In the finance literature, zombie firms are defined as firms who can generate cash flows barely covering its interest payments. These firms generally have lower operating efficiency and heavy debts relative to their industry peers. Since almost all of the fruits (cash flows) they generated are used cover their debt obligations, they have little capacity to do investments or R&D. These firms are “Zombies” simply b/c they cannot move.
However, this article from Financial Times about the “Zombie” chipmaker - SK Hynix tells a very different story. While SK Hynix is currently under the spotlight as the hottest company behind this AI infrastructure boom, it is not always the case in its history. Since its establishment in 1983 by Hyundai, Hynix was a creditor-owned “zombie” firm for many years following the 1997-98 Asian financial crisis and an early 2000s Dram glut.
Suitors came and went, including Micron, which offered $3.2bn in 2002 but without agreeing to take on Hynix’s $6bn of debts. The Hynix board rejected that deal. Not until 2011 did SK Group step in when it paid Won3.4tn to end what had become known as “the Curse of Hynix”.
Many internal opponents were horrified by the idea of taking over Hynix. “There was an outcry within SK Telecom,” says Lee In-sook, director of consulting firm Platform 9¾ and co-author of Super Momentum, a book on Hynix published last month. “They said, ‘If we take over that company, we will fail. We will only pour money into it and then we will go under too’.”
This trend did not change after SK group taking over Hynix for many year. In the figure below, although the revenue was trending upwards, earnings did not catch up. The “Zombie” situation was not resolved.
However, the turning point comes with the appointment of Park Sung-wook, a Hynix engineer veteran, as the CEO. He encouraged his team to prioritise long-term research over short-term financial performance. In particular, the company focued on developing the HBM technology when it is still at its infant stage and increased R&D spending approx. 14% per annum between 2010 and 2024. This bet does not turn into immediate revenue and profit booms as the market for application is too small, until the current AI boom. The groundbreaking introduction of ChatGPT and the surging demand for AI servers fueled substantial demand for HBM and SK Hynix’s long-term investments (bets) finally paid off.
In the literature, we generally think these Zombie firms are bad and useless. However, their existence may reflect the diversity of an economy and increase the resilence of an economy towards future shocks. Of course, doing nothing does not grant any zombie firms the privilage to survive, but SK Hynix's story suggests one channel to revive a zombie.
A very capital intensive business which has until AI been highly competitive and low margin. Given that every company materially involved in AI is in the process of designing their own chips, I’d have to guess the competitive landscape is going to change materially in the years to come. My guess is there will be no one big winner. The industry will continue to grow, but it will become more distributed and margins will once again fall to commodity levels. Regardless, never in the history of stock prices has a major vertical movement ever kept rising without major correction. – an interesting comment from one reader.