South Korea-China tensions have brought new obstacles and opportunities for their linked economies. Who are the new market winners and losers?
China, as South Korea’s largest trading partner, accounts for South Korean imports worth $131 billion, and has developed into their competitor. The two nations used to have a healthy economic and cultural relationship. However, diplomatic relations have suffered enormously since the intensifying debate about the controversial US missile defense system – the Terminal High Altitude Area Defense (THAAD). Since South Korea permitted the installation of the system, and following its initial operations at the beginning of March this year, the dispute has steadily reached a fever pitch. China argues that the US could use the active radar system to spy on its military operations. On the other hand, the US and South Korean assert that THAAD is a deterrent against North Korean military aggressions. Beijing has responded with a quiet diplomatic approach, encouraging its citizens to boycott the South Korean goods while it places sanctions of its own. The question therefore arises, what are the consequences? Can companies benefit from the South Korea-China tensions? And if so, who can benefit the most from the conflict?
Which industries are suffering most from the boycott, and which ones are benefitting?
In every industry, where substitutes can replace consumer products, there exists the potential for external influencers or forces. In the case of this boycott, the popularity of the protest is being spearheaded by social media influencers, who use platforms like the Chinese microblogging website Weibo (微博) to encourage millions of followers to participate in the movement.
A Weibo celebrity encouraging her Chinese followers to support the boycott of South Korean products. Source: YuBa Po (娱八婆)‘s Weibo account
YuBa Po (娱八婆), an online celebrity with more than 3 million followers on Weibo, states “Chinese will not die from not using South Korean cosmetics or not watching their dramas or not eating pickles, but will surely die from losing your homeland. China does not need you to go to war or raise fund, but it needs your backbone and integrity. Let’s keep resisting THAAD!“
In addition to individuals who have successfully influenced the market, government actions, though many unofficial, made some industries suffer much more than others. Most notably, the Chinese government has increased state-media campaigns for the boycott, as well as by raising trade barriers through tightened regulations and customs inspections. According to Sung Min Chun, senior project leader at Daxue Consulting, the tourism sector in South Korea was the most heavily affected, followed by the cosmetics industry.
Tourism industry hit hard by sanctions
Loser: Lotte Group, a South Korean multinational corporation, which provided the land for the missile defense system installation.
Winner: Other Asian countries like India and Vietnam, as South Koreans tourists have been seeking business partners elsewhere to reduce dependency on China and on San Ya (三亚), a Chinese duty-free shop only available for domestic travelers.
Chinese tourists account for 47 percent of all foreign tourists in South Korea. Therefore, all businesses related to the tourism sector, including restaurants, hotels, shopping establishments, and airlines, have been hit the hardest by the boycott. Chinese travel agencies stopped selling South Korea tour packages, Chinese cruise liners no longer docked at Korean ports, and some charter flights, as well as ferry services, had been canceled. The Chinese airline Xiamen Air (厦门航空) for example, noted a decrease in passenger bookings for South Korea flights of up to one-fifth of usual rates, according to Reuters. The absence of Chinese tourists has had a huge adverse effect, particularly on duty-free sales, of which 70 percent come from Chinese consumers. However, Chun says “Ctrip (携程) [a Chinese provider of travel services] has reactivated group tours to Korea since the tensions are loosening up already.”
Due to the declining number of tourists, the Lotte Group, particularly the Lotte Duty-Free division, is feeling the pressure from Chinese consumers, who used to constitute 70 percent of their customers. Despite attempts to maintain their Chinese consumer base through large sales promotions, the Lotte Group experienced a sales revenue decrease of 1.5%, with weekend sales at Lotte Duty-Free in March falling 30 percent YOY, mounting to a 30 billion RMB ($4.35 billion) loss to date.
The South Korean conglomerate Lotte, operating in various industries such as retail, food, hotels, and construction, sold off land to the south of Seoul to the government, which then used the land as part of the THADD site. As a result, the company is a major target of the boycott, and Chinese citizens are treating it as a scapegoat among other Korean companies. The boycott’s influence has extended beyond their duty-free stores and into other Lotte operations. Large e-commerce platforms, such as JD.com (京东商城) and Tmall (天猫) closed their online Lotte stores, and by the end of March 2017, about 80 percent of Lotte supermarkets in China had to shut down temporarily, the official cause in many cases being attributed to “violation of fire safety rules”. While the shutdown will result in millions of dollars of lost revenue, Chinese protesters continued to boycott Lotte goods. In Jilin (吉林), a province in northeast China, protesters took to social media to spread anti-Lotte sentiment and content.
