Executive summary
Shipbuilding, as part of the AUKUS partnership, is transforming Australia’s alliance with the United States. Shipbuilding is also poised to potentially transform Australia’s relations with its Indo-Pacific strategic partners, particularly the Republic of Korea (ROK or South Korea) and Japan. This policy brief discusses what lessons South Korea’s shipbuilding experience may hold for Australia’s own naval shipbuilding ambitions and how the two countries could cooperate.
First, it reviews how shipbuilding and defence industry has figured in the bilateral relationship. Second, it discusses how middle powers like Australia and South Korea have taken different approaches to heavy industries, of which shipbuilding is a part. Third, it explains the rise of South Korean shipbuilding with a focus on heavy industries, shipyards, workforce, exports, and past challenges. It concludes with lessons for how Australian federal and state governments could apply ROK experiences to build a sovereign shipbuilding industry. These include:
- Develop strong heavy industry foundations.To ensure a resilient, self-sustaining shipbuilding sector, Australia must address its declining heavy industries, such as steel production, petrochemicals and infrastructure construction. A comprehensive heavy and chemical industrialisation strategy that addresses these key foundational industries and the development of more robust supply chains, should accompany any discussion on developing Australia’s sovereign shipbuilding capabilities.
- Mitigate offshore dependency and supply chain risks. While offshore builds may reduce initial costs, they can also introduce vulnerabilities related to supply chain delays and overall control over delivery timeframes. Australia’s recent experience with other international partners in this area already underscores the need for Australian stakeholders to carefully articulate the acceptable trade-offs between foreign sourcing and meeting delivery timeline expectations.
- Focus on niche and sustainable roles in the defence supply chain. Australia should leverage its defence investments to create high-value niches within the shipbuilding and sustainment supply chain, such as specialising in maintenance, repair, and overhaul (MRO) services. Developing a role as a regional MRO hub could support not only Australia’s fleet, but potentially the United States and other allied forces’ too, bolstering Australia’s contribution to regional security efforts while simultaneously building a specialised workforce at home.
Introduction
Shipbuilding has yet to seriously figure in the Australia-ROK security relationship. In 1994, then Australian prime minister Paul Keating and ROK president Roh Tae-woo first discussed how to cooperate between their respective force modernisation plans, including submarine technologies, but these talks did not lead to substantial cooperation.1 Another shipbuilding opportunity came in 2014 when the Abbott government conducted a A$1.2 billion limited competitive tender for the SEA 1654 Phase 3 project to acquire two 20,000-tonne replacement Auxiliary Oiler Replenishment ships.2 Spain’s Navantia and the ROK’s Daewoo Shipbuilding & Marine Engineering (DSME) — later acquired by Hanwha and renamed Hanwha Ocean — were invited to bid, with Navantia eventually being selected.3 For much of the late 2000s and 2010s, Australia-ROK defence industry cooperation interest shifted to land warfare capabilities, including self-propelled howitzers and infantry fighting vehicles.4
Shipbuilding is poised to potentially transform Australia’s relations with its Indo-Pacific strategic partners, particularly the Republic of Korea and Japan.
Then in 2024, 30 years since the idea of shipbuilding cooperation was first mentioned, another opportunity arose. The Morrison government’s termination of the Attack-class submarine program with France in 2021 and the commencement of the AUKUS Pillar 1 partnership marked a paradigm shift in Australia’s shipbuilding plans. Recognising that the 2017 Naval Shipbuilding Plan was no longer adequate to meet the challenges of what the Albanese government has called “the most complex and challenging strategic environment since the Second World War,” Australia has embarked on a major overhaul of the Royal Australian Navy’s surface fleet shipbuilding requirements in addition to the AUKUS enterprise.5 This has included allocating 38% of Defence’s capability investment over the coming decade into shipbuilding and reducing so-called Tier 1 naval capability acquisitions like the Hunter-class frigates.6
The 2024 Independent Analysis of the Navy’s Surface Combatant Fleet that was commissioned out of the recommendations of the 2023 Defence Strategic Review proposed the acquisition of “at least seven, and optimally 11, Tier 2 ships, optimised for undersea warfare.”7 Under Project SEA 3000, three of these ‘general purpose frigates’ would initially be built offshore with the remaining eight being built in partnership with Australian shipbuilder Austal at the Henderson shipyard in Western Australia. This would ensure continuous shipbuilding there as part of the production pipeline together with other vessels such as patrol vessels and landing craft, while the Osborne shipyard in South Australia focused on the Hunter-class frigates and the SSN-AUKUS fleet. South Korea’s HD Hyundai Heavy Industries and Hanwha Ocean are among the five companies invited to submit offers for SEA 3000 alongside Spain’s Navantia, Germany’s TKMS and Japan’s Mitsubishi Heavy Industries.
