There is nothing like your national dish, in Korea's case fermented cabbage, being made abroad and imported back to make you wonder about globalization. The unfortunate Japanese have already had to live with their beloved Fuji apples being picked in China and exported back to Japan at a fraction of the price. Now Korea is in a similar situation, according to a report from CLSA.
The Chinese assault on Korea's national dish is a useful symbol of China's economic power. But gastronomic fears apart, Korea has obtained many benefits from China, with the mainland providing 80% of Korea's 2003 trade surplus.
The thrust of the report is that numerous Korean companies are well-positioned to capitalize on the growing economic links between the two.
Indeed, Korea's embrace of its giant neighbour has been remarkable.
China replaced Japan last year as Korea's top export market for digital household electronic products. Other exports include air-conditioners and washing machines. In return, China exports rather more low-end electronics and machinery, including home-appliances. The two countries also sell billions of dollars worth of agricultural produce to each other. China is also an important source of coal.
Unlike the Japanese, the Koreans come to China lured by the mainland's domestic market, rather than cheaper labour costs.
But they are less profitable than the Japanese, partly because they came to China some years later than the Japanese and partly because selling to the domestic market is a far more difficult proposition than manufacturing for export.
Only 9% of Korean firms surveyed by CLSA export more than 40% of their made-in-China goods, compared to 33% of Japanese firms surveyed, and more than half of Korean firms surveyed said they did not export any of the goods they made in China.
Only 47% of companies were profitable in China, according to the CLSA survey, compared to 80% of Japanese firms and 75% for US firms.
But it is not quite as gloomy as it appears since many Korean companies just about break even rather than lose money. The percentage that actually lose money is 10%, just 2% more than the Koreans at 8%.
CLSA analysts also debate the more fundamental question of whether addressing the domestic market as a source of revenue is wise. Profiting from the immense and tricky, domestic market is the China challenge in a nutshell. It is perhaps reassuring that it is not only Western investors that have problems in this area, but even the culturally much closer Koreans.
For example, many Korean companies have been hit by fierce competition in the consumer durables market where prices have been falling steadily. But LG Chem, on the other hand, opened plants to produce plastics and related products in the late 1990s and was profitable from the first year.
Despite these pressures, the survey reveals that Korean respondents are optimistic, with two-thirds predicting that China will contribute as much as 10% of overall annual earnings growth over the next three years. One-quarter said China will account for more than 10% of their annual earnings growth.
The CLSA analysts add that the strengthening links between the two countries are causing concern in Washington. Korea is a strategic US partner in Asia thanks to its role as the point man in any conflict with North Korea. China's usefulness in mediating negotiations with North Korea, as well as the mainland's status as the recipient of one-third of total Korean investment, more than goes to the US, could start to make the US feel it is playing the part of a wallflower, the report suggest.
At the back of everybody's mind is the extent to which Korea's relationship to China could be replicated by other countries, leading China to become an increasingly dominant power simply through its enormous economic gravity.
Growth figures show the increasing pull of China, with Korean exports to China growing 20% per year in the last ten years, compared to around 5% for exports to the US and slightly less for Japan. In the first quarter of 2004, China accounted for 18% of all Korean exports, double the level of 1996. Remarkably, Korean exports to China overtook exports to the US last year, the crossing point being a fraction over $34 billion.
Although Korean small-to-medium enterprises (SMEs) have been moving to China for decades, the real change occurred when Korea's giant conglomerates, the Chaebols, started pouring resources into China after the Asian Financial Crisis. It is their contribution which ensured that China passed the US to become the largest single destination of Korean foreign direct investment (FDI) this year, with 37% going to China and 29% to the US.
While the existing Korean presence in China is noteworthy, it is even more so if you consider that it has only been going on for around ten years. Indeed, China and South Korea have never formally signed a peace treaty following the Korean War in the early 1950s. The tense situation on the Korean peninsular meant it was difficult to imitate Japanese flexibility in bearing closer to China from the early 1970s onwards, giving them a major head start on the mainland.
One-fifth of listed Korean companies polled still have no sales in China, compared to only 5% of Japanese firms. Also according to the survey, just 61% of Korean companies have between 1% and 20% of their global sales in China, lagging the 86% of Japanese companies. However, at the upper end of the scale, heavyweight Korean firms such as LG Cable, JG Chem, Hankook Tire and online gaming companies Actoz Soft and NHN get more than 20% of their global sales from China.
The report recommends stocks such as Daewoo Heavy, Hanjin Shipping, LG Petrochem and Nongshim as potentially lucrative bets on Korean investments into the China market.
