China, THAAD and South Korean Business

China, THAAD and South Korean Business

China, THAAD and South Korean Business

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 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.

Politics

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.”

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Shayne Heffernan Funds Manager at HEFFX holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.

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