Korean conglomerates and KDB

Sean O Malley

Over the past five years, supply chain disruptions have led to increasing levels of inflation, which have led to decreased values of real wages, which in turn have reduced levels of consumer confidence. In this environment, more than ever, it is challenging for companies to sell products with high-cost inputs assembled by high-cost labor. It is especially difficult to sell a more highly-priced similar product that serves the same function as a lower-priced alternative. Enter SK Group with its recent request for financial support from the Korea Development Bank (KDB). The conglomerate and the KDB must be in a quandary.

SK Group, Korea's second-largest conglomerate, reportedly wishes to undertake a major reorganization to better focus on its core semiconductors, batteries and artificial intelligence businesses. A significant stumbling block to the plan appears to be SK On, the battery-making unit of SK Innovation. Experts reportedly believe that any successful reorganization must begin with restructuring the struggling affiliate. As it loses ground to Chinese battery makers in numerous markets, SK On has been hemorrhaging money, approximately 581 billion won ($418 million) last year followed by nearly 332 billion won in the first quarter of this year.

Since 2011, SK has reportedly earmarked some 38 trillion won in capital expenditures for SK On, though about 15 trillion won went unspent. Now, to increase the affiliate's competitiveness, SK has earmarked 7 trillion won this year. It says the money is necessary to help complete joint battery plant projects the affiliate has with Hyundai Motor and Ford in the United States.

This must be quite the conundrum for the KDB. To implement its plans, SK wants a larger line of credit from the KDB. Batteries are one of Korea's state-designated pillar industries subject to state aid. Therefore, the KDB wishes to extend more credit. However, the KDB recently downgraded SK Group's credit rating to A0 from A+, limiting the amount of KDB funds SK can tap, in no small part due to SK On.

Keeping in mind that a lack of funds for SK On's joint ventures may negatively impact Hyundai Motors' competitiveness, and that funds will be spent overseas as opposed to furthering employment and growth here in Korea, the KDB must determine whether an extension of credit for SK On would simply be throwing good money after bad, especially considering SK left 15 trillion won of its own earmarked funds unspent.

Currently, Chinese battery-making companies have the upper hand. With massive state-led support, lower-wage labor and cheaper inputs, Chinese battery makers long ago overtook Korean rivals in the global market. Today, these companies are teaming up with Chinese automakers to produce very inexpensive alternatives to Korean and U.S. autos, leaving Chinese automakers poised to overtake the competitiveness of their U.S. and Korean rivals.

Chinese automaker BYD now has a fully electric vehicle priced around $10,000. Chinese autos are manufactured so cheaply that U.S. experts are unconvinced that the Biden administration's plans for a 100 percent tariff on Chinese autos will hinder their sales in the U.S. market. Apparently, BYD is considering a manufacturing plant in the Chungcheong region, which may mean Korean consumers will soon have considerably cheaper alternatives to similar Korean models.

Under such circumstances, difficult realities must be recognized. Firstly, Korean battery makers going toe-to-toe with Chinese battery makers seems to be a losing proposition for Korean companies. SK On cannot compete on price and Chinese product quality is now on par or surpassing its rivals.

Secondly, the government of Korea, in this case through the KDB, cannot go toe-to-toe with Chinese state-funded support. The Chinese government will subsidize its industries endlessly to raise competitiveness and gain superiority. The KDB and the Korean government cannot match such support.

Thirdly, given the obvious advantages enjoyed by Chinese companies, Korean support for batteries seems like a wasteful proposition. If the first two propositions above are the case, one should ask whether batteries should be a state-designated pillar industry of Korea.

Maybe it is time for the government, the KDB and conglomerate leaders to sit down and decide where Korean companies have a realistic competitive advantage now (e.g., semiconductors) and in the future (e.g., artificial intelligence) over Chinese rivals. Once decided, they can funnel support to those industries as effectively as possible.

Making large investments in technology and national competitiveness is a risky business. Policymakers must make tough choices. Right now, it appears that propping up non-competitive affiliates like SK On, especially to fund their U.S. investments, may be a losing proposition for the Korean economy and its consumers while potentially slowing Korean competitiveness in other areas.

Which brings us to our last and possibly most disturbing reality: if Korea's second largest conglomerate needs massive funding support from the KDB in order to undertake a reorganization of its business structure, does this mean that conglomerate competitiveness and by extension Korea's competitiveness, is a rhetorical illusion more than a substantive fact?

As the developing state of China floods the global market with cheaper, high-quality alternatives to products produced by Korean conglomerates, it is this last reality that should frighten us the most. The Chinese economic juggernaut is here. Does Korea have the natural, human and financial resources to compete? Only if limited government funding is spent judiciously to foster competitive advantages.

Sean O’Malley (seanmo@dongseo.ac.kr) is a professor of international studies at Dongseo University, where he teaches classes on regionalism, free trade and technology in international relations.