TikTok, Shein chase e-commerce expansion in Korea

Korea is suffering from a deficit in e-commerce transactions as Chinese companies aggressively pursue unchallengeable low-cost strategies.

Shein's website features its first global ambassador for its sub-brand, Daisy, actor Kim Yoo-jung. [SCREEN CAPTURE]

A fresh batch of e-commerce and social media players from China like Shein and TikTok are breaking into the local market amid a widening deficit for Korean online retailers as fewer people outside of the country place orders with them while more people in Korea buy from foreign sites.

The emergence is coming at a time when Google-owned YouTube is also stepping into the world's fifth largest e-commerce market by revenue, further squeezing the standing of local operators like Coupang and Lotte.

Shein formalized its entry into the Korean market as of June 20, appointing actor Kim Yoo-jung as the first global ambassador for its sub-brand Daisy. It established its Korean subsidiary in December 2022, started social media marketing from last August and launched a Korean website in April.

Google entered the Korean e-commerce market on June 19 by introducing the world's first YouTube Shopping feature that allows viewers to purchase products directly from video descriptions.

Last December, the U.S. internet giant injected 260 billion won ($187 million) in Cafe24, a Korean e-commerce platform behind the YouTube Shopping feature, to establish a foothold in the country's burgeoning online retail market.

TikTok is also gearing up to launch TikTok Shop in Korea. Since starting in Indonesia in 2021, the service, which integrates shopping functions on the existing platform, has been expanding in Malaysia, the Philippines, Thailand, the United States and the United Kingdom.

TikTok Shop recorded $20 billion in global sales last year and is forecast to make $50 billion in sales this year.

In Korea, the company applied for the TikTok Shop trademark last December.

Sales in Korea from online overseas direct purchases are shrinking, exacerbating the trade deficit as Chinese online commerce companies increase their push into the domestic market.

Industry analysts attribute the deficit to the Chinese platforms' aggressive low-price strategy that weakens the competitiveness of Korean-sold products in the global market, as well as a significant decrease in demand for Korean products from China, which was once a major market for "reverse direct purchases."

In Korea, purchases of goods directly from overseas by local consumers are called direct purchases. Conversely, when foreign consumers purchase Korean goods directly from the domestic open market or online commerce market, they are referred to as reverse direct purchases. Such transactions allow domestic companies to sell their products globally.

Korea's trade deficit in the online shopping market, excluding duty-free shops, was 5.9 trillion won last year, almost doubling from 2.85 trillion won in 2019, according to online shopping trend data from Statistics Korea on Thursday.

The trade deficit is calculated by subtracting the overseas direct purchase amount from the reverse direct purchase sales total without counting duty-free shops.

The widening deficit is due to the increase in online purchases by Koreans from overseas shopping malls, while sales of domestic products abroad have decreased.

The country's online direct purchase market grew to 6.68 trillion won in 2023 from 3.6 trillion won in 2019. The growth can be attributed to the aggressive foray into Korea's market by Chinese companies like AliExpress and Temu, which leverage their low-price marketing strategy.

Meanwhile, the value of reverse direct purchases decreased to 752.9 billion won from 784.8 billion during the same period.

By product category, clothing and fashion products, which accounted for the most orders from overseas, decreased to 208.8 billion won in 2023 from 302.9 billion won in 2019.

Household and automotive products sales dropped to 20.3 billion won from 48.3 billion won, and home appliances, electronics and communication devices declined to 21 billion won from 31 billion won.

"In other countries, the increase in low-priced products from Chinese online commerce providers such as Temu and Shein has led to a decrease in the consumption of relatively expensive Korean clothing," said Ha Myung-jin, the head of the policy support office at the Korea On-line Shopping Association.

By region, the decline in consumption of Korean products was most pronounced in China. Sales from reverse direct purchases to China plummeted to 154.6 billion won last year from 210.4 billion won in 2019.

Sales to Japan, on the other hand, grew to 227.5 billion won from 189.3 billion won, and sales to the United States increased to 240 billion won from 186.6 billion won during the same period.

The value of orders in China of Korean clothing and fashion-related products, which had been the largest category, decreased significantly to 33 billion won from 77.8 billion won in 2019. Cosmetics, the second largest sales category in 2019, also decreased to 23.1 billion won from 59.4 billion won.

"The beauty trend in China changed before and after Covid-19 and the period when Chinese consumers blindly purchased Korean cosmetics has already passed, as brands there are offering high-quality products now," an official from a Korean online platform company said.

The number of new cosmetics companies in China increased dramatically to 3.67 million in 2022 from 940,000 in 2016 according to the Chinese market research institute iiMedia Research.

Additionally, the decline in sales from reverse direct purchases is attributed to the so-called patriotism consumption trend among the younger Chinese generation, which prefers domestic brands to foreign products, as well as to frozen consumer sentiment due to the country's economic slowdown.

Industry experts are looking at the United States and Japan as alternative markets to China. The proportion of reverse direct purchases to China decreased to 21 percent in 2023 from 29 percent in 2020. In contrast, the United States accounted for 32 percent, making it the largest market, followed by Japan at 30 percent.

By product category, the increase in the sales of records, videos and musical instruments is notable. Album sales, which came to around 89.4 billion won in 2019, increased significantly to 181.7 billion won in 2023. This is attributed to the rapid growth of the K-pop record market.

Although demand for cosmetics decreased in China, the total of reverse direct purchases of cosmetics increased slightly to 167.9 billion won from 159.8 billion won.

Currently, the consumption of mid- to low-priced Korean cosmetic brands is increasing, especially among the younger generation in the United States," said Jang Joon-ki, executive director of the Korea Cosmetics Association.

BY YI WOO-LIM, CHOI HAE-JIN [choi.haejin@joongang.co.kr]