[NEWS IN FOCUS] Korea Inc. takes contrasting responses to Russia-Ukraine war

Industry

Published: 01 May. 2023, 20:06 Updated: 01 May. 2023, 20:12

[NEWS IN FOCUS] Korea Inc. takes contrasting responses to Russia-Ukraine war

Hyundai Motor employees work at its plant in St. Petersburg, Russia. [SCREEN CAPTURE]

With the Korean government increasingly leaning toward supporting Ukraine in the prolonged Russia-Ukraine war, the country’s major corporations have taken differing approaches to their businesses in Russia.

Some of Korea’s biggest corporations like Samsung Electronics, LG Electronics and Hyundai Motor are on track to either exit or curtail operations in Russia, while some smaller food companies and financial firms have stood their ground, even generating larger sales as competitors pulled out of the region.

Companies are torn as Korean President Yoon Suk Yeol publicly mentioned the possibility of providing arms to Ukraine last month in a concerted effort to contain Russia alongside with the United States and its allies.

From electronics devices to snacks and cup noodles, the goods made by Korean companies are maintaining solid demand in Russia despite mounting political pressures.

The process of withdrawing from Russia also comes with financial costs to bear as the Russian government takes a 10 percent cut of transactions between companies.

Hyundai Motor is taking one of the most decisive steps among Korean companies to suspend its business in Russia.

Hyundai Motor's plant in St. Petersburg, Russia [HYUNDAI MOTOR]

Multiple media outlets have reported that Hyundai Motor will sell its Russian plant to a Kazakhstani company, after having halted its operations last year.

The carmaker said that it has been “reviewing all scenarios,” but “nothing has been decided.”

Some predict that Hyundai may suffer around 1 trillion won ($747 million) in losses due to the shut-down of the St. Petersburg plant.

It is instead trying to find alternative production sites in nearby countries like India.

Hyundai Motor announced in March that it is acquiring a General Motors automobile plant in Talegaon, India.

The Talegaon plant has an annual production capacity of 130,000, which will likely boost Hyundai’s production capacity in India to 1 million.

As Korean automakers struggle to survive in Russia, Chinese firms are filling up the empty seats.

Hyundai Motor sold only 738 vehicles in Russia in the first quarter, down 98 percent on year, accord-ing to data from the Association of European Businesses. During the same period, Kia sold 4,435 vehicles in Russia, down 87 percent on year.

The combined share of Hyundai and Kia dropped to 3.4 percent in the Russian market from 26.5 percent a year ago.
The sharp decline is a result of Hyundai completely halting its assembly plant in St. Petersburg in March, right after the outbreak of the Russia-Ukraine war.

The St. Petersburg plant had an annual capacity of 230,000.

Hyundai Motor and Kia sold a total of 378,000 vehicles in Russia in 2021, taking up 5.8 percent of its global sales.

Russian brands and Chinese rivals are filling in the vacuum left behind from Korean companies’ absence.

Russian automaker Lada’s share skyrocketed to 41.9 percent in the first quarter on year, from 19 percent.

China’s Wuhu, Anhui Province-based Chery Automobile raised its share to 12.3 percent as of the end of March from 2.2 percent last year. Combining Chery Exeed, its premium brand, the company’s share reached 16 percent.

China’s Haval held 10.8 percent of the Russian market, up from 3 percent a year earlier, while Geely Automobile Holdings’ share rose to 8.3 percent from 2 percent during the same period.

“Global automakers like Renault and Nissan already withdrew their business in Russia, and the situa-tion for Hyundai Motor is similar,” Kim Joon-sung, an analyst at Meritz Securities, said.

“Issues about Russia are causing uncertainty for Hyundai’s future performance, which may reduce its company value.”

Samsung Electronics and LG Electronics have maintained their workforce in Russia but suspended factory operations since the war broke out.

Samsung Electronics runs a factory for televisions and home appliances in Kaluga, but it hasn’t been operational since last March.

Samsung Electronics once topped the smartphone market share in Russia, but the crown is now held by Xiaomi.

The Korean electronics maker generated 48.9 billion won in net loss from its Russia business unit.
LG Electronics has a factory in Ludza for washers and refrigerators, but the manufacturer has also suspended operation since last year.

“We currently don’t have a plan to resume operation,” according to an LG Electronics spokesperson. “We are keeping a close eye on the situation.”

