Half of S.Korean Businesses in China in the Red

Chosun Ilbo ^ | 05/28/07

[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.

[ponder life]

The Chinese culture is probably more "conservative" than you could ever guess. The Chinese people are inspired by America and American initiatives. They want to take their place in the world community, and the socialist government is pursuing every option available. Therefore, the 'Chinese Model' you refer to is a work-in-process.

Wow, your economic view on China is so pragmatic and rare on this board it is a bit surprising....pleasantly surprising I will add.

But, yes, totally agree. It is a work in progress. Despite their problems (and there are many), they are working things out.

[ponder life]

There is a growing number of people in China who are having two and three kids, regardless of the consequences (all financial BTW), because they too have the same belief as you.

Yes, this is one area where I am wishing the Chinese people will push the limits of the law to have mulitple children. China made alot of wise decisions in regards to their economy, but this method of social engineering will only bring poverty in the long term. China is projected to only have 1.45 billion people by 2050. But if China steers her economy correctly and people pursue the right priorities, I don't see why China couldn't be a developed nation by then and still have a population of 1.7/1.8 billion people.