South Korea's chip giant lives in Samsung's shadow

Source: This article is translated from "forbes" by the public account Semiconductor Industry Observer (ID: icbank) , thank you.

Many were puzzled when Chey Tae-Won spent $3 billion to buy a controlling stake in troubled Hynix Semiconductor in 2012. A decade after being bailed out by the South Korean government, the world's second-largest chipmaker was losing money and its stock price was falling at a time when global demand for PCs and memory chips was falling. South Korea's SK Group is a sprawling conglomerate that owns a wireless carrier, an oil and gas company, a hotel operator, but no business in chipmaking.

“Almost everyone in the financial services industry agreed it was a bad acquisition,” said Dan Baker, director of Morningstar Research in Hong Kong. SK Holdings’ shares fell 15% from the day the deal was announced in November 2011 to the day it closed in February the following year.

But for Chey, the rationale was clear. “SK needed something else to grow. Someone needed to step up. That made sense to me,” he recalled in an interview during the World Economic Forum’s annual meeting in Davos. SK’s wireless subsidiary, SK Telecom, bought a 21% stake in Hynix from a group of creditor banks, and Chey, chairman of SK Group and SK Holdings, took on a new title: co-CEO of Hynix, which was later renamed SK Hynix.

Chey’s foray into the volatile chip industry proved to be one of his savviest investments, timed perfectly to coincide with the nascent boom in the global smartphone market. SK Hynix had revenue of $36 billion last year and an estimated $14 billion in profit, up 40% from 2017 and a profit margin of 39%. The stock has risen about 150% since SK took control. In September, SK Hynix ranked 20th on Forbes’ Digital 100 list, which was first published in 2018 and covers the globe, with companies from 17 countries and regions. Chey is the seventh richest person in South Korea, with a net worth of $4.7 billion. “It’s a great investment, given the growth in the memory market,” Baker said.

In recent years, SK Group has derived most of its profits from its semiconductor subsidiary SK Hynix.

For Mr. Chey, 58, the Hynix deal is also a turning point, emboldening him to make a big bet, like the one he made on SK before his father died in 1998. Mr. Chey demonstrated that confidence last June when SK Hynix paid $18 billion for a 49.9% stake in Japanese chipmaker Toshiba Memory. Hynix has also created the conditions necessary for Mr. Chey’s expansion. SK Hynix’s net profit now accounts for 70% of SK Group’s total, more than the profits of its telecommunications, oil and chemicals businesses, according to SK Hynix. Given the cyclical nature of the chip business, Hynix’s success carries just as much risk. So in a little over two years, SK Group has spent $2.6 billion on a range of new businesses, from ride-hailing apps to biopharmaceuticals to food and beverages. “We need to explore other areas and can’t rely 100% on semiconductors,” Mr. Chey said.

SK was founded in 1953, just after the Korean War, when Chey’s uncle, Chey Jong-kun, began producing synthetic fibers. Sunkyong Textiles (SK is short for Sunkyong) used government loans and tax incentives to expand, initially exporting rayon to Hong Kong. When Chey died of lung cancer in 1973 at age 47, his three sons were too young to lead the fast-growing company. In keeping with Korean tradition, his younger brother, Chey’s father, Chey Jong-Hyon, took over.

It all started here in 1953: Sunkyong Textile in Suwon, south of Seoul.

Choi led SK’s expansion into new industries by acquiring two companies that are now among SK’s biggest interests: In 1980, he bought a 50% stake from former U.S. oil giant Gulf (now SK Innovation), making SK one of South Korea’s top five conglomerates, or chaebols, today behind only Samsung and Hyundai. In 1994, he led the $530 million acquisition of state-owned Korea Mobile Communications Services, renamed SK Telecom.

When lung cancer claimed Choi Jong-hyun’s life in 1998, at the height of the Asian financial crisis, his 37-year-old son, Chey Tae-won, was thrust into the chairmanship of the group. “It was a war, and there was only one thing in my mind—I had to survive,” Chey recalls. Chey was groomed to lead the South Korean multinational: He met his wife, Roh So-Young, daughter of former South Korean President Roh Tae-woo, while studying at the University of Chicago in the late 1980s. He joined SK in 1989 as a manager of a subsidiary in San Jose, California, transferred to the group’s U.S. headquarters in New York two years later, and returned to Seoul in 1994 as group managing director. By 1997, he had risen from head of business development to CEO of SK Corp., then the group’s largest subsidiary.

