A Hyundai Motor dealership in Seoul.

Hyundai was one of the high-profile targets of the Chinese government's anti-South Korea
campaign. © Reuters

FT CONFIDENTIAL RESEARCH

Korean brands still under pressure in China despite

warmer ties
FTCR survey shows domestic auto and smartphone makers carving out greater market share

JANUARY 30, 2018 11:00 JST

Warming diplomatic ties between Beijing and Seoul have brought little relief to South
Korean brands, which continue to struggle in the Chinese market, according to the
latest consumer brands survey by FT Confidential Research.

The FT's survey of 2,000 households across China found the popularity of
South Korean brands continuing to wane as competition from domestic companies
intensifies (see chart).
The end of a diplomatic stand-off that began in 2016 over deployment in South Korea of
the U.S. Terminal High Altitude Area Defense missile system should remove
uncertainty for some South Korean companies operating in China. However, their
market position still leaves them vulnerable to lower-priced and increasingly potent
domestic competitors.

In response to Seoul's agreement to deploy THAAD, Chinese authorities began

intensifying pressure on South Korean business in the country and state media
encouraged a consumer boycott of South Korean goods. South Korean business was
disrupted, but the calls for a boycott were not successful. Chinese consumers do claim
to shop patriotically: 62.5% of respondents to our survey said changes in China's
relations with another country would affect their decision to buy goods from that
country. However, they also said factors such as quality, brand and price are far more
important than country of origin (see chart).
The end of the stand-off came too late for Lotte Group, which, along with
Hyundai Motor, was the most high-profile target of the government campaign. The
chaebol corporate group, which was directly involved in the THAAD row after providing
the land for its deployment, is trying to sell its supermarket operations in China after
most of its outlets were closed by local officials citing safety or tax violations. However,
Lotte had been struggling for years in China due to overexpansion and local
competition.

Hyundai's China operations, too, were disrupted but the automaker's problems in China
also go beyond THAAD. The company failed to adapt quickly enough to demand for
small SUVs, resulting in a disappointing 2017 and a subdued outlook for this year.

Our brand data shows Hyundai's popularity being eroded by domestic challengers,
although it did improve slightly among third-tier city residents, who generally have
smaller budgets (see chart).
Hyundai has partly countered falling sales with price cuts and has fast-tracked launches
of small SUVs. With a sticker price of 129,900 yuan ($20,275), Hyundai's ix35 is
aggressively priced against domestic rivals such as Great Wall's Wey VV5, which sells
for 150,000 yuan. South Korean car sales -- mainly those of Hyundai and Kia -- showed
signs of recovering toward the end of 2017. However, they may not spring back, as
Japanese car sales did following protests in 2012, given the problems of domestic
competition and inadequate product lines (see chart).
Samsung Electronics was unscathed by the spat but Chinese consumers continue to
favor either Apple at the top end of the market, or a growing crop of cheaper and
increasingly high-quality domestic models. Strong reviews for Samsung's Galaxy S8 and
Note 8 handsets did not stop the phone giant's popularity continuing to fall in China in
the fourth quarter, with just 4.1% of respondents saying they plan to buy a Samsung,
down from 4.8% in the first quarter of 2017.

Samsung has responded by giving its China operations more autonomy. The price of its
upcoming S9 handset has not been made public, although reports say the Chinese
versions will carry the lowest price tags globally, suggesting management is trying to
win back those consumers who bought cheaper domestic phones. However, we do not
think this will reverse the slide because the price gap is cavernous -- Samsung's S8 costs
nearly 40% more than Oppo's R11s -- while the technology gap is quickly narrowing.
Although the popularity of Korean cosmetics brands has proven resilient, a ban on
Chinese tour groups to South Korea has hurt sales via duty-free shops. This has reduced
the profits of AmorePacific Group, the biggest South Korean name in the Chinese
cosmetics market. However, its brand popularity among consumers improved in the
fourth quarter, according to our survey, particularly among the over-25s. In the
cosmetics sector, brand matters more than price. Cheaper Chinese cosmetics still lack
the allure of those sold by Korean names, not to mention the French, Japanese and U.S.
brands that dominate this market.

This article was first published by FT Confidential Research.

FT
Confidential
Research is
an
independent
research
service from
the Financial
Times,
providing in-
depth
analysis of
and
statistical
insights into
China and
Southeast
Asia. A team
of
researchers
in these key
markets
combine
findings from
proprietary
surveys with
on-the-
ground
research to
provide
predictive
analysis for
investors.
 Stay ahead with our exclusives on Asia
Sign up to our newsletters to get our best stories delivered straight to your inbox.

Email address

Sign Up