-
>
Defense Industry Challenges in South Korea: Examining Submarine Procurement Issues
김한경 안보전문기자
입력 : 2023.12.29 11:22
ㅣ 수정 : 2023.12.29 15:55
Navigating Troubled Waters: Unraveling Challenges in South Korea's Submarine Procurement
By Han-Kyung Kim, National Security Correspondent
In recent times, South Korea's defense industry has garnered global attention as it seeks new avenues for growth. The Defense Acquisition Program Administration (DAPA) is actively pursuing continuous institutional improvements and legislative revisions to overcome challenges faced by the defense industry. Despite these efforts, various issues are impeding the industry's development. News Today launches the "Defense Industry Issues Diagnosis" series, delving deep into these challenges. (Editor's Note)
• Hanwha Overtakes Hyundai in Submarine Project
(SEOUL-News2day) Hanwha recently secured the priority negotiation rights for the construction of the 3600-ton-class submarine (Dosan An Chang-ho Batch-Ⅱ), beating its competitor, Hyundai Heavy Industries (HHI).
If the final contract is signed after negotiations with DAPA, Hanwha Ocean will not only be responsible for the detailed design of the Dosan An Chang-ho Batch-Ⅱ submarine but will also build all three vessels. This would set a record, with Hanwha Ocean constructing 17 out of the total 24 submarines ordered by the Navy.
HHI, which competed for the project, previously collaborated with Daewoo Shipbuilding & Marine Engineering (now Hanwha Ocean) on the basic design of the 3000-ton Dosan An Chang-ho Batch-Ⅰ submarines and built one of them. However, failing to secure the Dosan An Chang-ho Batch-Ⅱ submarine construction contract raises concerns about Hanwha Ocean's dominance in overall submarine projects.
The Dosan An Chang-ho Batch-Ⅱ model features increased size and displacement compared to the Dosan An Chang-ho Batch-Ⅰ submarines. It incorporates improved combat and sonar systems, as well as four additional vertical launch tubes for Submarine-Launched Ballistic Missile (SLBM) capabilities. Notably, the inclusion of lithium batteries enhances stealth and operational performance compared to conventional lead-acid batteries.
• Hyundai's Questionable Bid and Core Equipment Costs
In an unusual turn of events, HHI submitted a proposal with a bid higher than the estimated cost provided by DAPA, leading to its exclusion from the negotiation process. DAPA had set the estimated cost for the third submarine at approximately KRW 1.6 trillion, and it is customary for bidding companies to offer a price below this estimation. According to regulations, submitting a bid below 95% of the estimated cost ensures a full score in the cost evaluation, while bids between 100% and 96% face deductions.
In response, Hanwha Ocean, aware of the competition with HHI, submitted a bid of KRW 1.02 trillion, approximately 95% of the estimated cost. On the contrary, HHI, known for setting exceptionally high prices for four critical components (vertical launch system, fuel cell system, integrated mast, function and armament system), provided a bid significantly exceeding the estimated cost. HHI explained that the high costs were due to the excessive pricing of these core components.
• Bid Price Discrepancy and Low Construction Costs
The fundamental issue in this procurement lies in the inadequacy of the submarine construction budget allocated in batch units. Typically, budgets are set for three vessels in a batch, and the construction period for these three submarines spans nearly a decade.
During this time, fluctuations in prices or disruptions in the supply chain can result in budget shortfalls, making it difficult to incorporate new technologies. The process of increasing the budget, based on industry feedback, is also challenging, leading to delays and insufficient project funding.
For the third submarine, the initial estimated cost was in the range of KRW 1 trillion, similar to the second vessel. However, due to factors such as rising raw material prices and supply chain uncertainties related to conflicts, the industry (represented by Daewoo Shipbuilding & Marine Engineering at the time) requested KRW 1.47 trillion, causing a one-year delay in the project. During this period, DAPA re-evaluated costs, underwent additional budget reviews with fiscal authorities, and eventually increased the estimated cost by KRW 300 billion, KRW 300 billion less than the industry's demand.
The underlying problem is that the project was re-launched with low construction costs, inevitably leading to deficits. Surprisingly, the same company that insisted on significantly higher construction costs the previous year now submitted a bid lower than the estimated cost, raising concerns about the viability of submarine construction costs.
• Issues with Subcontracting Core Equipment and Price Differences
Another challenge is the government-led development of core equipment for submarines, which is managed by DAPA rather than directly by the defense contractors. This structure forces companies like HHI to manage subcontracting for the core equipment, adding uncertainty to how the pricing of these components affects the overall bidding proposal.
On the contrary, the torpedo combat system supplied by Hanwha Systems follows a government-managed approach. Under this arrangement, DAPA directly contracts with Hanwha Systems to supply the torpedo system to the shipyard constructing the submarine. This ensures that, regardless of the shipyard selected through competition, the torpedo system is supplied at a consistent price, preventing abnormal situations like the current submarine project.
If the 30% of the submarine construction cost, attributed to the four critical components, transitions from subcontracting to direct government management, fair competition can be ensured. This shift can also prevent equipment price inflation and allow for bulk procurement, leading to lower equipment prices. However, under the current subcontracting approach, these advantages are lost, and the competitiveness of the companies continues to diminish.
• Government Initiatives Needed for Sustainable Development
Without solutions to these two fundamental problems, HHI, which does not produce core equipment, will find it challenging to secure contracts, making it difficult to sustain a submarine production base.
While Hanwha Ocean secured the third submarine construction project, the lack of profitability poses challenges for the company, hindering further investment or capacity building. Establishing a mutually beneficial relationship between the companies is crucial for global market dominance, as engaging in intense competition without a stable foundation may lead to setbacks.
Therefore, long-term solutions are necessary to secure the sustainability of the entire submarine industry, enabling South Korea to compete globally in areas such as the K2 tank, K9 self-propelled howitzer, and FA-50 fighter jet. Government initiatives, aligned with past specialization and consolidation efforts, should be pursued.
This involves selecting and designating competitive companies for each submarine type, ensuring equitable distribution of contracts. Additionally, flexibility in cost verification during the budget allocation process for batch projects is essential. Urgently transitioning the management of core equipment, a significant portion of construction costs, from subcontracting to government management is crucial.
These measures will be vital to overcoming the challenges posed by unrealistic submarine acquisition budgets, losses due to intense competition, and monopolization and price hikes associated with subcontracting core equipment.
댓글 (0)
- 띄어 쓰기를 포함하여 250자 이내로 써주세요.
- 건전한 토론문화를 위해, 타인에게 불쾌감을 주는 욕설/비방/허위/명예훼손/도배 등의 댓글은 표시가 제한됩니다.
0
/250
