SK Group

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SK Group

99 Seolin-Dong
Chongno-gu
Seoul,
South Korea
Telephone: (82 822) 2121 5114
Fax: (82 822) 2121 7001
Web site: http://www.skgroup.com

Public Private Company
Incorporated: 1953 as Sunkyong Textiles Ltd.
Employees: 43,600
Sales: KRW 60 trillion ($64 billion) (2006)
Stock Exchanges: Korea
Ticker Symbol: SK
NAIC: 551112 Offices of Other Holding Companies; 211111 Crude Petroleum and Natural Gas Extraction; 324199 All Other Petroleum and Coal Products Manufacturing; 517212 Cellular and Other Wireless Telecommunications; 517110 Wired Telecommunications Carriers

SK Group is South Korea’s fourth largest conglomerate, or chaebol, overseeing an empire of more than 50 companies—12 of which are listed on the Korea Stock Exchange. Yet unlike its often wildly diversified chaebol counterparts, SK Group has remained a relatively focused group, with most of its operations forming a part of its long-standing “petroleum-to-fibers” vertical integration strategy. The cornerstone of SK Group is its Energy & Chemicals division. The main asset in this division is SK Corporation, South Korea’s leading oil company, and one of the largest in the Asian region. SK Corp generates nearly 40 percent of SK Group’s total revenues, and is one of its primary profits generators. SK Corp is active in oil exploration and drill, is the largest oil refiner in Korea, the leading producer of lubricants, and manufactures a wide range of other petrochemical products.

Other companies in the Energy and Chemicals division include fibers producer SK Chemicals; SKC Company, which produces polyester films, and magnetic tape and optical media; and SK Gas, the leading wholesaler and distributor of liquefied natural gas in South Korea. SK Group’s second largest division is its Telecommunications division, focused primarily around SK Telecom, South Korea’s leading telecommunications company, which claims a 50 percent share of the country’s mobile telephone market. SK Telecom generates more than 22 percent of SK Group’s revenues.

SK third major division is Trading and Services. This division includes SK Networks—the new name for scandal-plagued SK Global—which provides marketing and distribution support for much of the products produced by the SK Group. As such, SK Networks produces revenues of $13.6 billion. Other operations in this division include SK Engineering & Construction, which operates worldwide; and SK Shipping, which operates a fleet of more than 130 vessels, providing logistics and support to other SK operations, as well as to third parties. SK Group is led by chairmn Tae-Won Chey, nephew of the SK Group’s founder.

TEXTILES FOR POSTWAR SOUTH KOREA

SK Group’s growth into one of South Korea’s top four chaebols —a type of highly diversified, tightly controlled and family-run conglomerate that dominated South Korea since the 1950s—was all the more impressive given the company’s decidedly humble origins. Founded in 1953, just after World War II, the company started out as a textile producer called Sunkyong Textiles. Founder Jong-Kun Chey correctly recognized that clothing and other textiles would come into high demand from the ravaged South Korean population as it rebuilt from the civil war, and he launched production that year in a small factory with just 15 looms. The company soon incorporated the use of manmade fibers into its production, which allowed it to enter the lucrative market for artificial silks. The company continued to invest in new equipment, and by the early 1960s had expanded its production room to more than 300 looms. Sunkyong had also launched its first brand by then, a line of silk bedding under the Phoenix name, introduced in 1958. By 1962, the company had launched its first exports, to Hong Kong, and by 1963 had acquired the exclusive right to export artificial silks to Hong Kong.

The South Korea of the early 1960s remained quite impoverished, with an average annual per-capita income of barely more than $100. Nonetheless, the arrival of the military government, and the launching of a series of five-year plans, were to transform the country in a radical way. Sunkyong remained a relatively small textiles producer through much of the decade, but it had begun to nurture its own ambitions to diversify. During the decade, Chey led the company into a number of new areas, notably the production of polyester fibers, launched under the future SK Chemicals in 1969. In that year, the company formed a joint venture with Deijin Japan, called Sunkyong Artificial Textiles. By the end of the year, the company had begun its first artificial textiles exports to Germany and Japan. Although these operations remained within the scope of Sunkyong’s original textile market, other business ventures took on more of the aspect of the typical chaebol —including the company’s purchase of Seoul’s Walkerhill hotel in 1973.

That year marked another turning point for the company, however, when Jong-Kun Chey died of a heart attack at the age of 47. Leadership of Sunkyong was taken over by Chey’s younger brother Jong-Hyon Chey, who had joined the company in 1962, upon his return to South Korea after pursuing his studies in the United States since 1954. Chey—who had originally thought about becoming a journalist or going into politics—instead took a chemistry degree at the University of Wisconsin, then earned an M.B.A. at the University of Chicago.

