Wait and See
South Korean companies are withdrawing from China as it has become difficult to do business there amid Beijing’s growing economic retaliation against Korea’s deployment of a U.S. Terminal High Altitude Area Defense (THAAD) missile defense system. However, SK Group has aggressively made an investment in China until recently. Therefore, all eyes are on whether SK Group Chairman Chey Tae-won’s betting will work well again this time. SK Group has invested more than 3 trillion won (US$2.66 billion) in China this year alone.
According to business industry sources on September 18, SK Group has decided to keep pursuing its “China Insider” strategy, despite China’s growing retaliation against South Korean companies over the THAAD. The China Insider strategy aims to make China the group’s second home as domestic markets become saturated. The goal is that it will operate in China as a local player by marking re-investment of money earned in China, rather than a foreign entity that has entered the Chinese market. Chairman Chey has visited China at every chance and put much effort after establishing the strategy in 2006.
Chey visited China 12 times in two years until July this year after he has returned to management in August 2015. In July, he attended the Tianjin Forum 2017 in China and met Li Hongzhong, Communist Party Secretary of Tianjin, and Wang Dongfeng, Mayor of Tianjin, to discuss the ways to invest and cooperate in the petrochemical and information communications sectors.
SK Group is running various businesses in China. SK Global Chemical, a subsidiary of SK Innovation, jointly established “China-Korea Petrochemical” with China’s state-run oil company SINOPEC in 2013, producing and selling oil products. The joint venture posted 2.04 trillion won (US$1.81 billion) in sale and 369.6 billion won (US$327.51 million) in operating profit last year and 1.35 trillion won (US$1.19 billion) in sales and 321.1 billion won (US$284.54 million) in operating profit in the first half of this year. SK Innovation believes that China-Korea Petrochemical’s performance will reach a new record high this year, breaking its highest sales of 2.53 trillion won (US$2.25 billion) and operating profit of 465 billion won (US$412.05 million) recorded in 2015.
SK Hynix is producing semiconductor chips in its plants in Wuxi and Chongqing in China and is planning to make a 950 billion won (US$841.83 million) investment to expand the Wuxi plant by the end of next year. In addition, SKC, SK Chemical and SK E&S are aggressively engaged in business in China.
Even though SK Group will maintain its basic strategy for the Chinese market, the company is expected to control the pace of new investments. SK Hynix and China-Korea Petrochemical have suffered but little damage from the THAAD issue but some subsidiaries, including SK Innovation which manufactures electric vehicle (EV) batteries, has adversely affected.
In July, SK Group bought a partial stake in e-Shang Redwood Group (ESR), the second largest logistics firm in China, invested in its Chinese holding company “SK China” and made a 3 trillion won (US$2.66 billion) investment in SK Hynix’ subsidiary. SK Innovation’s plan to set up an EV battery production plant in China virtually fell through.
SK Innovation established a joint EV battery production venture “Beijing BESK Technology” with Beijing Automotive and Beijing Electronics and has produced a battery pack. However, battery production plant has stopped operation from the end of last year. This was because the Chinese government has stopped providing subsidies to cars equipped with South Korean EV batteries from the end of last year.
An official from SK said, “The basic keynote is to go with China but the pace will not be as fast as in the past as the contextual situation is complicated. We will carry out business by making decision more carefully than the past.”