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If we make a new custom ship design ex: frigate class, then this design becomes enlisted into
"latest buildable designs" and is used for auto construction, and the other frigate design (auto generated by the AI) is still there meaning we now have 2 frigate designs.

Now when we research new tech I noticed the AI will use it's own (old) auto generated design and make it most recent skipping my own design which doesn't get upgraded at all.

Isn't auto upgrade function supposed to upgrade both (player and AI designs) of same ship class proportionally instead of upgrading only it's own designs?

as right now my own designs do not get upgraded even though I have auto upgrade enabled.

And if I override/edit AI design with my own then no upgrade is made at all for that ship class.
Not sure what I'm missing.

The AI only ever creates the latest version of the design in its build template (which is a count of each component to include). It should do that whenever a research item completes.

You can ask it to upgrade your design, which means it replaces components with latest tech of the same type.

If you really want your special frigate alongside the AI frigate, you must make sure to order the correct one (as default is always the latest). This should be possible at least from ship list and the build order screen.

To avoid your special frigates to be upgraded to AI frigates, you should turn off automatic retrofit at the top of the design screen. And only ever upgrade your "special cruisers" from the ship list where you can manually pick what design to upgrade to. You should also do the same for the AI frigates if your design is the "latest".

In the "real world" you should decide to either allow the AI to design a class, or do it all by yourself. You need to stay very on top of things to successfully mix the two.

Ok, I see, we need to maintain only 1 single design per ship class. but this doesn't seem to work either.

I just ran a quick test game, and, if I do not manually edit designs at all the auto upgrade works just fine, but if I make only 1 custom design the AI won't upgrade anything, not even its own designs. (I need to click "Auto upgrade selected design" for each design each time)

empire policy is set to auto upgrade, and all designs are set to auto.

EDIT:
Ok I see the point, If player makes its own destroyer then the AI will continue to upgrade all designs except destroyers.

Even if there is only one player made destroyer design (with refit off), the AI will ignore destroyers completely.

thank you for clarifying!

If you remove the checkmark for frigates in design parts of empire policy, the AI won't touch frigate designs. It will not ever automatically modify your new designs no matter what. But you can press the auto upgrade button to get it to upgrade what is already there, but this is of limited use.

What may work, is to save a fully fleshed out design (with all gadgets), and load this in the design screen. That way it could be automatically expanded as you research stuff, and the auto upgrade button may be of use. But I have never tried this, as I find designs a chore in this game and run with AI ones. I just make a "special" ship once in a while, that I use the "do not retrofit" setting on to avoid from being accidentally switched to AI designs.

thank you for helping, I see now how this works