Chey soon set out to transform the still-small textiles company into one of South Korea’s largest corporations. From the start, Chey established Sunkyong’s difference from South Korea’s other rapidly sprawling, highly complex chaebols. Instead of seizing any opportunity to expand, Chey developed a vertical integration strategy for the company, seeking to gain control of its entire production chain—including its raw materials supply. To this end, Chey founded Sunkyong Petroleum in 1973. By 1975, Chey had refined his vertical integration strategy, which was launched under the title “From Petroleum to Fibers” that year. Among the company’s first moves toward vertical integration came in 1976, with the founding of SKC Company, which began producing polyester film just one year later. By the end of the decade, SKC had begun to branch out. In 1979, for example, the company became the first in Korea, and only the fourth in the world, to produce magnetic tape for VHS recorders. Meanwhile, in recognition of its increasing focus beyond the textiles industry, Sunkyong Textiles changed its name, to Sunkyong Ltd., in 1975.

COMPANY PERSPECTIVES

Merely not satisfied with the results we achieved in our core business areas of energy, chemicals, and telecommunications, we are putting efforts to breathe in new value in these areas to raise Korea’s competitiveness.

Specifically, we will strengthen and pursue related new businesses in our energy and chemicals areas, which have contributed greatly to the industrialization of Korea, and as one the world’s leading telecommunications service providers, steer the ubiquitous era via digital convergence.

BUILDING PETROLEUM BUSINESS IN 1980

A major step forward in the company’s vertical integration strategy came in 1980, when Sunkyong acquired the 50 percent stake held—in partnership with the Korean government—by Gulf Corporation in Korea Petroleum Corporation. Founded in 1962, Korea Petroleum had grown into a major South Korean oil refiner by the time Sunkyong entered its capital. Soon after, management of Korea Petroleum was transferred to Sunkyong, in keeping with the South Korean government’s policy of privatized industry. By then, South Korean had begun its astounding growth, transforming itself from an economic backwater into one of the world’s leading economic and industrial centers in little more than two decades. The country’s growth in turn enabled Sunkyong to develop into one of the country’s top corporations.

Korea Petroleum was renamed Yunkong Co. Ltd. in 1982, then listed on the Korea Stock Exchange in 1984. The takeover of that company also boosted another relatively new area of Sunkyong’s operations, formed as Sunkyong Construction in the 1970s. Sunkyong gained Korea Petroleum’s own expertise in the construction and engineering market, notably in refinery construction: the company built South Korea’s first naphtha cracker in 1972. Later renamed as SK Engineering & Construction Co., this operation completed a number of large-scale projects in Mexico, Brazil, Kuwait, Colombia, the United States, and elsewhere, as well as the future SK Corporations new refinery complex, which was the largest in the world. By the early 2000s, SK Construction & Engineering had grown into a global business with revenues of more than $2.2 billion per year.

In the meantime, Sunkyong continued in its drive toward full vertical integration. By 1983, Yukong had launched its first oil exploration operations. The company also expanded its refinery capacity, and by 1985 had reached a total capacity of 345,000 barrels per day. Also that year, the company launched production at a new aromatic complex. By 1988, Yukong had begun to import oil from one of its first successful exploration ventures, off of the coast of Yemen.

At the other end of the vertical integration spectrum, Sunkyong had been steadily developing its international trade wing. Starting in the 1970s, the company had established a growing number of branch offices, including its first in New York in 1971, in support of its textiles business. By the end of the decade, the company had added offices in London, Sydney, Frankfurt, Los Angeles, Amsterdam, Hong Kong, Caracas, Sweden, Cairo, Tehran, Vienna, and Tokyo, among many others, extended its trading operations to include the full range of products manufactured by its diversified operations. The company’s international expansion drive achieved impressive results; by 1985, the company’s exports topped $1 billion. The company’s trade operations, which represented a continuation of the original Sunkyong Textiles’ marketing and trade arm, were later brought under the name of SK Global Company, and then SK Networks from the early 2000s. Among this subsidiary’s businesses was the operation of the SK’s 3,700-strong service station network in South Korea.

MOVE INTO TELECOMMUNICATIONS IN THE 1990S

By the early 1990s, SK had successfully completed its petroleum-to-fibers vertical integration strategy. The company had also risen to become South Korea’s fifth largest chaebol, trailing only Hyundai, Samsung, Lucky-Goldstar (later LG), and Daewoo, with more than $14 billion in total revenues. Some 58 percent of that total was generated by the group’s integrated petroleum and chemicals holdings. The company had also begun to expand its production beyond South Korea, launching a polyester filaments plant in the United States, under subsidiary SKC America, in 1989. Later, the company added plants in the United Kingdom and Mexico, among other markets.

