By Jhoo Dong-chan
Korean companies have reduced their investments in China by nearly half this year as it has become difficult to do business there amid Beijing’s growing economic retaliation against Korea’s deployment of a U.S. missile defense system.
Suffering a prolonged sales slump in China, a number of major Korean companies, including Lotte Mart and Orion, are reportedly not only downsizing their direct investments but also considering restructuring their business operations there or even a withdrawal from the market.
According to the Bank of Korea, Sunday, foreign direct investment (FDI) in China marked a 5.6 percent growth in 2015 compared to the previous year, but decreased by 0.2 percent last year. Between January and July this year, FDI in China was down by 6.5 percent from a year ago.
Korea’s direct investment in China, in the meantime, marked $1.75 billion in the period, down 43.7 percent from the $3.11 billion in the same period last year, the largest drop in major economies’ FDI in the world’s most populous country.
U.S. direct investment in China also declined by 37.5 percent while Japan’s investment was down by 3.7 percent in the January-to-July period. The European Union reduced its direct investment by 1.2 percent.
“Diplomatic tension between Seoul and Beijing over the deployment of the U.S. missile defense system is the reason behind Korean companies’ nosedive in investment into China,” the Bank of Korea said in a research report.
Sustaining snowballing losses in the market, Lotte Group decided to withdraw its supermarket franchise Lotte Mart from China. Currently, a total of 22 affiliates of the nation’s largest retailer are doing business there.
Lotte Group said it won’t withdraw any other affiliates from China but is considering a certain level of restructuring, including layoffs, to improve their profitability.
Lotte Chilsung Beverage, the group’s beverage making affiliate, is reportedly pushing a plan to dispose of some of its production plants while Lotte Home shopping is carrying out a restructuring process.
Korea’s largest supermarket chain E-Mart, which entered China in 1997, once had nearly 30 branches there, but has also recently decided to withdraw from the market by the end of this year.
E-Mart, now with only six supermarket chains there, is discussing with Thai CP Group over a possible sale of five chains. CP Group is also a possible candidate to take over Lotte Mart’s operation in China.
Orion, one of Korea’s three largest food companies that managed to successfully land into the Chinese market, also suffered a 64 percent decline in operating profit this year. It recently downsized its sales forces by 20 percent to reduce labor costs.
The nation’s largest carmaker Hyundai Motor and its sister brand Kia Motors also sold only 82,025 cars in China last month, down 39 percent from the same period last year.
A Chinese newspaper reported last week BAIC Group is allegedly considering possible dissolution of its partnership with Hyundai Motor, but Hyundai Motor dismissed the claim.
FDI is a form of investment controlling business ownership in one country by a company based in another country. It includes mergers and acquisitions, joint ventures, building new facilities, reinvesting profits earned from overseas operations and intra-company loans. Hyundai Motor entered into China under a joint venture with Chinese BAIC Motor in 2002.