[NEWS ANALYSIS] Korean companies leave China over weak demand

Industry

Published: 28 Aug. 2023, 06:00 Updated: 29 Aug. 2023, 09:31

[NEWS ANALYSIS] Korean companies leave China over weak demand

Hyundai Motor's No.1 factory in Beijing that was sold off in 2021. [YONHAP]

Korean corporations of all sizes are accelerating their exit from China due to heightened political and economic risks.

Once China served as a manufacturing hub for big-name companies like Samsung Electronics and Hyundai Motor, but they now turn to cheaper options like India and Southeast Asia.

A total of 46 production and incorporated units — whose parent companies are based in Korea — closed in China over the past six years, according to market tracker CEO Score.

Sales generated by Chinese units are also on a downward trajectory with combined sales of Chinese subsidiaries owned by 113 major Korean corporations slumping by 13.1 percent last year compared to 2016.

The shift away from China first arose in 2016 as major Korean retail companies took a hit from tensions between Korea and China over the deployment of the Terminal High Altitude Area Defense (Thaad) system.

Then, the former Trump administration started barring U.S. companies from using information and communications technology from Huawei in 2019, citing concerns about securities.

The push from the United States to cut China off advanced technologies prompted Korean chipmakers like Samsung Electronics and SK hynix to curb investment at their manufacturing sites in China.

The number of Chinese subsidiaries of Samsung Electronics was reduced to 30 as of the first half of this year from 37 in 2018.

Now, the tendency reverberates across the industry as China's appeal as a big market is fading fast due to patriotic consumption and a general slowdown in economic growth.

Automotive exodus after falling sales

Hyundai Motor employees work at its No. 3 Beijing plant in China [HYUNDAI MOTOR]

Hyundai Motor is one of the major Korean companies that saw the steepest drop in Chinese sales in recent years.

Sales of Beijing Hyundai Motor plunged 75.7 percent to 4.9 trillion won($3.7 billion) last year compared to 2016, while sales of Kia in China fell 80.8 percent during the same period.

Hyundai Motor on Wednesday said its Chongqing plant in China is up for sale at 3.68 billion yuan ($505 million), its second Chinese factory to be sold off.

Its Changzhou plant will also be up on sale within the year, which will reduce Hyundai's total number of operational factories in China from five to two.

Hyundai Motor originally had five factories in China, three in Beijing, one in Chongqing and one in Changzhou. Hyundai sold off its No. 1 Beijing factory in 2021 and halted operations at the Chongqing and Changzhou plants.

The Chongqing sale comes two months after Hyundai announced its Chinese business reconstruction plan in June due to the lingering sales slump.

First entered in 2002, Hyundai Motor's Chinese sales peaked in 2016, when it sold a total of 1.1 million units, representing 6.4 percent of the market.

However, it started to decline in late 2016 as a wide range of Korean products was largely neglected in China when the two countries clashed over the deployment of the Thaad.

The Korean automaker sold a total of 118,327 vehicles in China in the first half of this year, up 26 percent on year, which was still half of its figures from six to seven years ago.

“Hyundai Motor lost ground on Chinese brands in terms of price and lost its luxury image to German brands,” said Lee Hang-gu, a senior analyst at the Korea Automotive Technology Institute (KATI). “It is essential for Hyundai to map out a tactical strategy to make Chinese consumers think that Hyundai cars are superior to other brands, but also price competitive.”

Shipbuilders drifting away

A view of Samsung Heavy Industries' Rongcheng subsidiary in the Shandong Province, which manufactures ship blocks. It is the Samsung Heavy’s only production plant in China. [SAMSUNG HEAVY INDUSTRIES]

In the shipbuilding industry, Samsung Heavy Industries closed its manufacturing plant located in Ningbo, China, during the first quarter. The decision reduced the number of the company’s local plants in China from three to one.

Established in 1995, Samsung Heavy Industries Ningbo had been supplying ship blocks to its Geoje shipyard in South Gyeongsang for 26 years. The assets of the subsidiary, including land holdings, were sold to the Chinese government. Samsung Heavy Industries had publicly announced the closure in September 2021. Industry insiders suggest that factors such as decreased production efficiency and rising labor costs in China had impacted the cost competitiveness, contributing to this strategic move.

This marks the second instance of Samsung Heavy Industries closing its Chinese business, following the divestment of its entire stake in Rongcheng Gaya Heavy Industries last year. This leaves Samsung Heavy’s only production plant in China the Samsung Heavy Industries Rongcheng in Shandong Province.

"Our approach involves optimizing ship block fabrication within China, with a specific focus on the Rongcheng plant, which has heightened productivity from its streamlined manufacturing process,” a Samsung Heavy official said.