KEY DATES

1953:: Jong-Kun Chey founds Sunkyong Textiles Ltd. in South Korea.
1972:: Younger brother Jong-Hyon takes over company after Jong Kun Chey dies of a heart attack.
1975:: Vertical integration strategy “From Petroleum to Fibers” is launched.
1980:: Fifty percent and management control of Korea Oil Corporation is acquired and later renamed as Yukong.
1991:: Telecommunications industry is entered through launch of Daehan mobile telecom subsidiary.
1997:: Company acquires Korea Mobile Telecom, which is merged into Daehan to create SK Telecom.
1998:: Death of Jong Kun Chey; rebranding of all operations under SK brand; Yukong becomes SK Corporation.
2007:: As part of commitment to new corporate governance initiative, SK Corporation spins off shareholding assets into separate company, SK Holdings.

With the completion of its vertical integration strategy, SK began seeking a new market for its business expansion. The company targeted the highly promising mobile telecommunications market, forming subsidiary Daehan Telecom in 1991. That company was awarded a cellular communications contract from the Korean government in 1992. The company was forced to turn down that contract after the government faced charges of favoritism—Chey’s son was married to the daughter of Korean president Roh Tae-Woo.

Sunkyong’s telecom ambitions to become a major player in the South Korean telecoms market remained undeterred. By 1997, the company had achieved its goal, when it succeeded in acquiring Korea Mobile Telecom. The company then merged its Daehan operations into Korea Mobile, rebranding the business as SK Telecom. The combined operation made Sunkyong the leading mobile telephone services provider in Korea, claiming a 50 percent market share.

Sunkyong changed its name in 1998, becoming SK Group. That year also marked the death of Jong-Hyon Chey at the age of 68. By then, Chey had guided SK Group to a position as South Korea’s fourth largest chaebol, with revenues of more than $30 billion. The company then rolled out the SK brand across its entire network of companies, including Yukong, which changed its name to SK Corporation in 1997.

PLACING BETS ON CHINA FOR THE NEW CENTURY

Chey’s nephew Tae-Won Chey took over as head of the SK empire in 1998, at a time when the chaebol system, and the dominance of just a few families over most of the South Korean economy, had come under increasing criticism. SK’s relatively focused, vertically integrated operations enabled it to weather the financial crisis that rocked Korea in the late 1990s.

Nonetheless, the company found itself embroiled in scandal at the beginning of the 2000s, after accounting irregularities at SK Global—the company was accused of inflating its profits by more than $1.2 billion—resulted in the arrest and conviction of ten of its senior executives, including Tae-Won Chey. Released from prison after only a few months, Chey managed to resist efforts by minority shareholders’ to have him removed from the chairmanship. In 2005 was given a new vote of confidence, winning election to a new three-year term as chairman.

Chey’s survival came in part from his willingness to reform the SK Group, and especially its corporate governance. Over the next several years, SK Group pushed through a restructuring of the group in order to eliminate much of the intricate cross-shareholding that had long ensured family control of South Korea’s chaebols. This process continued into 2007, when SK Corporation—which had become the de facto holding company for the SK Group in the late 1990s—announced its intention to streamline itself as solely an operational company. As part of that process, expected to be completed in July of that year, SK Corporation promised to transfer its extensive shareholdings in other SK Group companies to a new holding company, SK Holdings. This move followed SK Corporation’s acquisition of struggling Korean rival Incheon in 2006, a move that helped place SK Corp among the leading Asian petroleum groups.

In the meantime, SK Corporation, as well as the rest of the SK Group, had developed a new strategy, targeting the Chinese market for its future growth. Into the middle of the first decade of the 2000s, the company multiplied its operations in China, starting from its Beijing office, which opened in 1991. In 2000, for example, SK Telecom formed a joint venture with GameKing, the leading game developer in China. In 2002, the company built its Life Science Research Institute, in Shanghai, which was then the center of its operations in that market. By 2004, the company had established a dedicated subsidiary for its growing range of operations in China, called SK China Holding Co., Ltd. The following year, the company’s SK Engineering and Construction Corp. formed a partnership with Forte Group, also in Shanghai. SK Telecom, too, made its drive into China, forming a partnership in 2007 with several Chinese operations to introduce its TDS-CDMA technology into the Chinese market. With total revenues of more than $60 million, the diversified SK Group promised to remain one of South Korea’s leading companies in the new century.

M. L. Cohen