Fourteen years ago, Korea Aerospace Industries (KAI) was hard to sell even when it was up for sale. The government moved to privatize KAI in 2012, but the sale fell through repeatedly. In the final round of bidding, Korean Air withdrew, leaving only Hyundai Heavy Industries, so no valid competition could be established. The government sought a buyer, but the private sector was reluctant to step forward.
Recently, Hanwha Group raised its stake in KAI to 15.89%, becoming the second-largest shareholder after the Export-Import Bank of Korea (26.41%). After expressing its intent to take part in management, and with its stake surpassing 15%, Hanwha also filed for a merger review with the Fair Trade Commission. Private capital and technology have grown enough to shoulder long-term investment, and the aerospace market is expanding rapidly.
KAI is not a state-owned enterprise. It was created in 1999 when the government led a "big deal" that combined the aviation divisions of Samsung Aerospace, Daewoo Heavy Industries and Hyundai Space & Aircraft. As losses mounted in its early years, a debt-for-equity conversion by creditors made the Korea Development Bank its largest shareholder, and in 2016, 500 billion won ($362 million) worth of KAI shares was contributed in kind to shore up the capital of the Export-Import Bank. A state bank became the top shareholder less as a governance design that foresaw the future of the aviation industry than as a byproduct of the foreign exchange crisis and the restructuring that followed. Even now, with the KF-21 Korean fighter jet taking to the skies, KAI's ownership structure remains stuck in that era.
To be sure, state leadership was not the wrong answer. In the immediate aftermath of the foreign exchange crisis, the private sector could hardly bear the enormous development costs and the risk of failure. Because the state backed research and development spending and demand, the country was able to produce the T-50, the Surion and then the KF-21. But whether the ownership structure that was necessary then remains the best one now is a separate question.
To view SpaceX's success solely as a triumph of private initiative is to read only half the story. NASA selected SpaceX as a Commercial Orbital Transportation Services (COTS) partner in 2006, sharing the development risk, and later purchased cargo delivery services to the International Space Station. The Organisation for Economic Co-operation and Development notes that the government's role in the space industry is broadening from "funder and developer" to "partner and enabler." The private sector leads investment, development and commercialization, while the government supports high-risk technologies and early-stage markets. Private leadership is not the state's exit but a redesign of its role.
Korea, too, should consider such a shift. Government involvement in KAI, which is directly tied to national security, is necessary, but the government need not be the largest shareholder. Lockheed Martin, which makes the F-35, is a publicly listed private company. The U.S. government manages defense firms through defense procurement contracts, protection of classified information and technology, and arms export controls. State control and state ownership are not the same thing. The government, too, needs to shift its role from a shareholder in companies to an investor in next-generation technology and a "first customer."
Hanwha's stake increase also shows how private-sector capabilities have changed. While KAI has strengths in developing complete aircraft such as fighter jets, helicopters and drones, Hanwha has built competitiveness in aircraft engines, radar, satellites and launch vehicles; LIG Nex1 in avionics and unmanned systems; and Korean Air in the maintenance and performance upgrade of drones and military aircraft. On the KF-21 as well, KAI builds the airframe, Hanwha Aerospace handles the engine, and Hanwha Systems is responsible for the active electronically scanned array (AESA) radar. If KAI's ownership structure is to be reshaped, the criteria should be not only the sale price but also the complementarity of the businesses, the capacity for long-term investment, and the ability to compete in the global market.
In 1993, the U.S. Department of Defense summoned the chief executives of major defense contractors to the Pentagon in what became known as the "Last Supper." With the end of the Cold War and cuts in military spending on the horizon, the department urged consolidation across the defense industry, after which large defense firms were born through combinations such as Lockheed with Martin Marietta and Northrop with Grumman. Of course, the case for consolidation is no license for restricting competition. In 1998, the U.S. government blocked Lockheed Martin's acquisition of Northrop Grumman, saying it could harm competition and innovation.
The combination of Hanwha and KAI must also find a solution that captures synergy without harming competition. The Fair Trade Commission should closely examine whether, if a major supplier takes part in KAI's management, there is any risk to independent parts selection or to the protection of competitors' technology and business information. If such concerns can be resolved, there is no reason to block consolidation. Building scale and business competitiveness while safeguarding the independence of the supply chain and market competition is also the government's responsibility.
What the government must protect is not its stake in KAI but the competitiveness of Korea's aerospace industry. The government should invest more boldly in technology and grow the market as the first customer for the products companies make. Now is the time to return KAI to the private sector.