Australia’s heavy industry woes
How did Australia and the ROK arrive at such different shipbuilding circumstances in less than 30 years? Shipbuilding is only one manifestation of a much broader transformation in how Australia and the ROK diverged in their approaches to heavy industries, generally defined as capital-intensive and machine-intensive sectors such as mining, chemical, energy, construction and transportation, including shipbuilding. Heavy industries have been a hallmark of rising great powers throughout history. However, the high costs of building and protecting what have often been derided as dangerous, dirty and difficult or ‘3D’ heavy industries in an era of globalisation led many developed economies to shift towards more productive industries.
For example, Australia opted to maximise efficiencies through the privatisation of its heavy and defence industries in the 1980s and 1990s as part of a wider privatisation of infrastructure such as oil refineries, ports and airports as well as services such as telecommunications, transportation and more. As the 1986 Dibb Review of Australia's defence capabilities explained at the time: “It is now recognised that Australian industry cannot and should not seek to be competitive in all sectors and for all products [...] Defence procurement offers no general panacea for the relative decline in the industrial capacities necessary for activities such as shipbuilding and heavy engineering.”8 What survived of Australia’s heavy industries, such as car manufacturing and oil refineries, have relied on billions of dollars in government subsidies. The Albanese government’s $22.7 billion ‘Future Made in Australia’ package thus joins a long list of efforts to rebuild industrial manufacturing in a post-industrial economy.9
Partly as a result, a different and more elastic understanding of ‘sovereign’ defence industrial self-reliance has prevailed in Australia. Most great powers and rising middle powers aspire to as much autarky as possible over their defence industrial base. By contrast, Deputy Prime Minister and Minister for Defence Richard Marles explained the Australian approach in his 2023 speech to Parliament, stating that: “whether our defence assets are developed indigenously, acquired from abroad, or developed in partnership — Australia will always make sovereign, independent decisions as to how they are employed. Because we will not trade sovereignty for capability. To do so would be illusory. For the only point of increased capability is to strengthen sovereignty.”10 Similarly, the 2024 Defence Industry Development Strategy clarified that: “Only in limited circumstances is Australian ownership critical to sovereignty.”11 This definition will be tested by AUKUS and other defence procurement projects relying on the heavy industries of foreign governments to deliver capability at cost, on time, and fit for purpose.
The Korean shipbuilding experience
Heavy industries
The Republic of Korea today has one of the world’s most successful shipbuilding industries. South Korean shipbuilders account for between a quarter and third of all annual global orders for commercial ocean-going vessels, including bulk carriers, container ships and oil and gas tankers. South Korea’s three biggest shipbuilders, HD Hyundai Heavy Industries, Hanwha Ocean and Samsung Heavy Industries, collectively won US$13.6 billion in commercial orders in the first quarter of 2024 — US$1 billion more than Chinese shipbuilders — and were on track to regain their top position in 2024.12 Such is the dominance of Northeast Asia in the sector that industry reports usually categorise orders by South Korea, China, Japan, Europe and ‘ROW,’ or ‘rest of the world.’13 This miraculous transformation should be of interest to decision makers in other small and middle powers.
The Republic of Korea today has one of the world’s most successful shipbuilding industries.
