China sees an exodus of South Korean giants as relations wane

CHINA’S appeal as a gold mine for foreign businesses is waning, and while some multinationals ponder their future in the world’s biggest consumer market, one group of companies is already headed for the exit.

South Korean firms are at the vanguard of what’s threatening to be a global shift away from China, with the higher tariffs and inconveniences of the trade war now compounded by disruptions wrought by the country’s zero-tolerance approach to Covid-19.

Retail giant Lotte Group, known for its department stores and supermarkets, is in the final stages of shutting its China headquarters and is pivoting its focus to other Asian markets, a person familiar with the situation told Bloomberg News, asking not to be identified because they’re not authorized to speak publicly.

Seoul-based cosmetics maker Amorepacific Group has closed more than 1,000 stores as the disruptions of the pandemic added to worsening consumer confidence in China, though it’s seeking to push more sales online.

Meanwhile, Korean manufacturing giants like Samsung Display Co. and LG Electronics Inc. are already selling off or shutting some factories in China, pressured by cheaper local rivals. They’ve also grappled with the uncertainty caused by China’s ongoing and intensive lockdowns.

“China is not a land of opportunity anymore for Korea,” said Scott Kim, who formerly worked as head of Shanghai and Beijing offices at Kotra, a unit under the Korean trade ministry. “China’s zero-Covid policy is too much, and Chinese companies are catching up with Korean companies. It would be better for Korean companies to abandon their fantasy about making money in China.”

It’s a sea change for Korean companies that in recent decades had joined Western peers in betting much of their future growth on the giant pool of consumers across the Yellow Sea, helped by the cultural influence of Korean entertainment, makeup and fashion. China’s total retail sales reached 44 trillion yuan ($6.6 trillion) in 2021, including 402.6 billion yuan spent on cosmetics, according to government data.

But the seeds of the Korean retreat predate the virus curbs that are disrupting global supply chains and even the trade war, which triggered an initial rush by manufacturers to diversify their operations to places like Vietnam. South Korea and its companies landed in Beijing’s cross-hairs in 2017, when China channeled its anger at Seoul agreeing to host a US anti-missile system into consumer boycotts and bans. Korea’s close diplomatic ties to Washington are an ongoing source of tension with China.

About 86% of 131 South Korean companies surveyed by the Federation of Korean Industries said in December that business conditions in China had deteriorated over the past decade. Political risk was the biggest reason, followed by discrimination against foreign companies, US-China trade conflicts, stricter environmental regulations and higher production costs.

About 80% of the 108 firms that have moved back to South Korea since 2014 had quit China, according to Korea’s Ministry of Trade, Industry and Energy.

And once they exit, they aren’t likely to return to China with new investments, said Han Jong-Hoon, deputy general manager at the Federation of Korean Industries.

No Korean company encapsulates the country’s difficulties in China quite like Lotte. The retail conglomerate’s aggressive expansion in the nation since 2008 hit a snag in 2017 when it agreed to provide land to the South Korean government to house the US missile defense system known as Thaad. The backlash from China, which saw the system as a threat, was swift and Lotte’s business there never recovered.

A Lotte company representative declined to comment on its operating outlook in China.

Amorepacific earned 208 billion won ($165 million) in China in 2016, its biggest market outside of Korea, before the missile-system scandal hurt demand for Korean goods in China and stanched Chinese travel to Korean duty-free shops. The company is now expanding into the US and Southeast Asia, and shifting its focus to online sales and premium brands like Sulwhasoo.

Meanwhile, with President Joe Biden wanting to make the US a center for electric vehicle production and supply chains, Hyundai Motor Group is increasing its planned investment in America to more than $10 billion by 2025, and Samsung Electronics Co. is building an advanced chip plant at its sprawling $17 billion complex in Austin, Texas.

It’s near-impossible for Korea’s corporations or those from any other country to completely break their reliance on China. About 80% of Korea’s 228 most-needed import goods, including raw materials like graphite used in EV batteries, an industry Korea is trying to dominate, come from China, according to Namsuk Choi, an international trade studies professor at Jeonbuk National University.

Still, the Korean government is trying to help reduce companies’ reliance on China. They launched a task force to help private companies diversify their sources of key raw materials, particularly inputs for semiconductors, batteries, petrochemicals and automobiles, according to the Korea International Trade Association. Companies are also making their own efforts, with LG Energy Solution Ltd. signing an agreement with Chilean giant SQM to provide an alternative source of lithium.

For some companies, moves in China are more about streamlining than a complete exit. Samsung SDI Co. closed two battery-pack plants last year to focus on its battery cell business. Samsung Display sold its LCD plant to a Chinese company in 2020 but will continue run two factories that make modules for OLED panels. LG Electronics Inc. shut two units in China last year, though still runs 16 units.

For businessmen like Park Sang-Min, who’ve bet their careers on the China opportunity, uncertainty reigns.

“I don’t know what to do — I still can’t decide whether I need to stay here or pack everything and go back to South Korea,” said Park Sang-Min, a 49-year-old Korean businessman who runs a marketing and online platform business in China, where he has lived for two decades. “The ‘China risk’ is unpredictable.” — Bloomberg