Do South Korean companies still have opportunities in the Chinese market?

By Dong Xiangrong and An Bo Source:Global Times Published: 2019/8/1 21:13:41

Illustration: Luo Xuan/GT

The news that South Korean conglomerate LG Group is seeking to sell off its Beijing headquarters building, LG Twin Towers, has made headlines recently. This marks another big move by LG after its withdrawal from the Chinese smartphone market. The sale of such high-quality assets as the LG Twin Towers underscores its inability to win back the Chinese market.

When it comes to LG, Chinese consumers usually think of smartphones and household appliances, but it actually offers far more than that. As one of the largest chaebols in South Korea, LG has extended its reach into a wide range of industries.

After more than 70 years of development, the company has now become a multinational group covering fields like chemical energy, electronics, communications, and services. 

Although LG clarified that the planned sale of the LG Twin Towers doesn't mean that the company will withdraw from China, it is true that South Korean companies are indeed seeing their market shares in smartphones and household appliances sliding continuously in the country. Then, the question is: Do South Korean companies still have enough core competitiveness in the Chinese market?

Thanks to China's reform and opening-up, as well as the "Northern Policy" under South Korea's Roh Tae-woo administration, China and South Korea officially established diplomatic relations in 1992. Since then, the economic relationship between the two countries has developed in leaps and bounds. 

In 2018, bilateral trade between China and South Korea reached $313.43 billion, with South Korea recording $95.85 billion in trade surplus. An important reason behind China's trade deficit with South Korea is the trade of a large amount of intermediate goods.

South Korea's exports to China mainly focused on the export of intermediate goods, such as mechanical and electrical products, chemical products, and optical medical equipment products, which didn't see much impact from changes in bilateral political relations.

Of course, South Korean companies are facing increasing competitive pressure in the Chinese market. In the past, they had certain technological advantages in China, but with the rapid development of Chinese companies' technological strength, South Korean companies' advantages are weakening.

Ten years ago, when the author conducted a survey in South Korea, Chinese companies that local people knew about were only Haier and Lenovo. Today, companies like Alibaba and Tencent have a high reputation in South Korea. Even Xiaomi has many middle-aged and older fans in South Korea.

Another reason for the slowing development of South Korean companies in China is that they fail to keep up with China's consumption upgrades. Take the automobile industry as an example. When Hyundai Motor entered China, the brand exactly met the needs of the automobile market in big Chinese cities, so sales were very brisk at the beginning. But with the consumption upgrade in China's big cities, the demand for medium and high-end cars has grown. Obviously, Hyundai Motor doesn't offer lots of medium and high-end vehicles to adapt to the taste changes of Chinese consumers.

In terms of China-South Korea economic cooperation, South Korea has a complicated mentality. After the suspension of the THAAD deployment, bilateral relations started to recover. The Moon Jae-in administration rolled out the New Southern Policy, and South Korean companies have increased their investment in Southeast Asia and South Asia.

Some South Korean capital has left China due to concerns about overreliance on China or because of their declining competitiveness. But the major reason may still be the rising costs of labor, land, and environmental protection in China.

So, what is the growth point of China-South Korea economic relations in the future? As we all know, the China-South Korea free trade agreement is a milestone in the history of the development of their economic relations. From signing the FTA agreement in June 2015 to the fourth round of negotiations over the second phase of the FTA in March 2019, the two countries have been striving to expand trade potential through the FTA.

During the G20 Osaka summit this year, leaders of the two countries also communicated on the second phase talks of the FTA. Both are looking forward to continued cooperation with each other and speeding up those second phase talks.

In fact, there are more opportunities for China and South Korea to expand cooperation in areas such as trade, technology, finance, and environmental protection. Both countries are opposed to protectionism and are supportive of multilateralism and a free trade system. Also, South Korea's New Northern and New Southern policies are in line with China's proposed Belt and Road Initiative in terms of goals. Therefore, the two sides may also seek cooperation programs in developing third-country markets.

Dong Xiangrong is a research fellow at the National Institute of International Strategy of the Chinese Academy of Social Sciences. An Bo is a doctoral student with South Korea's Sungkyunkwan University.


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