In 1969, in Suwon, South Korea, SK founder Choi Jong-gun (left) and his brother Choi Jong-hyun (right) went to the production site of the first production line of Sunkyong Chemical Fiber.

Chey rose to prominence in smaller deals. He orchestrated SK Telecom’s 2.3 trillion won ($2 billion) cash and stock takeover of smaller rival Shinsegi Telecom. The acquisition of Shinsegi Telecom boosted SK Telecom’s market share from 43% to 57% overnight. But his plans to move overseas were put on hold in 2003 when Chey was sentenced to three years in prison for accounting fraud. He was released seven months later and received a presidential pardon in 2008. Chey did not resume SK’s expansion until 2007, when he transformed SK Corp. into SK Holdings, a listed holding company for SK’s major subsidiaries; it is now effectively a holding company in which Chey and his family own nearly 30%. Chey then led SK into China, investing in oil exploration in the South China Sea and energy and chemicals in Shanghai and Wuhan.

Today, SK Group’s 101 companies have 93,000 employees and a combined revenue estimated at $140 billion. Of those companies, 16 operate autonomously, but the CEOs of those companies meet monthly as part of the “Supex Council” to coordinate strategy under the motto “independent but united.”

When Chey first began looking at Hynix, it was a troubled company that dominated the market for dynamic random-access memory (DRAM) chips. Nine South Korean banks that became its largest shareholders after a 2002 bailout had been looking for a buyer for years. Micron Technology, an American chip company, offered $3 billion in 2002, but was rejected by Hynix's board. Another South Korean chaebol, Hyosung, dropped a $2.8 billion bid in 2009. Chey, however, had something the other bidders didn't: SK Telecom's data traffic showed demand was rising as faster 4G networks replaced older 3G networks. Chey realized that demand would grow quickly for the DRAM that would power the data-heavy devices that used 4G networks.

In 1998, Choi Tae-won officially took office as chairman of SK Group.

He’s right. Over the past five years, the semiconductor industry has grown nearly 52 percent to $463 billion, according to research firm Statista. “With the adoption of 4G, smartphones need more memory, and demand for memory in general is growing, and that’s part of the overall growth potential that SK Telecom sees,” said Shawn Park, associate director at S&P Global Ratings in Hong Kong.

A year after SK bought Hynix, SK Hynix’s profits rebounded to a profit of $2.7 billion from a loss of $148 million the year before. But Chey wasn’t there to celebrate: In early 2013, he was arrested on charges of embezzling company funds, convicted in February 2014, and sentenced to four years in prison. In August 2015, then-President Park Geun-hye pardoned Chey and 16 other businessmen. Meanwhile, SK Hynix’s stock price rose 51% during his time in prison, as net profit rose 40% in 2014. SK Holdings’ stock price nearly tripled, and profits soared 90%.

Choi Tae-won returned in March 2016 as chairman of SK Holdings and SK Hynix and led a new round of vertical integration at the chipmaker, acquiring wafer and gas suppliers of SK Hynix’s raw materials. The following year, SK Hynix’s profits more than tripled, and in 2018 they rose another 46% to a record 15.5 trillion won. Such growth is bound to attract competitors. Now, Chinese chip companies pose a growing threat. State-owned Yangtze Memory Technologies is making NAND chips, which, unlike DRAM, store memory without the need for a constant power source like USB drives. “China wants to have a stable supply with internal production,” said Cliff Leimbach, senior analyst at information provider IHS Markit.

SK Hynix leads in NAND chips but lacks scale. It is the world's second-largest DRAM producer, but only fifth in NAND production. Smartphones need NAND both to run a growing number of apps and to store the exploding user photos, music, and other digital content. The deal with Toshiba last June provided a stopgap solution. Toshiba Memory is the second-largest producer of NAND. Its parent company, Toshiba, was looking for cash to pay down debt on its U.S. nuclear business. Bain Capital knew where to get the money, and formed a group that included Apple, Dell, Kingston Technology, and SK Hynix to buy a stake in Toshiba Memory.

The deal, which seemed straightforward, took nine months to win approval from regulators in at least eight countries, including China. China only dropped its opposition in May in an apparent olive branch to the United States. Toshiba's own hierarchy also proved to be a big obstacle, Chey said. Hynix's $3 billion contribution gave it a 15% stake in the Japanese chipmaker. "The deal itself is very complicated, involving South Korea, the United States and Japan; the purpose is cooperation," Chey said.

