There is a growing concern over technology leakage as a large Chinese electric wire company is seeking to take over Taihan Electric Wire Co. which is put up for sale.
South Korean private equity firm IMM Private Equity Inc. (IMMPE) has sounded out China’s five largest electric wire manufacturers, including Qingdao Hanhe Cable Co., TBEA Co., Hengtong Group Co., Baosheng High-Voltage Cable Co. and ZTT Group Co., about acquisition of Taihan Electric Wire, according to electric wire and investment banking (IB) industry sources on May 7. In particular, one of the companies had a direct meeting with IMMPE and is taking steps to acquire it.
IMMPE bought 67.1 percent of the electric wire manufacturers’ shares for 300 billion won (US$256.63 million) in 2015. It has recently chosen Credit Suisse (CS) as sales manager. The private equity firm also sold a 5.84 percent stake, or 50 million shares, in Taihan Electric Wire for 47.50 billion won (US$40.63 million) through a block deal on April 18.
If Taihan Electric Wire, the second largest electric wire producer in South Korea, is sold to a Chinese firm, there is a high possibility of technology leakage. Taihan Electric Wire has the technology to produce extra-high voltage cables above 500 kV. A very small number of companies in the world are currently capable of manufacturing that type of cables. Only seven companies in the world have the technology, including LS Cable & System Ltd. and Taihan Electric Wire in South Korea, Prysmian Cables & Systems Ltd. in Italy, Nexans S.A. in France, NKT Co. in Denmark and Sumitomo Electric Industrial Wire & Cable Inc. in Japan.
There is no Chinese firm that can manufacture extra-high voltage cables above 500 kV yet. Given the circumstances, the extra-high voltage cable technology will be leaked to China if Taihan Electric Wire is acquired by a Chinese company.
Notably, the extra-high voltage cable market has high growth potential in the future. Extra-high voltage cables above 500 kV are used to supply electricity to national backbone networks. Demand for 500 kV high voltage direct current cables (HVDC) which are used to connect with a national electrical grid, including a super grid in Northeast Asia, is likely to increase. Industry watchers said that the global market for 500 kV extra-high voltage cables was worth 2.40 trillion won (US$2.05 billion) a year from 2016 to 2018 but it is expected to grow by more than four times to 11 trillion won (US$9.41 billion) a year between 2019 and 2021.
There is a concern that the ecosystem of the domestic electric cable industry will collapse if Chinese firms enter the market. The operating margin of South Korea’s major electric wire manufacturers is remained at 2 to 3 percent now, while that of smaller firms is around 1 percent. Under the current situation, price competition will intensify and small and mid-size companies will face more difficulty if Chinese companies push into the domestic electric wire market.