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A geopolitical row with China damages South Korean business further

IN A cosmetics emporium in central Seoul, rows of snail-slime face-masks sit untouched. Not long ago, visiting Chinese tourists would snap these up as avidly as a designer handbag in New York or anything from London featuring the Queen. Yet now their rejuvenating properties are failing to lure the country’s shoppers. Seo Sung-hae, a salesman, says business has slowed to a snail’s pace, because of a drop in the number of Chinese visitors. “We used to have 100 customers a day, but after THAAD, there are almost none,” he says.  

THAAD, or Terminal High Altitude Area Defence, is an American missile-defence system designed to guard against North Korea that was installed in South Korea starting in March. Chinese authorities protest that its radar could be used to spy on its territory. Chinese newspapers have encouraged consumers to boycott South Korean goods. The plan was to “bully” Korea into ditching THAAD, says Han Suk-hee of Yonsei University, who until April was South Korea’s consul-general in Shanghai.

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Seven months on, the campaign has fallen short of that goal but has claimed a big corporate victim. On October 12th Lotte, a South Korean conglomerate, confirmed that it hopes to sell its Chinese hypermarkets by the end of the year. That marks a significant retreat for the firm, which had been trying to crack the market since 2008. The group employs about 20,000 people—a third of its overseas staff—in China, and in 2015 registered 3trn won ($2.65bn) of sales there. 

It became a target after signing a deal in February with the South Korean government that allowed the defence ministry to use one of its golf courses as a base for the THAAD launchers. (Shin Dong-bin, its chairman, later said he had no choice but to comply). Chinese officials then closed 77 of the 99 Lotte Mart stores in China on pretexts such as breaches of fire-safety rules. The firm itself shut another 13 stores when customers stayed away. Sales in the second quarter slumped to 21bn won ($18.5m), down from 284bn won in the same period last year.

South Korean cars, beauty products and even confectionery have been affected. Sales at Beijing Hyundai, jointly owned by the South Korean conglomerate and Chinese manufacturer BAIC Motor, dropped by two-fifths in the first eight months of the year. AmorePacific, a cosmetics firm in South Korea, reported a 58% dip in its second-quarter operating profits. The country’s tourism industry, too, has felt the pinch since group tours from China were banned in March. There were 87% fewer Chinese tourists on Jeju, a pretty island south of the peninsula, during this year’s harvest festival than in 2016. Korean businesses will lose $15.6bn of tourism revenue if the slump continues until next March, according to the Hyundai Research Institute, a think-tank funded by the conglomerate. Korean industries other than tourism could lose $8.3bn over the row, says the Korea Development Bank. 

Yet the boycott is being applied selectively. It favours some Chinese firms by penalising their South Korean competitors, while leaving manufacturers on the mainland free to continue importing the parts on which their businesses rely from other South Korean firms, notes Choi Pae-kun, an economist at Konkuk University in Seoul. Korean exports to China jumped by 23% in September compared with the same month last year, driven in part by surging demand for memory chips, many of which are made by Samsung.

The row with China may obscure some failings of South Korean business. Carmakers’ share of the Chinese market fell from 9% in 2014 to 7% in 2016, before the row. Partly due to competition from online retailers, Lotte Mart has been losing money in China since 2011. But the events of March were undoubtedly a turning point. Beijing Hyundai’s sales rose in January and February, but plunged by 65% in May. Lotte Mart’s overseas losses are predicted to rise from 124bn won in 2016 to 250bn won this year. “It can’t be 100% THAAD,” says Kim Soo-min, a lawmaker. “But even if there were losses before, they would not suddenly more than double in a year.”  

China’s stance may be shifting. Mr Han says an agreement on October 13th to extend a currency-swap deal between South Korea and China was a “gesture” of peace from Beijing. China will surely see little point continuing the boycott, since it failed to stop the remaining THAAD launchers being installed last month, he argues. Some analysts predict that China will end its ban on tour groups visiting South Korea after the Communist Party’s congress, which began on October 18th. “There is a little bit of hope,” says Ms Kim.

Source: economist
A geopolitical row with China damages South Korean business further

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