Corruption Scandal Shakes Up KAI’s Vision for $10bn US Project
(Source: The Korea Herald; published Sept 19, 2017)
By Cho Chung-un
The South Korean government fears the corruption scandal that has engulfed Korean Aerospace Industries could derail Lockheed Martin bid for the US Air Force’s T-X program, which is based on KAI’s T-50 Golden Eagle jet trainer. (LM photo)
Until last year, Korea Aerospace Industries, the nation’s sole aircraft manufacturer, was riding high on the expectation of its increased entries into foreign markets with homegrown choppers and jets.

Speaking proudly of KAI’s fast technological advancement, then-CEO Ha Sung-yong told investors on Jan. 28, 2016 that the company aimed to become one of the top 15 aircraft manufacturers in the world by 2020. Its joint venture with US defense giant Lockheed Martin on the US Air Force’s trainer program, codenamed “T-X,” was a key to achieving the goal.

Despite its confidence at the time, the company has been backtracking since becoming mired in a corruption scandal. A few executives are suspected of accounting fraud and manipulating costs in manufacturing the multipurpose helicopter called Surion.

On Thursday, former CEO Ha was questioned by the prosecution, which believes that Ha -- a suspect -- gained illicit profits worth 10 billion won ($8.85 million) by inflating the prices of parts of the T-50 and FA-50 delivered to the Korean Air Force.

Since the investigation began in July, KAI’s stock value has been plummeting. The company hit a low on Aug. 14, reaching 35,750 won per share. The price has bounced back to the 46,000 won level this week, but uncertainty remains, said Lee Jae-won, an analyst at Yuanta Securities, citing delays of projects.

“We assume the Surion and the maintenance and repair operations program will be suspended and KFX sales growth may slow after the changes to the treatment of advance payment,” he said.

The biggest concern appears to be the company losing its credibility overseas, a crucial factor in business-to-government deals.

The upcoming T-X project is reportedly to be announced by the end of this year. US President Donald Trump’s election win was regarded as favorable for KAI, as Texas -- a US state where Trump won a majority vote -- is home to Lockheed Martin.

The Korean company said that it expects to generate around 38 trillion won of revenue if it wins its bid. During his official trip to the US, Korean President Moon Jae-in also reportedly requested Trump support the Lockheed-KAI venture, though he did not receive an affirmation from his US counterpart.

But the investigation into KAI could possibly affect the US government’s decision on the project, according to industry insiders.

Under the US public procurement law, the government is obliged to check the business integrity and honesty of contractors during the bidding process, they said.

The scandal itself has not led to any cancellations of KAI projects. But the governments of Indonesia and Thailand, which signed contracts with KAI, are said to have expressed concerns over the prosecution’s probe into the company. Lockheed Martin’s spokesperson in Seoul declined to comment.

Along with the credibility issue, KAI could also be suspended from trading its shares or delisted from the market if the prosecution or the state-run audit agency prove that executives including Ha had inflicted financial damages more than 2.5 percent of its net worth.

But the chances of the company being kicked out from the market are low, as there is no fresh evidence to prove their wrongdoings, said Lee Bong-jin, an analyst from Hanhwa Investment and Securities in a report. “If the prosecution found nothing new from the investigation, it is unlikely that the company will be delisted,” he said.

KAI is expected to gain momentum with a new CEO as well as the announcement of the T-X project in December, the analyst added.

The company has not begun looking for a new leader since Ha voluntarily stepped down in July.

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