SK Hynix May Bring in Outside Investors for Honam Fab, Easing Multi-Trillion-Dollar Funding Burden

SK Hynix Inc. may be able to bring in outside capital when it builds a fabrication plant in the Honam region, easing a funding burden that has so far been constrained by group-structure rules. The Democratic Party and the government plan to loosen holding-company regulations through a special law to support construction of a semiconductor cluster in southwestern South Korea. The change would also help other advanced-technology companies attract external investment and bolster South Korea’s lead in artificial-intelligence semiconductors.

A draft amendment to the Special Measures Act on Strengthening and Protecting the Competitiveness of National High-Tech Strategic Industries, obtained by the Korea Economic Daily on July 13, includes the deregulation plan. The move comes about seven months after the government outlined plans to ease holding-company rules in a presidential policy briefing late last year. Democratic Party lawmaker Kim Won-i, who represented the ruling party as senior member of the National Assembly’s trade, industry, energy, SMEs and startups committee in the first half of the 22nd Assembly, prepared the bill in consultation with the Ministry of Trade, Industry and Energy and other agencies. The party and the government aim to pass it during the regular parliamentary session that begins in September.

South Korea’s Fair Trade Act currently requires a holding company’s grandchild subsidiary to own 100% of any great-grandchild subsidiary. SK Hynix is a grandchild subsidiary of SK Inc. Critics have said that requirement makes it difficult to move quickly on new semiconductor plants using outside funding. The amendment would add Article 34-2 to allow grandchild subsidiaries in designated advanced industries to hold as little as 50% of a jointly funded corporation treated as a great-grandchild company, provided the industry minister grants approval. The joint venture’s headquarters would have to be located outside the Seoul capital region. Kim said the bill is intended to preserve South Korea’s lead in AI semiconductors and create new growth engines by expanding advanced industries beyond the capital area under the government’s “five mega-regions and three special zones” strategy. He added that the party and the government would push to pass the bill in the regular session so the Lee Jae Myung administration’s southwest semiconductor cluster does not remain only a declaration.

Separately, the government held a national fiscal strategy meeting on July 13 and set next year’s total expenditure growth rate at “10% plus alpha.” It expects tax revenue to rise sharply on the back of a semiconductor boom and plans to draw up a record budget topping 800 trillion won ($578 billion).

SK Hynix, a grandchild subsidiary of SK Inc., would be able to split as much as half of fab investment costs with strategic and financial investors.

Advanced small and midsize companies would also become easier acquisition targets, and LG Energy Solution Ltd. could benefit from incentives for investment outside the capital region.

SK Hynix has been unable to bring in outside capital for semiconductor plants that cost trillions of won to build. Even as the planned investment in the Yongin semiconductor cluster in Gyeonggi Province expanded to 600 trillion won ($434 billion) from 120 trillion won ($86.7 billion) in 2019 over six years, the company had to shoulder the burden on its own. The reason is the Fair Trade Act’s requirement that a holding company’s grandchild subsidiary own 100% of any great-grandchild subsidiary.

According to the National Assembly and industry officials on July 13, the party and the government decided to sharply ease the great-grandchild rule as they push ahead with three mega projects. The move reflects a practical judgment that South Korea can no longer rely solely on regulation if it wants to maintain leadership in AI and semiconductors while also advancing regional decentralization. The two sides have spelled out conditions including a requirement that eligible entities be based outside the capital region and a dual-review process, and they aim to pass the bill in this year’s regular session.

Kim prepared the amendment in consultation with the Ministry of Trade, Industry and Energy and other agencies. The proposal takes concrete form about seven months after it was first announced at a presidential policy briefing late last year. It would ease the rule so a holding company’s grandchild subsidiary could own 50% of a great-grandchild subsidiary, down from the current 100%.

The bill comes with conditions. The great-grandchild company must have its principal office outside Seoul, Gyeonggi Province and Incheon. A provision the government had considered last year that would have created an exception for capital-region growth-management zones, including the semiconductor belt in southern Gyeonggi, was removed. To qualify, companies would need approval not only from the Fair Trade Commission but also from the National High-Tech Strategic Industry Committee under the prime minister’s office. Cases would be reviewed again every five years after initial approval. The bill also adds requirements including an advanced-company certificate from the industry minister and capital contributions from a high-tech strategic industry fund within the National Growth Fund. It also creates new special provisions for industrial complexes under Article 34-3 and related clauses. Land and factories in industrial complexes can usually be leased or disposed of only after construction is completed, but companies with nationally strategic technologies would be allowed to secure tenants before completion.

The party and the government plan to pass the bill during the regular National Assembly session that begins in September. Kwon Jae-yeol, a law professor at Kyung Hee University, said the Fair Trade Commission’s rationale for regulating holding-company ownership structures — curbing concentration of economic power — is a concept found only in South Korea among OECD members. Using the advanced-industry law to create a limited exception fits global trends and could also help speed the legislation, he added.

One of the clearest beneficiaries would be SK Hynix. Equipment costs have risen as memory-chip processes have shrunk into the low-10-nanometer range. Volatility in the memory market has also been a burden. SK Hynix posted record results in the first quarter of this year, but it reported an operating loss three years ago.

Companies such as SK Hynix would see a sharp reduction in upfront cash needs and borrowing pressure. They would be able to bring strategic investors and financial investors — including the National Pension Service, Korea Investment Corporation and Korea Development Bank — into a special-purpose company for fab construction and split roughly half the investment cost. An industry official said the structure would let companies spread investment risk with outside partners, preserving room for capital spending even if market conditions worsen. It could also help revive mergers and acquisitions of smaller advanced-technology companies.

Global companies already use joint-investment structures to reduce such risks. Intel Corp. adopted a “smart capital” strategy in 2022 and 2024 by setting up joint ventures with asset managers Brookfield and Apollo, respectively, to share factory investment costs. Industry participants say the framework could also be applied to other South Korean holding-company groups. LG Group could benefit if LG Energy Solution, a subsidiary of LG Chem Ltd., pushes ahead with large production facilities outside the capital region.

Lee Si-eun, Korea Economic Daily reporter see@hankyung.com

Kang Hae-ryeong, Korea Economic Daily reporter hr.kang@hankyung.com

Han Jae-young, Korea Economic Daily reporter jyhan@hankyung.com