April 20, 2017 10:00 am JST

Beijing hits South Korea in the pocketbook over THAAD

Companies scramble for options as missile defense dispute drags on

KIM JAEWON, Nikkei staff writer

A Lotte department store in Shanghai: Lotte's China business has been hit hard by a dispute between Beijing and Seoul over the latter's decision to deploy a U.S. anti-missile system. © AP

JEJU/SEOUL, South Korea The pub near the Lotte Hotel on Jeju Island was deserted on the evening of March 16, one day after Chinese authorities banned group tours from visiting South Korea.

The owner of the beer hall, simply called Island, is normally packed with Chinese tourists staying at the five-star hotel, but they are nowhere to be seen now. "I have no idea how I can run this shop," he said. "I just hope that things will get better."

He is not alone. As China tightens its sanctions against South Korea in protest over its decision to deploy a U.S. missile defense system, an array of companies is feeling the squeeze, from household names like Hyundai Motor to small travel agencies catering to Chinese tourists.

Beijing and Seoul have been at odds since July over deployment of THAAD, the Terminal High Altitude Area Defense system. Beijing suspects THAAD's powerful radar will be used to spy on it. Seoul and Washington say it is aimed solely at defending South Korea from North Korea's missiles, but China remains adamantly opposed to its presence.

PUTTING ON THE BRAKES Hyundai Motor's sales in China plunged 44.3% on the year to 56,000 cars in March, the company announced recently. In the first quarter, the automaker sold 196,000 cars, down 14.4% from the previous year. Its smaller affiliate, Kia Motors, is in even worse shape. Kia's unit sales tumbled 68% to 16,000 last month. In the January-March period, the company's sales came in at 77,000 cars, down 45% from the previous year.

Lotte, a Korean-Japanese conglomerate, is another victim of the bilateral dispute. It has become a key target of Beijing's vendetta because the company ceded land that was once a golf course to South Korea's Defense Ministry, giving it a place to put the hardware. Lotte Mart, Lotte Shopping's discount chain, said 74 out of its 99 stores in China have been closed by the authorities, as of April 19. The company shut down 13 more outlets on its own that had been hit by a customer boycott.

The dispute is also affecting South Korea's mergers and acquisitions market, as Chinese investors pull out of deals. Seoul-based private equity firm MBK Partners announced in March that it would list ING Life Insurance on the stock market. MBK had originally planned to sell the company to Chinese investors, including Anbang Insurance Group, but the investors halted the negotiations. Market watchers believe the Chinese government pressured the bidders to withdraw to make its displeasure over THAAD known.

South Korea's central bank is keeping a nervous eye on the economy as the costs of the retaliation rise. The Bank of Korea said the fallout from THAAD will shave 0.2% from economic growth this year, predicting a 30% slide in tourism from China and a 2% fall in exports to the country.

"China is placing barriers to trade due to deepening tensions over THAAD. It is a downside risk for economic growth," said Chang Min, a director general at the bank. "Exports in the service sector are also in poor condition, hit by China's trade sanctions," he said.

Despite the sanctions, the central bank is forecasting growth of 2.6% this year, up from its January forecast of 2.5%, helped by strong exports, particularly of semiconductors.

Economists say China's ban on group tours to South Korea will kill jobs, putting a damper on a recovery in the labor market that has been helped by rising exports and presidential campaign promises.

"The strong export recovery and pledges by presidential candidates to support job creation for the young are positive for the labor market outlook, but lower Chinese tourist arrivals and restructuring in the shipbuilding sector should result in some job losses," said Kwon Young-sun, an economist at Nomura, a Japanese investment bank.

China is the largest source of international tourists to South Korea. In February, some 590,000 Chinese came to the country, up 8.1% from a year ago, accounting for 47.2% of the total. Market watchers say the number of Chinese tourists may have fallen sharply in March, following the ban on group tours. Official data for March will come out in late April.

OPTIONS DEALING South Korean companies are looking for options as China tightens the economic screws. According to a survey by Korea International Trade Association in March, 42.9% of 597 companies doing business in China said they are seeking alternative markets in Southeast Asia.

AmorePacific Group, the country's largest cosmetics maker, which relies heavily on the Chinese market, is eyeing Southeast Asia as a way to hedge its bets. The company launched its Innisfree store in Ho Chi Minh City last fall, and set up a research center in Singapore in January.

"We believe Southeast Asian countries have huge potential to grow in the future. We are expanding our presence in the region, though China is still the largest overseas market for us," said an AmorePacific spokesman.

Provincial governments are also working harder to attract travelers from other countries, hoping to offset their Chinese losses. Jeju Province is in talks with AirAsia X to launch direct flights connecting the resort island with Kuala Lumpur, aiming to pull in more tourists from Malaysia.

China accounted for almost 96% of the island's inbound flights in March, bringing in over 184,000 people, according to Jeju tourism officials. There were over 5,000 arrivals from Malaysia in January, making it the second-largest source of international visitors.

South Koreans, too, are reluctant to visit China since tensions between the two countries have ratcheted up. "The THAAD issue is definitely affecting our ticket sales on Chinese routes," said Seo Ki-won, a spokesman for South Korea's Asiana Airlines. "Customers are wary of China's retaliation, which they see in the media."

Asiana said that it expected its sales on Chinese routes to fall 35% this year due to the THAAD issue. Chinese routes accounted for 19.5% of the airliner's passenger business in the fourth quarter of 2016.

But there is no sign South Korean consumers are boycotting Chinese products. China's Tsingtao Beer is one of the best-selling imported beers in the country, along with Japan's Asahi and Dutch brand Heineken, according to retailers.

Meanwhile, Hwang Kyo-ahn, South Korea's acting president and prime minister, said on April 17 he agreed with U.S. Vice President Mike Pence that the two countries should work together to put an end to what he called China's unfair actions over the THAAD deployment. Pence was visiting as part of his Asia-Pacific tour, which includes stops in Japan, Indonesia and Australia.

Asia300

Hyundai Motor Co., Ltd.

South Korea

Market(Ticker): KRX(005380)
Sector:
Industry:
Consumer Durables
Motor Vehicles
Market cap(USD): 38,380.09M
Shares: 285.47M
Asia300

Kia Motors Corp.

South Korea

Market(Ticker): KRX(000270)
Sector:
Industry:
Consumer Durables
Motor Vehicles
Market cap(USD): 13,778.89M
Shares: 405.36M
Asia300

Lotte Shopping Co., Ltd.

South Korea

Market(Ticker): KRX(023530)
Sector:
Industry:
Retail Trade
Department Stores
Market cap(USD): 8,128.55M
Shares: 31.49M
Asia300

AmorePacific Group, Inc.

South Korea

Market(Ticker): KRX(002790)
Sector:
Industry:
Consumer Non-Durables
Household/Personal Care
Market cap(USD): 9,824.20M
Shares: 88.90M
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