There was plenty of razzmatazz when Samsung Electronics opened what it called the world’s largest mobile phone plant in July: South Korean President Moon Jae-in was there to cut ribbons, along with the de facto leader of the electronics colossus, Lee Jae-young.
But the brand new, US$716 million factory was not in the “workshop of the world,” China. The other high-profile scissor wielder at the event alongside Moon and Lee was Prime Minister Narendra Modi – the plant is in Noida, on the outskirts of New Delhi.
With political risks adding to the long list of perennial business obstacles that bedevil foreign firms in China, Korean investors are diversifying away from the Middle Kingdom. India would love to seize some of the capital that is up for grabs, but South Korea’s main money flows are now towards its key ally the US, while Southeast Asia is clearly proving an attractive alternative.
India gets Samsung factory, but …
“The Modi government is trying to open up to foreign investors and he has invited Korean companies,” said Lakhvinder Singh, a Seoul-based Indian academic who is also president of the India-Korea Business and Policy Forum.
That appeared to be on Modi’s mind at the factory opening: “This 50 billion-rupee investment will not only strengthen Samsung’s business ties in India, it will also play a key role in India-Korea relations,” he said.
That is sound thinking: Samsung is the benchmark other Korean companies follow. “Korean companies are studying the market potential. In the near future we hope things will be right side up,” said Singh. “Now Samsung has opened, it gives a lot of incentives for other Korean companies to invest in India.”
Samsung is not the first South Korean firm to enter India which, with its rising population and nascent middle class, is a promising market for consumer products: The number-two manufacturer in the Indian auto market is Korea’s Hyundai Motor.
India is also investing heavily in defense and South Korea’s K9 tank is being built under license. “It is even better than the Korean version, it is being called the best tank in the world!” Singh enthused. “It is a combination of Indian and South Korean technologies.”
That may be so, but even Singh concedes that India has problems: legal and bureaucratic difficulties irk foreign investors, and potential South Korean investors were shaken in 2012 when a planned $12 billion investment by steel-maker POSCO foundered on the rocks of local politics and environmental issues.
POSCO lost patience and instead built a mill in Indonesia. “The POSCO incident hurt India’s reputation among Korean companies,” said Singh. “I hope Samsung will change this perception.”
China favored, investment drooping
If India wants to catch up with China in terms of luring South Korean capital, it has a stern task ahead.
According to data compiled by the Export-Import Bank of Korea, last year China lured $2.1 billion of South Korean manufacturing capital invested aboard, making it the number one destination on the charts; India took in a far more modest $416 million.
Even so, the Indian figure was up 55.8% from the previous year, while the China figure was a -12.9% decline from 2016. Indeed, the Indian figure has been rising steadily for the last five years, while the China number has been falling.
For decades, foreign-invested companies, keen to place themselves at the humming center of the global supply chain, serviced China’s surging middle class and pre-positioned themselves for the day when the “Workshop of the World” became the world’s largest economy – they have been building factories across China.
But the business landscape there has proven a rocky one to navigate.
Foreign investors have suffered from technology leakage, poor IPR protection, dubious JV partners, onerous bureaucracy, corruption and unfair competition from state-backed players.
In one of the highest-profile ongoing cases, two of South Korea’s leading companies in the promising electric vehicle battery segment, LG Chem and Samsung SDI, have suffered from not being able to access the state subsidies won by local rivals, who have subsequently spent big.
Overseas firms have also suffered political fallout, with Japanese firms being the subject of public boycotts in 2012 over historical controversies. It was South Korean’s turn in 2016 after Seoul announced the deployment of THAAD (Terminal High Altitude Area Defense) US anti-missile battery, designed to fend off North Korean rockets, on its own soil.
Beijing, which believed the THAAD radars could snoop on its own weapons, retaliated not just diplomatically, but also economically.
South Korean companies had invested massively to service a surging Chinese tourism market – such as by raising massive duty-free stores in downtown Seoul. Beijing halted group tours. There were campaigns against South Korean products, with Korean auto companies, in particular, suffering sales slumps.
The biggest victim was retail giant Lotte Group, which was in Beijing’s crosshairs as it had donated the land on which the THAAD battery was deployed. Amid a crippling boycott, Lotte announced it would close its operations in China and hired Goldman Sachs to sell its assets.
“It did damage: South Korea was very confident in China,” said Singh. “Many, many South Koreans were shocked by the sudden aggressiveness, so they started looking for new alternatives and openings.”