On the other hand, food companies such as Paldo, Orion and Lotte Wellfood hardly made any changes to their Russian businesses after having already built a considerable market size in the country.

Paldo remains the company with the largest sales figure in Russia among domestic food producers. Paldo’s Dosirak series occupies over 60 percent of the total instant noodle market in Russia. Paldo surpassed 370 billion won in sales in Russia in 2022.

The company runs two plants in Russia, and it also recently acquired the Russian plant of Spain’s global food producer GBfoods in October, reportedly for tens of billions of won. GBfoods’ Russian plant raised 35 billion won in sales last year.

Consumers browse boxes of Orion's Choco Pie at a supermarket in Russia. [Orion]

“Paldo’s Dosirak products have settled in as a national brand since the company entered the Russian market in 1991,” a Paldo spokesperson said. “We are not detecting any changes in sales in the market, nor was there any sort of nudge from the Yoon Suk Yeol government regarding the matter.”

Korean snack brand Orion’s iconic Choco Pies are also enjoying popularity in Russia, and their sales have grown even amid the Russia-Ukraine War. The food company produces and sells 14 kinds of Choco Pies. Sales for Orion’s Russian subsidiary grew 79.4 percent on year to 209.8 million won in 2022, an all-time-high record since the company established the subsidiary in 2003.

Orion runs two factories in Russia — one in the Tver region in western Russia and the other in Novosibirsk — to bulk up its supplies, and it aims to export its products to the Russian and Central Asian markets.

“We’ve stabilized our business in the domestic market, and there were no noticeable changes after Yoon’s comment [on Ukraine],” an Orion spokesperson said.

Lotte Wellfood invested 34 billion won in its Russian plant earlier this year to expand its number of production lines and establish a storage facility for its Choco Pie and Moncher brands at the Russian plant. Moncher is another type of packaged round cake product with cream in the middle.

Lotte Wellfood’s Russian plant grew 53 percent on year to 80.6 billion won in 2022.

Due partially to the companies still active in the region, Korea’s major banks also saw a surge in profit last year.

Woori Bank’s Russian subsidiary in 2022 recorded an operating profit of 36 billion won, up 176 percent on year, and net profit of 12 billion won, up 140 percent on year. Total assets also increased by over 50 percent to 786 billion won at the end of last year.

Similarly, Hana Bank’s Russian subsidiary last year reported on-year operating profits of 16.3 billion won, up 158 percent, and net profits of 13.9 billion won, up 148 percent. Total assets increased by 66 percent during the same period to 1.21 trillion won.

The Russian subsidiaries of the two banks were established with the expectation of benefiting from the expansion of Korean companies in the region. They have been operating to target Korean companies and residents as well as some locals.

The sharp increase in Russia’s benchmark interest rate has also significantly contributed to the banks’ operating profits.

Woori and Hana banks explained that the increase in interest income was “due to enhanced healthy deposits and the rising market interest rates.”

“We are focusing on risk management instead of expanding the assets of the Russian subsidiary in response to the prolonged war,” a Hana Bank official said. “We are currently maintaining the subsidiary to provide financial support for Korean companies in the region, and will respond accordingly to any sudden change in the situation, according to our contingency plan.”

Against this backdrop, CJ CheilJedang has been curtailing its presence in the Russian market since the war.

CJ CheilJedang, the company with the largest share in the domestic instant food market, began operations of its subsidiary in Russia to manufacture frozen food in 2017. However, the company told the Korea JoongAng Daily that its Russian subsidiary in St. Petersburg is “barely in operation.”

“As other companies pulled out of Russia, CJ CheilJedang halted our business in the Russian subsidiary as well,” a spokesperson from CJ Cheiljedang said. “The subsidiary still exists, although there are hardly any business activities.”

The largest Tobacco company in Korea, KT&G, which has two subsidiaries in Russia, briefly commented that they are “assessing the situation” in regards to the war but did not give any detailed plans.

Beauty and health company Amorepacific has one subsidiary in Russia, to export their products overseas. A spokesperson from the company said that the business is far from active.

“It’s true that we have a subsidiary in Russia, but we aren’t pushing aggressively into the market,” the spokesperson said. “We have also not been ordered or pressured by the Yoon government [to pull out of the market]. We are not one of the companies largely influenced by a change of policies.”

BY SARAH CHEA, LEE JAE-LIM, PARK EUN-JEE, SEO JI-EUN [chea.sarah@joongang.co.kr]]