Hanwha Ocean Gains Edge in KDDX Contract Bid [Yang Nakgyu's Defence Club]

Defense Acquisition Committee Finalizes Designated Competition Method
HD Hyundai Heavy Industries at a Disadvantage Due to Security Penalty

The lead ship project for the next-generation Korean destroyer (KDDX) has been decided to proceed through a designated competition method. HD Hyundai Heavy Industries and Hanwha Ocean will have to compete, but with HD Hyundai Heavy Industries facing a 'security penalty,' the likelihood of them winning the contract has significantly decreased.

On December 22, the Defense Acquisition Program Administration announced that it had held a Defense Acquisition Program Promotion Committee meeting at the Ministry of National Defense and reviewed and approved a project implementation plan. The plan is to select the company responsible for detailed design and lead ship construction through a designated competition method, which complies with the general principles set forth in the National Contract Act and provides opportunities for participation in the project.

Initially, HD Hyundai Heavy Industries and Hanwha Ocean were at odds over whether to proceed with a private contract or a competitive bidding process. Naval shipbuilding projects proceed in sequence: conceptual design, basic design, detailed design and lead ship construction, and then follow-on ship construction. HD Hyundai Heavy Industries, having carried out the basic design, maintains that it should be awarded the detailed design contract as a matter of customary practice. The KDDX project aims to secure six 6,000-ton Aegis destroyers by 2030. The company argues that using a private contract would allow the Navy to fill the power gap created by the decommissioning of three Gwanggaeto the Great-class destroyers (DDH-I) currently in operation, matching the timing of their retirement.

On the other hand, Hanwha Ocean has advocated for competitive bidding. This method would have HD Hyundai Heavy Industries and Hanwha Ocean compete sequentially from the bidding announcement stage to win the final contract. If competitive bidding is conducted, HD Hyundai Heavy Industries will be at a disadvantage due to the application of a 'security penalty.' This penalty was imposed after internal employees of HD Hyundai Heavy Industries were convicted of secretly photographing and leaking Daewoo Shipbuilding & Marine Engineering's conceptual design materials during the KDDX basic design process. As a result, the security penalty will remain in effect until December 2026.

Previously, there was widespread speculation that, following President Lee Jaemyung's remarks, the selection of the KDDX contractor would be concluded as a joint development. If the contractor is chosen for joint development, two lead ships would be ordered simultaneously and constructed separately by each company. This approach is expected to reduce costs if additional needs arise, such as follow-on ship construction. On December 5, President Lee stated, "There are strange discussions about whether to award a private contract to a company that has been punished for leaking military secrets. Please make sure to check such matters thoroughly."

Some observers have noted that joint development could have created the potential for future conflicts. The Defense Acquisition Program Administration recently requested an authoritative interpretation from the Fair Trade Commission on whether such an arrangement could constitute 'collusion' under the Fair Trade Act. However, the Fair Trade Commission reportedly responded that this would be a matter for post-facto judgment, indicating that the possibility of conflict remains. For now, the designated competition bidding method poses no legal controversy for project implementation, as the Ministry of Trade, Industry and Energy has designated both HD Hyundai Heavy Industries and Hanwha Ocean as defense contractors with KDDX production capabilities.