Significant Difficulties
Between 2013 and 2015, during China’s economic boom, the business outlook in China was rosy for South Korean corporations. Exports to China increased, leading to an upsurge in investment. However, companies overly dependent on China have encountered significant difficulties barely a decade later.
Industries such as automobiles, secondary batteries, and energy, which successfully transitioned to markets like North American electric vehicles, managed to shake off the impacts of declining performance in China. However, those that could not adapt have either shrunk their earnings or remained stagnant for the past decade.
The cosmetics industry dramatically illustrates changes in the Chinese market over the past decade. In 2014, Amorepacific saw massive growth, surpassing sales of 3.8 trillion won (US$3 billion) and operating profits of 560 billion won. In the first half of 2015 alone, sales reached 2.4 trillion won and operating profits amounted to 480 billion won. It was a star company in the stock market. The stock price, which exceeded 1 million won at the end of 2013 (before the stock split), exceeded 3 million won in just one year and even jumped to 4 million won, demonstrating the influence of the Chinese market.
However, with the continued economic downturn in China and decreasing dependence on the Chinese economy, it is expected that Amorepacific’s sales in the first half of this year will fall below 2 trillion won and operating profits will barely surpass 100 billion won. Compared to the first half of 2015, sales have dropped by about 25% and operating profits by nearly 80%.
The market evaluation, which encompasses the future value of the company, is even colder. The market capitalization of Amorepacific, which was 24.4 trillion won at the end of the first half of 2015, has shrunk to 6.2 trillion won as of July 17. Alongside Amorepacific, LG Household & Health Care, another leading cosmetics company, has also been stagnant for over a decade, causing a market cap plummet from 12 trillion won to 7.3 trillion won in the same period.
Companies that were dependent on Chinese consumption, such as hotels, casinos, and duty-free shops, have experienced a similar fate. Hotel Shilla’s market cap dropped from 4.3 trillion won at the end of the first half of 2015 to 2.9 trillion won as of July 17, and Kangwon Land dropped from 7.9 trillion won to 3.6 trillion won in the same period.
In addition, firms in the intermediate goods, construction machinery, and capital goods sectors, which include industries like chemicals and steel, have also enjoyed significant benefits from the Chinese market. In the 2010s, China used real estate stimulation as the most effective card for economic revitalization. With major infrastructure investments like roads, bridges, and ports, Korean capital goods companies sold large quantities of industrial machinery and materials needed to implement these projects.
However, with the structural change in China’s industry, it has become difficult to expect such benefits any longer. Chinese consumers no longer consider Korean consumer goods to be luxuries. The number of consumers looking for Chinese brands under the belief that they should patronize their domestic brands has increased. Infrastructure investments are no longer focused on large-scale civil engineering projects. Investment fields have shifted to data centers for artificial intelligence infrastructure and 5G communication networks. Korean companies find it challenging to wedge into these areas.
According to the Korea Trade Association, the proportion of Korea’s exports of intermediate goods, capital goods, and consumer goods to China has been rapidly declining since 2021. Although still ranked first in the proportion of intermediate goods and second in capital and consumer goods, the trend has been on a downward trajectory for quite some time.
Of course, many companies that depended on China are discovering new business areas and diversifying their export markets, achieving results. Hyundai Motors, which at one point had China accounting for as much as 25% of its total sales, now has less than 10% reliance on China. Instead, it is shifting its focus to the U.S. and European markets, adopting strategies for large and luxury brands preferred in these markets. LG Chem also turned its eyes to new business areas such as secondary battery materials early on. As of the first quarter, LG Chem’s sales in China account for 41% of total sales, which is high compared to 49% in 2015, but it is diversifying its export items and still selling products in demand in the Chinese market.
According to these company movements, there is an opinion that hints can be obtained on how to deal with the changed Chinese market.
Kang Na-young, a senior researcher at the Korea Trade Association, said, “If Korea focused on exporting generic products to China in the past, it now needs to recognize that China’s technological capabilities and financial resources have significantly increased.” She continued, “The role China played in the past is now being performed by India and Southeast Asia, and the Chinese market needs to be targeted with high value-added products and high-end consumer goods.”