Certainly the combined group would have much greater pricing power when foreign customers such as Airbus and Boeing seek South Korean suppliers, says an adviser to a company involved in the deal. Another result, also common in almost any industrial takeover, would be to economize on overheads and to optimize use of costly machinery, in part by avoiding duplication.
If Korean Air wins, the government would probably forbid reorganization of the two groups for two years, says the adviser. Choi suggests the two companies would be operated indefinitely as separate subsidiaries. The advantage of doing so is not clear, except that it would help mollify KAI's managers.
A combined group, being larger, would be more competitive on the world stage; that was one reason why, four years ago, China began grouping together aeronautics plants that regarded each other as rivals.
Even a cursory look at the two South Korean companies shows they lack the scale of leading aerospace groups, even by the standards of the country's neighbors. KAI's sales last year were 1.29 trillion won ($1.15 billion). Korean Air's Aerospace Div. is much smaller, with revenues of around 550 billion won last year. By comparison, Mitsubishi Heavy Industries reported aerospace sales of ¥495.9 billion ($6.38 billion) for the year to March 31.
Remarks by Yoo Seongmin, an influential member of parliament who could be defense minister within months, have hinted that the defense ministry is worried about ending up with a monopoly supplier but has been bureaucratically bypassed. The departments driving the sale are the finance ministry and the ministry of knowledge economy, as the industry ministry is known. They “recklessly want to sell KAI without asking the opinion of the defense ministry,” Yoo says.
He is expected to become defense minister if Park Geunhye of the ruling Saenuri Party wins the election. That should unnerve the whole industry and the bureaucrats that seek to guide and promote it, since his public statements show that he puts their interests well behind those of national security. “Weapons are for fighting and winning wars, not for developing an export industry or for serving as a new engine for economic growth,” he told parliament last year. He is also opposed to indigenously developing a stealth fighter under the KF-X program, arguing instead for cheaper imports (AW&ST Sept. 24, p. 30).
To some extent, Korean Air Aerospace and KAI have become complementary rather than competitive suppliers to the defense forces. KAI is the country's fast-jet builder and seems to have been anointed as the national rotary-wing specialist, while drone programs are now consistently assigned to Korean Air. Also, KAI has a much larger design office and therefore the greater capability for in-house development.
Both companies rely heavily on manufacturing of parts for Airbus and Boeing civil programs, but defense accounts for almost 60% of KAI's business. Hyundai Heavy, separate from but related to Hyundai Motor, has diversified activities such as shipbuilding and oil refining. The conglomerate that spawned them contributed its aerospace division to the formation of KAI.
The size of South Korea's economy highlights the anomaly of the country having two aircraft builders. Japan has three to choose from, but only by carefully nurturing them at great public expense, and its economy is more than five times as large as South Korea's. Australia, also with an economy larger than South Korea, is not much interested in such nurturing at all; no company there can fully build aircraft, apart from simple general aviation types.
KAI has willing sellers as well as a willing buyer. Four groups, led by the government's Korea Finance Corp., are offering a combined 42% stake in the company. The administration of President Lee Myung-bak has put Korea Finance under pressure to sell state assets before he leaves office, because that is what he promised before his election five years ago. The other three big shareholders, all private and including Hyundai Motor, propose to sell jointly with Korea Finance. Lacking much reason to own stakes in an aircraft builder, they have been waiting for such a chance. Under South Korean law, only local investors can buy the stake.