Industry Trend Analysis - Chinese Pressure On Korean Brands To Continue Until 2018 - OCT 2017
BMI View: Strained diplomatic relations between China and South Korea is weighing heavily on the financial performance of major Korean brands, as we predicted. Regulatory obstacles, combined with Anti-Korea sentiment from Chinese consumers and a sharp drop in Chines e visitors to Korea has severely impacted the operating environment for companies such as Lot te Group and Hyundai. While we expect consumer demand to rebound in 2018 , the sales weakness will persist over the near-term, highlighting the volatility of political risks facing retailers and autos manufacturers in the region.
Our view that South Korean consumer-facing companies exposed to Chinese demand would come under intense pressure as a result of the diplomatic fallout between the two countries is playing out (See: 'Sino-Korea Tensions Pose Short-Term Risks For Consumer Sectors', 30 March 2017). China responded to the decision by South Korea to host a US missile defence system in March 2017, by increasing regulatory oversight for South Korean firms operating in China, issuing a ban on Chinese tourist groups visiting the country, and encouraging a backlash against South Korean brands via criticisms in state media.
As the examples below demonstrate, China's aim was to put pressure on major consumer-facing companies in Korea, as these represent soft-targets that would have little impact on its own supply-chains or the performance of Chinese companies and exporters.
Fallout Weighing On Korean Consumer Firms Quarterly operating profit, % y-o-y Source: Company results
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