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[KH Explains] Warship rivals at loggerheads

Defense experts say it's not time for Hanwha Ocean and HD Hyundai Heavy Industries to fight

March 5, 2024 - 15:44 By Kan Hyeong-woo
The headquarters of Hanwha and HD Hyundai (Courtesy of Hanwha and HD Hyundai)

The dispute between South Korea’s two major shipbuilders -- Hanwha Ocean and HD Hyundai Heavy Industries, housed under Hanwha Ocean and HD Hyundai Heavy Industries, respectively -- is escalating, with Hanwha taking legal action.

Hanwha Ocean on Monday filed a complaint with the National Office of Investigation to probe into the case of HD Hyundai Heavy Industries’ nine employees who were convicted of collecting military secrets and leaking them, asking the authorities to uncover information on HD Hyundai’s executives allegedly involved in the illegal actions and punish them accordingly.

The HD Hyundai employees were found guilty in November last year as the court ruled that they violated the Military Secret Protection Act by illegally obtaining military secrets related to the Korea Destroyer Next Generation (KDDX) project drafted by Hanwha Ocean, then Daewoo Shipbuilding and Marine Engineering, and sharing them on their firm’s server from 2012 to 2015.

Following the conviction, HD Hyundai received security penalty points of 1.8 for future bids from the Defense Acquisition Program Administration until November 2025. In July last year, when Hanwha was selected as the preferred bidder for the fifth and sixth warships of the Future Frigate eXperimental, or FFX, Batch-IV program, the final difference in points between Hanwha and HD Hyundai was only 0.1422, demonstrating the graveness of the penalty.

The conviction led the DAPA to conduct its contract review committee to decide whether or not to restrict HD Hyundai from entering the state-run arms procurement agency’s future bids. The DAPA announced on Feb. 27 that it would not ban the shipbuilder from its future bids, saying that the case had passed the statute of repose and that it could not confirm whether the shipbuilder’s executives were involved in the wrongdoing.

Defense security

“The crimes of detecting, collecting and leaking military secrets by the HD Hyundai Heavy Industries employees that were revealed through the court judgment could not have been planned and conducted without the intervention of the management, such as executives,” said Koo Seung-mo, an attorney at Hanwha Ocean’s compliance office, as he presented parts of court documents and investigation reports to back up the firm's claim in a press conference in Seoul on Tuesday.

Referring to the DAPA’s recent decision to allow HD Hyundai to take part in the state’s future arms bids, Hanwha Ocean expressed concern that if HD Hyundai's attempt to throw its employees under the bus goes unpunished, it could give defense firms the wrong impression.

Asked whether the legal dispute might harm the country’s entire defense industry as the two warship builders battle each other, Hanwha Ocean reiterated that this is not an altercation between the companies.

“If there are no sanctions, there will be repetitive acts done by employees without executives’ involvement and this has to be mended,” said Jung Won, a partner attorney from law firm Yulchon who is working on the complaint with Hanwha Ocean.

“Although (I stand on this side today), if Hanwha Ocean did similar illegal acts, there should be severe punishment. This is about setting (a standard for) national security.”

Past case

HD Hyundai Heavy Industries dismissed the claims by Hanwha Ocean.

“The basis that Hanwha Ocean brought as it filed a complaint against HD Hyundai Heavy Industries is nothing more than a difficult-to-understand claim,” said HD Hyundai Heavy Industries in a statement.

“The issues raised by Hanwha Ocean such as the involvement of executives are cases that have already been closed by the judiciary's ruling and two deliberate reviews by the DAPA.”

HD Hyundai stressed that what Hanwha disclosed during its press conference could possibly violate the Official Information Disclosure Act, saying it is regrettable that Hanwha is largely distorting the facts by unilaterally stitching up investigation reports and court judgments.

HD Hyundai Heavy Industries also noted that it is not unusual for employees to register their business trip plans or the results from the trips.

The shipbuilder said it will focus on strengthening the capabilities of the country’s defense industry through developing technology and expanding exports.

Missing the point

The conflict between the two shipbuilders appears to be closely related to the Korean Navy's 7.8 billion won ($5.9 billion) KDDX project as a bidding restriction could have taken HD Hyundai Heavy Industries, the sole rival of Hanwha Ocean, out of the competition.

The budget for the KDDX project consisted of 1.8 trillion won for the development cost and 6 trillion won for building six next-generation destroyers.

But defense experts say the escalating quarrel between Hanwha and HD Hyundai is shifting the focus of the KDDX project, highlighting that adding six next-generation destroyers will greatly increase the capacity of the Korean Navy’s battle forces.

“This immense project of building six destroyers will be difficult for just one company to take full charge of,” said a naval architecture and ocean engineering professor who wished to remain anonymous.

“If (Hanwha and HD Hyundai) truly want what’s best for the Korean shipbuilding and defense industries, they need to stop blaming each other and revealing sources to the press. Rather, they should sit down ... and settle the issue and discuss what will be for the greater good of K-defense in the end.”

The Korean Navy currently operates six Chungmugong Yi Sunshin class destroyers, three Sejong the Great class Aegis destroyers and one Jeongjo the Great class Aegis destroyer, with two more Jeongjo the Great class battleships planned for introduction in the future.