S. Korean businesses quitting China as virus curbs add to trade woes

BEIJING • South Korean companies are at the vanguard of what is threatening to be a global shift away from China, with higher tariffs and inconveniences of the US-China 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, said a person familiar with the situation.

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 is seeking to push more sales online.

Meanwhile, Korean manufacturing giants such as Samsung Display and LG Electronics are already selling off or shutting some factories in China, pressured by cheaper local rivals. They have also grappled with the uncertainty caused by China's ongoing lockdowns.

"China is not a land of opportunity anymore for Korea," said Mr 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," he said.

It is a sea change for Korean firms that in recent decades had joined their 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, make-up and fashion.

China's total retail sales reached 44 trillion yuan (S$9.2 trillion) last year, including 402.6 billion yuan spent on cosmetics, according to government data.

But the seeds of the Korean retreat predate the Covid-19 curbs and even the US-China 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 crosshairs in 2017, when China channelled its anger at Seoul for agreeing to host the Thaad US anti-missile system, into consumer boycotts and bans. Seoul's close diplomatic ties with Washington are an ongoing source of tension with Beijing.

About 86 per cent of 131 South Korean firms 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 firms, US-China trade conflicts, stricter environmental regulations and higher production costs.

About 80 per cent 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 are not likely to return to China with new investments, said deputy general manager Han Jong-hoon of 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 Korean government to house the Thaad, or Terminal High Altitude Area Defence. The backlash from China, which saw the system as a threat, was swift and Lotte's business there never recovered.

Amorepacific earned 208 billion won (S$227 million) in China in 2016, its biggest market outside of South Korea, before the missile-system scandal hurt demand for Korean goods in China and stanched Chinese travel to Korean duty-free shops.

The firm is now expanding into the United States and South-east Asia, and shifting its focus to online sales and premium brands.

Meanwhile, with President Joe Biden wanting to make the US a centre for electric vehicle production and supply chains, Hyundai Motor Group is increasing its planned investment in America to more than US$10 billion (S$13.7 billion) by 2025, and Samsung Electronics is building an advanced chip plant at its sprawling US$17 billion complex in Austin, Texas.

Seoul is trying to help reduce companies' reliance on China. It has launched a task force to help private firms diversify their sources of key raw materials, particularly inputs for semiconductors, batteries, petrochemicals and cars, said the Korea International Trade Association.

BLOOMBERG