South Korea’s ramped up FDI regulation hinders Chinese semiconductor and biotechnology M&A attempts

News Analysis 6 January

South Korea’s ramped up FDI regulation hinders Chinese semiconductor and biotechnology M&A attempts

  • NASIA strengthens existing FDI regulation of ‘national core technologies’
  • Chinese investments in sensitive sectors face deep scrutiny, longer reviews
  • Cowin DST suitor Focuslight expects to hear from MOTIE in February
  • Ramped up FDI screening comes after government found over 100 tech leakages

The South Korean government’s strengthening of its foreign direct investment (FDI) screening process, which is aimed at preventing the overseas leakage of strategic high technology, is stifling Chinese attempts to invest in the country’s semiconductor and biotechnology sectors, two lawyers told this news service.

The comments come after the Korean government, last year, enacted The National Advanced Strategic Industries Act (NASIA), which strengthens existing FDI regulation concerning industries and technology deemed strategically important.

Semiconductors and biotechnology have been a particular focus of Chinese companies over the past few years, but uncertainty around the need to seek Korean FDI regulatory approval for deals together with lengthy reviews has increasingly become a major problem for them, said one of the lawyers.

The lawyer, who specialises in China-Korean M&A, said some Chinese companies, upon learning that it will likely take them a long time to resolve regulatory concerns, have been abandoning plans to invest in, or buy, Korean companies.

There is little publicly available data on review timelines, said the lawyer, but the consensus amongst deal advisors is that reviews of Chinese investments in sensitive domestic businesses by the Ministry of Trade, Industry and Energy (MOTIE), which overseas Korea’s FDI regime, take around seven to eight months. They also involve more meetings with government officials than reviews of deals involving other foreign acquirers, which last around five to six months, said the lawyer.

According to Dealogic data, China mainland and Hong Kong headquartered entities have accounted for around 36% (45) of the estimated 122 foreign announced Korean inbound deals or investments into semiconductor or bio-healthcare businesses since January 2010. Almost a third (14) of these announcements failed to result in a completed deal, according to the data.

The most high-profile transaction impacted by FDI regulation in recent years was the March 2021 announced USD 1.4bn sale of Korean-based Magnachip Semiconductor [NYSE:MX], an OLED driver IC developer, to Chinese private equity firm Wise Road. Despite initially not being conditional on either US or Korean regulatory approval, MOTIE, in June, issued a draft classification of its technology as being a “national core technology (NCT)” and claimed jurisdiction over the deal as did the US national security watchdog (CFIUS). The deal was abandoned in December 2021.

Other notable deal failures include Tsinghua Unigroup’s 2015 rejected attempt to acquire a 20% stake in Korean semiconductor giant SK Hynix [000660] and the failure in 2016 of another subsidiary of Tsinghua Holding to secure an approx. 30% stake in biomedicine maker Binex Co reportedly due to “soured” diplomatic relations between China and South Korea.

As reported, one ongoing deal that MOTIE is scrutinising is Xi’an Focuslight Technologies's [STAR: 688167] USD 50.95m (CNY 349.7365m) September announced bid for Korea-based Cowin DST, which is a loss making company that produces display panel repair equipment.

If Cowin DST has OLED related technologies, the deal will be closely looked at under both NASIA and NCTs regulation, the second lawyer said. Accordingly, MOTIE will very likely be strictly reviewing the Cowin DST’s potential sale, the lawyer added.

According to one of four 22 September Focuslight regulatory filings, the deal faces ‘transaction approval risk” related to the requirement to gain Korean and Chinese government clearance. Speaking in mid-December a spokesperson for Focuslight told this news service that it expects to update the market on the deal when it receives material feedback from the Korean regulators likely in February.

A report published this week by iMedia, a Chinese news outlet, said that despite Cowin DST’s weak financial state, it is “one of the few equipment companies in the world to have mastered all LCD/OLED laser repair technologies” and the acquisition will help Focuslight “accelerate its semiconductor laser annealing system [capability] and break the foreign monopoly and achieve ‘import elimination’”

Leaks led to ramped up FDI regulation

The second lawyer said Korea’s increased scrutiny of FDI in sectors deemed strategically important follows evidence in recent years of significant technology leakage to China. The lawyer said that, from 2015, Chinese display companies showed huge improvement in their LCD related technologies and have produced OLED products more actively. This may have caused MOTIE to review Chinese companies’ M&A with Korean companies more strictly [than deals involving other international buyers], the lawyer said.  

According to the Korean government's plan for technology protection, which was published in December 2021, domestic industrial technology leaks overseas occur in globally competitive industries such as semiconductors, OLEDs, secondary batteries, and shipbuilding. The Korean government detected 24 technology leakage cases in 2017; 20 cases in 2018; 14 cases in 2019; 17 cases in 2020; and 11 cases up to June 2021. SMEs with poor security capabilities accounted for a high proportion of leaks, according to the report.

“The National Advanced Strategic Industries Act (NASIA), which came into effect in August 2022, was enacted [as a result of sensitive technology leakages to China],” the second lawyer added. NASIA will eventually become legal guidelines for MOTIE, the lawyer added.

The newly enacted NASIA is designed to define “the most important technology among the ‘national core technologies’ as ‘national high-tech strategic technology’”, the second lawyer said.  Many parts of the NASIA’S “national high-tech strategic technologies” and the NCTs overlap, such as OLED related technologies, the lawyer said.

On 4 November 2022, the National High-Tech Strategic Industry Committee (NHTSIC), which is overseen by the prime minister, specified what constitutes “national high-tech strategic technologies”. These are semiconductors, displays, secondary batteries, automobile technology, hydrogen, space and aviation, food, fiber, and solar tech.

According to NASIA, Korean companies with “national high-tech strategic technologies” that plan to seek FDI are required to give MOTIE advanced notice of their intentions. They are also required to “immediately” report to MOTIE whenever they become aware of any foreign companies trying to invest in or acquire them.

Furthermore, NASIA requires foreign companies that hope to acquire, merge with, or invest in Korean companies with national advanced strategic technologies, to report to MOTIE “prior” to agreeing any deal. For the reported FDIs, MOTIE may order suspension, prohibition, or restoration.

NASIA comes with strong criminal penalties, the second lawyer said.

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