Back in 2012, it was a mystery to many why Chey Tae-won spent $3 billion to buy control of troubled Hynix Semiconductor. Ten years after being bailed out by South Korea’s government, the world’s second-largest chipmaker was losing money and its stock sliding amid a global slump in demand for PCs and memory chips.
South Korea’s SK Group, the sprawling conglomerate Chey chairs, had a wireless carrier, an oil and gas company, a hotel operator but no presence in chipmaking.
“Pretty much everyone in the financial services industry thought it was a terrible purchase,” says Morningstar Research Director Dan Baker in Hong Kong. SK Holdings’ stock fell 15% between the day in November 2011 the deal was announced and the day it closed the following February.
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To Chey, though, the rationale was clear. “SK needed something else to grow,” he recalls during a rare interview held on the sidelines of the World Economic Forum’s annual meeting in Davos. “Someone needed to step up. It made sense to me.”
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SK’s wireless subsidiary, SK Telecom, bought a 21% stake in Hynix from a group of creditor banks, and Chey, already chairman of SK Group and SK Holdings, gained a new title: co-CEO of Hynix, later renamed SK Hynix.
Chey’s foray into the volatile chip industry turned out to be one of his savviest investments, timed almost perfectly to take advantage of a nascent global boom in smartphones. SK Hynix earned an estimated $14 billion last year, up 40% from 2017, on revenue of $36 billion—an impressive 39% profit margin. The stock has climbed roughly 150% since SK took control.
In September SK Hynix ranked No. 20 on the Forbes Digital 100, an inaugural list of the industry’s top publicly traded companies across 17 countries. Chey ranks No. 7 on the list of Korea’s 50 richest, with a net worth of $4.7 billion.
“It has been a fantastic investment given the growth in the memory market,” says Baker.
The Hynix deal was also a turning point for Chey, now 58, emboldening him to make the kind of big bets that characterized SK under his father before his death in 1998. Chey demonstrated that confidence last June when SK Hynix joined a group of investors paying $18 billion to buy 49.9% of Japanese chip maker Toshiba Memory. Hynix also created an imperative for Chey to expand.
SK Hynix now produces 70% of SK group’s net profits, according to the company, eclipsing its earnings from telecom, oil and chemicals and thereby posing a risk as big as it is successful, given the cyclical nature of the chip business.
In a little over two years, therefore, SK group has spent $2.6 billion to venture into a range of new businesses, from ride-hailing apps and biopharma to food and beverages. “We need to explore other areas,” Chey says. “I cannot rely 100% on semiconductors.”
SK was born in 1953, when the Korean War had just ended and Chey’s uncle Chey Jong-kun started making polyester. Sunkyong Textiles took advantage of government loans and tax incentives to expand, starting with exports of rayon to Hong Kong (SK is an abbreviation of Sunkyong).
When Jong-kun 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 and Chey’s father, Chey Jong-hyon, took over.
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Jong-hyon steered SK’s expansion into new industries with the purchase of two companies that now rank among SK’s biggest interests: in 1980, he bought 50% of Korea Oil from former U.S. oil giant Gulf (now SK Innovation), placing SK among Korea’s top five conglomerates, or chaebol, by assets (today it is No. 3 after Samsung and Hyundai). Then, in 1994, he led the $530 million takeover of state-owned Korea Mobile Telecommunications Services, renaming it SK Telecom.
In 1998, at the height of the Asian financial crisis, lung cancer claimed the life of Jong-hyon, thrusting his 37-year-old son, Chey Tae-won, into the role of group chairman. “It was a war situation,” Chey recalls. “There was only one thing on my mind: I have to survive.” Chey had been groomed to lead the Korean multinational: while studying at the University of Chicago in the late 1980s, he met his wife, Roh So-young, daughter of former South Korean president Roh Tae-woo.
He joined SK in 1989 as a manager at a subsidiary in San Jose, California, moved two years later to the group’s U.S. headquarters in New York and returned to Seoul in 1994 as group managing director. By 1997, he had already been promoted from head of business development to CEO of SK Corp., then the group’s largest subsidiary.
