Cosmetics rally amid chilly Korea-China ties

Graphic by Cho Sang-won

By Kim Ji-soo

No other Korean export may be enjoying a rally these days more so than Korean cosmetics, amid a general pessimistic forecast for other sectors. Consumers around the world, in Asia and elsewhere, have proclaimed themselves Korean cosmetics fans. Even American consumers have begun to discover the wonder of Korean cosmetics, as can be seen on the beauty website Refinery29 and In the Gloss and chat forums such as Reddit.

The slightly chilly relations between South Korea and China following Seoul’s decision to deploy the Terminal High Altitude Area Defense (THAAD) system in July to counter threats from North Korea have not dented exports of Korean cosmetics, according to official statistics. Figures for August, announced by the government in early September, show that exports of Korean cosmetics reached $364 million, an 80 percent increase over the same period the previous year and a departure from the decrease in cosmetic firms’ share prices following the announcement of THAAD.

Strategy and Finance Minister Yoo Il-ho, who doubles as the top economic policymaker, surveys cosmetics products at Doota Mall in Jung-gu, Seoul, Thursday, the day Korea began its Korea Sale Festa to attract visiting foreigners and domestic buyers. / Yonhap

Even on the streets of Korea, one can see the enthusiasm of tourists, mainly Chinese, for Korean cosmetics. They can be seen purchasing the products in stores along Garosugil and Myeongdong and at online shopping sites. Shops have already hired Chinese-speaking employees in anticipation of the influx of Chinese customers during the Chinese National Day holiday over Oct. 1-7.

Korean firms are aggressively expanding their turf abroad. Claire’s Korea announced that it will enter original design manufacturer (ODM) and original equipment manufacturer (OEM) businesses for its own brand and foreign ones using a factory operated by its affiliate Cos Nine. Claire’s Korea is known for its horse oil product, for which sales last year totaled 180 billion won ($163.49 million).

TonyMoly is building an ODM factory in Zhejiang Province, China, to make up to 500 million products a year through its affiliate Megacos. It is also building an ODM factory, due for completion next year, in Hwaseong, Gyeonggi Province.

Shinsegae Intercos Korea, a joint venture between Shinsegae International and Italian firm Intercos, is building a cosmetics manufacturing factory in Osan, Gyeonggi Province, due for completion at the end of this year.

These cosmetics firms are trying to follow in the footsteps of Korean companies Korea Kolmar and Cosmax, the world’s top two cosmetics ODMs, which are now diversifying into other markets. In September, Korea Kolmar announced that it acquired a 51 percent stake in U.S. firm Process Technologies & Packaging LLC (PTP), which has supplied cosmetics to top global brands L’Oreal, Coty and Shiseido. The deal is a partnership with Wormser Corporation, a New Jersey-based contract manufacturer of personal care cosmetics and fragrances, which acquired a 49 percent stake in PTP. Cosmax, which acquired a factory in the United States in 2013 in Solon, Ohio, has lately focused on markets such as Indonesia.

“There are no specific statistics, but we estimate Korea’s ODM/OEM market to be around 1.3 trillion won up to 1.5 trillion won, and it seems to be growing,” an industry official said.

In addition to the industry overall, top Korean brands such as AmorePacific and LG Household &Health Care are steadily growing, providing another compelling reason for firms to enter the industry.

“But (any) ODM/OEM company must be able to put forth a new product if it wants to be viable,” the industry official said.

Na Eun-chae, a senior analyst with Korea Investment and Securities, saw the expansion of smaller but growing cosmetics firms that are making a foray into ODM as sensible business moves. Despite the negative effects from Seoul’s deployment of the THAAD system, Korean cosmetics in general have been doing well and are expected to reach a total export volume worth around 5 trillion won this year, she said.

“Also, the ODM market in China is only likely to expand to the tune of 20 percent per year in the next years,” Na said.

Compared with the fallout on K-pop or K-drama, the THAAD deployment’s negative effects on Korean cosmetics is smaller, Na said. To date, many K-pop and K-drama events have been either postponed or cancelled, including, most recently, the pushback to January next year of the Chinese airing of “Saimdang, Memoir of Colors,” starring top “hallyu” actors Lee Young-ae and Song Seung-heon.

“Cosmetics products, and the industry in general, have customer loyalty, so there is that too, and consumers are now familiar with the products that they put on their skin, even more so than with other hallyu or Korean pop culture products,” she said.

Meanwhile, Korea’s Ministry of Health and Welfare estimated that the Chinese cosmetics market will grow into the world’s largest in 2019. To further promote Korean firms in that market, the ministry sent representatives from 25 small and medium cosmetics firms to Chengdu, China, in late September to facilitate market research and provide sales opportunities.