By Troy Stangarone
Last month, Hyundai Motor announced its plans to address its declining market share in China. A shift in Chinese consumer preferences toward SUVs, together with retaliation for the deployment of THAAD, resulted in a decline in the automaker's sales from 1.14 million vehicles in 2016, to less than 686,000 in 2019.
For much of the last two decades, China has been one of the world's most promising markets. Initially firms looked to China as a source for production. Since 2000, South Korean firms have set up nearly 23,500 operations in China to produce goods for sale in the global market or domestically in China.
However, the hope has always been that in time, China would become a new market of consumption ― similar to the United States ― that would drive the global economy.
Over the last two decades, China has grown into the world's second largest economy and largest market for new automobile sales. Its population of 1.4 billion possesses a large and growing urban middle class that has access to the disposable incomes to spend on beauty products, flat-screen TVs, smartphones and other consumer goods.
While rural China remains relatively poor, prior to the pandemic, consulting firm McKinsey estimated that the urban middle class accounts for more than 60 percent of China's GDP growth, and is increasingly important outside of the first-tier cities. Coupled with China's strong rebound from the pandemic, it is the type of market no firm can afford to ignore.
But challenges have been emerging in recent years that undermine China's strength as part of global supply chains and as a growing consumer market.
The ongoing conflict between the United States and China over trade and technology has become a factor in the ability to use China as a production platform. While the current conflict involves issues of national security related to certain technologies, such as semiconductors, it also relates to Chinese investment practices that have required firms to share their intellectual property with local partners, as well as Beijing's "Made in China 2025" plan.
Under "Made in China 2025," Beijing aims to make China self-sufficient in certain cutting-edge technologies, such as semiconductors, green energy, and green vehicles. Its goal is to develop domestic firms to be leaders in these and other areas.
This policy direction has had implications for Korean firms. As part of China's efforts to grow its own domestic firms for electric batteries, electric vehicles equipped with Samsung and LG batteries weren't eligible for government subsidies until last year. Reports indicate that Hyundai may go with a Chinese producer due to these subsidy rules.
Electric vehicles will be critical to Hyundai's longer-term strategy in China. Beijing has set a target for 40 percent of new vehicle sales to be electric vehicles by 2030, as well as to phase out the sale of all vehicles powered only by combustion engines by 2035.
Tesla's Model 3 was the top-selling electric vehicle in China over the last year, but a series of new Chinese models, along with domestic nationalism, are beginning to erode Tesla's position.
The New York Times recently noted that, as Chinese firms are becoming more technologically savvy and improving their quality, they are increasingly appealing to nationalism to convince Chinese consumers to switch to Chinese brands. According to JD Power, nearly half of all expected car buyers in the next six months plan on purchasing a Chinese model, up from around 20 percent in 2016. For those 35 and under, the number rises to 60 percent.
As the smartphone industry attests, quality products do not assure success in China. Samsung, along with Apple, is the world's top seller of smartphones. Samsung accounted for 23 percent of all smartphone sales globally during the first quarter of this year, and 19 percent for all of 2020. Samsung's share in China, however, is only around 1 percent.
International politics is also becoming an issue for doing business in China. Beyond China's informal sanctions over Terminal High Altitude Area Defense (THAAD), Australia has faced economic consequences for its call for an independent investigation into the origin of the pandemic, while Western firms are now having their logos blurred on Chinese TV, over issues related to concerns about labor practices in Xinjiang.
Whether it is the competition between great powers, domestic Chinese policy, domestic nationalism, or international politics, China is becoming an increasingly challenging market for Korean and other international firms. But it is ultimately a market that Korean firms cannot ignore. In time, some of these issues may abate, but Korean firms should expect to be less profitable for the foreseeable future as they navigate these and other challenges.
Troy Stangarone (ts@keia.org) is the senior director of congressional affairs and trade at the Korea Economic Institute.
 |
For much of the last two decades, China has been one of the world's most promising markets. Initially firms looked to China as a source for production. Since 2000, South Korean firms have set up nearly 23,500 operations in China to produce goods for sale in the global market or domestically in China.
