Korean companies heavily reliant on China deliver weak results amid low growth

Amorepacific Corp. headquarters in Seoul [Courtesy of Amorepacific]

South Korean companies that relied heavily on China for exports when the country achieved high growth are facing losses amid the sluggish economy.

Korean cosmetics giant Amorepacific Corp., which once flourished thanks to strong exports to China, posted an operating profit of 102 billion won ($80.62 million) in the first half of this year. The amount is only a quarter of what it made in the first half of 2015 when the Chinese economy was flourishing.

In the past, 80 percent of the company’s exports were destined for China, but it has recently dropped to 50 percent without finding a suitable alternative market.

POSCO Holdings Inc., the parent of the country’s biggest steelmaker POSCO, disclosed on Tuesday that its preliminary operating profit for the second quarter fell 38 percent from the same period last year.

Korean companies, which had increased their reliance on the Chinese market during the high-growth era, are struggling to stay afloat.

Even companies that have consistently attempted to diversify their exports cannot avoid the negative impact of China’s economic downturn.

The International Monetary Fund (IMF) has warned that the Chinese economy is likely to enter a low-growth phase of 3 percent within the next three years.

Industry insiders note that the later a company undertakes de-risking operations in China, the greater the impact it will face.

According to an analysis by Maeil Business Newspaper on 10 companies with high reliance on China, their average stock return rate for the first half of this year was negative 12 percent, down nearly 30 percent on a comparative basis.

The benchmark Kospi index rose 17 percent during the same period.

Foreign investors have been net sellers of more than 1.5 trillion won in shares of these companies this year. Industries that have lost the benefits from China include cosmetics, petrochemicals, and steel. Casinos, hotels, and duty-free shops, which benefited from Chinese tourists, are also struggling.

On the other hand, the country’s largest automaker Hyundai Motor Co., which has reached out to alternative markets such as North America and Europe, and the country’s top chemical giant LG Chem Ltd., which has succeeded in discovering new high-value-added businesses such as secondary batteries and new materials, are performing well in both earnings and stock prices despite the slow business in China.

A joint analysis by Maeil Business Newspaper and the Korea Economic Research Institute showed on Tuesday that the economic shock caused by China’s slow growth and decline in demand was greater in Korea than in the Group of Seven (G7) countries.

A 1 percent decline in China’s final import demand would lower Korea’s economic growth rate by 0.069 percent, according to the analysis.