Chey cut his teeth on smaller deals: in 2000, he engineered the takeover by SK Telecom of a smaller rival, Shinsegi Telecom, for 2.3 trillion won ($2 billion) in cash and stock. Buying Shinsegi boosted SK Telecom’s market share overnight to 57% from 43%. But Chey’s plans for an overseas push were put on hold when, in 2003, he was sentenced to three years in prison for accounting fraud. He was released after seven months and given a full presidential pardon in 2008.
Chey didn’t manage to resume SK’s expansion until 2007, when he turned SK Corp. into a listed holding company, SK Holdings, for SK’s major subsidiaries; it is now the de facto holding company in which Chey and his family hold nearly a 30% stake. Chey then led SK into China, investing in oil exploration in the South China Sea as well as energy and chemicals in Shanghai and Wuhan.
Today, the SK group employs 93,000 people in 101 companies and generates an estimated $140 billion in combined revenues. Of these, 16 major companies operate autonomously, yet the CEOs of these firms convene monthly as part of a “Supex Council” to coordinate strategy under the slogan “independent yet united.”
When Chey first started looking at Hynix, it was a troubled company with a dominant position in the market for dynamic random-access memory, or DRAM, chips. The nine Korean banks that ended up its largest shareholders after its 2002 bailout had hunted for years for a buyer. U.S.-based chip company Micron Technology bid $3 billion in 2002, only to be rejected by Hynix’s board.
Another Korean chaebol, Hyosung, dropped a $2.8 billion bid in 2009. Yet Chey had access to something the other bidders didn’t: SK Telecom’s figures for data traffic, which showed demand rising as older 3G networks were replaced by speedier 4G. Chey sensed that demand for the DRAMs to power the more data-hungry devices using these networks was set to take off.
He was right. Over the past five years the semiconductor industry has swelled by nearly 52% to $463 billion, according to research firm Statista. “With the adoption of 4G, smartphones required more memory and the demand for memory grew overall,” says Shawn Park, associate director of S&P Global Ratings in Hong Kong. “That is part of what SK Telecom saw in the overall growth potential.”
The year after SK took it over, SK Hynix’s earnings rebounded to $2.7 billion from a loss of $148 million the year before. Chey wasn’t on hand to celebrate: in early 2013, he was arrested on charges of misappropriating company funds, convicted and sentenced in February 2014 to four years in prison. In August 2015, then-President Park Geun-hye pardoned Chey along with 16 other businessmen. Shares of SK Hynix, meanwhile, rose 51% while he was in prison as 2014 net profits climbed 40%; shares in SK Holdings almost tripled as its earnings soared 90%.
Chey returned in March 2016 as chairman of both SK Holdings and SK Hynix and led a renewed push for vertical integration at the chipmaker, buying suppliers of the wafers and gases that are SK Hynix’s raw materials. The next year, SK Hynix’s earnings more than tripled, and rose another 46% in 2018 to a record 15.5 trillion won.
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That kind of growth was bound to attract competitors. Now China’s chip companies pose a growing threat. State-owned Yangtze Memory Technologies is building out its production of NAND chips that, unlike DRAM, can store memory without access to a constant power supply, like a USB drive. “China wants an in-house production to have a stable supply,” says Cliff Leimbach, a senior analyst for information provider IHS Markit.
SK Hynix has a head start in NAND chips, but lacks scale. It’s the world’s No. 2 DRAM producer, but only No. 5 in NAND production. Smartphones require both: DRAM to run increasing numbers of apps; NAND to store the exploding number of user photos, songs and other digital bric-a-brac.
Last June’s Toshiba deal provided a stopgap. Toshiba Memory is the No. 2 producer of NAND. Its parent Toshiba was looking for cash to pay down debt at its U.S. nuclear energy business. Bain Capital knew just where to get it, forming a group that included Apple, Dell, Kingston Technology and SK Hynix to buy the stake in Toshiba Memory.
While seemingly straightforward, the deal took nine months to win approval from regulators in no less than eight countries, including China, which only dropped its objections in May as an apparent olive branch to Washington. Toshiba’s own hierarchy, Chey says, proved a high hurdle of its own. “The deal itself was so complicated,” he says. SK Hynix’s $3 billion contribution fetched it a 15% stake in the Japanese chipmaker. “Korea, U.S. and Japan; the purpose is cooperation,” Chey says.