Now there are signs of improvements. LG Chem and Samsung SDI may benefit from playing the long game as their local competitors, having invested lavishly, may soon face bankruptcy. The missile controversy has also simmered down, after the conservative administration of Park Geun-hye was ousted in early 2017: A Lotte spokesperson told Asia Times, that, despite reports to the contrary, the company has still not decided on the sale of its Chinese assets.
Lure of Southeast Asia
Still, even prior to the missile dispute, there were good reasons for South Koreans to look beyond China. “In the 1990s and 2000s, most Korean foreign direct investment went into China, but China costs rose very rapidly, so there was a trend to diversify – lots went to Southeast Asia, especially Vietnam,” said a source in the Seoul office of securities firm CLSA.
China, which secured $2.9 billion in overall South Korean investments in 2017, is no longer the leading investment destination in the region. The main play is Southeast Asia: ASEAN nations, in addition to Vietnam and Singapore – which are so significant, they merit their own positions on Seoul’s finance charts, despite both being part of the ASEAN grouping – secured a whopping $8.7 billion in South Korean capital in 2017.
Moreover Hong Kong, with its advanced financial infrastructure, has also seen a massive rise in South Korean numbers – the $2.9 billion it lured in 2017 was almost double the figure from 2016. That number, which falls just a whisker short of the amount South Koreans invested in the rest of China, may represent a hedge against mainland risks.
Now the biggest political risk facing China investors is Washington’s trade war. Given the massive import disparity, and given President Donald Trump’s apparent determination to continue lifting tariffs, Beijing looks vulnerable. Meanwhile, Trump’s corporate tax cuts and other policies are luring capital to the United States.
While it is far too early to conclude that Trump’s push-pull investment policies have worked to pull money out of China and into the US, South Korea’s recent overseas investment patterns would appear to vindicate them.
While South Korea has cut investments in China, its plays in the United States have surged: According to the Export-Import Bank of Korea, they were worth $5.8 billion in 2013; $5.9 billion in 2014 and $7 billion in 2015.
Then, in 2016 – the year Trump was elected – they soared to $13.5 billion. Last year they rose even further, to $15.2 billion. South Korean investors in the US have been particularly interested in plays in IT, telecommunications and broadcasting, according to the Export-Import Bank of Korea. In terms of FDI, they have also invested heavily in the auto sector.
As a result, on a region-by-region basis, North America took the lion’s share of South Korean capital in 2017 – $15.7 billion – compared with runner-up Asia, with $12.2 billion.
Expanding investment pool
Meanwhile, South Korea’s overseas investment pool is widening. In 2013, it was $30.7 billion; in 2017, that had expanded to $43.6 billion. For manufacturers in particular, offshoring makes sense.
“Korean companies have preferred, in recent decades, to go overseas to get around tariffs and to go with demand, rather than expanding capacity in Korea, for multiple reasons – labor unions and labor market flexibility – and to go to a low-cost base,” said the source at CLSA.
“Talking about foreign direct investment, the biggest companies that go overseas are either tech or autos, and the autos have pretty much finished with overseas expansions: Hyundai and Kia have opened in Turkey, Russia, India, Czech, the US and China. Samsung’s biggest factory was in Vietnam; they make up to 50% of Vietnam’s exports.”
This, however, may be changing, as President Moon has personally implored conglomerates to invest back home in order to create jobs. Samsung – whose leader Lee was released from a five-year jail sentence for corruption in February with a suspended sentence, and who met Moon at the Indian factory opening in July – has responded.
Samsung announced in an August press release that it plans to invest a whopping 180 trillion won ($159 billion) over the next three years – and of that, 130 trillion is earmarked for South Korea.
Meanwhile, South Korean investment behavior is changing. Koreans customarily invested in metal bashing, often with greenfield investments, like the Indian cellphone plant. But the country is now expanding into M&As, an area it was traditionally reticent about – especially given the powerful business culture inside South Korean firms, which have sometimes faced difficulty digesting foreign practices and employees.
“In M&A activity the Koreans have been pretty shy overseas but recently they have had a lot of cash on their balance sheets,” said the CLSA source – noting that Samsung and renewable energy company Hanwha have made recent expensive acquisitions.
South Koreans are also increasingly making portfolio investments in markets beyond their own shores. Wholesale investors such as the National Pension Fund and Korea Investment Corporation, a sovereign wealth fund, have been among those leading the charge into overseas equities.
The rising trend for portfolio investments is particularly striking when looking at the investment numbers in Europe over the last five years: most South Korean money flowed into financial territories and tax havens. For example, the figure for the entire United Kingdom – $1.1 billion – is only slightly north of the figures invested in the tiny Channel Islands of Guernsey and Jersey – US$1 billion.