[COLUMN] Chinese retaliation will continue in first half of next year

By 임장원 Posted : July 18, 2017, 11:30 Updated : July 18, 2017, 15:57

[Yonhap Photo]


(This article was contributed by Kim Sang- chul, former supervisor of KOTRA in Beijing / Shanghai.)

We can learn a lesson from how Japan has overcome its row with China over Diaoyudao (Senkaku Islands in Japanese) in September 2012, as China's retaliation for the deployment of a THAAD battery in South Korea showed a similar pattern. Despite time lags, we can gauge the impact of China's retaliation and what scenarios will be possible if we compare these two situations. Timing is proper because we can find a common ground --  the Chinese boycott targeting new cars and consumer goods come with a sharp drop in the number of inbound travelers.

It's acknowledged that Japan has completely separated politics and economy in handling the Diaoyudao dispute in gradual efforts to turn it around in its favor without seeking the quick restoration of its market share in China. By diversifying its export market and overseas investments, Japan had entrenched substance for one or two years, making good use of the trend and nature of Chinese consumers, who get easily excited and easily forget, to surge back again with fresh force.

The Diaoyudao dispute created a momentum for Korea to surpass Japan in the Chinese market. Thanks to the intensified boycott of Japanese goods, Korea wrested the top spot from Japan in 2013 and had kept it until 2016. Meanwhile, Japan turned its top export market away from China to the United States and paid attention to the traditional Southeast Asian market. The THAAD row changed the situation. At the end of June, the gap between Korea and Japan has narrowed rapidly in China. Japan's recovery in China has been visible from 2015 while Korea and many other countries posted a decrease in their exports to China. It is quite possible that Japan may regain its top position in four years. Moreover,  there has been a great change in the pattern of Japanese investments abroad. To avoid risk, Japan moved away from its heavy dependence on China and kick started 'China + 1'. While reducing its investment in China, Southeast Asia and India have gained more attention. Japan's investment in China fell to US$ 8.7 billion in 2015 from a peak of US$ 13.2 billion in 2012 while investments in ASEAN increased substantially to US$20.2 billion.

How should we evaluate Japan's recovery in China? On the surface, Japan seemed not to make any particular effort. It can be explained in two ways. One is the duality or hot temper of Chinese people and the other is that Japan benefitted from Korea's downturn in China. After the Diaoyudao dispute, Korea beat Japan, benefitting from its setback in the Chinese market. Chinese consumers pretend to dislike Japan but their yearning for Japanese goods in their mind seems to be reviving.

In fact, sales of Korean new cars have been falling in China this year while Japanese brands have seen a rapid rebound. At the end of June, the market share of Korean cars in China fell to 3.8 percent from 7.3 percent a year ago, but Japanese cars increased their share by 2.3 percentage points to 17.3 percent. It's attributable to Chinese consumers who ignored Korean cars as well as the surging popularity of local brands. It is no exaggeration to say Japanese cars and Chinese local brands are almost filling up the recession of Korean cars.

- Prediction is possible if we look at the situation following the Diaoyudao dispute -

After the Diaoyudao conflict, China's retaliation has led to the boycott of Japanese commodities and the control of tourists. Sales of Japanese cars suffered a fatal blow, showing a continued drop for six months, and their market share that had stayed at 20 percent fell to 7.6 percent in October of that year. Although the growth of sales began in September 2013, compared to sluggishness in the previous year, it's reasonable to say that Japan saw its recovery in earnest 0from the first half of 2014. It took more than a year for its full-fledged recovery roughly in line with the start of sluggish sales by Hyundai and Kia.  In this process, the weak yen strongly pushed by the Japanese government and the timely release of small cars and SUVs to meet the trend of Chinese consumers were effective. In 2016, Japan sold a record high of 4.3 million units, and this year it is targeting five million units to occupy a 20 percent market share. One particular characteristic that has recently emerged in the Chinese market is that domestic brands are scrambling for an almost 45 percent share. Therefore, it's not easy for Japanese brands to recover a 20 percent market share, but it is quite possible in the current trend. The number of Chinese tourists to Japan has begun to recover after a year-hong hiatus and continues to increase.

Although China's THAAD retaliation began at the end of last year, we're are clearly witnessing its aftermath from March this year when the number of Chinese tourists declined sharply and Korean car sales in China registered a sharp fall. Judging from the Diaoyudao dispute, it's  possible to predict that the impact of the THAAD row will last at least until the first half of next year. There are, of course, some suppositions here. The question is whether the temper of Chinese consumers can be equally applied to tourism or Korean products and whether Hyundai and Kia will be able to find a turnaround in China.

The political situation is also a variable. China seems to be putting aside the Diaoyudao dispute while concentrating on the construction of artificial islands in the South China Sea. It probably reflects the strategy of avoiding two fronts at once. The conflict between China and Japan is effectively under the water. The THAAD issue is tangled with the United States, and US pressure against China can be a factor that would affect the level of Chinese retaliation against us. We should work out 'Plan A, B, and C' to solve our dispute with China wisely, as shown in the case of Japan. We must actively seek alternative markets or alternative investment destinations while continuing to ship good products that can attract Chinese consumers. It is a matter of time, but we should act wisely to turn time to our advantage.
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