[Yang Nakgyu's Defence Club] Is LIG Nex1 Entering the Race to Acquire KAI?

Kang Guyoung Resigns with Three Months Left in Term
Successor Expected to Lead Sale...
LIG Nex1 Steps Up with Secured Funding

The early resignation of Kang Guyoung, CEO of Korea Aerospace Industries (KAI), has brought the issue of KAI's privatization back into the spotlight. As expectations grow that the next CEO?who will effectively be appointed by the government?will lead the privatization process, defense companies hoping to acquire KAI are moving quickly.

Yonhap News

According to industry sources on July 1, the largest shareholders of KAI are the state-run Export-Import Bank of Korea (holding a 26.41% stake) and the National Pension Service (holding 9.29%). Because the government holds a significant stake, KAI’s CEO has typically been a retired general or former government official who participated in the presidential campaign of the winning candidate. The CEO position at KAI is known to come with an annual salary in the 500 million won range and a three-year term.

Kang, who stepped down on this day after submitting his resignation following the launch of the new administration on June 4, fits this pattern. A graduate of the 30th class of the Air Force Academy, Kang served as the chairman of the “National Defense Forum with the People,” a group of military officers who supported former President Yoon Suk-yeol during the last presidential election.

KAI CEO Appointments Dominated by Political Connections

The negative effects of such politically appointed CEOs have been serious. Immediately after taking office, Kang carried out a major executive reshuffle. Over a span of three months, more than 20 executives left the company. The resulting vacancies were filled by individuals from the Air Force and from organizations where Kang had previously worked. The indiscriminate hiring of personal acquaintances significantly damaged the organizational culture. One retired Air Force general hired during this period was even investigated by the local labor office over allegations of workplace abuse. Under Kang’s leadership, KAI received extremely low scores in a comprehensive defense technology protection audit. Indonesian engineers were caught attempting to leak internal KF-21 data. Although Kang submitted a petition to prosecutors requesting leniency for the Indonesian engineers, Indonesia has yet to pay its promised share of the KF-21 program costs.

Successor Expected to Lead KAI Sale

Kang Eunho, former head of the Defense Acquisition Program Administration, is being mentioned as a possible successor. During the Lee Myung-bak administration, Kang served as the senior defense administrative officer at the presidential office, and in November last year, he worked as a defense industry advisor for Democratic Party leader Lee Jaemyung. Initially, Kang was expected to take on a defense-related role in the current presidential office. However, now that he is a candidate for KAI CEO, industry reactions are negative. Some in the industry argue that appointing a former agency head as CEO of a defense company would create conflicts of interest. Ryu Kwangsoo, former executive vice president at Hanwha Aerospace, is also being mentioned, but there are concerns that returning to his former company would be inappropriate. While some in the defense industry argue that swift privatization should take precedence over political appointments, there is also a consensus that a capable leader is needed to oversee the acquisition process.

Hanwha and LIG Nex1 Likely to Join Acquisition Race

KAI privatization efforts have been made in the past. Korean Air and Hyundai Heavy Industries previously attempted to acquire KAI but failed. If the current administration pushes for privatization, Hanwha and LIG Nex1 are considered the most likely contenders. If Hanwha Group acquires KAI, it would become a comprehensive land, sea, and air defense company?essentially “Korea’s Lockheed Martin.” There are concerns that this could allow Hanwha to dominate the defense industry ecosystem. Some also argue that Hanwha is already stretched thin, as it is focused on maintaining, repairing, and overhauling (MRO) U.S. naval vessels through Austal and Philly Shipyard.

LIG Nex1 Has Already Secured Funding Through LG Affiliates

LIG Nex1 remains determined to acquire KAI. LIG Nex1’s strength lies in guided weapons, but the avionics, engines, and radars for these weapons are produced by Hanwha affiliates. There is a growing sentiment that, for the sake of balance in the defense industry, LIG Nex1 should take charge of the aerospace sector. However, securing acquisition funds remains a challenge. With LG Group affiliates participating, LIG Nex1 could enter the acquisition race. The industry estimates that acquiring the stakes held by the Export-Import Bank of Korea and the National Pension Service in KAI would cost around 3 trillion won. If LG Group affiliates invest 70% of the funds and LIG Nex1 covers the remaining 30%, the acquisition is considered fully feasible.

An industry insider said, “In the past, Hyundai Motor and Poongsan considered acquiring KAI through equity participation but failed. If LIG Nex1, which has been preparing for the acquisition for the past two years, succeeds, it could create a two-strong system in the defense industry alongside Hanwha.”