Korean Companies Face China Crisis as Missile Boycott Grows

 | Mar 06, 2017 | 8:00 AM EST
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Lotte Group, the Korean conglomerate that covers shopping malls to sweet chocolate, is under attack in China. It faces a consumer boycott that threatens to spill over and affect the products of other Korean companies.

Already, travel agencies say they are being ordered to stop selling trips to South Korea. Lotte Shopping (KS:023530) has seen its shares fall 17.9% since mid-February, as the protest against the company grew. 

"We have completely scrubbed the name of Lotte from our Web site," Chen Ou, the founder of the Chinese group-buying platform Jumei Youpin said in a blog post on Sina Weibo last week. The site specializes in cosmetics sales. "We would rather die than carry its goods in the future."

It's worth watching the shares of Korean companies that get caught up in the boycott. While that may temporarily depress their shares, it might present a buying opportunity. If history is any guide, it's likely that the problems won't last that long.

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For now, though, Korean companies are suffering, particularly those involved in retail and tourism.

Tour operators in Beijing said last Thursday that China's tourism ministry told them to cease sales of Korea trips from March 15 -- a ban that's now spreading to other parts of mainland China, according to the Korea Tourism Organization. China has also canceled a visit by the South Korean trade minister, Joo Hyung-hwan, to the annual Boao forum, although the conference said that is because there aren't suitable panels for him to attend.

The flashpoint for the nationalist anger in China is Lotte's decision to trade to the government a golf course that Lotte owns outside Seoul so it can be used for a U.S. missile-defense shield. Seoul says the U.S. Terminal High Altitude Area Defense system is purely for self-defense, with North Korea's missile threat in mind. Beijing says its radar can be used to spy on Chinese installations and aircraft movements.

Lotte said on Monday that it had closed more than 10 of its stores after inspections by the authorities. The group had 115 stores in China as of January, generating sales of more than 3 trillion won ($2.6 billion) in 2015. Employees told Reuters that the stores closed due to fire-safety concerns.

Lotte Duty Free said its Web site came under attack last week and crashed. It's back up and running. Lotte gets around 70% of its duty-free sales from Chinese shoppers.

The Reuters columnist Jun Yang says the China crisis may be a blessing in disguise, allowing Lotte to ditch an unprofitable operation. When the two sons of Lotte's founder came to loggerheads in 2015, the elder brother said Lotte had lost more than $870 million in China in the four years through 2014, losses his younger brother, the group's chairman, hid from their father.

The main problem for Lotte in China has been online competition. And it is getting shut down on that front, too. 

JD.com, the e-commerce platform backed by Tencent Holdings (TCEHY) and Wal-Mart Stores (WMT) , last week closed its Lotte Web site selling Korean confectionery. It gave no explanation.

Tmall, the luxury-goods sales site run by Alibaba Group Holding (BABA) , likewise closed its Lotte online store in January, without explaining why. Lotte products still sell on Alibaba's main e-commerce site, Taobao.

Other Korean companies are getting ensnared in the scandal. Seoul-based food producer Orion (KS:001800), which has cornered two-thirds of the Chinese market for chocolate pies, has been attacked by people posting on Sina Weibo. That forced Orion to issue a statement that it is not a Lotte subsidiary. Its shares have dropped 13.9% since Feb. 24.

The shield's importance only gained on Monday after North Korea launched four missiles into the sea between it and the coast of Japan. South Korea and the United States are currently holding their joint annual military exercises, held this time of year every year -- an event that almost always produces some form of response from Pyonyang.

Nationalist sentiment in China has boiled over into physical protest before over political tensions. When Japan and China sparred verbally over the Senkaku islands, known as the Diaoyus in China and contested by both nations, vehicles made by Nissan Motor (NSANY) , Toyota Motor (TM) and Honda Motor (HMC) were vandalized in several Chinese cities.

Those kind of nationalist tendencies seem to boil over always at awkward economic or political times. China's rubber-stamp parliament, the National People's Congress of the People's Republic of China, is currently convening. Protesters, as usual, have gathered outside the venue -- but have scant chance of being able to air their grievances.

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