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What are Chaebols?
Chaebols are massive South Korean industrial conglomerates that dominate that country's economy. For an American version of a Chaebol, think General Electric Company (GE) and Tyco International Ltd. (TYC). Some of these South Korean firms are now household names in the U.S., like Samsung Group, best known for Samsung Electronics Co., Ltd. (OTC:SSNGY), and LG Corp., best known for LG Electronics (OTC:LGEIY), but the majority are still unknown in the United States. These companies have dominated their home country's economy for decades, and have recently begun growing quickly outside of their borders.
Why should investors care? Because these corporate behemoths are driving massive technological change throughout the world and have helped South Korea be named the second most innovative economy by Bloomberg Business Week in 2012. Now the Chaebols are partnering up with key technology leading American companies and these companies could be poised to benefit greatly.
South Korean Chaebols with deep pockets are embracing U.S. companies with new intellectual property and have emerged as fundamental investors and long-term strategic partners, stepping out on the risk curve where others (like U.S. public corporations and venture capital firms) have been less willing.
Fundamental Trend - South Korea investing in the U.S.
South Korean foreign direct investment in the U.S. is exploding, almost doubling from $13.9 Billion in 2008 to $24.3 Billion in 2012 (according to the U.S. Bureau of Economic Analysis). Strong military ties and a new Free Trade Agreement (2012) between the two countries are major catalysts.
Investments from South Korean companies into clean-tech / technology companies.
In the clean-tech space, POSCO ENERGY Co., Ltd., an independent power producer and a subsidiary of POSCO (PKX) recently made a $30 million Private Placement into FuelCell Energy Inc. (FCEL) in March 2013. POSCO is now FuelCell's largest shareholder and has licensed to sell in Asia its technology systems that convert natural gas into electricity through a chemical process. POSCO has also begun construction of a factory that will be in production of FCEL's power systems in early 2015.
While this Company's stock was a former super-high flier, valuation levels have come back down to earth and more importantly, the fundamentals of their business keep improving. At the end of Q4-2013, revenues had grown 56% from the year before, from $120.7M to $187.7M. The backlog increased to $355.4 million from $318.9 million a year ago, and this is before the POSCO factory goes into production.
In technology, the partnership between KT Corp. (KT) and Boingo Wireless, Inc. (WIFI) continues to strengthen, as Boingo services all of KT Corp's customers in South Korea using its proprietaryWi-Fi hotspot technology. KT mobile phone users are also allowed to use all of Boingo's international Wi-Fi hotspots throughout the world for internet roaming.
At the time that their original partnership was announced in 2010, it was a huge validating contract for Boingo. The Boingo / KT Corp relationship is typical of the types of international expansion that Boingo has had, growing their overall sales from $80.4M in 2010 to $106.0M over the last twelve months (as of September 31st, 2013).
Investments from South Korean companies into new materials companies.
In October 2013, Samsung Display Co., Ltd., a subsidiary of Samsung Electronics Co. Ltd., invested $400 million in the form of a Private Placement into Corning Inc. (GLW). While not a small company, it's a reminder that a big U.S. company like Corning can still be a hotbed of innovation in the electronics display space.
The transaction also comes with a 10-year LCD glass-supply agreement, wherein Corning will supply the materials for Samsung's devices (mobile phones, smart pads, etc), using Gorilla Glass through 2013. This high-tech glass is also used in products made by device makers, such as Apple Inc. (AAPL) and Sony Corporation (SNE).
A smaller name in the materials space is a company called Integral Technologies, Inc. (OTCQB:ITKG), a new materials company that produces an electrically conductive hybrid plastic called ElectriPlast®, which will be used in cars all over the world as part of a greater "lightweighting" theme that is occurring in the automobile industry. In June 2013 ITKG announced partnerships with three global leaders in the chemicals/new materials/auto supplier space, including Hanwha L&C, a subsidiary of Hanwa Corp. (OTC:HNWAF), BASF Corporation, a subsidiary of BASF SE (OTCQX:BASFY) and Delphi Automotive PLC (DLPH). Of the three partnerships, the one that is moving the fastest is the South Korean company. In early November, ITKG announced that they are going into production in Q1-2014 with their South Korean partner, which will give ITKG its first significant revenues.
Value-Add of a South Korean Chaebol vs. Other Investors
An investment from a South Korean Chaebol means validation of the technology from some of the most innovative groups in the world. But oftentimes it also means follow through with sales contracts that move the revenue needle single-handedly for these U.S. companies. These guys are not just writing checks, as they see new markets in these U.S. technologies and recognize innovation better than most. The 4 domestic names mentioned above will be interesting to watch as their South Korean partners add value and take them to the next level.