[In-Depth Review] Will COVID-19 Accelerate Industry Restructuring?

Kim Young-jun, Head of Industry Analysis Team, Hana Financial Research Institute

A massive dark cloud is looming over the South Korean economy, which had shown signs of a brief recovery. This is because the novel coronavirus infection (COVID-19) is rapidly spreading nationwide, damaging the fundamentals of key industries. Not only is a direct impact expected on service industries such as distribution, aviation, and accommodation due to a sharp contraction in consumption caused by a decrease in tourists and reduced outings, but there are also concerns about the impact on manufacturing industries highly exposed to the global value chain with China.

However, in the case of manufacturing, except for the automobile industry where domestic factories have partially shut down due to prolonged factory closures in China causing parts supply disruptions, direct damage is still considered limited. But if the COVID-19 situation prolongs, most manufacturing sectors will find it difficult to avoid damage due to parts and material procurement disruptions and a contraction in global trade. In particular, industries such as IT, transportation equipment, and machinery, which have high exposure to China, may suffer significant damage, requiring caution.

The industry suffering the greatest damage from the spread of COVID-19 is distribution. This is because sales losses from temporary store closures due to visits by confirmed COVID-19 patients, damage to duty-free shops caused by a decrease in inbound and outbound international travelers, and inevitable offline business contractions in department stores, large supermarkets, and traditional markets due to avoidance of gathering facilities are expected. Especially, duty-free shops, which have high sales per store and are sensitive to changes in international travelers, and among them, small and medium-sized duty-free shops with weaker competitiveness are expected to be hit hard.

The aviation industry is also expected to suffer damage from direct sales declines due to the suspension and reduction of flights on Chinese routes, which account for about 20% of all international passenger routes, as well as cancellations caused by domestic and international travel avoidance. The decrease in cargo volume due to global production slowdowns, including China, is also negative for the industry. Particularly, following Japan (boycott movement) and Hong Kong (political unrest), the Chinese routes are also being hit by the spread of COVID-19, raising the likelihood of prolonged poor performance for low-cost carriers (LCCs) that have focused on short-haul routes.

The accommodation industry, including hotels, is expected to be severely impacted by the sharp decline in foreign tourists. There is even concern about a decrease in domestic guests, represented by the "hokangseu" (hotel + vacation) group, due to reduced outings and travel. With a reluctance toward group activities, cancellations of various events and gatherings are expected to significantly affect sales of ancillary facilities such as wedding halls and restaurants. In particular, hotels rated three stars or below, which heavily rely on room sales and Chinese guests, are expected to suffer severe damage.

Small and medium-sized duty-free shops, LCCs, and hotels rated three stars or below, which are expected to be severely affected by the spread of COVID-19, share a common characteristic. They are latecomers who recently entered the market, supported by the Korean Wave and deregulation. At the initial stage of market entry, they were so successful that suspicions of preferential treatment arose, and they were even regarded as "golden egg-laying" businesses. However, excessive entry in a short period intensified oversupply, and successive shocks such as the Middle East Respiratory Syndrome (MERS) in 2015, the retaliation over the Terminal High Altitude Area Defense (THAAD) system in 2017, and the Japan boycott movement in 2019 caused rapid deterioration in their performance.

Recently, COVID-19 can be seen as a kind of "adding insult to injury." Even without this incident, the performance deterioration of latecomers would likely have continued due to structural oversupply. The government has announced support measures for LCCs, duty-free shops, and accommodation businesses struggling due to COVID-19. However, it should not be forgotten that fundamental industry restructuring must accompany not only piecemeal financial support but also comprehensive measures.

Kim Young-jun, Head of Industry Analysis Team, Hana Financial Management Research Institute

This content was produced with the assistance of AI translation services.