South Korean consumer groups bear brunt of China’s Thaad ire

Car sales have more than halved, dozens of supermarkets have closed and tourist visits are down nearly 70 per cent as a government-led Chinese boycott of South Korean companies over Seoul’s missile shield takes a toll on business. 

Beijing has waged a campaign against South Korean groups since Seoul agreed in July 2016 to host the Terminal High Altitude Area Defence (Thaad), a US missile defence system. It says it threatens China’s security and has responded with criticism in state media, investigations of South Korean companies and a ban on tour groups visiting the country.

Some expected the sanctions and their effect to be short lived. But as tensions on the Korean peninsular persist, and with South Korea’s President Moon Jae-in warning Pyongyang against crossing a “red line” in developing nuclear weapons, companies are counting the cost.

South Korea’s Hyundai reported that China sales dropped 42 per cent year on year in the six months to the end of June, while at affiliate Kia they fell 54 per cent, with the latter blaming “anti-Korea sentiment”. 

The Chinese market is crucial for both carmakers and accounts for more than a fifth of Hyundai’s sales. “Thaad has an effect,” says a salesman at one of the company’s Shanghai showrooms.

Yet total South Korean exports to China rose 12 per cent year on year in the first six months of 2017, with trade in semiconductors especially strong. China accounts for more than a third of microchip maker SK Hynix’s sales, and the company reported record profit for the second quarter.

The Thaad backlash has been limited to consumer goods because South Korean companies are crucial to the supply chains of many Chinese exporters, says Paul Choi, an analyst at brokerage CLSA. 

Some Korean companies were faring poorly in China before the missile spat, however. “It’s not like Hyundai and Kia were gaining share,” Mr Choi adds. “But the Thaad issue has accelerated the poor sales.” 

Chinese tourists had flocked to South Korea in recent years, reaching a record 7m last year, a major boost for the country’s retailers. Visits continued to climb after Seoul’s announcement of Thaad, suggesting politics had limited effect on Chinese citizens’ decision to travel to South Korea.

But that changed in March, when Beijing banned agents from selling group tours to South Korea. Chinese visits have plummeted, falling 66 per cent in June compared with the same month last year. Two of China’s largest online travel agents, Ctrip and Tuniu, say the ban is still in place.

Meanwhile, Beijing has made efforts to curtail the spread of South Korea’s popular pop music and television serials. Online video sites have been banned from buying rights to new South Korean shows, according to two people with knowledge of the matter. 

Dean Jung, a South Korean television producer who says his Chinese partners have pulled out of filming a sequel to a series that last year racked up tens of millions of views, says the restrictions mean lower visibility for Korean products. “It’s a case of out of sight, out of mind,” he says. 

Cosmetics companies such as AmorePacific, South Korea’s largest which last year derived about a third of its revenues from Chinese consumers, have also been hit. The company reported a 58 per cent slump in operating profit in the second quarter. 

“During the Thaad controversy, I suspended my business because I’m patriotic,” says a cosmetics importer from the central city of Zhengzhou, who asked not to be named because he uses “grey” channels to avoid customs duties.

Traders say that consumers have shunned South Korean brands. “Because of protests against South Korea, Korean cosmetics sales almost halved in March. Then sales rebounded a little, but not as much as before,” says one importer in Shanghai.

Lotte, one of South Korea’s largest conglomerates, had nearly all of its 99 Chinese retail outlets closed by local authorities by March for unspecified fire code violations after it sold land to the government for Thaad. 

Five months later, 87 stores remain shut. “We will reopen once fire adjustments have been made,” reads a battered yellow sign on the window of one Lotte supermarket in the eastern city of Suzhou. 

Footfall in the remaining stores has slowed to a trickle. “Everything must go,” reads a sign at a store in Shanghai, where rows of shelves are empty and a sales assistant says the outlet is preparing to close. 

Lotte Shopping, the conglomerate’s retail subsidiary, said its operating profit fell 49 per cent in the second quarter of 2017 to $77m because of closures in China and reduced tourist spending at domestic stores. 

“Even though the situation remains difficult for a prolonged period, we have no plan to sell our Chinese business,” Lotte says, adding it is “looking into various ways to reorganise the business structure in terms of efficiency”.

But the recent missile tests by Pyongyang means Seoul’s commitment to Thaad has hardened. President Moon Jae-in last month asked for discussions with the US on deploying additional Thaad units. Chinese foreign minister Wang Yi condemned the move.

Mr Jung, the TV producer, says: “It doesn’t look like things will get better soon.”

Additional reporting by Kang Buseong in Seoul

Twitter: @hancocktom

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