ArrowArtboardCreated with Sketch.Title ChevronTitle ChevronEye IconIcon FacebookIcon LinkedinIcon Mail ContactPath LayerIcon MailMenu BurgerPositive ArrowIcon PrintIcon SearchSite TitleTitle ChevronIcon Twitter
Business

Deflationary pressures pose threat across industries

Shipbuilders such as Hyundai Heavy Industries are suffering from weak orders.

SEOUL -- Earnings at South Korean companies are being squeezed by internal and external deflationary pressures, and the fortunes of emerging industries may determine which direction the softening economy will take.

     Combined sales in the year ended Dec. 31 slipped 3% to 949.6 trillion won ($781 billion) for 35 nonfinancial companies for which comparisons can be made. All of the companies are a part of the Nikkei Asian Review's Asia300 list.

     Though based on a wider sample, 2014 group sales for listed South Korean companies fell 0.4% compared with 2013, according to the Korea Exchange.

     For Lotte Shopping, the domestic business environment was "worse than we'd imagined," a source close to the retailer said. The company saw operating profit shrink by nearly 30% in fiscal 2015. Although the Middle East respiratory syndrome outbreak and rules restricting weekend operating hours for large stores had an impact, profit in the mainstay department store business dwindled by double digits and large supermarkets fell into the red.

     The retailer's sales grew 4% but that was largely due to expansion in the department store business overseas and the Black Friday sales event in October, a nationwide effort initiated by the government. Some point out that the Black Friday sales ate into future demand.

     The consumer price index rose 0.7% in 2015, far below the 2% target set by the Bank of Korea. The inflation rate was 0.6 point lower than in 2014.

     The sales drop at the companies can also be traced to low crude oil prices, although operating profits at chemical companies and utilities have benefited immensely from the trend.

     Other industries, however, are facing a tougher business environment. Steelmaker Posco's group sales tumbled 11%, and operating profit plunged 25%. The inflow of cheap, excess Chinese products have depressed prices. Posco is selling carbon steel at an average 606,000 won per ton, a 17% drop from a year earlier.

     "We wouldn't complain if the prices were fair, but we cannot produce at the type of cheap prices set by the Chinese," said Posco CEO Kwon Oh-joon.

     Heavy industry, which had propped up the South Korean economy, has also become shaky. Earnings have stalled at shipbuilders such as Hyundai Heavy Industries and Samsung Heavy Industries in part due to slumping orders. Hyundai Motor's profit decreased for a third straight year. The automaker's unit sales in China have been lackluster in the face of lower-priced vehicles from local competitors.

Change on the horizon?

The question remains whether up-and-coming economic drivers can take over.

AmorePacific has seen healthy sales overseas of its cosmetic products, such as the Sulwhasoo line.

     Snack food maker Orion "will continue growing [in China] by at least double-digit increments every year through its product appeal and marketing strategy," said a source close to the company. Fiscal 2015 sales from its Chinese business jumped 15% on the year to 1.3 trillion won and operating profit rocketed up 23% to a record 200.4 billion won.

     The Chinese business accounts for over 50% of group sales. The company hired South Korean celebrities like actor Lee Min-ho, who is also very popular in China, to promote products in that market.

     Cosmetic companies such as AmorePacific Group also employed the services of celebrity spokespeople to boost sales in China and Southeast Asia.

     The pharmaceutical industry also shows promise. Celltrion, which produces biosimilars, grew group operating profit by nearly 30%. Hanmi Science's group operating profit ballooned more than 10 times thanks to licensing contracts signed with major Western drugmakers on drug candidates developed by the South Korean company.

     To combat the low economic growth brought on by an aging population, President Park Geun-hye plans to invest in next-generation growth industries such as medicine, tourism and software. Whether those sectors will reignite corporate Korea remains to be seen. 

Sponsored Content

About Sponsored Content This content was commissioned by Nikkei's Global Business Bureau.

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this monthThis is your last free article this month

Stay ahead with our exclusives on Asia;
the most dynamic market in the world.

Stay ahead with our exclusives on Asia

Get trusted insights from experts within Asia itself.

Get trusted insights from experts
within Asia itself.

Get Unlimited access

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this month

This is your last free article this month

Stay ahead with our exclusives on Asia; the most
dynamic market in the world
.

Get trusted insights from experts
within Asia itself.

Try 3 months for $9

Offer ends October 31st

Your trial period has expired

You need a subscription to...

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers and subscribe

Your full access to the Nikkei Asian Review has expired

You need a subscription to:

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers
NAR on print phone, device, and tablet media