As the Lee Jae-myung administration begins, expectations are rising in the related industries as the previously strained South Korea-China relations are anticipated to enter a phase of improvement. In particular, there are prospects that this will positively impact the beauty and duty-free industries, which had a high dependency on Chinese sales.
According to the related industry on the 4th, the Chinese government implemented the 'Korean Wave restriction' (Hanhan-ryeong) after the deployment of the Terminal High Altitude Area Defense (THAAD) system in 2016, leading to poor performance. However, with the government's initiatives to promote visa exemptions for group tourists from China starting in the third quarter of this year (July to September), there are observations that friendly currents between the two countries will officially take shape following the launch of the Lee Jae-myung administration.
During a TV debate on the 27th of last month, President Lee Jae-myung (then a presidential candidate) noted, "We cannot ignore our relations with China and Russia. There is no need to be unnecessarily hostile as we are now." He also emphasized the goal of stabilizing South Korea-China relations through 'practical diplomacy' in his presidential campaign manifesto. To develop a 'strategic cooperative partner' relationship with China, he stated the importance of managing the Korean Peninsula situation stably through communication at all levels and institutionalizing South Korea-China-Japan cooperation to enhance collaboration.
The cosmetics industry is closely watching whether business with China will recover. For LG H&H, based on 2021 figures, sales in China reached 1.39 trillion won, accounting for 53% of its overseas sales; however, due to a decline in demand from China, sales have decreased, and the company has faced difficulties.
The company's consolidated operating profit last year was 459 billion won, which was a 5.7% decrease from the previous year. The operating profit in the first quarter of this year continued to decline compared to the previous year. While K-beauty brands gained popularity in North America and Europe, analyses suggest that their prolonged focus on the Chinese market delayed the transition to other sales channels. Among overseas sales, which account for 32% of total sales in the first quarter, the region with the highest share remains China at 12%.
Amorepacific Corporation, once considered a beneficiary of the Chinese market, suffered a nearly 30% drop in operating profit in 2017 right after the Hanhan-ryeong came into effect. Since then, the company has reduced its stores in China by more than 30% and has shifted its strategy to diversify markets by exploring various opportunities. As a result, in the first quarter of this year, sales in Western markets (20%) surpassed those in the China region (12%).
However, the consensus in the industry is that growth will be difficult with just the 'de-China' strategy. This is because China is geographically close and has the world's second-largest cosmetics market. According to the Korea Cosmetic Industry Institute, last year, the export value of cosmetics to China was 3.55 trillion won, which represented about a 10% decrease from the previous year, but it still accounted for 25% of total exports, ranking first. This is significantly higher than the second-ranked United States (18.7%).
Amid this, many in the industry are hopeful about the new government's commitment to improving South Korea-China relations. A source from the cosmetics industry stated, "While K-beauty is growing in Western markets, considering the geographical position and the expenses involved in market development, there is still a long way to go," adding, "The environment must be created that allows the normalization of the Chinese business while also entering the Western market."
The duty-free industry is also anticipating improved performance due to the improvement in South Korea-China relations. According to the Korea Tourism Organization, the number of Chinese tourists (Yuke) nearly reached 8 million in 2016, but this dropped to 4.6 million last year after experiencing the THAAD incident in 2017 and the COVID-19 pandemic in 2020.
The duty-free sector continued to grow by increasing sales to Chinese daigong (parcel sellers) due to the decrease in Chinese tourists, but during the pandemic, commission fees soared to 50%, leading to a halt in transactions with daigong. Last year, the operating losses of the four major domestic duty-free companies (Lotte, Shilla, Hyundai, Shinsegae) amounted to approximately 280 billion won. Duty-free shops have been barely managing to survive through restructuring by halting operations of city stores and reducing manpower.
Orina, a researcher at LS SECURITIES, said, "In the second half of the year, large-scale momentum from the new government's launch, domestic stimulus measures, easing U.S. tariff burdens, recovery of group tourists from China, and the holiday season effect will impact traditional retailers." She further noted that the easing of competitive conditions in the urban duty-free market is positive, and the visa-free entry for Chinese group tourists planned to be implemented in the third quarter is also expected to contribute to performance.
However, the long-term stagnation of China’s domestic demand is a concern as the per capita spending of Chinese tourists has decreased from $1,800 (about 2.47 million won) in 2016 to $950 (about 1.31 million won) in 2024. Additionally, unlike in the past, the focus of Chinese tourists visiting Korea has shifted from duty-free shops to street stores (Daiso, Olive Young) such as Myeongdong and Hongdae, which could be a variable. In response, the duty-free industry is focusing on stocking up low- to mid-priced items.
Jeong Yeon-soong, a professor at Dankook University's Department of Business Administration, stated, "If relations with China improve, there is a possibility of benefits arising from increased sales to China or a rise in the number of Chinese consumers visiting Korea," but he cautioned that "when looking at the overall market, there are concerns that the competition between China commerce and domestic companies may intensify, negatively impacting the retail industry."