China’s white knights of business too often turn out to be vampires

Shares in Jeju Semiconductor & Creative Power Plant rose to the maximum daily limit last June when the company announced that an offshore affiliate of China’s Zhaode Group, Wing Champ Investment, was participating in a capital increase of 100 billion won ($87 million), which would make the Chinese company the majority stakeholder.

The investment deal, however, guaranteed independence for the management. The company, which specialized in mobile memory chips, was in need of investment as it was planning to expand its portfolio into the biomass industry. Four months later, the company admitted the investment agreement fell through.

Although the investment didn’t materialize, Chinese investments are welcomed, especially for small and midsized operators that have had trouble finding new investments in the local market, especially at a time when Korean conglomerates are hesitant to expand their businesses because of recent economic sluggishness.

Last month, Sim Entertainment saw its stock value surge. Shares that were trading in the 2,700 won range surged to 11,000 won after the company announced on March 14 that an affiliate of China’s biggest entertainment company, Huayi Brothers, would become the company’s largest stakeholder. Other companies that benefited from such investment news included the children’s product manufacturer Agabang, whose shares surged more than 130 percent in just three months after the company announced in November 2012 that the Chinese apparel company, Lancy Group, was investing 55.3 billion won in it. Similarly, the apparel company Avista saw its shares surge 135 percent in three months after China’s Dishang Group announced it was becoming the company’s majority shareholder.

But investment from China is not without risk. Several Korean companies sold to Chinese companies complain that Chinese investors sucked out key technologies and left the companies to wither.

The most notorious case is Ssangyong Motor, which once dominated the local SUV market. On the verge of bankruptcy in 2005, it thought it found a savior in China’s Shanghai Automotive Industry Corporation (SAIC), which bought a controlling stake in the company for $500 million. The Chinese automaker pulled out in 2009, without following through on promises of investment in research and development, expansion of production or its guarantees for employees’ jobs. Ssangyong went into court receivership and had to cut 52 percent of its workforce. Ssangyong employees accused the Chinese automaker of stealing its key technologies, including a hybrid engine, which SAIC continues to deny.

Another example was Hydis, which specialized in liquid crystal display (LCD) panels. The company was part of Hyundai Electronics, but after the Asian financial crisis of the late 1990s, it was split off and sold to China’s BOE Technology Group for 400 billion won. The company filed for bankruptcy after BOE Technology pulled out in 2006 and was under court receivership until it was purchased by Taiwan’s E-ink for 300 billion won in 2007. According to an investigation, the Chinese company took major technology data and also some key engineers.

While the Korean company struggled, BOE Technology became one of the biggest LCD manufacturers in China.

“Investments from China are a good opportunity,” a market analyst said. “But you need to be careful.”

BY SPECIAL REPORTING TEAM [lee.hojeong@joongang.co.kr]