Mid-sized shipbuilders have already accomplished overseas market competitiveness. DAO Yachts in Sacheon of South Gyeongsang Province exported a small vessel called RHIB 12m and an amphibious boat of 6.1m/7.1m to Indonesian BASARNAS (National Search and Rescue Agency) in 2014. In the same year, Woonam Marine in Gimhae signed a contract with the Malaysian Ministry of Defense and MRI Technology to sell 2.5 million USD worth of 20 military speed vessels.
“The Philippines and Southeast Asia depend on importing special ships, especially defense-related ones, as they cannot be acquired locally. I believe Korean ships have good quality with cost-efficiency, which gives market competitiveness.”
Mr. Doyoon Kim, The Executive Director of Woonam Marine
In 2017, Samwon Heavy Industries signed a deal of building 5 coastal patrol vessels worth 40.5 million USD for the Indonesian Coast Guard, while DTEC in Busan exported jet boats worth 120,000 USD.
In 2020, three projects out of six DAPA-requested naval projects were awarded to shipbuilding SMEs and Samkang M&T won the contract of building Ulsan-class Batch-3 frigate last year. Large ships over 3000 tons have always been monopolized by large companies, but they are on alert because of SMEs’ rapid progress in larger-scale of shipbuilding projects.
Ongoing concerns from SMEs
While large shipbuilders (DSME, HHI, Samsung) have been successful to secure contracts that totally worth around 7.6 billion USD so far, which already exceeds 25.2 percent of their annual numerical goal (30.4 billion USD) in the first quarter of this year, SMEs assert that they are still suffering from the lack of winning contracts. South Korea reportedly has about 150 small and medium shipbuilders.
According to the document from the Export-Import Bank of Korea, Korean small-sized shipbuilding companies’ contract amount drastically decreased to 900 million USD in 2019 from 3.9 billion USD in 2010. In 2020, the first half of the quarter contract shrank worse to 280 million, which was a decrease of 44.5 percent. The bank’s research institute estimated that they secured 100 million USD deals in the second half of the year’s quarter, with a decrease of 70.3 percent compared to the same quarter in 2019. At the National Assembly in October 2021, the Democratic Party member Kyungman Kim mentioned the need for expanding financial support and foreign business support projects for the recovery of SME shipbuilders.
Even though the naval shipbuilding industry has entered the competitive phase, SMEs’ complaints have not ceased as the DAPA’s plan to change the way of shipbuilding contracts could bring disadvantages to them and negatively affect their profitability.
“Naval ship contracts have had no problem through competitive bidding and qualification examination. But the DAPA informed companies that the administration is considering raising the bar score that decides the winner (85 to 92 out of 100) of a contract or qualification exam, and this is disadvantageous to SMEs.”
An informed person at a mid-sized shipbuilding company
Another person in the industry said, “Raising the bar score includes previous winning records and a company’s credit, which would hinder SMEs from fairly competing with large shipbuilders. This will lead to the concentration of contracts to experienced large companies, blocking SMEs and new players from entering the market.”
Regarding this, DAPA explained that “Nothing has been decided as we are still internally reviewing to change the way of shipbuilding contracts. We will make sure that all bid-participating companies could have fair competition without advantages or disadvantages.”
Backlash from major shipbuilders
As DAPA decided to modify a guideline to prevent low-price bidding that might affect the quality of shipbuilding projects and to apply it as of next year, controversy has aroused among large shipbuilding companies since it is expected that certain companies that are likely to bid at the lowest price might win contracts.
The project to build the ROK Navy’s six next-generation frigates of 3500 tons, Ulsan-class Batch-3, has started as of March 2020 as HHI and Samkang M&T are respectively working on the first and second ships. Samkang M&T, which was created after acquiring STX Maritime Engineering’s shipbuilding division and will be acquired by SK Ecoplant, won the second ship by low-price bidding strategy that had beaten other then-competitors HHI, DSME, and Hanjin Heavy Industries.
To be more specific, the construction of the second ship was estimated 390 billion KRW. Reportedly, DSME wrote 350 billion KRW, Hanjin wrote 351 billion, and Samkang wrote 335 billion. It is expected that Samkang could submit the lowest price as it relatively has fewer R&D and planning manpower based on outsourcing capabilities.
Large shipbuilders criticized that South Korea has never built such a new type of frigates and that the first ship has not even been completely built, claiming that it is impossible for inexperienced shipbuilders to win the second ship. Reportedly, an SME received the lowest score instead of disqualification when the company did not meet the minimum required manpower specified in the tender, as the shipbuilder achieved a high score at a cheap price compared to others. An employee in the shipbuilding industry harshly criticized, “a company that has no record of constructing large ships and employed less than 300 workers won the business only with a low price.”
Large shipbuilding players requested DAPA to improve the bidding system by raising concern over the ships’ quality and performance degradation due to low prices. Consequently, DAPA changed its course to prioritize performance and quality rather than price competition, planning to apply a proposal evaluation method that would consider shipbuilding capabilities such as technology, workforce, and business records. DAPA also plans to give the same score if each company’s proposed price falls within a certain similar range.
Large shipbuilders optimistically observed that DAPA would apply the revised standard starting with the third and fourth ships of the Ulsan-class frigate. However, DAPA declined by saying, “It is true that we considered the bidding system improvement, but we have not decided to apply it to a certain tender. Based on the result of reviewing the influence that it would have on the business schedule after the improvement, as we might lack time to proceed with projects, we concluded to apply the new standard in tenders released as of January next year.”
Major shipbuilding companies consider that this means that the bidding for the third and fourth ships of the frigate would be based on the lowest price again, not technology and knowledge. They believe this year’s tender to construct two frigates will be certainly taken by SMEs.
Against this doubt about favoritism, DAPA explained, “This year’s tender will follow the same method and procedure adopted in contracts of other ships, meaning that there is no favoritism towards some particular companies. According to the special conditions on the contract of building a naval ship, in principle, it is impossible for a third-party to build the end-product, but the third-party can produce components or be involved in some shipbuilding process.” This can be interpreted that outsourcing some shipbuilding process would be possible even though a shipbuilder does not fulfill the minimum required employees defined in a tender.
DAPA is scheduled to hold a policy meeting within the second half of this year due to the controversy regarding the tender for the following ships of Ulsan-class frigates. DAPA stated, “We discussed the system improvement of shipbuilding businesses with naval companies several times, and none of them expressed a different opinion about the direction of the improvement.” A shipbuilding employee countered, “The shipbuilding industry has not agreed to the timeline of applying the changed standard, and it was not a discussion but a unilateral notice.”