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US request for 'friend-shoring' expected to accelerate exodus
By Park Jae-hyuk
Once regarded as a "land of opportunity" for its low labor costs and rapid economic growth, China is now considered somewhat notorious among companies from other countries for its unstable political and economic conditions.
More Korean companies have joined the recent trend of global firms leaving China, relocating their workforces and manufacturing facilities away from the world's most populous country.
Although Korea Chamber of Commerce and Industry (KCCI) Chairman Chey Tae-won emphasized during a forum on Jeju Island this month the importance of maintaining amicable economic relations with China, SK Group under his leadership has also downsized its operations there.
"Whether you like it or not, China is a significantly large market," Chey told reporters. "It is too early to decide to stop doing business in China."
The chairman, however, admitted the difficulties in doing business there.
Last August, SK China, the holding entity of the group's operation there, sold its entire stake in its car rental business in the Chinese market to Toyota for 300 million yuan ($44 million). The group also sold SK Tower building in Beijing in June last year.
SK Group cited its plan to invest more in promising Chinese startups as the main reason for the sell-offs, but the series of restructuring measures are widely interpreted as part of the group's efforts to cut its reliance on China, just as many other Korean firms are doing.
A recent survey conducted by the Korea International Trade Association (KITA) showed that a majority of Korean firms doing business in China were considering downsizing, retreating or relocating their operations there, as most of them anticipated that the Chinese government would continue its strict quarantine measures against COVID-19 throughout this year.
According to the survey, 88.1 percent of respondents answered that China's lockdown measures had a negative impact on their business, causing setbacks in transportation, sales, marketing and supply chains.
"Even after lifting the lockdown, Shanghai has restricted face-to-face customer services," KITA's Shanghai office said in a report. "Because transportation is still inconvenient, it will take time for non-manufacturing companies to normalize their operations."
Political risks
The quarantine measures, however, seem to have had a limited impact, compared to political risks stemming from the conflict between the U.S. and China.
Korean companies that have been active in China for more than a decade picked the Chinese government's regulations, discrimination in favor of local firms and intensifying trade feud between the U.S. and China as the major reasons for the worsening investment environment there, according to the Federation of Korean Industries.
Lotte Group, for example, has almost finished pulling out of China, after facing five years of severe economic retaliation from Beijing, due to the conglomerate's decision in 2016 to offer a site for the U.S. Forces Korea to deploy a Terminal High Altitude Area Defense (THAAD) missile defense system.
Amorepacific has also closed hundreds of outlets over the past few years, following a boycott from Chinese consumers.
Hyundai Motor Group sold its plant in Beijing last year, two years after the factory's operation had been suspended, due to sluggish sales amid the THAAD row.
LG Corp. sold its Twin Tower building in Beijing for 8 billion yuan in 2020, while LG Electronics liquidated two factories in Tianjin and Kunshan, as well as a Hi Plaza store in Shenyang.
Against this backdrop, the U.S. asked Korean semiconductor and battery manufacturers to leave China, in order to strengthen cooperation among allies.
Following U.S. President Joe Biden's visit in May to a Samsung Electronics factory in Pyeongtaek, Gyeonggi Province, U.S. Treasury Secretary Janet Yellen toured LG Chem's R&D facility in Seoul this month, calling for "friend-shoring," a strategy of building supply chains excluding unfriendly nations.
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| U.S. Treasury Secretary Janet Yellen delivers a speech at LG Science Park in Seoul, July 19. Courtesy of LG Chem |
During her visit to Korea, Yellen even described China and Russia as "unreliable" and "authoritarian," criticizing them for threatening the global economy.
In response, Chinese state media warned that Samsung Electronics and SK hynix will suffer if Korea decides to join the U.S.-led "Chip 4" alliance along with Japan and Taiwan.
However, U.S. experts ruled out the possibility, given that Chinese firms are incapable of producing high-quality semiconductors.
Amid the geopolitical tensions, Samsung Electronics has actually downsized its workforce in China.
According to the company's sustainability report, the number of employees hired by its Chinese subsidiary dropped 51.9 percent to 17,820 in 2021 from 37,070 in 2016. In contrast, the number of employees in Korea rose to 111,126 from 93,000 during the same period. It has maintained the number of employees in the Americas at around 25,000.
"The number of employees at our Chinese subsidiary has decreased naturally as we have downsized our production lines there," a Samsung Electronics official said.
Need for diversification
The Yoon Suk-yeol administration has been expected to follow the request from the U.S. to stand in solidarity with its allies, amid the ongoing global supply chain crisis.
"The era of booming exports of the past 20 years via China is coming to an end," presidential secretary for economic affairs Choi Sang-mok told reporters during Yoon's visit to Spain last month to attend the NATO Summit. "We need substitute markets and diversification."
China's economic slowdown has also made the country less attractive for businesspeople. Its growth rate fell below 1 percent during the second quarter, showing a 0.4 percent year-on-year growth.
Economic experts have called on the Korean government and businesses to devise strategies for market diversification as soon as possible, if they wish to cut their reliance on China.
"It is impossible to deny the fact that Korean industries have relied heavily on China," Hyundai Research Institute economist Joo Won said. "Considering the potential negative impact on sales of intermediate goods to China, diversification measures are necessary for Korean firms."
