Korean firms split from China as key materials remain a headache

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Korean firms split from China as key materials remain a headache

Published: 26 Aug. 2023, 06:00 Updated: 28 Aug. 2023, 17:14

Korean firms are searching for ways to cut down their reliance on China. [SHUTTERSTOCK]

Korean firms’ dependency on the Chinese market in 2022 dropped to a third of 2016 levels as economic and political uncertainties took their toll.

The percentage of sales by China-based production units of Korean car, electronic parts, steel and construction materials companies, which account for 33 percent of the Kospi’s market capitalization, made up 5 percent of the firms’ sales, according to market tracker FnGuide.

The figure was down 11 percentage points from 2016 when the units’ sales had a 16 percent slice of the firms’ total sales.

In terms of the amount, the production units’ sales over the seven-year period shrunk 13.1 percent to 111 trillion won ($83.8 billion). Forty-six units in China were either disposed of or liquidated, rendering an estimated sales loss of 20 trillion won.

[NEWS ANALYSIS] Korea Inc. exiting China over weak demand, festering tensions

But Korea managed to trim the drop in sales to minus 23 percent from minus 25 percent during the cited period.

“Korean firms have been pushing to scale down their dependence on China after bearing its ban on Korean culture in 2016, the U.S.-China trade war in 2018, the Covid-19 pandemic in 2020 and Russia’s war of aggression against Ukraine and China’s lockdown in 2022,” NH Investment and Securities analyst Jeong Yeo-kyung said.

Chinese people residing in Korea participate in a demonstration urging the Chinese government to lift its Covid-19 lockdown measures at Yeongdeungpo District, western Seoul, on Dec. 31, 2022. [YONHAP]

The “made in China” products losing presence in the U.S. market may work in favor of “made in Korea” commodities.

The United States’ import from Chinese clothes, toys, machinery and electronic goods declined 25 percent on year in the first six months of 2023, according to the U.S. Census Bureau. The descent made China the third-largest trading partner of the United States, after Mexico and Canada.

China had been the United States’ No. 1 supplier since 2006.

The United States is about to up its anti-China trade policy by levying heavier duties on China-made solar energy products shipped from Southeast Asian countries from June 2024.

“Korean companies may benefit in the long-term in sectors such as solar energy, amid the softening competition with China in the global trade market,” Jeong added.

A slowdown in China’s economy will not bring down the Korean economy as much as it did in the past, analysts say.

“China’s share of Korea’s exports peaked at 30.8 percent in May 2020 and sharply fell to 19.4 percent in June this year,” Bloomberg economist Kwon Hyo-sung said.

Samsung Electronics Chairman Lee Jae-yong visits a Samsung Electro-Mechanics production plant in Tianjin, China, on March 24. [SAMSUNG ELECTRONICS]

“Between 2000 and 2017, a percentage point growth in China’s economy would have translated into a 1.3 percentage point rise for Korea’s exports and a 0.4 percentage point growth for Korea’s economy. The increases are now 0.3 percentage point and 0.1 percentage point, respectively.”

This means that China’s sluggish growth will not affect the Korean economy as much as it did before 2017 thanks to Korea’s efforts to de-risk from China, Kwon added.

Others argue that it is premature to assess the results of the de-risking moves since China is still a major supplier of materials for semiconductors, batteries and rare earth elements, which are Korea’s key export products.

“China virtually has a monopoly on mining chips, batteries and rare earth materials following its decade-long investment in Africa and other regions,” said Jeon Byung-seo, head of the China Economic and Financial Research Institute.

“Hurried de-risking may turn out toxic as finding substitutes in the coming five years won’t be easy.”

BY KIM KYUNG-HEE, SOHN DONG-JOO [sohn.dongjoo@joongang.co.kr]