Hope from China
While rattled by a near 7-percent plunge in Chinese shares on Jan. 4, the first trading day of the new year, the Seoul bourse got news of a more agreeable kind. Hanmi Pharmaceutical announced that its founder and chairman Lim Sung-ki was giving away 900,000 shares he owns in holding company Hanmi Science - worth 110 billion won ($92.5 million) - to his employees. Each of 2,800 employees of the pharmaceutical company, which made business news headlines throughout last year with blockbuster licensing deals, would get 40 million won worth of shares. The company and its chairman are known to be daring and unconventional.
In 1996, when few drug-making companies thought to enter China, Lim decided to set up a joint-venture with a Chinese company. The company’s supplement for lactic-acid-producing bacteria for kids and over-the-counter cold medication are bestsellers in their categories in China. The company funnels over 20 percent of its revenue into research and development. It has an excellent reputation for corporate social responsibility among drug companies. The Korean parent company got the limelight for its multibillion-dollar deals, but researchers in the joint-venture in China are partly responsible for its success.
Korea faces entirely new challenge as the Chinese economy upgrades the manufacturing industries. Korean imports are losing market share to their home-grown counterparts and competitiveness against their Chinese rivals. Increased volatility in the Chinese stock and other financial markets send shockwaves to Korean markets several times a year. Korea weathered the financial crises in 1997 and 2008 by riding the Chinese boom. But we no longer can expect to benefit from China.
Yet, cases like the Hanmi joint-venture raise hopes for the prospects of Korea Inc. “It was always hard,” says one head of a small and mid-sized company. What we need is determination to beat this challenge. For instance, a cosmetics company is highly successful in China by reducing production costs to offer quality beauty products at low prices. An IT company was able to generate a profit after supplying biometric authentication modules to a Chinese company for three years. And a food company saw exports of milk powder to China nearly triple over the last three years. There are many companies that do well in China in various fields regardless of the new headwinds.
There are new opportunities in China for Korean companies. The free trade agreement between the two countries can help Korean exporters of consumer products thanks to reduced tariff rates. Currently, intermediary goods make up the bulk of our exports to China, while the share of consumer products is only 5 percent. But this can work in Korea’s favor over the long run. Under the FTA, Chinese consumers would be increasingly drawn to cheaper Korean beauty and fashion products available online. China also would be carrying out ambitious plans laid out in its five-year economic blueprint including the One Belt, One Road infrastructure initiative from this year.
There will be many areas in the environment, facilities and infrastructure in which Korean companies can participate. Although growth in China’s overall gross domestic product is slowing, the services sector should continue to enjoy brisk growth rates. The burgeoning services market could be another opportunity for Korea’s excellent medical, franchise and content industries. Beijing has been liberalizing its services sector. The state-led retooling of the manufacturing sector also could demand Korea’s outstanding skill in technology and parts.
Korea also should customize its export strategy by targeting the outer and underdeveloped regions in China more aggressively through linking up with local distribution networks. Foreign products remain rare in the remoter cities, but the purchasing power of their people is as strong as in bigger cities. Experts predict that more than 60 percent of the Chinese middle class will migrate to peripheral cities. Since consumer tastes, distribution and business practices vary by region in the vast mainland, companies must come up with services and products tailored to specific regions and markets.
China is in a transition period. The process looks choppy. It is unwise to be blindly optimistic despite the odds. But we should remind ourselves that Korean products have been the bestselling imports in China for the last three years. We hope to see more CEOs like Lim be happy to share the fruits from aggressive investment and unwavering management.
Translation by the Korea Joongng Daily staff.
JoongAng Ilbo, Jan. 12, Page 29
*The author is the head of the Korea Trade-Investment Promotion Agency Beijing Representative
by Chung Kwang-young