Korean food companies worry about growing tension with Russia, China

Paldo co.’s instant cup noodles Dosirak for Russian consumers [Photo provided by Paldo]

South Korea’s food companies operating in China and Russia are worried sales could fall and business activities could stall as tensions with these countries mount ahead of President Yoon Suk Yeol’s state visit to the U.S.

Food companies with subsidiaries in China or Russia are closely watching Yoon’s seven-day state visit to the U.S., according to industry sources on Monday. They are keeping an eye out for any comments or behavior that may be perceived unfavorable by China and Russia. Earlier, the two countries criticized Yoon for commenting on Ukraine and Taiwan in an interview before his trip.

Paldo Co., Orion Corp. and Lotte Wellfood Co. have businesses in Russia. These three companies have a strong foothold in the market based on their local production facilities and aggressive localization strategies. Paldo’s Dosirak instant cup noodles are widely popular among Russian consumers. The product alone generates about 300 billion won ($224.9 million) in sales per year.

Orion’s Russian subsidiary saw a 79 percent increase in sales from a year before, and sales at Lotte Wellfood’s subsidiary there grew by 53 percent.

Robust growth in local business has led to aggressive investment. Paldo took over the Russian business of Spanish food company GB Foods SA in October. Earlier this year, Lotte Wellfoods invested 34 billion won into a local subsidiary to expand its production facilities and warehouse space. Orion began operations at its third new plant in Russia last year.

In China, Korean companies have learned the lessons in the past in terms of business operations there after 2016 when many Korean companies were targeted in China in retaliation for deploying Terminal High Altitude Area Defense (THAAD) anti-missile system in Korea. Global corporations consider China to be one of the most politically risky countries to do business due to its government.

Orion’s Chinese subsidiary posted 1.33 trillion won in sales in 2015, but saw that nearly halve to 794.8 billion won in 2017 following Beijing’s reaction to the anti-missile defense system in Korea. The company has since not recovered its business to its pre-THAAD levels.

CJ Cheiljedang Corp. headquarters [Courtesy of CJ Cheiljedang]

Other Korean companies that operate factories in China are also concerned. CJ Cheiljedang Corp. is doing pretty well in China thanks to the growing popularity of its brand Bibigo. The brand’s dumplings saw sales of 7 billion won in 2015, but that jumped to 160 billion won in 2020 thanks to the popularity among young Chinese consumers. The company’s Chinese sales have since grown to 457.4 billion won, up more than 20 percent from a year before.

Pulmuone Corp. completed its second factory in Beijing last year, equipped with some of the most advanced tofu production facilities. Daesang Corp.’s health food business, Daesang Life Science, formerly known as Daesang Wellife Corp., teamed up with a local Chinese company to target the Chinese health supplements market. Daesang signed a letter of intent to establish a joint venture with China Sinopharm International Corp., commonly known as Sinopharm International, and a subsidiary of China National Pharmaceutical Group Co. (Sinopharm), the largest local pharmaceutical group.

In January, Lotte Chilsung Beverage Co. established a local subsidiary in Shanghai, moving from Beijing to further expand its business across the country. “Korean companies are doing well thanks to higher standards in quality and credibility among Chinese consumers, particularly after Covid,” said an industry insider.

Other Korean food companies doing business in China include CJ Foodville Co., which runs the Tous les Jours franchise bakery, Kyochon Food & Beverage Co., which is known for the fried chicken franchise Kyochon Chicken, and another Korean fried chicken franchise, Genesis BBQ Co.

“Product brands that took companies years to build can be destroyed instantly when a conflict between countries emerge,” said one industry insider.

Another industry insider also raised concerns about diplomatic risk when operating global businesses. “While food companies are seeking overseas business opportunities more aggressively due to a gloomy outlook for the domestic food market due to the decline in birthrate, any diplomatic ramifications could disrupt business efforts to develop new markets.”