Three South Korean Companies Shift Production out of China

The logo of Hyundai Motor at the #WeAreMobility fair at the 97th edition of the Brussels Motor Show, in Brussels, Belgium, on Jan. 18, 2019. (Dirk Waem/AFP/Getty Images)

Three South Korean companies have recently shut down some of their production facilities in China, after taking a cue from South Korean tech giant Samsung Electronics.

Automakers Hyundai Motor and Kia Motors, and tech giant LG Electronics decided to execute a long-overdue decision to shift production out of China, after seeing Samsung announce such a decision in December last year, according to Japanese media Nikkei.

The companies cited reasons such as strong competition from Chinese counterparts and the aftereffects of the ongoing trade war, according to Nikkei. South Korea’s overall exports to its biggest trading partner China dropped 20 percent in May from a year earlier.

“It’s like they held out this long to avoid giving the Chinese government a bad impression, but now they can’t take it anymore,” an unnamed source at a major Japanese financial institution that frequently deals with South Korean companies told Nikkei.

In December 2018, Samsung halted mobile phone production at its plant in the Chinese port city of Tianjin, due to slumping sales in China and competition from Chinese counterparts, according to Reuters. At the time, the tech giant announced that it would offer its laid-off employees either compensation packages or opportunities to transfer to other Samsung facilities.

South Korean media Business Korea, citing data from US market research firm Strategy Analytics, reported that Samsung had a mobile phone market share of 20 percent in 2013. However, the number plummeted to 0.8 percent in 2018, trailing behind Chinese counterparts, including Huawei, Vivo, and Xiaomi.

At another factory in southern China’s Guangdong Province, Nikkei reported that Samsung was now offering voluntary retirement packages to its employees to cut down on operational costs.

Other South Korean firms are following Samsung’s lead.

“When Samsung takes the lead, the psychological burden on us is lower,” an unnamed employee at a South Korean company told Nikkei.

In April, Beijing Hyundai, a 50-50 joint venture between Hyundai Motor and a Chinese company, halted its production at its Beijing Plant 1, according to another report by Business Korea. The plant had a production capacity of 300,000 vehicles per year.

Also, Kia Motors will end production at its Yancheng Plant 1 in coastal China’s Jiangsu Province at the end of June and will lease the plant to China’s state-run Yueda Group, according to Business Korea. The state-run group has a diverse business in multiple sectors including automobile and real estate development.

As for LG Electronics, the Korean appliance maker recently moved all production of its refrigerators destined for the U.S. market from a facility in eastern China’s Zhejiang Province back to South Korea.

Chinese-made refrigerators are now being subjected to 25 percent U.S. tariffs.

Nikkei pointed out that U.S. sanctions against Chinese telecom giant Huawei is set to hurt the South Korean economy, given that chips make up about 20 percent of all South Korean exports. The Chinese market makes up a big proportion of chip sales.

In May, the U.S. Commerce Department placed Huawei on a trade blacklist that effectively bans it from buying from U.S. suppliers or other suppliers that use 25 percent or more U.S.-origin technology.

“Huawei’s massive planned orders of chips from South Korean companies would need to be canceled, leading to the market being flooded with excess inventory,” Nikkei stated, if the sanctions are to continue. Excess inventory would drag down prices and squeeze Samsung’s profits in the semiconductor business.