Space Empires III greatly improved on SE2's design system: while all components still had only one hitpoint, they were now divided into three layers: armor, outer hull, and inner hull. Only armor components could be placed in the armor layer, and it was limited to 10% of the size of any design. Any component could be placed in the inner and outer hull layers, but inner hull was restricted to 35% of the total hull size. Components were damaged in order of layer: armor, outer hull, inner hull; and if there was more than one component in a layer, one was chosen randomly from that layer. If that component was already destroyed, then the hit proceeded to the next layer, providing a "leaky armor" effect.
SE3 also improved on SE2's shield/armor balance: instead of shields completely overpowering armor, they complemented each other, as armor was fairly cheap, didn't provide much protection, and was immune to shield piercing/depleting weapons (and there was also emissive armor which reduced damage from attacks!) while shields were expensive and vulnerable to piercing/depleting attacks but provided lots of hitpoints.