Korean companies brace for impact of THAAD spat

Korean companies are bracing to take hits from Beijing and Chinese consumers as repercussions of Seoul’s decision to install an American anti-missile system here begin to take shape both in China and in Korea.

Beijing has been ramping up retaliatory measures against Korea, especially since Lotte Group decided to sign a land swap deal with the Defense Ministry to provide land for the Terminal High Altitude Area Defense System here last week. 

The moves, including an unofficial travel ban to Korea and stricter inspections of Korean companies‘ products and outlets, stand to deliver a crippling blow to Korean companies that are dependent on the Chinese market.

The harsh measures targeting Korean companies led Korea‘s Trade Minister Joo Hyung-hwan Sunday to say that Seoul could seek “international legal action against possible violations of the World Trade Organization and the Seoul-Beijing free trade agreement.“

On Mar. 1, many of Lotte’s retail outlets in China underwent inspections regarding adherence to fire and sanitation codes. Four of the group’s supermarket outlets were shut following the inspection citing fire code violations, the first time that Lotte Mart outlets in China were officially ordered to stop operations. 

Lotte Group said Sunday that it had called an executive meeting to discuss the current situation in China. The group said that it would "request active support from the government" regarding the potential impact on Lotte and other Korean businesses' operations in China while creating a response team on the ground.

Cosmetics companies exporting to China have also expressed concerns about Chinese authorities applying regulations more strictly towards Korean companies. 

“The situation will hurt small and medium companies trying to export to China more than anyone else,” said a spokesperson at one cosmetics company. “China can turn back shipments or order recalls based on violations of obscure or small regulations, which are often overlooked by these smaller companies.”

At a recent press conference, Chinese Foreign Ministry Spokesperson Geng Shuang answered a question regarding Lotte‘s operations in China by saying that “(foreign companies’) operations in China must comply with Chinese laws and regulations” and that “at the end of the day the Chinese market and consumers will determine whether a foreign company is successful in China.”

Here in Korea, the fallout is expected to hit the tourism and duty-free sectors the hardest.

The tension between Beijing and Seoul comes at a particularly disastrous time for the duty-free industry, as the number of downtown duty-free operators has rapidly grown over the past two years. Seoul is set to see 13 duty-free outlets in the city alone by the end of 2017, intensifying competition to bring in more tourists. 

Data from the Korea Tourism Organization shows that Chinese tourists made up 8.06 million, or nearly half of the 17.2 million foreign tourists who came to Korea last year. These Chinese tourists were in turn responsible for propping up duty-free sales from foreigners here, which reached $7.6 billion last year according to the Korea Duty Free Shops Association.

At Lotte Duty Free, the largest duty-free operator here, Chinese shoppers contribute 70 percent of sales. At Shinsegae DF, Chinese shoppers make up 70 to 80 percent of all shoppers.

Retailers such as Hyundai Department Store and Shinsegae DF are facing the travel ban while building newly licensed outlets for opening later this year. To absorb the shock coming from reduced tourism from China, these companies will need to create operational strategies that diversify their consumer pool.

“Since our first store opening last year, we have focused our strategy on targeting individual travelers rather than tourist groups,” said a spokesperson for Shinsegae DF. “We have also signed agreements with Air Asia and Taiwan to diversify the countries from which our customers come.”

Meanwhile, consumers in Korea have begun to express anger online over China’s moves. Online commenters have taken to social media to call for boycotts of Chinese products, calling the issue a matter of “pride” and calling it a “betrayal of Korea” to buy Chinese products.

“I’m not going to use anymore Chinese-made products,” said one commenter. “China imposed a travel ban first, so as a Korean of course I’ll take part in a boycott.”

By Won Ho-jung (hjwon@heraldcorp.com)