Hanwha Ocean (042660.KS) has effectively been selected as the contractor for the detailed design and construction of the lead ship for South Korea's next-generation destroyer (KDDX), beating HD Hyundai Heavy Industries after a fierce competition.
According to defense industry sources, the Defense Acquisition Program Administration (DAPA) completed its individual company evaluations Tuesday for the selection of the KDDX detailed design and lead ship contractor and notified each company of the results.
One of the two companies will be selected as the final preferred bidder after follow-up procedures, including objections, in which each company can review the basis for the evaluation. The preferred bidder will undertake the detailed design and lead ship construction of the KDDX following detailed negotiations with DAPA.
The score gap between the two sides in this evaluation was reportedly 0.58 points. HD Hyundai Heavy Industries led by 0.64 points in the technical capability evaluation, but a 1.2-point deduction for a security breach was applied, ultimately placing Hanwha Ocean in first place by a 0.58-point margin. The controversial extension of the security deduction ultimately determined the outcome.
The KDDX is a project worth approximately 7.8 trillion won to build six 6,000-ton Aegis-class destroyers for the Navy using domestic technology. The defense industry expects that the two companies will ultimately each build three ships, or participate in construction on a "four-ship, two-ship" basis.
The biggest variable in this contest was the "1.2-point deduction" applied to HD Hyundai Heavy Industries. Nine HD Hyundai Heavy Industries employees became subject to the deduction on charges of photographing and leaking KDDX conceptual design materials and other data carried out by Daewoo Shipbuilding & Marine Engineering, the predecessor of Hanwha Ocean. Of these, eight were found guilty in November 2022, and the remaining one in December 2023.
DAPA initially viewed the deduction period as lasting until November 2025, but after an internal legal review, it changed its judgment to apply the deduction until December 6 this year, based on December 2023, the time of the final guilty verdict for the last person. HD Hyundai Heavy Industries objected and filed for an injunction, but the court rejected it on the 5th.
With the security deduction applied, HD Hyundai Heavy Industries led in the technical capability evaluation, but Hanwha Ocean's score reportedly came out about 0.58 points higher. In the end, the security deduction imposed on HD Hyundai Heavy Industries effectively decided the contest.
DAPA plans to select the preferred bidder as early as early next month after follow-up procedures, including each company's requests for post-evaluation explanations and objections.
The goal is to sign a contract by the end of next month following additional negotiations.
"If there had been no security deduction, the result could have been different," a defense industry official said. "Since DAPA's decision eliminated HD Hyundai Heavy Industries, which leads in technical capability, a legal dispute has become inevitable."
Some observers believe HD Hyundai Heavy Industries, although its injunction related to the security deduction was rejected, will file a main lawsuit to seek another reversal. In this regard, HD Hyundai Heavy Industries is known to have first submitted an appeal against the rejection of its injunction seeking to bar the application of the security deduction.
HD Hyundai Heavy Industries said, "We find it regrettable that the first- and second-ranked companies were selected based on a security breach deduction, despite the considerable gap in technical scores," adding, "We plan to appeal to the court regarding being evaluated as the lower-ranked company in the highly demanding KDDX project due to a security breach deduction, even though we possess the only Aegis-class destroyer design and construction capabilities in the country."
Naval ship construction projects typically proceed in the order of conceptual design, basic design, detailed design and lead ship construction, and follow-on ship construction, with Hanwha Ocean and HD Hyundai Heavy Industries having taken charge of the conceptual design and basic design, respectively.
Detailed design and lead ship construction were initially scheduled to begin in 2024 after the completion of the basic design in December 2023, but the project was delayed by about two years as DAPA failed to reach a conclusion amid overheated competition between the two companies.
