KAI Union Warns Against Hanwha Stake Increase

The Korea Aerospace Industries (KAI) labor union has raised concerns over Hanwha Group's increasing stake in the company, urging the Fair Trade Commission to prevent the business combination. The union's opposition stems from potential conflicts of interest and information leaks, given Hanwha's dual role as KAI's supplier and competitor in the space industry.

However, the union acknowledges that defense industry procurement and costs are managed by the government, making it challenging for Hanwha to unilaterally control KAI's supply chain. The KAI union issued a statement opposing Hanwha's management participation on August 12. Hanwha Group had been purchasing KAI shares since November of the previous year, securing a 15.89% stake as of August 10, which was later changed to 'management participation.'

Consequently, this stake now falls under the Fair Trade Commission's business combination reporting and review.

As an example, the KF-21 engine, a representative defense material, is not procured by KAI. Instead, Hanwha Aerospace signs a contract directly with the Defense Acquisition Program Administration. The engine supply contract for the initial mass production of the KF-21 is approximately 1.1794 trillion won (about $830 million). KAI is responsible for system integration, developing and mass-producing finished aircraft, rather than procuring engine components.

Government-defined defense materials and defense contractors' costs are managed through the Defense Acquisition Program Act, which requires approval from the Minister of the Defense Acquisition Program Administration and the Minister of Trade, Industry and Energy. The union also cited the Hanwha-Ocean business combination as a precedent, highlighting that the Fair Trade Commission extended the implementation period of corrective measures for three years, indicating that competition concerns have not been resolved.

The union's stance is supported by the fact that costs for defense contracts are calculated according to government cost accounting regulations, making it difficult for a major shareholder to set prices arbitrarily like a general civilian enterprise. The business combination's impact on the aerospace sector needs to be separated from the competitive structure of the entire defense market, as there are still separate major operators in each field, such as Hyundai Rotem, LIG Nex1, and HD Hyundai Heavy Industries.

Experts argue that domestic defense contractor integration is crucial for survival in global markets. Nevertheless, Kim Ho-sung, president of the Korean Association of Defense Industry Studies, maintains that even if KAI is acquired by Hanwha, it will still operate as a separate legal entity, and the engines are already manufactured by Hanwha Aerospace, so major problems are not expected.