Posted on 05/27/2007 6:40:37 PM PDT by TigerLikesRooster
Half of S.Korean Businesses in China in the Red
In mid-December of last year, the executives and employees of a medium-size South Korean leather company in China ran away under cover of night. About 30 South Korean executives and employees of company "S", including its president, fled to a nearby city and eventually left China, leaving the factory and facilities behind.
Company S had been losing money because of a price war with Chinese competitors. It left behind debts of tens of millions of dollars owed to banks and skipped out on paying the wages of some 300 Chinese workers.
A lot of South Korean businesses are operating in China, but one out of every two is failing. An increasing number of owners and employees flee by night because of the difficulty of surviving there.
Based on an analysis of year-end financial statements from 2005 of 598 South Korean companies operating in China, the Export-Import Bank of Korea said Sunday that 51.8 percent of those businesses are operating at a loss.
Fifty-five percent of small and medium-size South Korean businesses based in China are suffering losses, while 46.7 percent of South Korean conglomerates operating there are suffering losses.
Why are South Korean companies doing so poorly in China? It's because they are becoming less and less competitive, with Chinese wages rising sharply and new, more competitive Chinese enterprises coming into play.
Another report by the Export-Import Bank shows that South Korean companies in China registered a 1.3 percent profit margin on sales (for 2005). This is far below the average ratio (6 to 7 percent) of listed companies in South Korea.
Moreover, the top 58 best performing South Korean companies showed a declining net margin for three recent years -- 6.5 percent in 2003, 3.5 percent in 2004, and 2.3 percent in 2005.
Early this year the South Korean Embassy in China conducted an on-site survey in areas where South Korean enterprises are clustered. In Dongguan in the southern province of Guangdong, the number of South Korean textiles, apparel and toy companies dropped from 40 to 15. The officials of most of the defunct companies disappeared in the night.
Experts say that the time when South Korean companies could take advantage of low Chinese wages is over. Hong Suk-woo, deputy minister for trade and investment policy at the Ministry of Commerce, Industry and Energy, said, "We need to change our strategy for the Chinese market from low-value added, labor-intensive industries to high-value added ones, and to switch focus from exports to third countries to domestic consumption in China."
South Korean companies have made a total of 15,909 investments in China and invested US$16.9 billion from 1998 until late last year.
Ping!
More competition for the sector that the US is trying to target.
WOW I didn’t know about this Tiger
Really
A lot. In return, they will get screwed royally in the end. Let them feel cocky now.
China / Korea ping
While I hope you are right, I don't see how this would happen. Could you please explain?
A massive stock bubble currently forming inside China, their badly corrupt financial system, and adverse effect of undervalued currency(invites currency speculation) lead to an unhappy ending. As for stock bubble, these days Chinese media features kiddy stock whiz in an elementary school who made bundle from his stock investment. This is an episode akin to shoeshine boy giving stock tips to Joseph Kennedy.
Comparing China to Japan is difficult.
Explain your point a bit further please. The artificial manipulation of the Chinese government’s currency has nothing to do with this?
People have been talking about this since the mid-90s. Most of the "shakers and movers" doing business in China have been planning their next move in Asia for years...
The currency changes (9% compared to the USD so far), and policy changes in the country, are making it more competitive while improving opportunities for local corporations thus creating a level playing field.
No longer do Chinese employees choose a foreign company to work for as a first option. There are a few local companies that have implemented very good business practices and could be considered world class.
However, on the flip side, there are still many years yet before business should be completely abandoned as they write in the article. A company needs to fully understand how to do business in China, and the tools necessary to be successful. In fact, there are still opportunities in the western part of China where the government is promoting growth.
The areas that are affected by increasing wages and cost are the giant super-cities along the east-coast where good employees are becoming more difficult to find. This is because there is always another company willing to pay more for their talent, driving up the cost for labor... The cost for services and materials are also driven upwards because of the increased demand in those cities.
The main reason those companies shut down, or are in the red, is because of poor management and bad planning.
Samsung is not moving to Vietnam because of the Chinese market conditions, but they are opening a new plant in Vietnam because of the opportunity for business in Vietnam and neighboring countries.
You don't understand. Foreign companies, especially smaller ones, incur many hidden costs, while Chinese companies with connections would do better. Besides, labor cost is rising because so much cash flow into China, and it is also creating huge bubbles in financial and housing market. This is in large part due to artificially undervalued Chinese currency.
China is also facing the same problem as S. Korean companies do. Their advantage of cheap labor is diminishing while other social costs are rising. Even though they may not face the problem now, they will soon do so.
The only way to take advantage of the situation is to understand the market and its dynamics. Only then can we always be one step ahead. Didn't Sun-tzu write something along those same lines?
The main reason those companies shut down, or are in the red, is because of poor management and bad planning.
You can always say that. Well-managed company can even survive world-wide economic depression, for sure. Still, the exodus of such company relfects worsening business condition in China.
I heard that Samsung's new plant in Viet Nam will service Europe and other areas. It may service S.E. Asia, but it is only a part of it.
There could be more opportunities deep inside China. However, as export hub, they may not meet the requirement of many foreign companies.
You are pro China manipulating it’s currency? Yes or No?
From what I see, there are no indications of an exodus, however one company's decision to relocate. The reasons for this move can be numerous, but in my experience, the larger companies will retain a portion of their production in different areas.
Therefore, the final product being shipped to Europe will have one component made in the Phillipines, one made in Malaysia, one made in Singapore, one made in China, one made in Japan, and finally assembled in Vietnam and put on a container for Germany.
This is how costs are kept down and all their eggs aren't kept in one basket...
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.