However, the hope has always been that in time, China would become a new market of consumption ― similar to the United States ― that would drive the global economy.
Over the last two decades, China has grown into the world's second largest economy and largest market for new automobile sales. Its population of 1.4 billion possesses a large and growing urban middle class that has access to the disposable incomes to spend on beauty products, flat-screen TVs, smartphones and other consumer goods.
While rural China remains relatively poor, prior to the pandemic, consulting firm McKinsey estimated that the urban middle class accounts for more than 60 percent of China's GDP growth, and is increasingly important outside of the first-tier cities. Coupled with China's strong rebound from the pandemic, it is the type of market no firm can afford to ignore.
But challenges have been emerging in recent years that undermine China's strength as part of global supply chains and as a growing consumer market.
The ongoing conflict between the United States and China over trade and technology has become a factor in the ability to use China as a production platform. While the current conflict involves issues of national security related to certain technologies, such as semiconductors, it also relates to Chinese investment practices that have required firms to share their intellectual property with local partners, as well as Beijing's "Made in China 2025" plan.
Under "Made in China 2025," Beijing aims to make China self-sufficient in certain cutting-edge technologies, such as semiconductors, green energy, and green vehicles. Its goal is to develop domestic firms to be leaders in these and other areas.
This policy direction has had implications for Korean firms. As part of China's efforts to grow its own domestic firms for electric batteries, electric vehicles equipped with Samsung and LG batteries weren't eligible for government subsidies until last year. Reports indicate that Hyundai may go with a Chinese producer due to these subsidy rules.
Electric vehicles will be critical to Hyundai's longer-term strategy in China. Beijing has set a target for 40 percent of new vehicle sales to be electric vehicles by 2030, as well as to phase out the sale of all vehicles powered only by combustion engines by 2035.
Tesla's Model 3 was the top-selling electric vehicle in China over the last year, but a series of new Chinese models, along with domestic nationalism, are beginning to erode Tesla's position.
The New York Times recently noted that, as Chinese firms are becoming more technologically savvy and improving their quality, they are increasingly appealing to nationalism to convince Chinese consumers to switch to Chinese brands. According to JD Power, nearly half of all expected car buyers in the next six months plan on purchasing a Chinese model, up from around 20 percent in 2016. For those 35 and under, the number rises to 60 percent.
As the smartphone industry attests, quality products do not assure success in China. Samsung, along with Apple, is the world's top seller of smartphones. Samsung accounted for 23 percent of all smartphone sales globally during the first quarter of this year, and 19 percent for all of 2020. Samsung's share in China, however, is only around 1 percent.
International politics is also becoming an issue for doing business in China. Beyond China's informal sanctions over Terminal High Altitude Area Defense (THAAD), Australia has faced economic consequences for its call for an independent investigation into the origin of the pandemic, while Western firms are now having their logos blurred on Chinese TV, over issues related to concerns about labor practices in Xinjiang.
Whether it is the competition between great powers, domestic Chinese policy, domestic nationalism, or international politics, China is becoming an increasingly challenging market for Korean and other international firms. But it is ultimately a market that Korean firms cannot ignore. In time, some of these issues may abate, but Korean firms should expect to be less profitable for the foreseeable future as they navigate these and other challenges.
Troy Stangarone (ts@keia.org) is the senior director of congressional affairs and trade at the Korea Economic Institute.
![[INTERVIEW] Partnership with allies is key to Seoul's space plans](https://img.koreatimes.co.kr/upload/thumbnailV2/7c6f5aaf019240eeb38dcf75f9d97cb3.jpg/dims/resize/178/optimize)
![[INTERVIEW] Lee Jun-hyuk unrecognizable in 'The Roundup: No Way Out'](https://img.koreatimes.co.kr/upload/thumbnailV2/77a9da6df7da4284adbee249a87307c1.jpg/dims/resize/178/optimize)
