December 21, 2024

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ROKS Jeongjo the Great, the lead destroyer of the KDX III Batch II program, constructed by HD Hyundai Heavy Industries, is set to be delivered to the Republic of Korea Navy by November this year. (HD Hyundai Heavy Industries)

South Korea’s shipbuilding industry is bracing for the conclusion of a high-profile police investigation into alleged corruption surrounding the Korea Destroyer Next Generation (KDDX) project, with results expected as early as mid-September. The outcome could determine whether the delayed selection process for the multi-billion-dollar naval project finally moves forward.

The National Office of Investigation, part of the National Police Agency, is set to finalize its probe into allegations of corruption in the KDDX bidding process, according to industry sources on Monday. The police indicated last month that they aimed to finalize the investigation “as soon as possible,” signaling that the results may be disclosed by this month.

The KDDX investigation revolves around two major allegations. The first accuses Wang Jung-hong, former chief of the Defense Acquisition Program Administration, of manipulating the 2020 tender process to favor HD Hyundai Heavy Industries during the selection of the KDDX basic design contractor. Wang has been under investigation for abuse of power and related charges for several years.

The second allegation involves claims that HD Hyundai Heavy Industries employees stole classified military data about the KDDX project from Hanwha Ocean, then Daewoo Shipbuilding & Marine Engineering, between 2012 and 2015. These accusations were brought by Hanwha Ocean in March this year, prompting a legal battle. HD Hyundai responded with a counter-suit, accusing Hanwha of defamation.

The investigation has led to significant delays in the KDDX program, a critical project in Korea’s naval modernization strategy. The KDDX project aims to build six 6,000-ton destroyers by 2030, with an estimated budget of 7.8 trillion won (around $5.23 billion). Originally set to be confirmed in July, the project has been postponed indefinitely as DAPA awaits the conclusion of the investigation before moving forward with the procurement process.

The ongoing delay has created mounting tensions between HD Hyundai Heavy Industries and Hanwha Ocean, two of Korea’s largest shipbuilders. The two companies are fiercely competing for the KDDX contract, as it represents a major strategic and financial opportunity for both.

The rivalry between HD Hyundai and Hanwha is not confined to the KDDX project. In recent months, the companies clashed over a separate 125.5 billion won contract for a large maritime test vessel commissioned by the Agency for Defense Development. While Hanwha Ocean handled the basic design, HD Hyundai won the detailed design and construction bid through open competition.

Hanwha Ocean has since argued that the KDDX project should also be subject to competitive bidding, as was the case with the test vessel. However, HD Hyundai countered that the two projects are fundamentally different -- pointing out that the maritime test vessel is a general-use product, while the KDDX is a defense-specific project, where sole-source contracts are common practice.

“According to Korea’s defense procurement guidelines, the company responsible for the basic design should also be awarded the detailed design and lead ship construction contracts. This process guarantees efficient R&D and helps meet critical deadlines,” said an official from HD Hyundai Heavy Industries.

The contract decision hinges on whether DAPA will opt for a sole-source contract, which would favor HD Hyundai Heavy Industries, the lead designer of the project, or a competitive bidding process, which could benefit Hanwha Ocean. Traditionally, such defense projects in South Korea have been awarded through sole-source contracts, but Hanwha Ocean’s push for a competitive bid has complicated the situation.

“In this particular case, it’s unfair for a company facing allegations of stealing sensitive military information to be handed such a crucial defense contract without competition. A competitive bidding process is the only way to guarantee integrity here,” said a Hanwha Ocean official.

If HD HHI is cleared, the project could move forward relatively smoothly. But if wrongdoing is confirmed, the matter could escalate into prosecution, dragging out the process further and causing additional delays.

By Moon Joon-hyun (mjh@heraldcorp.com)