Korean companies with high dependence on China struggle due to feeble growth

LG Household & Health Care Ltd. headquarters in Seoul [Courtesy of LG Household & Health Care]

South Korean companies that enjoyed robust growth from strong exports to China during its economic heyday are now struggling as the world’s second-largest economy faces a downturn.

Cosmetics is one of the industries that has witnessed dramatic changes in China over the past decade. In 2014, industry leader Amorepacific Corp. achieved more than 560 billion won ($441.7 million) in operating profit on sales of 3.8 trillion won.

Sales reached 2.4 trillion won and operating profit 480 billion won in the first six months of 2015 alone.

However, with the slowing Chinese economy and reduced dependence on the market, Amorepacific’s sales in the first six months of this year are projected to fall below 2 trillion won, with operating profit barely surpassing 100 billion won.

Amorepacific’s market capitalization, which stood at 24.4 trillion won in the second half of 2015, has shrunk to 6.2 trillion won as of Monday.

LG Household & Health Care Ltd. has also experienced a sharp fall in market capitalization to 7.3 trillion won from 12 trillion won over the same period.

There are other industries that have been affected by the weak Chinese economy - hotels, casinos, and duty-free shops.

The market capitalization of Hotel Shilla Co. fell to 2.9 trillion won as of Monday from 4.3 trillion won at the end of the first half of 2015, while that of Kangwon Land Inc. to 3.6 trillion won from 7.9 trillion won.

[Courtesy of Hotel Shilla]

Companies engaged in intermediate goods, such as chemicals and steel, and in-capital goods including construction machinery also saw strong growth during the heyday of the Chinese economy.

During the 2010s, China effectively used real estate to stimulate its economy. Korean capital goods companies sold industrial machinery and materials in large quantities to China to support the country’s major infrastructure construction projects such as roads, bridges, and ports.

However, with the structural changes in China’s industries, it has become increasingly difficult to rely on the same effect.

Chinese consumers no longer consider Korean consumer goods to be high-end and more consumers are looking for local brands out of patriotism.

Infrastructure investment is also no longer centered on large-scale civil engineering projects and has shifted to data centers for artificial intelligence (AI) infrastructure and fifth-generation (5G) communications networks. In these areas, Korean companies have limited opportunities to participate.

“Chinese companies such as Huawei Technologies Co. and ZTE Corp. dominate the value chain for data centers and 5G network infrastructure, and they have a high level of price and quality competitiveness,” said Park Su-jin, an analyst at Mirae Asset Securities Co.

According to the Korea International Trade Association (KITA), Korea’s exports of intermediate goods, capital goods, and consumer goods to China have declined sharply from 2021.

Although it still ranks first in terms of intermediate goods and second in terms of capital and consumer goods, the trend has long begun to decline, KITA said.

[Courtesy of LG Chem]

Many Korean companies, in the meantime, still manage to find new business areas and diversify export markets other than China.

Korea’s top chemical giant LG Chem Ltd., for example, has not seen a sharp decline in its sales in China as its chemical products are regarded as high-value-added goods.

About 80 percent of its products consist of high-value-added polyvinyl chloride (PVC) and ABS, which require advanced technology.

Analysts note that demand for these products has declined more slowly than for lower-value-added products. LG Chem has successfully discovered new high-value-added businesses such as secondary battery materials.

Korea’s largest automaker Hyundai Motor Co. has also successfully expanded into North America and electric vehicle markets, compensating for the decline in the market share in China.

When China launched an economic retaliation against Korea for deploying the U.S. Terminal High Altitude Area Defense (THAAD) in its own soil in 2017, Hyundai Motor looked into other regions such as the ASEAN where it had been losing out to fast-growing India and Japan.

Hyundai Motor began to compete in the U.S. with local and German automakers by focusing on sport utility vehicles (SUVs) and luxury cars.

Industry insiders, however, note that Hyundai Motor lacked strategy to regain its share in China.

“While Korea used to focus on exporting general-purpose products to China in the past, now it needs to recognize that China has significantly improved its technological and financial capabilities,” said Kang Nae-young, a senior analyst at the KITA.

“The role that China used to play is now being played by India and Southeast Asia, and Korea should focus on high-value-added products and high-end consumer goods.”

Kang also emphasized the need to consider strategies for expanding into second- and third-tier cities.