Chey isn’t stopping there. In October SK Hynix opened a new NAND production facility in its home turf as part of an $18 billion investment over the next five years. Separately, in February, it announced a 10-year plan to invest $107 billion, starting in 2022, to house four large semiconductor plants and a network of suppliers. While analysts note that any 10-year plan can be subject to change, the announcement is a sign that Chey is thinking long-term with SK Hynix.
Chey has been diversifying into new industries, spending $3.2 billion to buy 12 companies in Europe, Southeast Asia and the U.S. in the past six years. In 2017, SK paid $459 million for two chemical lines from U.S.-based Dow Chemical. In March last year, it paid $75 million for a stake in Singapore-based ride-sharing company Grab.
And 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 an estimated net worth of $1.3 billion.)
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Chey, who wrote a book on social enterprise during his incarceration, insists that SK’s investments won’t be based solely on scale and profits—they should also create social value. “My father had a philosophy,” he says. “He asked, ‘Why are we here?’ It’s about the people.” At Davos, he is hosting, for the first time, a panel with the Boston Consulting Group on social impact investing. “If we spend so much money,” he says, “it has to impact society.”
Asked how SK is making a difference, he cites a pilot program SK Innovation launched in September with rival refiner GS Caltex (a joint venture between Korea’s GS Holdings and U.S. oil giant Chevron), Korea’s CJ Logistics and logistics startup Zooma that lets online retailers use roughly 200 of SK’s 3,600 filling stations as merchandise distribution points.
SK says this “Imagine Your Gas Station” project supports small entrepreneurs by lending its infrastructure to startups such as Zooma. While promising, others note the embryonic nature of this effort. “It’s still a minor part of the company’s business,” says Wan Hee Yoo, an analyst at Moody’s in Hong Kong. “It’s not a big revenue driver. We have to continue to watch it.”
Others worry SK’s overseas investment binge is an unwelcome diversion from its core businesses in Korea. “Investors do not like uncertainty,” says Yang Jong-in, an analyst at Korea Investments and Securities in Seoul. “Overseas investment success rate is so low. They prefer domestic services, not services by foreigners.”
Many analysts, however, say it makes sense for Chey to reduce SK’s dependence on income from a business that, as Hynix learned in 2001, is boom-and-bust. Despite its impressive earnings growth since 2013, SK Hynix now faces a downturn amid a looming glut of memory chips.
“Weak demand and uncertainties with global trade are two of the common reasons that we are hearing,” says Leimbach. The smartphone market is saturated, he says. “Consumers are no longer replacing their phones as quickly as they were.”
Taking a cue from Japanese tech giant Softbank, SK plans this year to convert SK Telecom into an intermediate holding company to channel the group’s tech investments. SK Telecom has already begun acting more like a private-equity firm.
In the past year, SK Telecom’s chief executive Park Jung-ho has overseen the $650 million purchase from the Carlyle Group of a 55% stake in Korean security systems firm ADT Caps and secured $450 million in funding for Korean e-commerce company 11 Street. “There will be some failures,” says Baker, “But they are hoping to build a few sizable businesses out of all of these investments.”
At the group level, SK made its investment in Masan through a new, $500 million fund it set up last year in Singapore called the SK Southeast Asia Investment fund, which will receive another $500 million this year to invest in the region. “SK Group has been keen on the Southeast Asian market, which has much growth potential,” says Cho Dae-sik, who chairs SK’s Supex Council, in an email interview.
Chey, who will likely step down as chairman of SK Holdings this month to focus on his role as CEO, says Masan is also part of SK’s social impact efforts: “We didn’t look at their portfolio as much as we did their management.” He has also met with the Vietnamese government to suggest new engines for growth, particularly in areas that create social value such as the environment.
“In the end, it’s the pursuit of happiness, for all of us. Some would say, ‘Just make more and more money,’ right? Actually, that’s not really true,” he says. “Think about why chaebols are looked down upon. I want to start changing that.”
-Grace Chung;Forbes Staff
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