Chinese ravenous for Korean firms with core technologies

Chinese IT giant Tencent spent 72 billion won ($64 million) in April to acquire a 13.8 percent stake in Kakao, which runs Korea’s most popular mobile messenger KakaoTalk. Through the investment, China’s favorite Internet portal site operator has become Kakao’s No. 2 shareholder.

Speculators say that Tencent, listed on the Hong Kong Stock Exchange, based its bold investment decision on KakaoTalk’s growth potential. Even though the mobile messenger already has over 56 million users worldwide, it is still in its infancy in terms of turning a profit. Moreover, the Chinese company wishes to learn from the example of its Korean partner, according to industry watchers.

Tencent, whose business portfolio also includes various games, launched its own mobile messenger in January last year. “In the long term, it may harbor ambitions of outpacing KakaoTalk,” said an executive with a local venture capital firm, who requested anonymity.

Tencent is one example of a Chinese enterprise acquiring, or attempting to purchase a sizable portion of, a Korean company in leading industrial fields such as IT and automobiles.

Chinese home electronics group Konka was one of the most likely candidates to buy a 28.4 percent stake in Woongjin Coway, Korea’s top water purifier producer, until it was sold to MBK Partners, a Korean private equity fund, last week.

Meanwhile Haier, China’s electronic appliance bellwether, emerged as one of the bidders for Hi-Mart, Korea’s largest electronics retailer, earlier this year. Hi-Mart was eventually sold to Lotte Mart in early July.

China was seen as a land of opportunity for a flurry of Korean manufacturers wishing to take advantage of the country’s low labor costs until a few years ago.

Haier also participated in a previous failed bid to purchase a majority stake in Daewoo Electronics, which has now entered its sixth round of negotiations to find a new owner.

This trend has gained momentum in recent years as Chinese Premier Wen Jiabao announced in 2009 a plan to “support mergers and acquisitions of foreign companies” when unveiling 10 new industrial promotion policies.

In 2003, there was an initial M&A boom, but it quickly faded after the state-run chemical firm Sinochem’s bid to acquire Inchon Refinery collapsed due to severe protests from the Korean public, which claimed the nation’s basic industry should not be sold to a Chinese enterprise.

China now only wants those foreign investors with “special technology,” according to Kim Ik-soo. A professor of business management at Korea University, he has written a book titled “China on a Shopping Spree and Korea on Sale.”

China has now broken away from labor-intensive industries and is migrating over to high-value-added ones, rapidly narrowing the technological gap with other tech powerhouses.

“China’s M&A targets have widened their scope from the United States and Europe to Korea,” said Prof. Kim. “Chinese firms are increasingly interested in Korea’s IT companies, which own cutting-edge technologies but lack capital.”

Research from the Korea Institute for Industrial Economics & Trade shows that China’s automobile sector lagged Korea’s by just 4.2 years as of 2011. The gap between the two countries’ shipbuilding and semiconductor industries was 3.1 years and 2.4 years, respectively.

By Seo Ji-eun [spring@joongang.co.kr]