Parts suppliers parting ways

Due to its sluggish sales, Hyundai Steel is also selling its two Chinese automotive steel plate facilities.

Hyundai Steel Beijing Process, built in 2002, and Hyundai Steel Chongqing, built in 2015, both process the automotive steel plates supplied to Hyundai Motor and Kia factories in China.

Posco last year sold off 50 percent of its stake in its production subsidiary in Guangdong Province, while Dongkuk Steel sold a 90 percent stake in its Chinese subsidiary, DKSC, to the Jiangyin Municipal Government in Jiangsu Province.

Chinese sales of Hyundai Mobis, the auto parts maker that supplies components to Hyundai Motor and Kia, also dropped by 80.8 percent last year compared to a year ago.

Petrochemicals seeking diversification beyond China

Stranded between lagging demand and a supply glut, chemicals and petrochemicals manufacturers are scrambling to diversify their markets away from China, a country that has been the biggest importer of Korean petrochemical products.

Lotte Chemical has recently sold off its 50-percent share of Lotte Sanjiang Chemical, a Zhejiang-based joint venture, to China Sanjiang Fine Chemicals, which holds the remaining 50 percent of the company. The joint venture was established in 2010, with each company raising 90 billion won, in order to produce ethylene oxide, feedstock for solvents, polyurethane foam and pharmaceuticals.

Lotte Chemical did not provide financial details of the sell-off such as the amount of the deal.

Lotte Chemical offices in Zhejiang, China [LOTTE CHEMICAL]

Lotte Sanjiang Chemical posted an operating loss of 13.8 billion won in 2021 and 37.5 billion won in 2022, as competition from local manufacturers had grown more intense.

Other petrochemical companies are feeling the heat too, as their presence in the Chinese market continues to falter. LG Chem’s petrochemicals division posted an operating loss of 12.7 billion won in the April-June period, and Hanwha Solutions’ chemical business saw a 79 percent on-year drop in operating profit in the second quarter.

Ethylene-naphtha spread, which refers to the margin between prices of ethylene and naphtha, stood at around $170 per ton last month, remaining below the break-even point of $300 for more than a year. The figure is a major indicator of profitability in the petrochemical industry.

Weak demand pushing companies to reinvent

Such trends are likely to stay, as the ongoing sector-wide challenges in chemicals and petrochemicals are mainly derived from weak demand in China due to the slow economy, as well as the country’s increasing self-sufficiency on petrochemical production.

As such, the companies are seeking breakthroughs by extending their portfolio into more high-value-added or environmentally-friendly products while focusing on future growth sectors.

“Some say that the Chinese economy is losing its drive and others say it will recover gradually, but the general consensus is that the market will not be as profitable as it used to be [for chemical and petrochemical exporters],” said a chemical industry source who spoke on the condition of anonymity.

“As there are many external variables in not just the Chinese market but in the overseas markets in general, we are trying to diversify our export markets while improving self-sufficiency in raw material supply,” said the source.

Retailers, first mover of China exodus

Lotte Group phased out its operations in the Chinese market well in advance.

This shift started in 2016 during a diplomatic spat between Beijing and Seoul over the Thaad, when a former Lotte golf course was used as the home of the antimissile system which led to strained relations. China, responding to the perceived cooperation with the Thaad deployment, initiated a nationwide boycott of Lotte products and investigated its affiliated businesses operating within its borders.

The mounting pressure from China led Lotte to gradually reduce its presence in China — making it as one of the companies most affected by the neighboring state’s wrath.

"Technically, Lotte's retail has withdrawn from China since the Thaad issue,” a spokesperson for Lotte Shopping said.

Lotte Shopping, the retail unit of the conglomerate, had once boasted more than 100 department stores and marts, but by 2018, it had stopped its shopping operations. In the following year, it decided to discontinue its beverage and confectionery businesses, selling key production bases such as factories. By 2022, Lotte dissolved its central retail headquarters in China, the Lotte China Management.

Lotte Shopping’s Lotte Department Store branch in Chengdu, China [LOTTE CORPORATION]

At present, Lotte Mart is closed down in China entirely. Only one Lotte Department Store branch remains in Chengdu, which also decided to sell its shares last year.

Lotte Wellfood, Lotte’s confectionery brand, is in the process of selling the group’s sole food production location in China.

“This is in part of streamlining operations, and we are currently looking for potential buyers,” a spokesperson for Lotte Wellfood said. “Instead, we’re planning to increase exports as our new approach to the Chinese market.”

BY SARAH CHEA, SHIN HA-NEE, SEO JI-EUN, PARK EUN-JEE [chea.sarah@joongang.co.kr]