China’s sluggish economic recovery, along with its heightened social controls, were the “direct or indirect contributing factors” behind the trend, the Yonhap News Agency reported, citing the bank.
South Korean companies have attached greater importance to the security and resiliency of their supply chain
As for Korean companies that have already been operating in China, Zhang Huizhi, a professor of northeast Asian studies at Jilin University, said there is an obvious trend of these firms withdrawing capital from China or moving to Southeast Asia.
Korean-funded labour-intensive enterprises are also faced with rising costs, and many cannot make their industries or products more competitive – that is the main reason that South Korean-funded firms have left China, Zhang said.
“Additionally, South Korean companies have attached greater importance to the security and resiliency of their supply chain, and they are emphasising the need to not be solely dependent on China,” Zhang explained. “Coupled with the negative impact caused by the United States and other Western countries smearing China, some are eyeing product exports to third-party markets to avoid risks, and they have also relocated their investments.”
The competition between China and the United States, with Washington levelling sanctions that could affect Korean operations, coupled with the measures taken by South Korea to entice firms to return, have had spillover effects on Korean-funded enterprises, giving them more options, Zhang added.
South Korea dropped from second place last year to fifth place this year among exporters to China in the first six months of the year, according to official figures. In just a few years, China has gone from being South Korea’s largest trade-surplus partner to its largest deficit partner.
Rising labour costs in China have eroded the cost advantage that once made it the most attractive manufacturing hub, and persistent trade tensions between the US and China have created uncertainties and trade disruptions that have prompted Korean companies to explore alternative markets, including Vietnam.
As South Korea and Japan tilt to US, economic ties with China present dilemma
As South Korea and Japan tilt to US, economic ties with China present dilemma
In the first three quarters of last year, South Korean businesses set up only 156 new entities in China, and that was the first time it had ever been outpaced by Vietnam, which saw 233 new South Korean-funded companies during the period, according to the Aju Korea Daily, citing figures from the Export-Import Bank of Korea.
Notably, South Korean manufacturers have been reconsidering their operations in China as they face increased competition from local Chinese companies, as well as challenges related to intellectual property protection.
Samsung Electronics, a South Korean tech giant, has been gradually shifting its smartphone production away from China to countries such as Vietnam and India.
Hyundai Heavy Industries, one of the world’s largest shipbuilding companies, has reduced its operations in China and is focused on higher-margin projects in more specialised sectors, including offshore engineering.
03:09
South Korea stages military parade in Seoul as Yoon warns North against nuclear threat
South Korea stages military parade in Seoul as Yoon warns North against nuclear threat
LG Innotek has said it is relocating its camera production line from China to Vietnam, where labour costs are lower and production is expected to be less affected by the growing US-China tensions.
The number of Korean companies in China mushroomed in the years following the establishment of diplomatic relations between South Korea and China in 1992. Korean investors saw China as a land of opportunity, offering government support and cheap labour.
In 2006, before the global financial crisis, the number of new legal entities set up in China by South Korean firms peaked at 2,392 before dropping in the following years, according to the Aju Korea Daily.
Seoul: ‘no more plans’ to deploy China-opposed missiles, wants Xi-Yoon summit
Seoul: ‘no more plans’ to deploy China-opposed missiles, wants Xi-Yoon summit
According to the Aju Korea Daily, citing a report last year by the Korea Institute for Industrial Economics and Trade, the number of South Korean firms looking to pull out of China in the following two to three years more than tripled from 2020-22, from 2.7 per cent to 9.6 per cent.
Structural reasons were primarily to blame, as 38 per cent of polled South Korean firms that were considering a China withdrawal said rising production costs were the main factor. Among others, 22 per cent pointed to fierce competition in China, and 16 per cent were worried about the fallout from China-US trade disputes.
Korean companies are required to keep up as technologies and digitisation constantly evolve, and they need to keep pace with Chinese consumers’ changing appetite for products, Professor Zhang said.
“In the future, Korean enterprises operating in China will need to meet new demands for high-quality economic development in areas such as the digital economy and cutting-edge technologies, to remain competitive,” she said. “They will also need to align with China’s requirements in fields like environmental protection, to support China’s ecological-development goals.”