An online influencer calling on his Weibo followers to pursue the boycott until the Lotte conflict is properly solved. Source: ZhiCheng Da Bing (至诚大兵)’s Weibo account
Zhi Cheng Da Bing (至诚大兵), an online influencer specialising in military and political issues with more than 140 000 followers on Weibo, wrote“[…] Chinese should show no mercy to Lotte no matter it can survive or not until Korea gives up on THAAD.”
A chance for other market players and South-east Asian nations?
As South Korean businesses seek to shift their operations outside of China, other Southeast Asian countries will look to capitalize on the move. These other nations, like India, Vietnam, and Thailand, are adjusting their tourism advertising budgets accordingly. With an expected increase of both South Korean and Chinese travelers, these nations are hoping to bolster their tourism industries.
Since Chinese consumers have begun staying clear of Lotte and other Korean brands, the San Ya (三亚) duty-free franchise has emerged as a successful alternative. As the only available duty-free shop for local travelers, Chinese tend to purchase similar products in their homeland there to show support for the boycott.
The cosmetic industry’s flourishing K-beauty is banned
Loser: Amore Pacific (爱茉莉), the South Korean beauty and cosmetics conglomerate, which lost approximately $886 last year, as well as other SME’s adversely affected by the ban.
Winner: Chinese skincare brand Pechoin (百雀羚), realized sales increase of 200 percent YOY during boycott.
In 2016, South Korean cosmetic sales in China accounted for 36 percent of their overall sales. Thus, the industry is heavily dependent on the Chinese market. K-beauty products are particularly popular among Chinese citizens. It is estimated that over 30 percent of Chinese women say that they frequently purchase South Korean brands over others.
Falling shares and sales for the South Korean cosmetic firms
The dispute with China has already caused massive damage to Amore Pacific, the South Korean beauty and cosmetics conglomerate, which owns popular brands such as Etude House and Laneige. Amore’s shares fell more than 4 percent last year, resulting in a loss of nearly $ 886 million.
Additionally, an interesting aspect of the cosmetic industry to examine is its supply, which is also severely affected by the dispute. Korean cosmetic brands have difficulties importing their products, as Chinese authorities are refusing to import the goods, such as lotions, masks, or shampoos. 19 out of 28 rejected cosmetic products were Korean products, which officially could not pass quality control, as the new regulations regarding the allowance of certain materials have become stricter recently. Sung Min Chun also states that SME’s especially suffer from the ban, as lesser-known South Korean cosmetics brands, including Laso, Ottie, and Aekyung cosmetics, are the manufacturers of these banned products.
Who will replace the unsatisfied demand?
According to research conducted by Daxue Consulting, until 2013, China was a very lucrative market for foreign and especially French cosmetic brands, such as L’Oréal Paris, Lancôme, Clarins, and Dior. Today, they face increasing competition from their Korean counterparts, but also from Chinese companies, such as the skincare brand Pechoin (百雀羚). China Daily reports Pechoin seeing increased sales in November 2017, up by 200 percent YOY and being the first store to reach 100 million sales on Tmall in 2016.
Weibo, is also used as a platform for cosmetic lovers to search and share relevant information, underlines the shift taking part in Chinese consumers’ minds.
The keyword search results on Weibo for Amore Pacific after THAAD. Source: Weibo micro index
The keyword search results on Weibo for the Chinese skin care brand Pechoin（百雀羚）after THAAD. Source: Weibo micro index
According to Weibo micro index (微指数), in the last three months, the keyword search results relating to AmorePacific declined rapidly from 5,640 to under 940 after THAAD movements escalated in March. Pechoin (百雀羚）, however, is experiencing increasingly high search results, surging in early April 2017 and fluctuating from 1,300-2,600 throughout the rest of the month.
An Era of Korean-free Entertainment in China?
Loser: S.M. Entertainment, Korean’s largest entertainment agency with a fall in stocks of 8.2 percent, and Chinese domestic TV series and reality shows that feature Korean actors.
