there is no significant difference in technology between the two companies. A Hanwha Ocean official said, "HD Hyundai Heavy Industries and Hanwha Ocean are the world's top 1 and 2 shipbuilders, possessing world-class technology, and there is no substantial technological gap between the two." He added, "In the past 10 years, Hanwha Ocean has outperformed in 7 out of 13 naval shipbuilding technology evaluations," and "In design projects, Hanwha Ocean received superior evaluations 3 out of 4 times." In the technical capability evaluation for the Ulsan-class Batch-III 5th and 6th ships, HD Hyundai Heavy Industries scored 0.9735 points higher, narrowly leading by a decimal difference.

In naval shipbuilding competitions where success or failure is decided by decimal point differences, continuous penalties make it practically difficult for HD Hyundai Heavy Industries to succeed in bidding. Next year, the detailed design and construction project for KDDX is scheduled. KDDX is called a 'mini Aegis destroyer' that performs the basic missions of an Aegis destroyer, such as missile interception. The project scale is a total of 7.8 trillion won.

Visitors are looking at a model of the next-generation Korean Destroyer (KDDX) being developed by HD Hyundai Heavy Industries at MADEX (International Maritime Defense Industry Exhibition) held at BEXCO in Busan last June.
[Photo by HD Hyundai Heavy Industries]

Hanwha Ocean can now proceed with the main contract procedures that were halted due to HD Hyundai Heavy Industries' provisional injunction request. Once designated as the preferred negotiation candidate, the parties negotiate delivery dates, start of work, and requirements before signing the main contract. A Hanwha Ocean official said, "All schedules have been on hold due to HD Hyundai Heavy Industries' provisional injunction request." He added, "The Navy's schedule for operating existing surface ships and receiving new ones could be delayed accordingly," and "With the dismissal of the provisional injunction request, we can now proceed with the procedures for the main contract."

HD Hyundai Heavy Industries stated that they are reviewing future response plans regarding the dismissal of the provisional injunction request. A representative said, "If the current unreasonable security incident penalty standards continue to be applied, fair competition will be hindered, potentially having a negative impact on the entire defense industry," and "We will make a decision after a comprehensive review of future plans."