Although the ROK and Japan are often viewed synonymously as East Asian industrial powers from a Western perspective, they differ in important respects.14 Whereas Japan was historically a rising great power that embarked on shipbuilding in the late 19th century and fought major wars against great powers like the United States and Russia, the ROK’s shipbuilding story only began 50 years ago following the Korean War. The ROK and Australia are far more comparable in terms of size than Japan. For example, Australia and Korea have similarly sized economies ranking around 12th and 13th respectively and comparable defence expenditures, ranking 7th and 6th respectively when compared with other countries in the Indo-Pacific.15 South Korean brands such as Hyundai, Samsung, Hanwha, LG and others are today known globally for their cars, appliances, electronics and sporting sponsorships, yet much of the ROK’s annual exports remain in the heavy industries such as refined petroleum and petrochemicals, mechanical parts, steel and construction equipment, and ships.
As a country with hardly any natural resources and dwarfed by neighbouring Japan and China in terms of population and economic size, how has the ROK survived and thrived in shipbuilding? This is despite the shipbuilding industry being extremely volatile, prone to periods of boom and bust, inconsistent orders, tiny profit margins, long and often cumbersome supply chains that cause delays and shortages, and perennial skilled workforce shortages. The majority of previous literature has pointed to government leadership and subsidies that protected South Korean shipbuilding from foreign competitors.16 When the Royal Australian Navy was acquiring its fleet of Oberon-class attack submarines in the 1960s, the Republic of Korea did not have a single commercial shipyard and its coast patrol fleet was comprised of donated US Navy vessels from the Second World War era. It was during this period that the ROK took a radically different approach to heavy industries, defence industry and commercial and naval shipbuilding in pursuit of greater self-reliance.17 Shipbuilding in the ROK only seriously began in the late 1960s as part of the wider heavy and chemical industrialisation of the economy. Throughout the 1960s, then president Park Chung-hee selected and fostered strategic industries crucial for national economic development. He went further by assigning certain industries to specific companies to avoid unnecessary competition, and backed these firms with cheap credit loans, tax concessions and subsidies. Fraught relations with the United States and heightened fears of abandonment during the Nixon administration further accelerated efforts to build up an indigenous defence industry. Shipbuilding’s commercial and naval sectors were therefore designed to serve bigger national planning objectives throughout the 1970s. Understanding the unique historical trajectory that laid the foundations for the ROK’s heavy industries is crucial to understanding shipbuilding’s place in the economy.
Shipyard location and workforce
In much the same way that Australia’s shipbuilding industry was consolidated in Adelaide in the late 1980s for both commercial viability reasons and geostrategic defence-in-depth purposes, the ROK’s major shipyards are also located along the country’s southeast coast, rather than near the megalopolis of Seoul-Gyeonggi Province, which accounts for over half of the country’s population. This was a deliberate decision made during the period of military rule in the 1960s when the prospect of a resumption of hostilities with North Korea was serious. Locating heavy industries as far from the frontline as possible was only prudent.
Take for example the industrial city of Changwon, located an hour’s drive west of the second-largest city of Busan. Changwon was selected as the ROK’s military-industrial hub because of its geostrategic value, surrounded by mountains and next to a deep-water port closest to shipping lanes to Japan and potentially inbound US forces.18 The ROK’s main shipyards at Ulsan and Geoje were similarly chosen for their proximity to nearby steel mills. Another feature of geographic placement is the co-location of civilian and naval shipyards. Unlike the United States or Australia, ROK shipbuilders produce vessels for commercial and military contracts in adjacent dry docks, often making use of some of the same workers.19
Unlike the United States or Australia, ROK shipbuilders produce vessels for commercial and military contracts in adjacent dry docks.