Winner: A new generation of Chinese stars.
The Korean wave or so-called ”Hallyu”（韩流）is huge in China. The impact of Korean pop stars and actors from popular Korean dramas on Chinese consumption behavior is impressive. They are trendsetters with regards to what they eat, wear, and use, thus influencing a variety of industries. Korean celebrities are regularly featured in Chinese ads ranging from cars to cosmetics or smartphones, all of which employ these pop stars to be their spokespeople. According to Bloomberg, in April 2016, a new episode of the melodrama “Descendants of the Sun,” reached 2.3 billion Chinese views within two days.
South Korea-China tensions have taken their toll on the Korean entertainment industry, which is largely dependent on the Chinese market, as it is their second largest market for dramas, songs, and various media content. For example, according to Chun, big Korean brands invitations’ of Chinese KOLs, who have millions of followers, were retracted for unexplained reasons at the Liber-China (Guangzhou) International Fashion Week & Global Designer Exhibition（Liber 中国（广州）国际时尚周）. It is very likely that these Korean fashion brands decided not to invite Chinese celebrities due to the political situation. What’s more, the Chinese government has imposed a ban on South Korean entertainers, and many Korean TV series and reality shows, no longer appear on Chinese websites. Radio stations have also stopped broadcasting any content related to South Korea, which has also led Chinese Internet portals to follow suit.
S.M. Entertainment, Korean’s largest entertainment agency, experienced a fall in stocks of 8.2 percent. Additionally, a survey by Seoul’s culture ministry showed 58 of 160 local media and entertainment firms are having their operations directly impacted by the South Korea-China tensions, such as cancellations of contracts.
Who else apart from South Korean entertainment firms are affected?
Although the ban seems to be in favour of Chinese entertainment, culture, and stars, Chinese operations are also experiencing hardships. Many Chinese shows, such as“We are in Love”（我们相爱吧）or ”I am a Singer”（我是歌手）got their copyrights from Korean producers, and are therefore facing substantial pressure from The State Administration of Radio Film and Television of China. They are required to add more Chinese elements and innovate more in the shows to distinguish themselves from the Korean originals. Moreover, some Chinese TV series such as“Emerald Lovers”（翡翠恋人）that have casts of both Chinese and Korean actors have gone on hiatus indefinitely, and will likely not resume until the conflict simmers down.
The young generation of Chinese stars stands to benefit the most from the tension. For instance, Yang Yang（杨洋），and Wu Lei（吴磊）, are both enjoying rising popularity since the incident began. However, the Chinese TV market is still developing and lacks original content and writing.
Demand for Korean fashion is still high, but what about supply?
Winner: Potentially the American and European Markets.
Loser: Korean firms which are heavily dependent on the Chinese market, such as the South-Korean fashion giant E-Land & Korea Fashion weeks.
According to research by Daxue Consulting about , total sales in China accounted for 68 percent of the total Chinese fashion market. As the industry is somewhat tied to the tourism and entertainment sectors, it is suffering as well. Sales in Korea’s major fashion hubs like Seoul, Dongdaemun and Myeongdong, for instance, have decreased by around 50 percent, Chun states. Also, firms which are heavily dependent on the Chinese market are also concerned, such as E-Land, a South Korean fashion giant. It operates more than 7000 shops across China, with sales of about $ 2.4 billion, which is more than its total domestic fashion sales (about $ 1.8 billion).
Moreover, Chinese buyers used to comprise of about 60 percent of all the buyers in Korea fashion week. However, the number of Chinese buyers that participated in 2017 Autumn Seoul Fashion Week decreased by half compared to last year. Still, 60 out of 140 foreign buyers had been Chinese, which indicates that the demand is still high, underscored by online sales, according to Chun.
Despite all the recent criticisms and supposed disinterest in Korean goods, online sites like Taobao (淘宝) and Tmall (天猫) have reported steady sales of Korean products.
