SK’s global projects adrift with boss jailed

2014-03-09 18:18

SK’s global projects adrift with boss jailed

Na Jeong-ju
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Just a decade ago, SK Group’s major revenue sources were limited to domestic telecommunications, energy and construction markets.
Now it is one of the most globalized Korean companies ― about 70 percent of its revenue comes from overseas sales.
The group’s exports totaled $61.4 billion last year, accounting for 71.7 percent of total sales, compared to a mere $5 billion in 2001.
A driving force behind SK’s successful transformation into a strong global player was Chairman Chey Tae-won.
Chey’s visions for globalization were well reflected in a Chinese idiom he presented as the firm’s new motto in 2004: “We all die if we don’t move forward.”
However, since Chey was jailed in January last year after being convicted of embezzlement, SK’s global expansion is showing signs of losing momentum. In fact, some of its key overseas projects have crashed.
Early this year, SK Energy dropped a plan to bid for a stake in United Petroleum, an Australian oil company, which had been regarded as a stepping stone for its expansion into emerging markets.
SK Innovation secured $2.4 billion in cash after hitting the jackpot from its investment into an oil field development project in Brazil in 2011, but has failed to re-invest the money.
SK Telecom and SK E&S considered purchasing ADT Caps, a security solutions provider, and STX Energy, respectively, but gave up these plans.
SK Telecom is also known to be interested in buying Dongbu HiTek, a mid-sized semiconductor company that mainly produces non-memory chips. Analysts say an acquisition of Dongbu could create positive synergy effects for SK hynix, the world’s second-largest memory chip maker and the largest cash cow for SK Group. Hyundai Motor Group is also considered as one of the potential bidders for the semiconductor company because it wants to reinforce its car electronics business using non-memory solutions.
The SK affiliate, however, has been dragging its feet in jumping into the fray.
SK Group established a unique decision-making body, the Supex Council, in 1998. This is a collective leadership system aimed at enhancing managerial efficiency and better responding to external challenges. The council, which includes heads of all major affiliates, makes important managerial decisions.
However, acquisition deals and globalization strategies are still directed by the group’s chairman.
“Almost all of the group’s expansion plans have been stalled since Chey was imprisoned,” an SK official said on condition of anonymity. “The Supex Council has been doing quite well in addressing the leadership vacuum, but its role is limited. How can we make decisions that can determine the group’s future without Chey? This is not possible.”
Chey’s absence from management is especially damaging the group’s global energy and semiconductor businesses.
SK Innovation, which focuses on the petrochemical and oil business, has advanced into China, Russia, Indonesia and other emerging markets over the past decade in an effort to offset dwindling income from domestic sales. Exports now account for more than 73 percent of its total revenue.
Amid an uncertain outlook for global demand for oil products, its dream of becoming a major global energy company is at stake. Analysts say the firm should re-chart growth strategies by actively engaging in merger deals overseas, which may help secure stable sources of demand in the future.
SK hynix is also being urged to expand its overseas sales network through mergers and acquisitions (M&A). Its exports accounted for 19.5 percent, or $1.2 billion, of the group’s total overseas sales last year.
“The firms need to set up new growth plans centered on M&A, but are losing opportunities,” an analyst said, asking not to be named. “They rapidly expanded their global presence under Chey’s leadership over the past decade. However, they may suffer a lost decade if they fail to move forward.”
Kim Chang-geun and Supex Council
Last week, the Supreme Court upheld the four-year prison term for Chey, 54, for embezzling 45 billion won in company funds. If he is not released on bail or does not get a presidential amnesty, he will remain in prison until early 2017.
The ruling has put the group in turmoil.
This week, Chey said he would resign from the position of SK chairman, and give up his board seats on all SK affiliates.
“I decided to give up these posts because I’m unable to manage the group. I hope the group will overcome the current difficulties without me,” Chey said in a statement released by SK.
Speculation is now mounting over who will fill Chey’s positions.
Some company officials said the Supex Council may take over the jobs, while the vacant board seats will be filled by outside directors. They dismissed concerns about a possible managerial vacuum created by Chey’s absence, saying the group’s growth strategies will not be affected.
“We will cherish Chey’s visions for growth and social responsibility in tiding over this difficult time,” a company spokesman said. “This is a heartbreaking moment for both Chey and all SK workers.”
Analysts forecast council head Kim Chang-geun, who is currently serving as chairman of SK Innovation, may manage the group on behalf of Chey until he completes his jail term.
There are also rumors that Chey’s cousins, SKC Chairman Chey Shin-won and SK Chemical Vice Chairman Chey Chang-won, may have bigger voices in making crucial managerial decisions.
Chey’s younger sister, Chey Ki-won, chairwoman of SK’s charity foundation, is also a potential challenger. She is the second largest shareholder of the group’s de-facto holding company, SK C&C, with 10.5 percent. Her brother is the largest shareholder with a 38 percent stake.
An SK official denied these rumors.
“Chey’s cousins have their own businesses. They have rarely been involved in making decisions for the group,” the official said. “His sister is also in charge of only charity affairs. She has never showed any interest in managing the whole group.”
The official said Chey will remain as a “strategic investor” after resigning as chairman.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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