Exodus of Korean Companies from China

Many small and mid-size Korean companies operating in China are having difficulties in doing business. Those companies, numbering about 30,000, moved their factories to China from the early 1990s due to rising labor costs and consequently, weakening competitiveness. However, they are currently striving to keep afloat amid rising operating costs resulting from a worsening business environment and the increasing competitiveness of Chinese companies.

Among the hardest hit are the processing businesses, such as sewing, toys, accessories, and electronic parts producers, which make up 80 percent of Korean companies domiciled in China. Their profits depend upon low labor cost. Because of continued losses, some companies have left China without even paying their employees salaries. Those irresponsible withdrawals of businesses prompted the Chinese government to make a protest with the Korean government, giving rise to diplomatic conflicts.

On the other hand, the number of companies that gained ground in the Chinese market with unrivaled technology and brand power is also increasing, though they are still few.

Lee Pyeong-bok, KOTRA trade director in Dalian, emphasized, “Companies who don’t have their distinctive brands, technology, and market routes are likely to fail in China. It’s time for businesses to change their strategies of making a foray into China.”

From “China Rush” To “China Exodus”-

According to the news report compiled by this newspaper’s China correspondent, Chengyang District in Qingdao, Shandong Province, which is home to first generation Korean companies, witnessed 44 companies shut down their factories and flee the country at night.

Among them, three are Chinese companies, two are Taiwanese, and the remaining 39 are Korean companies. “Other districts in Qingdao have similar experiences. Beginning this year, the number of companies closing their businesses is rapidly growing,” said Hwang Jae-won, deputy director of KOTRA in Dalian.

The reason Korean companies are closing their operations in China is because of the so-called “aggravating factors”: growing labor costs stemming from the enforcement of a new labor contract law, the restrictions imposed on the trade of low-cost processed goods, decreasing tax benefits for foreign businesses, and heightened regulations aimed at protecting the environment.

In particular, labor costs will soar next January when the new labor contract law comes into force. Those changed business environment have also resulted in faltering investment in China by domestic companies.

Among Korean companies’ total investment overseas, the proportion of investment in China tumbled to 31.0 percent in 2006 from 41.4 percent in 2003. When measured by the number of investments, it decreased to 44.3 percent from 59.7 percent over the same period. This year, the proportion also dropped to 38.0 percent.

Appearance of the New Success Model -

In the meantime, some Korean companies are gaining firm ground in China. They are equipped with brand power and technologies that Chinese companies cannot keep up with, and fully aware of the characteristics of the Chinese market.

“Lock And Lock,” renowned with sealed up containers, is selling its products for prices three times higher than those produced by Chinese manufacturers, but its sales is increasing by 100 percent every year. That’s the result of its high brand strategy which was adopted to beat Chinese rivals and has been maintained since 2004 when the company set foot on China. People in and around Shanghai consider “Lock And Lock” a luxury product.

Hansung Elcomtec Co., Ltd., which produces condenser for microwave ovens, made a soft landing in the Chinese market thanks to its thorough examination of the market. In 1992, the company established its division in Tenjin, conducted a four-year examination of the Chinese market, and started rolling out products in March 1996. From the outset, it locally procured raw materials and parts instead of importing them from its Korean headquarters, reducing production costs by 40 percent. Due to those strategies, Hansung Elcomtec became the world’s largest microwave condenser manufacturer with the worldwide market share of 52 percent, beating global companies such as Samsung Electronics and General Electric.

“Small and medium-sized companies can succeed in the Chinese luxury goods market if they equip themselves with quality products and brands,” said Jeong Min-ho, director of Shanghai E-Mart.

eye@donga.com jinhup@donga.com