South Korea Fueling Chinese Competition With Investments
21 August 2002
stratfor.com
Summary
South Korea invested $320 million in China in the first half of 2002, a 10.3 percent year-on-year increase; this is twice as much as South Korea has invested in the United States during this period. The shift in investment flows is due both to a desire to be first in China following its World Trade Organization entry and to the slackening U.S. economy. But such heavy investment in a competitor may threaten South Korean domestic industry in the long run.
Analysis
South Korea invested $320 million in China in the first half of 2002, twice the $160 million it invested in the United States, according to the Korea Trade-Investment Promotion Agency (KOTRA). This also marks a 10.3 percent year-on-year rise for Korean investments into China, and it places Korea on track to invest $700 million in China this year. Korean investments in China stood at $510 million in 2001, compared to $580 million in the United States.
Several factors are contributing to this rise in investment flows away from the United States and toward China. The U.S. economy has been slack, while China's November 2001 membership in the World Trade Organization has sparked a massive surge in incoming foreign investments. China's proximity, coupled with its cheap labor and massive market also have attracted South Korean companies, which steadily raised investments in China from 1992 until 1997, when the Asian economic crisis short-circuited most economic activities.
But while South Korean firms have been eager to expand their presence in China following Beijing's WTO entry, Chinese products are growing more competitive with their Korean counterparts. In order to contend with China's emerging economic might, South Korea is seeking to climb on the China bandwagon, but in doing so, it risks harming domestic industry in the long run.
After a brief dip following the Asian economic crisis, South Korean investment in China revived in 2000. China now represents the top destination for South Korean foreign investments. In 2001 Korea became the No. 1 investor in China in terms of the number of projects, though in dollar terms it stood at fifth behind Hong Kong, the United States, Japan and Taiwan. According to KOTRA, Korean firms have invested primarily in the manufacturing sectors in the Shandong region and Heilongjiang, Jilin and Liaoning provinces, where there are large concentrations of ethnic Koreans.
While Korean investments in China are expanding in terms of sectors and regions, so is South Korea's dependence on China as a market. China emerged in 2001as the second-largest importer of Korean goods, taking in 12 percent of South Korea's aggregate exports while the United States imported 20.8 percent and Japan 10.9 percent. The percentage of South Korea's exports going to China grew again in the first half of 2002, with China taking in 13.5 percent of exports.
Despite the overall rise in South Korean exports to China, Seoul is steadily losing market share there. As Chinese industry develops, domestic firms are producing more products that compete directly against South Korea's key exports to China, in particular electronics and appliances. According to the Korea Herald, Chinese electronics production is valued at $71.3 billion, higher than South Korea's $67.3 billion. And Chinese firms are moving into more value-added products, further threatening South Korean industry.
The boom in Chinese electronics poses a challenge beyond China's borders as well, as Chinese goods are competing more effectively around Asia. Tokyo, for example, already is raising concerns that Chinese auto manufacturing will chip away steadily at Japan's dominance over the next decade. Chinese electronics and appliance exports already are eroding South Korea's market share in several key Southeast Asian markets, and Beijing continues to eat away at South Korea's share of exports to Japan, according to KOTRA.
Yet as with most other Asian nations, South Korea is at a loss as to how best to deal with China's apparently unstoppable evolution into a regional economic power. On the one hand, South Korea doesn't want to miss out on the marketing opportunities inside China's liberalizing economy. Seoul realizes that to remain competitive with China, it must lower costs, and one of the best ways to do that right now is to move manufacturing operations to China. But the more money and technology South Korea pumps into China, the more competitive China will become against South Korea's own industries.
Unless South Korea can reshape its investments in China -- focusing on the service or other sectors -- and continue to evolve its own domestic economy, it risks long-term damage to domestic industries as they continue to pack up and move to China in order to remain regionally and globally competitive. |