Customs and quality inspections tend to be stricter
The fashion industry is currently experiencing an influence in supply: new Korean fashion brands trying to enter Tmall, which have been stalled indirectly due to the Chinese government. Additionally, much stricter controls with regards to customs and quality inspections with imports are taking place. For example, SKU’s with incorrect labeling are usually allowed to pass, such as “blouse” instead of “T-shirt,” but now are withheld for a days at a time, and causing subsequent delays in delivery, says Chun. Jung Mi-sun, designer of the fashion label Nohke, told the South China Morning Post: “In fact, customs proved difficult as I entered China for this year’s Shanghai Fashion Week.” Online sales provide another outlet by which the industry is affected. The so-called Daigou (代购) business, an order-based business model, has been profoundly affected as well as offline sales, says Chun. For instance, Buckaroo, the Korean denim brand, has seen its sales drop by around one-third recently. However, Min Chun believes, this phenomenon may be not only due to the political tensions, but also due to an online trend set by KOLs, where the process initially starts with posting new designs online. From there, production of the clothes begins only after feedback from thousands of fans, which results in better customer-tailored brand.
Therefore, while China is still a major market for Korea, many Korean designers will also attempt to explore European and US markets more.
How is the Korean automotive industry faring?
Loser: Motor Group Hyundai, where March sales fell 52 percent YOY in 2017.
Winner: Domestic brand Great Wall, whose sales increased by 30 percent YOY in 2017.
China accounts for 23.5 percent and 21.5 percent of global sales of Hyundai and Kia respectively. Therefore, Korean automakers are also feeling the effects of THADD. According to the Financial Times, March sales in China fell 52 percent year-over-year for the automakers. Consequently, the impact also reaches suppliers within the industry.
In contrast, China Daily (中国日报) reports Chinese auto brands’ market share grew from 41.3 percent to 43.2 percent. In particular, the domestic brand Great Wall (长城) is benefiting greatly. In February 2017, the total sales number of the company’s cars reached 77,500, an increase of 30 percent compared to February 2016.
However, this is not the only issue which is causing the Korean automotive industry to suffer. It is important to note that consumer preferences in China have shifted to vehicles like SUVs, a demand which the Korean brands do not yet satisfy.
The electronics industry approaches dangerous territory
Loser: Samsung, whose smartphone sales dropped by 60 percent and possibly Chinese manufacturers assembling high-end South Korean technology parts
Winner: Chinese domestic smartphone manufacturers, e.g. Oppo (欧珀), VIVO (维沃) and surprisingly South Korean electronic part makers LG Display and Hynix.
Image credit: Daxue Consulting
During the first quarter of the year, Chinese brands such as Huawei, Oppo(欧珀), or Vivo (维沃), gained market share in the global smartphone market. In contrast, iPhone lost about 15 percent of sales YOY. However, Samsung Electronics, whose smartphone sales dropped by even 60 percent, has lost even more.
Data source: Yinhang163.Net (银行信息港).
What can be gleaned from the table above is that the Chinese brands OPPO (欧珀) and VIVO (维沃) took top ranks with an upward growth trend, while Korean Samsung ranked 9th with a drastically decreasing ratio of 25.5 percent. Could this be an additional effect of the South Korea-China tensions? It is not clear, however, as industry watchers claim that pricing, distribution channels, and a lack of localized app services are partially to blame.
Nevertheless, the reaction to Lotte’s land deal with the South Korean government was swift by companies like Rakuten, a Japanese electronics and internet group. As its Chinese name has the same characters （乐天） and pronunciation (Le Tian) as Lotte, Rakuten officially declared not to have connections with the South Korean conglomerate:
Source: Rakuten’s Weibo account
Rakuten states “We honor the history and state sovereignty of other countries all along” on its microblog. By doing so, they seized the opportunity to market their brand while clarifying their position, effectively mitigating a PR disaster.
How can the South Korea-China tensions have a global impact and even harm Chinese businesses?
Since China and South Korea have been fostered their political, economic, and cultural relationship since 1992, their economies and dependencies on each other are inextricably linked.”Imagine, for example, a battery manufacturing company producing specifically for the Korean market, and suddenly they need to stop because of political disputes, the Chinese firms will also suffer immensely.” Chun states, but also adds that it depends a lot on the industry.
