KDDX Project Faces Crisis as Shipbuilders Warn of $145M Loss Per Vessel

"If the project proceeds without accounting for raw material costs, exchange rates, and inflation after more than two years of delays, contractors will inevitably face losses of 200 billion to 300 billion won per vessel."

Concerns are mounting in the defense industry over construction costs for the lead ship of the next-generation Korean Destroyer Experimental (KDDX) program following approximately three years of delays. Some critics argue that the total project budget set by the Defense Acquisition Program Administration (DAPA) fails to adequately reflect cost increases caused by the delays. This has raised fears that contractors may bear an excessive share of the losses.

According to military authorities and defense industry sources, the Defense Acquisition Program Promotion Committee is scheduled to convene on January 23 to finalize the lead ship's price and bidding method under the "KDDX Detailed Design and Lead Ship Construction Plan" agenda. The timeline calls for bid announcements in March, proposal submissions and evaluations in May, selection of preferred bidders and establishment of detailed design and construction plans in June, and final contract signing in July.

At a preliminary briefing held at the Gwacheon government complex on January 11, DAPA notified HD Hyundai Heavy Industries and Hanwha Ocean that only 20 billion won had been added to account for cost increases from project delays, setting the total lead ship construction budget at 882 billion won. Industry observers warn that the severely inadequate budget may force companies to accept losses, potentially derailing the competitive bidding process.

The defense industry maintains that a minimum 20-30% budget increase is necessary given inflation, raw material cost surges, and exchange rate spikes during the project's stagnation. DAPA has indicated it could accommodate up to 900 billion won, but the gap between the two sides remains substantial. Industry estimates suggest the lead ship will require more than 1.1 trillion won.

Defense contractors are therefore demanding "an additional increase of at least 200 billion to 300 billion won."

One defense industry official pointed out: "While labor and material costs for naval vessels are not major issues, the costs of raw materials and onboard equipment for hull construction—which accounts for 80% of the vessel—have surged compared to three years ago. This has dramatically increased the burden on both the winning contractor and hundreds of subcontractors, yet DAPA is ignoring this reality."

Most critically, prices for key equipment with high foreign dependency—including gas turbines, integrated masts, and sensor and electronic systems—have risen sharply due to expanding global defense demand and exchange rate fluctuations. DAPA has not reflected these increases in the total project budget. Another industry official noted: "Budget increases are inevitable since core equipment like gas turbines is entirely import-dependent."

Furthermore, the KDDX program includes multiple domestic core technology development projects such as multi-function radar, combat systems, and integrated propulsion systems. With the delivery target for KDDX Hull No. 1 set for late 2032, the delayed construction schedule will likely require extended R&D periods and additional costs for maintaining research personnel and conducting tests and evaluations.

The lead ship's price will serve as the baseline for constructing Hulls 2 through 6, amplifying fiscal concerns. If both companies split construction of three vessels each as previously planned, assuming losses of 200 billion to 300 billion won per ship, each would face approximately 900 billion won in total losses—effectively building one KDDX without compensation.

Subcontractor-related risks present another challenge. Suppliers have been idle during the project delays, raising questions about whether they can deliver components on time and how much additional compensation will be required for extended project timelines.

Even after a systems integrator is selected, significant additional costs may arise from integrating and synchronizing technology developed during government-led R&D conducted without the integrator's involvement.

A senior defense industry executive warned: "Considering all six hulls, cumulative losses for defense contractors could reach 1 trillion won at current prices. If we accept a project expecting losses and push forward recklessly, we cannot rule out the possibility of shareholders filing breach of fiduciary duty complaints against management."

Despite these circumstances, DAPA maintains that industry demands are excessive. The agency's position is to proceed with the KDDX project first and address problems on a case-by-case basis as they arise. A DAPA official stated: "The lead ship construction budget was objectively calculated based on basic design results and analysis by the Korea Institute for Defense Analyses. We will proceed with the project first and respond to issues individually as they emerge."

Current regulations also constrain DAPA, leaving the defense industry with no avenue for appeal. Accommodating industry demands would require increasing the total project budget from 7.8 trillion won to more than 9 trillion won.

However, under current law, national projects exceeding planned budgets by more than 15% must undergo renewed feasibility studies. This could further delay deployment schedules. Budget authorities are also skeptical about increasing KDDX funding, deepening industry concerns and raising fears of disruption to the competitive bidding process.