Thursday, September 14, 2006

When is your IP not your IP?

Welcome to Korea! You just spent millions of dollars to buy a failing Korean firm. It may have been tough, but you bought the thing. Now you own it lock-stock-and-barrel. Or do you?

If all the restrictions in Korea were not enough, there is a growing movement to restrict something else, technology. Over the past few weeks, three major cases have been put in the press about foreign companies who have the gall to buy Korean companies and their Intellectual Property and then use that IP outside Korea.

I do not want to raise larger issues about property rights, the rule of law, and perhaps cultural attitudes. However these cases should be noted as it should give a foreign investor pause as to why he is buying assets in Korea and the portability of those assets once (he thinks) he has purchased them.

In perhaps the case furthest along, a NGO and related labor unions have sued Sssangyong motor for, well, making a business decision from the Joongang:

Spec Watch Korea, a civic group that monitors foreign investors, and members of Ssangyong Motor Co.'s labor union yesterday filed a lawsuit against nine directors of the Korean car maker for allegedly stealing auto assembly technology from the company for its Chinese parent firm, Shanghai Automotive Industry Corp (SAIC).

In late June, Shanghai Automotive announced it will make Ssangyong Motor's sport utility vehicles in China through a licensing deal worth 24 billion won ($25 million). The pact sparked a massive protest among Ssangyong Motor workers here for "an unusually small amount of money" for a deal of its size.

Now I would assume that when SAIC bought Ssangyong for millions of dollars, part of that would include the intellectual property of the firm. This would include all plans, production methods, name plates, etc. The transfer cost of US$25 million, and whether or that is fair or not, is a bit of red herring if you ask me.

Moving on we now have the case of Daewoo Electronics. In perhaps one of the final chapters in the disintegration of the once huge Daewoo chaebol after the Asian Financial Crisis, Daewoo Electronics (a small piece of that) was sold to a consortium lead by an Indian electronics firm.

One would think this would be a cause to celebrate. This is a firm that has limped on long past the time a firm in the west would be taken out behind the barn and shot. It survived long enough to get a new life, and fresh capital. However that view is not the view shared by the CEO. The top paragraphs from his press conference announcing the deal:

There is no practical way to prevent Daewoo Electronics Co.'s technology from being leaked to India once it acquisition is final, said Lee Seung-chang, president of Daewoo Electronics.

Mr. Lee's remarks came at a press conference in Seoul yesterday.
Mr. Lee confirmed that a joint consortium of RHJ International, the holding company of the U.S. private equity fund Ripplewood, and India's Videocon Industries, was selected as the preferred bidder on Sept. 8.

"After the merger, 10,000 patents that Daewoo Electronics owns may be turned over to India's Videocon," Mr. Lee said.

No granted that was not the entire content of the press conference, but one has to wonder the motives behind this comments/questioning and how it was of such import that it was dwelt on long enough to be noted.

The final case is interesting somewhat due in part by the omissions by the reporter:

Korean management at BOE Hydis requested court protection in an August 8 petition to Seoul Central District Court, saying that there was a shortage of capital at the company. BOE Hydis said its situation was in part due to parent company BOE Group failing to invest in the firm. BOE Group is a China-based firm that took over the Korean firm Hydis in 2003.

Chung Nam-il, a leader of the labor union at BOE Hydis, said that BOE Group "has not invested [in Hydis] at all since 2003 when it took over the company. BOE only has an mind to drain away state-of-the-art core technologies at an unreasonably low price."

The BOE Group lent Hydis’ Advanced Fringe Field Switching (AFFS) technology to BOE’s Chinese affiliates in 2004. This year, the group’s Chinese affiliates tried to grab experts in the technology and bring them to China. This move was strongly resisted by creditor banks and the Korea-based company’s labor union. In addition, in 2004 BOE Group paid BOE Hydis 75 billion won (US$78 million) for using the technologies for 20 years, fueling controversy that the company had in effect been sold at a bargain rate.

The history left out of this article is the fact Hydis was once Hyundai Display Technologies. In other words it was part of Hynix nee Hyundai Electronics. The sale of Hydis to the Chinese firm was actually done at the behest of Korean government owned banks in order to shore-up Hynix.

In other words, the Korean government and all the stakeholders (even union leader Chung Nam-il) knew what they were getting into. They all agreed in some measure to both the sale of Hydis and the price. But for some reason its fine to buy the company to save Chung’s ass, but no to effectively leverage their assets.

Speaking of which I remember a scare tactic used by Hynix back then. When it was all but officially bankrupt, the company was desperate to keep going somehow. Part of this effort was to get more and more favorable terms from its creditors, who by this time were all government owned banks (Korea Exchange, Cho Hung, Korea Development Bank, et. al.). One of its negotiation cards was to discuss accepting a tender offer from an overseas company (with usually “Chinese” instead of overseas). Perhaps this is not a recent worry/phenomenon.

Consider yourself warned foreign investors.


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