Just like Australia, workforce shortages remain one of the biggest challenges for ROK shipbuilders. In 2024, the total number of domestic shipbuilding workers was estimated at 113,000.20 Recruitment tends to be drawn heavily from the surrounding cities in Gyeongsang Province which enjoy some of the highest income levels in the country. The ROK government even pays workers up to $6,000 for direct training support to continue upskilling the workforce.21 Notably, about 13% of the ROK’s shipbuilding workforce are foreign workers.22 The number of foreign workers is likely to surpass 20,000 this year, with 8,700 at HD Hyundai Heavy Industries, 3,800 at Samsung Heavy Industries, and 3,000 at Hanwha Ocean.23 Many of these workers are from the Philippines, Nepal, Uzbekistan, Sri Lanka and other parts of Southeast, South, and Central Asia and must pass Korean language proficiency and skills tests.
Shipbuilding exports and challenges
The ROK’s shipbuilding industry would not have survived had it only serviced the needs of the ROK Navy and domestic shipping companies. Despite much emphasis on the role of ROK government intervention and subsidies, ROK banks and lending institutions had limited reserves of capital for investment in the early decades. The role of government was therefore less as a monopsony and rather as a kick-starter for firms to build up infrastructure and processes before going abroad in search of contracts. That same approach underpins how ROK defence firms are also emerging players in the global defence trade, where they are challenging the historic dominance of American, European and Russian defence firms.24 ROK shipbuilders have similarly gone on to win and deliver contracts for vessels across Southeast Asia, South America, Europe and more.
Nonetheless, the experiences of two Korean shipbuilders should serve as a caveat to the notion that ROK shipbuilding is infallible or unstoppable. The first is the downfall of Daewoo Shipbuilding and Marine Engineering. Long considered one of the major ROK shipbuilders, DSME had led major exports into Southeast Asia, such as Indonesia’s submarine program. But throughout the 2010s following the global financial crisis, the global shipbuilding market entered a period of recession as orders dried up. DSME’s financial position was further damaged by delays and cancellations on existing orders, especially in offshore rigs. Reports of financial misreporting were followed by near bankruptcy, leading to a $4 billion bailout by the state-run Korea Development Bank in 2015.25 Hyundai Heavy Industries’ bid to acquire DSME was approved by overseas antitrust regulators following internal restructuring before being vetoed by the European Union in 2022.26 This paved the way for the Hanwha Group to make its own bid for DSME and incorporate it into the renamed Hanwha Ocean.
The second case is the setbacks of Hanjin Shipbuilding and Construction (now known as HJSC). Part of the larger Hanjin conglomerate that operates across transportation, including the de-facto national airline Korean Air, its heavy industries business also produced the ROK Navy’s flagship amphibious assault ships. The group also led the high-profile investment near Subic Bay in the Philippines in the 2000s, an area that had been home to the US naval presence in the Philippines throughout the Cold War. Again, inconsistent orderbooks, disruptions to debt servicing, over expansion of facilities and workforce, and a range of industry factors ultimately saw the shipbuilder go into receivership in 2014, with its collapse in the Philippines representing the largest bankruptcy in that country’s history.27
Lessons for Australia
By analysing the successes and challenges that South Korea has faced while on the path to becoming the global shipbuilding powerhouse that it is today, Australian state and federal leaders should be mindful of the following issues whilst developing their own sovereign shipbuilding industry.
Cart before the horse: Shipbuilding without heavy industries
The decline of Australian heavy industries poses significant national security risks at a time when Australia is beginning to grapple with the question of national preparedness and mobilisation. Australia is unlikely to rebuild a heavy industry base overnight, such as steel production, oil refineries, petrochemicals, scaling up small and medium-sized defence businesses, and critical infrastructure construction and ownership. However, without at least some of these precursor or adjacent industries, the ability to not only construct vessels onshore but be capable of sustained military operations is questionable. Any discussion of sovereign shipbuilding should therefore proceed alongside whether governments have a larger heavy and chemical industrialisation strategy to support national defence supply chains.
