Selling of Dongbu HiTek
Creditors are reportedly considering selling Dongbu HiTek to overseas companies, as large local firms have showed lukewarm responses to the acquisition, contrary to their expectations. Their strategy is to minimize the possibility of a failure in the future sales deal by preventing controversy surrounding technology leakage, which almost always occurs in the event of foreign acquisitions.
However, experts are saying that controversy over corporate technology leakage and national wealth outflow could be reignited. It first started in 2002, when creditor banks pushed ahead with the takeover of Hynix Semiconductor by overseas firms.
Critics say that any hasty attempt by creditors to sell off Dongbu HiTek’s assets to overseas firms may make things wrong. Creditors, on the other hand, believe that there will be no problems with technology leakage, even with the sale of the cash-strapped Korean firm to overseas companies.
According to industry sources on Feb. 24, the Korea Development Bank (KDB Bank) reached the conclusion that any problem related to leakage of technology or expertise will not occur, even if Dongbu HiTek is sold to overseas companies.
An official high in the financial industry remarked, “As far as I know, KDB Bank carefully compared the level of Dongbu HiTek’s technology with that of overseas companies in the same industry.” The official added, “Apparently, the bank has come to the conclusion that the disposal of Dongbu HiTek to foreign firms would not lead to technology leakage.”
In fact, KDB Financial Group Chairman Hong Kyttack reportedly reached a similar decision after figuring out the tech level of Dongbu HiTek on his business trip to Silicon Valley at the end of January. Dongbu HiTek is said to be similar, or somewhat lagging behind, its Chinese and Taiwanese competitors in the system semiconductor field. The industry considers KDB Bank’s conclusion to be its preparation for selling the financially-distressed firm to overseas companies.
Industry analysts are saying that KDB Bank may have already started the work to prevent controversy over the outflow of technology and national wealth from happening, which is unavoidable when selling large-scale industries such as semiconductors and autos to overseas firms. KDB Bank seems to be determined not to repeat the past, when it had quite a rough time over the disposal of Hynix Semiconductor.
Hynix Semiconductor’s system semiconductor unit came close to being sold to US Micron Technology in 2002, but fell through at the last minute owing to board members’ opposition. Creditor banks intended to sell off the debt-ridden company at any cost, but were attacked in the media due to controversy surrounding the outflow of technology and national wealth. They were criticized by their market oriented attempt to sell the company, without considering the fact that it is one of the nation’s core businesses. In the end, creditors sold Magnachip Semiconductor—Hynix Semiconductor’s system semiconductor unit—to overseas funds, and its core memory business to SK in 2004. After SK’s purchase, the company was reborn as SK Hynix, which makes huge profits in the range of several trillion won.
Meanwhile, despite the disposal effort, creditors have not attracted as many candidates for Dongbu HiTek’s business sales as they hoped. It is due to the fact that large local companies such as SK, Hyundai Motor, and LG, which have been cited as potential candidates for the acquisition, are passive about the buyout. Therefore, creditors are concerned about the prospect, since they need to sell unsound enterprises in order to decrease Dongbu Group’s toxic assets and to secure liquidity.
That is why KDB Bank is turning its attention to overseas firms as contenders for business sales. In fact, semiconductor companies such as Taiwan-based United Microelectronics Corporation (UMC) and Vanguard International Semiconductor Corporation, which are similar in technology with Dongbu HiTek, are said to show their interest in purchasing their Korean rival. KDB Bank might elicit participation from large local firms that have not shown any enthusiasm, by revisiting the possibility of a foreign acquisition.
Nevertheless, the Korean government is worried about KDB Bank’s move. The government’s position is that the state-owned policy bank ought to consider the local semiconductor industry ecosystem, even if there is no possibility of technology leakage. Another reason for Seoul’s concern lies in the fact that local semiconductor companies have never been successful after being sold to overseas firms.
Dongbu HiTek’s sales in the country represent around 40% of the total. Small and medium-sized enterprises (SMEs) make up a large percentage of its local customer base. If the Korean semiconductor foundry is purchased by foreign companies, these SMEs may find themselves in a disadvantageous situation where they have no choice but to order semiconductor chips from overseas firms.
The predicament is attributable to the fact that what SMEs need is not the kind of products that Samsung Electronics or SK Hynix usually make. An official at the Ministry of Trade, Industry and Energy (MOTIE) explained, “There are companies that make money by using cutting edge technologies to manufacturing processes just like Samsung and SK Hynix. But there are also firms that earn money in the niche market through consignment arrangements just like Dongbu HiTek.” The official pointed out, “It is necessary for these two types of companies to coexist so that the local semiconductor industry can grow.”
The MOTIE official added, “Leaving aside the issue of technology leakage, let us examine the possible result. If Dongbu HiTek is bought by overseas firms, the semiconductor company is likely to be taken advantage of, and then forced to reduce its operations when it becomes useless, as evidenced in SsangYong Motor’s case.” The official concluded by saying, “Given that about 3,000 people are working in Dongbu HiTek, careful consideration should be given to the issue of a foreign acquisition.”