This phenomenon is certainly the case with the electronics industry. Two of the major electronics companies in South Korea, LG Display and Hynix – both Apple suppliers – reported record profits with an upward trend this year, according to Reuters. South Korean firms control a vast majority of components such as memory chips, screens, and other essential electronic products, all which make South Korea the biggest electronics importer to China. Thus, the Korean firms may benefit in the short-run, as customers and local businesses will restock their inventory because it would be hard to switch to alternative suppliers quickly. What’s more, in the event of an interruption in South Korean operations, global manufacturing of smartphones, televisions, computers, and tablets would be decreased. China would feel the impact the most, as Chinese manufacturers assemble those Korean high-technology components and machines into products and sell it to other markets.
Implications in The Food Industry
Loser: Orion Confectionery, with China accounting for 77 percent of the firm’s overall sales.
Winner: Potentially Mondelez International, which is investing more than $ 100 million into China in the next three years.
As the dispute between the nations is causing rifts in many industries, the food service industry is no exception. It influences, for instance, Korean-style restaurant chains operating in China, making some of them feel the gravity of the dispute in regards to the South Korea-China tensions. The catering company Halla Group (汉拿山), for example, announced that it has never used or sold products from Lotte and that it is a “100 percent Chinese-funded enterprise.”
Halla stated “The arrangement for THAAD deployed by Korean Lotte and government has posed severe damages to China’s security and the Chinese government has shown its strong stance by clearly saying, ‘we will not tolerate actions like this’. Halla has nothing to do with Korean Lotte, it never sold or utilized any products of Lotte and will not engage in such things in the future. Halla is a domestic brand founded in Beijing by Chinese and always shows unwavering support for the homeland.”
These reactions may likely be responses of self-preservation, as the companies do not want to invoke the wrath of the public, as the Korean firm Orion did. For Orion Confectionery, six of its products’ combined sales in China account for 77 percent of the firm’s overall sales. However, the scandal reached Orion via posts on Weibo , which then served to attack the firm. It forced the company to issue a statement saying that it does not belong to Lotte.
In an official statement, Orion insisted that it is not a brand belonging to Lotte Group and is not affiliated with it in any way. Moreover, Orion sincerely apologized to the public and consumers for the misunderstanding and hopes to seek their patronage in the future.
Nevertheless, its shares dropped – 13.9 percent since February 24th, according to The Street. Additionally, some factories opened by Orion in China ceased operation due to stockpiling in April 2017.
Does it clear the way for its competitor Mondelez International, an American multinational confectionery, food, and beverage company? In 2016, the company announced to invest more than $ 100 million into China in the next three years to manufacture and launch its chocolate brand. The ongoing South Korea-China tension and negative comments towards Orion may be a benefit for the international brand.
South Korea-China Dispute: End Results
Resulting from the dispute, Chinese consumers may turn to local or other international companies who can address their preferences instead of Korean brands. In response, many companies are making efforts to distance themselves from any potential Korean business operations, all while maintaining profitable operations.
However,Chun asserts that some consumers who were always buying Korean products would probably still buy Korean products. What’s more,some Chinese companies – depending on the industry – may suffer a lot from the ongoing tensions, such as in the entertainment industry, and may not adapt despite the protests.
Min Chun says, all in all, SME’s are much more affected by the South Korea-China tensions than big players in the industry: ” an SME planning to enter China may get no more support from the government and thus, has no chance to expand its business operations in China.” However, big players may recover from weak sales.
In summary, from a short-term point of view, domestic and other international companies may benefit in contrast to Korean firms, depending on the industry. However, from a long-term perspective, Min Chun refers to the territorial disputes between China and Japan in 2012, which resulted in calling for the boycotting Japanese products. “We can see from the past that when tensions are loosening up, which is already the case in the tourism sector, businesses will go back to normal operations, the trade will return to normal levels. Chinese individual consumers will still purchase Korean items regardless of the tensions between the two countries. However, Chinese citizens who have who never bought Korean products are more likely to be influenced to get a wrong impression of Korean brands and in general, we can say China’s reaction with the boycott caused a lot of anti-Chinese sentiment in Korean minds.” A survey by the Asian Institute for Policy Studies already shows a shift from Japan to China as being their most disliked country now. Another notable point is that in the long run, Korean enterprises in various industries, such as fashion or tourism, will strive to seek wider market overseas for risk diversification instead of solely relying on China.
Thus, the question remains, who will finally turn out to be the market victor as a result of this dispute, or if there will even be one. It is safe to say however that the worst-off entity from this event is the Lotte Group, all things considered.
Feature image credit : Fortune