Offshore build is not a panacea
The challenges of an offshore build and dependence on overseas supply chains will continue. For example, Australia’s two Auxiliary Oiler Replenishment ships, the HMAS Supply and HMAS Stalwart, which were built in Spain by Navantia have been plagued by issues to such an extent that neither vessel is currently in service, with reported wait times of up to 40 weeks on parts.28 The shift away from demanding full onshore builds in return for acquiring capabilities in shorter timeframes is crucial, but expectations need to be managed about the trade-offs that will arise. Overdependence on US and UK supply chains, especially when they are simultaneously increasing their orderbooks will risk a loss of control over delivery timeframes. This has arguably been one of the most debated points regarding the transfer of US Virginia-class submarines in 2032 and 2035 which have been made conditional by the US Congress on the US Navy meeting its own production schedule. Just as South Korean shipbuilders partnered with German companies to build their first indigenous submarines in the 1990s, Australia should use partnerships as a springboard not as a crutch.
Niche shipbuilding and sustainment supply chains
Across many industries, from mining to agriculture, there is great emphasis on value-adding through the processing of raw materials and commodities. For example, ROK shipbuilders have steadily moved up the value chain to focus on LNG and LPG carriers as Chinese shipbuilders have increased market share in comparatively easier to build bulk carriers and container ships. Thus, despite Chinese firms leading in terms of volume of orders, ROK firms dominated revenue. The same logic should be considered in Australia’s defence industry ambitions. Australian governments should be focused on how they can use investments to add value to the construction and fit-out of vessels, or if they can find a value-add niche at points in the supply chain that complements US and allied shipyards.
One such area could be as the sustainment and MRO hub for not only Australia’s own fleet but that of allies and partners. For example, this is something that HD Hyundai Heavy Industries is pursuing in the Philippines in partnership with US venture capital firm Ceberus Capital Management which took over part of the Subic Bay shipyards and plans to become an allied MRO hub. Something similar has been an unintended outcome of the AUKUS Pillar 1 SRF-West initiative to give Australian workers a chance to train maintenance skills on a visiting US SSN. It is possible that in years to come, Australian workers could specialise primarily in MRO rather than construction. There are historical precedents for such a shift in roles. For example, Australia's shipyards during the Second World War only built 113 new naval vessels but repaired over 4000 naval ships, over 500 United States Navy ships and 391 British Navy ships. 29
Conclusion
This brief has offered a short overview of the ROK shipbuilding sector with a focus on relevant experiences and lessons for Australia’s own shipbuilding ambitions. Since the heyday of Australia’s self-reliant defence modernisation, Australian governments have rarely had to make difficult procurement trade-offs or demand on-time acquisition delivery in the shadow of war. Now, Australia must try again. There is nothing intrinsically preventing Australia from building a sovereign and globally competitive shipbuilding industry like the ROK that can meet the Royal Australian Navy’s capability procurement needs while also building vessels to help regional partners defend their maritime security. The case of Korean shipbuilding is but one example of how a middle power can successfully out-build, out-innovate and out-pace bigger rivals.30 It offers important lessons if Australia’s ambitions to build a ‘Future Made in Australia’ are to be realised. These lessons fall into three key areas:
- Develop strong heavy industry foundations. To ensure a resilient, self-sustaining shipbuilding sector, Australia must address its declining heavy industries, such as steel production, petrochemicals and infrastructure construction. A comprehensive heavy and chemical industrialisation strategy that addresses these key foundational industries and the development of more robust supply chains, should accompany any discussion on developing Australia’s sovereign shipbuilding capabilities.
- Mitigate offshore dependency and supply chain risks. While offshore builds may reduce initial costs, they can also introduce vulnerabilities related to supply chain delays and overall control over delivery timeframes. Australian stakeholders will have to carefully articulate the acceptable trade-offs between foreign sourcing and meeting delivery timeline expectations.
- Focus on niche and sustainable roles in the defence supply chain. Australia should leverage its defence investments to create high-value niches within the shipbuilding and sustainment supply chain, such as specialising in maintenance, repair, and overhaul (MRO) services. Developing a role as a regional MRO hub could support not only Australia’s fleet, but potentially the United States and other allied forces’ too, bolstering Australia’s contribution to regional security efforts while simultaneously building a specialised workforce at home.