Employees at the three domestic power equipment makers (HD Hyundai Electric, Hyosung Heavy Industries, LS Electric) are letting out happy screams these days. They say in unison, "We expected the market to improve, but we didn't think the day would come this quickly when we could sell transformers at such high prices."
According to the industry on the 20th, the operating margin of HD Hyundai Electric, Korea's No. 1 power equipment maker, is expected to reach about 27% this year. Just seven years ago, it posted consecutive losses and was treated like an ugly duckling within the group, but it has now firmly established itself as a cash cow.
Securities firms say that if you look only at the power equipment and heavy industry segments of LS Electric and Hyosung Heavy Industries, their operating margins will top 18%. Compared with the average operating margin of domestic manufacturing at 7.1% as of the third quarter of last year, the prevailing view is that the power equipment business has entered the "dream margin" zone.
This boom stems from an explosion in demand for ultra-high-voltage transformers—high-priced gear—driven by the data center investment frenzy sparked by artificial intelligence (AI). On top of that, the strong dollar has helped, and Korea's power equipment industry is, literally, raking in money.
HD Hyundai Electric, which is expected to have logged more than 900 billion won in operating profit last year, paid employees a performance bonus at the end of last month equal to 1,195% of their contracted wages, including base salary. That is the highest payout ratio among HD Hyundai affiliates. Employees at rivals Hyosung Heavy Industries and LS Electric are also buoyant, expecting record bonuses.
◇ Big Techs line up and add premiums amid a shortage of ultra-high-voltage transformers
The strong market is expected to continue for the time being. Order backlogs at domestic power equipment makers are filled through 2028. With supply unable to keep up with demand, these companies have emerged as a "super subordinate with leverage," and can now pick and choose orders, favoring expensive, high-margin products.
Big Techs, in a rush to expand data centers, are lining up to receive ultra-high-voltage transformers quickly, even if it means paying a premium. As this seller's market continues, the three domestic power equipment makers filled more than half of last year's order backlog with U.S. orders, boosting profitability.
At HD Hyundai Electric, U.S. orders already account for more than 65% of the total backlog. An industry official said, "A higher U.S. share of orders means the quality of profit has changed," adding, "Profit margins on products for Big Tech data centers are typically more than 20% higher than orders from other regions."
◇ "Start with the pricey orders"… strategy to maximize profitability
Domestic power equipment makers are in fact pursuing a profitability-first strategy rather than simply bulking up sales. Samsung Securities and Kiwoom Securities forecast HD Hyundai Electric's operating margin this year at 27.9% and 27.2%, respectively. On Feb. 7, HD Hyundai Electric's revenue outlook for this year (435 billion won) came in about 10% below market expectations, briefly jolting the stock, but this is seen as a strategy to reject low-priced orders and selectively take high-margin ones.
Hyosung Heavy Industries is offsetting risks in its "aching finger," the construction institutional sector, with a boom in power equipment. As the expansion of its Memphis, Tennessee, plant—its U.S. production foothold—kicks into full gear this year, the share of high-margin U.S. orders is also expected to rise. Kyobo Securities projects the operating margin of the heavy industry institutional sector, which handles power equipment at Hyosung Heavy Industries, to reach 18.5% this year.
LS Electric, a latecomer in ultra-high-voltage transformers, is going through growing pains as it restructures its China subsidiary, but the industry expects profitability to improve once that is behind it. Kyobo Securities forecasts the operating margin of LS Electric's power equipment institutional sector at 18.4% this year. With production capacity at the Busan ultra-high-voltage transformer plant roughly tripling since late last year, the company is said to have entered its highest profitability zone since its founding.
◇ "At least three years of shortage"… preparing for the second supercycle
With power equipment makers simultaneously embarking on capacity expansions, some worry that oversupply could arrive sooner than expected. But the industry largely says a down cycle is still a long way off. That's because transformer manufacturing is largely handwork that requires skilled labor, which is hard to secure, making it impossible to expand production recklessly.
An industry official said, "Companies are approaching expansions cautiously, like tapping a stone bridge before crossing, so supply is expected to be short for at least the next three years," adding, "To prepare for the second supercycle, we are also accelerating research and development (R&D) in direct current (DC) and ESS (energy storage systems)." The power industry's race to innovate so as not to miss the flow of a supercycle unlike any seen before is expected to continue.