As the Chinese government pushes forward its domestic demand-driven growth strategy, trade and FDI in China are facing changes at the structural level. Trade based on export-oriented simple processing is decreasing, while general trade linked to domestic demand is increasing. Korea’s share in China’s imports for domestic demand, however, is relatively small. According to import statistics compiled by Chinese customs which we have acquired for this research, Korea’s share in China’s domestic demand import market was 5.9% while its share in total import market of China is around 10%.
Compared with other countries or regions, the pattern of Korea’s exports to China is similar to that of Taiwan. As for major economies such as Japan (11.6%), USA (8.3%) and Germany (7.5%), they enjoy larger shares of China’s domestic demand import market. In categorizing domestic demand into primary, intermediary, and final goods; we have found that Korea’s exports to China is heavy in intermediary goods, at 76.3%. Taiwan’s percentages and structure are similar to that of Korea; however the greater proportion of Japanese, American and German exports consist of final goods and less intermediate goods.
Further investigation of the trend of Korea’s export to China reveals that intermediary goods exports for domestic demand has been increasing since 2008. In 2010, when Korea’s intermediary goods export reached USD28.8 billion, sharp growth in exports of General machine parts (64.3%), Petrochemicals and Coke (50.2%), Automobile parts (57%), Plastics (19.5%) and Chemical materials (14.3%) contributed to the increase. On the other hand, export of final goods for domestic demand increased by 52.9% in 2010 and reached USD8.3 billon. Precision Optical Instrument (35.7%), Vehicles (63.1%), General Machines (68.2%), Special Machines (74.1%), Electric Devices and Equipments (32.7%) and Electronics and Communication (75.6%) also registed major increases.
The main competitors in China’s intermediary goods market are Korea, Japan and Germany. In the market for Korea’s main export product, namely Chemical materials and Plastics, the competitors include Korea, Taiwan and Japan. In China’s final goods market, Japan, USA and Germany are the main competitors. The only industry that Korea possesses a lead is in Textiles and Garments.
As for FDI, investment to China from the rest of the world has rebounded recently from the sharp decrease during the financial crisis and its focus is shifting from manufacturing to service industries. For the research on the trend of Korea’s investment to China and the performance of Korean firms in China, we have analyzed series of data from KOTRA’s and Korea EXIM bank’s survey on Korean firms in China. Through investigation of these materials, we have identified recognizable features in Korean investment to China as follows. First, Korean investment to China reached its ceiling in 2004 and decreased since then. Second, investment to Shandong, Jiangsu and Beijing has decreased and investment to the Huadong region increased. But investment to inland provinces has not shown a clear increase. Third, the weight of manufacturing has decreased but still remain around 70~80%. This is a much higher figure compared with the world average, 46.9%. Fourth, the amount of investment per contract is growing. Fifth, large firms make adequate profits but small and medium-sized enterprises do not. Sixth, sales of manufacturers exploded before 2007 but has leveled off since. Seventh, several emerging service industries such as Lodging and Catering, Commercial Service, Mass Media and Health Care show congestion or reduction in their sales whereas Wholesales and Retail, Transportation and Leisure show significant growth. Eighth, Korean firms understand that the investment environment has improved in terms of institutional transparency but degenerated in terms of economic aspect such as wages. These patterns coincide with actual facts. Ninth, Korean firms emphasize the Chinese domestic market, which brings more profit than Korean or the third country markets. Its share, however, is increasing very slowly. Tenth, as the procurement of parts and material is localized, trade balance improvement effect of investments to China is decreasing. Nevertheless, export of parts and materials are still increasing. Eleventh, Korean firm’s intention to invest to China is getting weakened.
To respond to the above, the strategy for making inroads into China’s market for domestic demand is required. Chinese investment environment is becoming unfavorable for manufacturing and processing but consumption is on the rise as household income grows and inland provinces become richer. As a matter of fact, various markets such as luxury goods, low-price goods, 2nd and 3rd tier cities, rural areas, 80-90 hou and women are emerging.
This report has investigated a few successful foreign firms in emerging domestic markets. Media-Markt, a German home appliance distribution company; Shimadzu, a Japanese precision chemical device manufacturer; Nongshim, a Korean food company and Another Group, a Hong Kong clothing chain store are selected. These companies are engaged in aggressive marketing activity focused on Chinese consumers. They have entered China’s mid-western and northeast regions seeking increasing market shares there, aside from Beijing and Shanghai. They are supported by sufficient capital and are cooperating with localized firms. They established R&D bases in China to satisfy local demands. In addition, their cooperation with the Chinese government played a very important role.
As for export strategies, this report classifies intermediary and final goods for domestic demand into ‘excellent items’, ‘growth items’ and ‘competing items’. The 5 Excellent items of intermediary goods need to retain/maintain their buyers in China. Competitive items such as Plastics and Chemical materials are Korea’s 1st and 2nd export product respectively, and will need to diversify buyers. The most representative among competitive final goods items, such as Precision Optical Instruments, comprise the 1st and main export products for Korea. Its status would be impacted much by the ECFA between China and Taiwan and will require special attention. On the whole, it is necessary that Korea examine the demand for each intermediary product to enter the Chinese import market. Moreover, the competitive advantage of products in the growth items category should be studied with respect to their foreign competitors. Besides, the consumer market should be differentiated and each market should be approached with its own set of strategies.
Concerning investment strategies, the report describes Korean firms’ activities in China by a SWOT analysis framework. First, Korean firms have competitive manufacturing capacity. Second, Korean firms are not doing very well in the domestic consumption market nor investing in non-manufacturing areas. Third, the Chinese domestic market is growing rapidly and investment opportunity continues to burgeon along with development in China’s mid-west region. Fourth, factor costs such as wages are increasing rapidly and the government is being selective with foreign capital, which will worsen the investment environment. According to such analyses, specific investment strategies could be deduced as follows. First, manufacturing investment could continue in China’s mid-west provinces where Korean firms’ competitive advantage can be maintained for a while and local governments are looking to attract foreign production facilities. Second, distribution channels for Korean products should be secured for access to the domestic market. Third, a few existing Korean industrial complexes in China could be expanded or new ones be established. Fourth, cooperation between Korean and Chinese small and medium-sized enterprises could be promoted. Korean SMEs are suffering from lack of local distribution channels while Chinese ones are deprived of opportunities for cooperation with foreign firms by large state-owned enterprises.
- 대중국 경제협력 및 무역투자 활성화 방안 내수시장 진출과 투자 활성화를 중심으로
- 이승신; 최필수; 김부용; 여지나; 박민숙; 임민경
대중국 경제협력 및 무역투자 활성화 방안 내수시장 진출과 투자 활성화를 중심으로
[세종, 한국] : 대외경제정책연구원
|Series Title; No||경제 인문사회연구회 대중국 종합연구 협동연구총서/11-03-01; 연구보고서 / 11-27|
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Economy < Trade
Economy < Direct Investment