Hanwha Ocean, HD Hyundai reconcile, look to joint overseas warship bids

South Korea’s two warship builders – HD Hyundai Heavy Industries Co. and Hanwha Ocean Co. – have agreed to bury the hatchet and join forces to bid for overseas warship construction projects as one team.

The two companies have fiercely competed for shipbuilding projects in Korea and abroad and were recently embroiled in a legal battle over the 7.8 trillion won ($6 billion) next-generation Korean destroyer (KDDX) project.

Last Friday, Hanwha Ocean withdrew its complaint to the police against HD Hyundai Heavy, filed in March over allegations HD Hyundai executives were involved in tech leaks of Hanwha-owned warship secrets.

Sources said Hanwha Vice Chairman Kim Dong-kwan and HD Hyundai Senior Vice Chairman Chung Ki-sun negotiated the reconciliation.

“We believe laying the groundwork for cooperation serves the national interest," said a Hanwha Ocean official.

An HD Hyundai executive said, "We will together strive to strengthen K-defense competitiveness and expand exports."

PROMPTED BY FAILED BIDS FOR AUSSIE NAVY PROJECT

Their decision to reconcile came after the two rivals failed to win an A$11 billion (US$7.3 billion) deal from Australia to build 11 advanced frigates. This dealt a blow to the Korean shipbuilding industry, which seeks a new growth driver in the global warship market.

The two Korean warship builders were expected to be included in the shortlist, given their price competitiveness and their pledge to deliver ships faster than other bidders.

The Australian government, however, shortlisted Germany's ThyssenKrupp Marine Systems and Japan's Mitsubishi Heavy Industries Ltd. as the top bidders for a project to build up to 11 heavily armed light frigates to replace its aging fleet.

Korea’s Defense Ministry and the Defense Acquisition Program Administration (DAPA) wanted Hanwha and HD Hyundai to form the “K Defense Industry One Team.”

Sources said, however, that it was also hard for the Korean government to support the two firms in their bids for the Australian projects, given their legal disputes.

LEGAL BATTLE

In November of last year, nine employees of HD Hyundai Heavy were sentenced to prison or suspended jail terms on charges of illegally acquiring KDDX-related project details from Hanwha Ocean, then Daewoo Shipbuilding & Marine Engineering Co. (DSME), between 2012 and 2015.

The KDDX is Korea’s first destroyer to be built entirely using domestic technology. Under the project, the country aims to build six units of a 6,500-ton destroyer, dubbed a mini Aegis-class destroyer, by 2030.

Hanwha Ocean argued that HD Hyundai was ineligible to bid for the KDDX project.

The DAPA, however, dismissed the claim. Hanwha later filed a formal complaint against HD Hyundai.

Hanwha has long been the main supplier of submarines for the country's Navy since 1987.

Formerly Hyundai Heavy Industries Co., HD Hyundai Heavy is a unit of HD Korea Shipbuilding & Offshore Engineering Co.

HD KSOE, the intermediate holding company of HD Hyundai Co., a shipbuilding, oil refining and machinery conglomerate, has three shipbuilding affiliates under its wing – HD Hyundai Heavy, HD Hyundai Mipo Co. and HD Hyundai Samho Co.

IMMEDIATE TARGET: $50 BILLION CANADIAN SUBMARINE PROJECT

Industry watchers said Hanwha and HD Hyundai are expected to cooperate in their bids for a 70 trillion won (US$50 billion) Canadian project to build 12 units of 3,000-ton diesel submarines.

Hanwha Ocean, with its strengths in submarine technology, will take the lead, while HD Hyundai Heavy Industries will share construction responsibilities if contracts are secured, sources said.

Subsequently, the two companies are expected to jointly bid for a Polish submarine project worth 3 trillion won and a 2 trillion won Philippine submarine project.

While their reconciliation marks a step forward, analysts said tensions remain.

Sources said Hanwha Ocean wants the KDDX project, like international bids, to be split between the two.

HD Hyundai, however, argues that it deserves exclusive rights to the detailed design and lead ship construction, as it already completed the basic design for the KDDX project.

The DAPA is expected to decide soon whether to award the detailed design contract through competitive bidding or other means.

Write to Hyung-Kyu Kim and Woo-Sub Kim at khk@hankyung.com

In-Soo Nam edited this article.