As leaders argue, S Korea finds China is no longer an easy sell

Published: 4:00 AM, March 10, 2017

Until recently, Beyond Cosmetics could not fill Chinese orders fast enough for its Green Piggy Collagen Jella Pack, a creamy beige substance containing pig collagen, or its Carbonated Bubble Clay Mask, which leaves the user’s face covered with foam.

Then, in November, international politics struck this South Korean maker of skincare products. As China’s ire grew over plans by Washington and Seoul to park a missile defence system on South Korean soil, sales of the two beauty aids fell to one-fifth of Beyond Cosmetics’ sales, from one-half.

Now, as the deployment of the system begins this week and China threatens to punish South Korea further, companies such as Beyond Cosmetics have been bracing themselves for the worst.

The intensifying diplomatic ruckus is exposing deep cracks in South Korea’s economic success story and forcing the nation to confront its dependence on China, its largest trading partner.

Even before the current crisis, Beyond Cosmetics had started to look past China, where it was increasingly running into problems such as tougher government rules and rising homegrown competition.

“We thought we could do something better with our time than attempt to go further into the Chinese market,” said the company’s vice-president, Mr Kim Byung-sun, adding that he travelled regularly to promote halal-certified products in Malaysia, and long-lasting lipsticks that can withstand the humidity in Thailand.

An export powerhouse that began its upward trajectory decades before Beijing embraced capitalist economics, South Korea has long benefitted from China’s rise. Chinese factories are major buyers of Korean-made components. A growing Chinese middle class embraced Korean devices, cosmetics, television shows and music, often on shopping trips.

All of that may be in jeopardy now. Consumer boycotts have hit Korean chain stores in China. K-pop shows there have been cancelled. Just last week, the China National Tourism Administration ordered regional travel agencies to halt sales of package tours to South Korea.

But even before China began lashing out at South Korea, the economic relationship between the industrial giants had started to shift. China is increasingly a competitor as much as a customer for South Korea.

Chinese companies have improved product quality and can compete on price, both at home and abroad, in everything from complex components to cosmetics and smartphones.

That presents major challenges for a country where a bribery scandal has engulfed both the country’s president and the de facto chief of its biggest conglomerate, Samsung, and raised questions about whether an economy driven by exports and close ties between officials and big business have reached their limit.

To thrive long term, said experts, South Korea needs to consider overhauls that will help empower entrepreneurs and spread wealth domestically.

“A key question is whether Korea is going to be able to make a shift away from a trade- and export-led growth model that brought them dramatic economic success,” said Mr Mark Lippert, who recently left Seoul as the American ambassador to South Korea.

Chinese manufacturers have started to make the parts and components that South Korean companies have been selling into China, where factory workers assemble them into products destined for European or US consumers. This so-called intermediary trade accounts for about three-quarters of all of South Korea’s exports to China.

Chinese companies are also making more of their own consumer goods such as cars, phones and television screens. Samsung, which commanded a 20 per cent share of the Chinese mobile phone market in 2012, now has only 6 per cent, according to market researcher GfK. The top four best-selling mobile phone brands in China, according to research firm IDC, are now made by Chinese companies.

Mr Kim, of Beyond Cosmetics, said Chinese cosmetics manufacturers have wooed South Korean research employees with salaries that are three times higher than what his company can offer, in addition to other benefits.

In 2015 and 2016, South Korea’s exports fell for the first time in close to 60 years, said the Korea International Trade Association. Last year, exports to China slid 9.3 per cent compared with a year earlier as the Chinese economy slowed down; however, those figures were up in the first two months of this year.

“Regardless of the industry, Korea has depended on China too much,” said Mr Kang Seon-jou, professor of trade and economic studies at the Korea National Diplomatic Academy.

Beijing has protested against South Korea’s agreement to host the missile defence system — the Terminal High-Altitude Area Defense system (Thaad) — and the Chinese state news media have been calling for a boycott, affecting everything from South Korean pop stars and television programmes to Korean-owned supermarkets. This week, alarmed by the most recent test of ballistic missiles by North Korea, the US began to deploy the system.

That is affecting an effort by South Korea to reap more economic power from its popular culture. Several music events featuring its performers in China have been cancelled, and South Korean dramas have been pulled from Chinese online video services.

Lotte, a South Korean conglomerate that is providing land for the Thaad deployment, has reported that its online stores in China have been hacked and that half its China-based shops have been shut down for reported fire-code violations.

In Incheon, a port city about 400km from the nearest port in China, Chinese consumers arrive by ferry to buy items such as rice cookers. Still, local merchants are experiencing what they say is a slowdown in tourist activity from China. Incheon officials said that, this month, several large Chinese businesses that were planning to send thousands of employees to workshops in the city cancelled the visits.

In the Sinpo International Market, a warren of small retail stalls selling clothing and mobile phones, business was sluggish on a recent visit. “Things are really bad right now,” said Mr Kim Min-seop, 52, owner of Mirae Mobile. “But what can the government do? This is such a sensitive political issue.” the new york times


Motoko Rich is Tokyo bureau chief for The New York Times