China’s rise to become South Korea’s main trade partner has been sudden. Twenty years ago there was only one weekly flight linking Seoul with China. Twelve years ago, Seoul imported a mere 10 tonnes a year of Chinese-made kimchi, Korea’s spicy national dish of fermented cabbage.
China is now omnipresent. A 2005 spat over parasites in imported Chinese kimchi has been forgotten, and South Korea imports 142,000 tonnes of the appetiser each year. Korean businessmen who run enterprises in China now have no problem finding a flight, with 642 connections a week.
Beijing deposed Washington as Seoul’s main trade partner in 2003, and the kimchi factories that pepper north-eastern China epitomise its early commercial relations with Seoul. Korean businesses sought cheap production bases from which to export goods back home or to the US.
That picture is changing. With Chinese wages rising, Korea’s medium-sized enterprises with tight margins are under pressure to move elsewhere. The mighty Korean conglomerates are the big winners, switching their focus from exports to China’s ravenous consumer market.
“Things are difficult for small and medium-sized enterprises in China, but solid mid-sized and large companies such as Samsung, LG, Hyundai and Posco targeted the Chinese consumer market three or four years ago, so they are all right,” says Jung Hwan-woo, a China specialist at the Korea International Trade Association.
Hankook Tire, South Korea’s leading tyre maker and the top brand in China, says it has seen exports from its China plant slide to less than 43 per cent of annual output last year, from 56 per cent in 2007. Chinese consumers now buy slightly more than 57 per cent of Hankook’s output there.
Samsung Electronics is one of the largest exporters from China, where it has 135 centres for manufacturing, research and sales. Since 2007, it has consistently sold roughly 40 per cent, or $12bn-worth (£7.8bn, €9.4bn), of its annual production in China to the local market. Even one of the factories that was founded to export cheap kimchi back to Korea now sells all its wares in China.
Korean luxury businesses are accelerating investment in China. Paris Baguette, a patisserie chain, has opened 37 branches in China. Cosmetics maker AmorePacific expects sales in China to triple to Won150bn (£80m, €100m, $125m) this year from 2007. But South Korean companies’ appetite for fresh investment in China is waning as workers there demand more pay. South Korea is increasingly favouring Vietnam and Indonesia as a production base; its investment in China has slipped to $2.6bn in 2009 from a 2007 peak of $7.1bn.
Political relations between South Korea and China have also cooled sharply since the sinking in March of a South Korean warship. Seoul says North Korea torpedoed the corvette, but communist Beijing refuses to penalise its ally.
Andrew Gilholm, who covers China and Korea for Control Risks, a consultancy, says China’s rising wages would not squeeze out heavyweight investors whose labour constituted a tiny fraction of total costs. Still, he cautions that medium-sized companies from Taiwan, Hong Kong and Korea with tight margins have hit difficulties and moved abroad or to China’s cheaper interior.
“Overall, the labour climate in China is still preferable to most south-east Asian environments,” he says. “For most companies in China, the idea they are only here for cheap labour is a decade out of date. An increasing proportion of companies are in China mainly to access one of the most important domestic markets in the world.”
Mr Jung says some Korean companies have been too hasty to abandon China. “Some companies that moved to Vietnam and Indonesia reported the business environment was more difficult than they imagined,” he says.
Additional reporting by Kang Buseong