After a series of delays, SK Hynix has received approval for a key stake in Toshiba's memory business in Japan.

Chey isn't stopping there. In October, SK Hynix opened a new NAND production plant in its hometown as part of an $18 billion investment over the next five years. Separately, in February, the company announced a 10-year plan to invest $107 billion starting in 2022 to build four large semiconductor factories and a network of suppliers. While analysts note that any 10-year plan is subject to change, the announcement suggests that Chey is considering a long-term partnership with SK Hynix.

Over the past six years, Chey has been expanding into emerging industries, spending $3.2 billion to acquire 12 companies in Europe, Southeast Asia, and the United States. In 2017, SK paid $459 million for two chemical product lines from U.S.-based Dow Chemical. Last March, the company paid $75 million for a stake in Singapore-based ride-sharing company Grab. In September, it paid $470 million for a 9.5% stake in Masan Group, a Vietnamese conglomerate whose portfolio includes food and beverages, livestock, mining, and financial services. (Masan’s chairman, Nguyen Dang Quang, joined the Forbes billionaires list this year with a net worth of about $1.3 billion.)

SK Group has diversified into new business areas to hedge its reliance on chips.

Chey, who wrote a book on social entrepreneurship while serving his sentence, insists that SK's investments won't be based solely on size and profit, they should also create social value. "My father had a philosophy that asked, 'Why are we here?' It's about the people," Chey said. In Davos, he co-hosted a panel discussion on social impact investing with the Boston Consulting Group for the first time. "If we spend this much money, it has to have an impact on society," he said.

Asked how SK could play a role, he cited a pilot program launched in September by SK Innovation with rival GS Caltex, a joint venture between South Korea’s GS Holdings and U.S. oil giant Chevron, CJ Logistics Korea, and logistics startup Zooma, that allows online retailers to use about 200 of SK’s 3,600 gas stations as distribution points. SK said the “Imagine Your Gas Station” project supports small businesses by lending its infrastructure to startups such as Zooma. Despite the promise, others noted the effort is still in its infancy. “It’s still a small part of the company’s business and not a big revenue driver,” said Wan Hee Yoo, an analyst at Moody’s in Hong Kong. “We have to keep watching.”

Chey poses for a photo with SK employees during a company-wide "happy talk." He pledged to hold 100 such informal meetings in 2019.

Others worry that SK's overseas investment spree is an unwelcome diversion from its core business in South Korea. "Investors don't like uncertainty. The success rate of overseas investments is too low. They prefer domestic services to those of foreigners," said Yang Jong-in, an analyst at Korea Investment and Securities in Seoul.

Yet many analysts say it makes sense for Chey to reduce SK’s reliance on revenue. As Hynix learned in 2001, SK’s business goes through boom-and-bust cycles. Despite stunning earnings growth since 2013, SK Hynix is ​​now facing a downturn amid a looming glut of memory chips. “Weak demand and uncertainty about global trade are two common reasons we hear,” Leimbach said. “The smartphone market is saturated. Consumers are no longer replacing their phones as quickly as they used to.”

Inspired by Japanese tech giant Softbank, SK plans to transform SK Telecom this year into an intermediate holding company to guide the group's tech investments. SK Telecom has begun to behave more like a private equity firm. Last year, SK Telecom CEO Park Jung-ho oversaw Carlyle Group's $650 million purchase of a 55% stake in South Korean security systems company ADT Caps and secured $450 million in financing for South Korean e-commerce company 11 Street. "There will be some failures, but they hope to build some sizable businesses out of all these investments," Baker said.

At the group level, SK invested in Masan through a new $500 million fund established in Singapore last year, called the SK Southeast Asia investment fund, which will receive another $500 million this year for investments in the region. "SK Group has always been keen on the Southeast Asian market, where there is great potential for growth," Cho Dae-sik, chairman of the SK Supex board of directors, said in an email interview.

"Masan is also part of SK's social impact work," said Chey, who is expected to step down as SK Holdings chairman this month to focus on his role as CEO. "We are not looking at their portfolio as much as their management." He has also met with the Vietnamese government to propose new growth engines, particularly in areas that create social value such as the environment. "At the end of the day, for all of us, it's the pursuit of happiness," he said. "Some people say, 'It's just about making more money,' right? In fact, that's not true. Think about why chaebols are looked down upon. I want to start changing that."

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