[Opinion] Domestic Companies Must Wake Up from the China-Oriented Daydream

Kim Kyung-jun, Vice Chairman of Deloitte Consulting

China was a land of opportunity for Korean companies. It opened its doors with the 1978 reform and opening-up policy and joined the WTO (World Trade Organization) in 2001, integrating into the global economic structure. The production-consumption potential embedded in its 1.4 billion population combined with external capital and technology sparked economic growth. Geographically adjacent, South Korea was directly influenced. So-called China experts eagerly offered rosy forecasts, and companies rushed to enter the Chinese market. From today’s perspective, these expectations have proven to be unrealistic daydreams.

In mid-June, the corporate evaluation site CEO Score released the sales survey results of the top 500 domestic companies’ Chinese production subsidiaries from 2016 to 2020. Samsung Electronics’ sales dropped 78%, from 24 trillion won to 5 trillion won, and Hyundai Motor-Kia-Hyundai Mobis combined fell 66%, from 39 trillion won to 13 trillion won. Sales decreased by 45 trillion won in just the Samsung Electronics and Hyundai Motor groups alone. It is hard to believe that the competitiveness of Korea’s flagship companies declined so drastically in only four years. This confirmed with numbers the unfair discriminatory policies against Korean companies that had been reported sporadically. This is not a matter of individual corporate capabilities but stems from the fundamental characteristics of the Chinese Communist Party system.

The core problem embedded in the Chinese economy is the contradictions arising from the communist system. The Chinese Communist Party’s economic management is a cage economy based on the birdcage theory (鳥籠論), which confines the economy?the bird?within the cage of politics. Political power subjugates the private market, and in a structure where private property is not guaranteed and modern rule of law is not established, corporate independence does not exist. There is no choice but to survive by submitting to political power.

Jack Ma, founder of China’s largest e-commerce company Alibaba, is a representative case. After criticizing government policies at a public event in October last year, he disappeared. Subsequently, his subsidiary’s IPO was canceled, and a fine of about 3 trillion won was imposed for regulatory violations. Although he has recently resumed activities, many aspects of his speech and behavior appear unnatural. It is fortunate that Jack Ma at least preserved his life. In 2016, Liu Han, chairman of Hanlong Group, the largest private company in Sichuan Province, and five others including his brother were executed on charges of corruption and bribery. In 2017, Xiao, chairman of Mingten Group, who was arrested by Chinese public security in Hong Kong, disappeared, and subsidiaries worth about 200 trillion won were nationalized. In 2018, Wang Jian, founder of Hainan Airlines Group, died under suspicious circumstances in a French tourist spot, and his assets were donated to a public welfare fund. Such cases are not uncommon among smaller companies beyond the large corporations reported by foreign media.

So-called China experts still argue that the vast potential of the Chinese market should be noted, but this is close to gambling on luck. The larger the investment scale, the greater the degree of submission to Chinese political power. Apple in the United States is a representative example. It has promoted itself as protecting user information and refused law enforcement’s request to unlock the iPhone of a suspect in a 2015 U.S. terrorist incident. However, last May, The New York Times reported that Apple handed over all iPhone user information in China at the request of the Chinese government. Apple, highly dependent on China for production and sales, is in a difficult position where it must even concede its so-called core values to continue business. If Apple, the world’s largest U.S. company by market capitalization, faces such a situation, there is no need to mention other companies.

China is a graveyard for foreign companies. The Chinese government uses them merely as a primer to build the business foundation for domestic companies. After attracting investment by leveraging China’s vast domestic market, it effectively confiscates businesses under various pretexts once their scale grows. Korean companies have learned this reality by paying huge tuition fees in the Chinese market. Using the deployment of THAAD (Terminal High Altitude Area Defense), a national security issue, as an excuse, the Chinese government forced the closure of Lotte Mart, a private company. The sharp decline in sales of Samsung Electronics and Hyundai Motor is also the result of unfair policies supporting Chinese native companies like Xiaomi. It is not too late even now. We must wake up from the daydream about Chinese business and face reality coldly.

Kim Kyung-jun, Vice Chairman, Deloitte Consulting

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