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South Korea's Hyosung eyes Japan market by way of Vietnam

Planned plastic factory would exploit duty free trade with Japan

The Hyosung group is one of South Korea's leading chemical producers.   © Reuters

SEOUL -- South Korean chemical maker Hyosung is looking to finally establish a name for itself in Japan -- and eventually the rest of the world -- by using Vietnam as a back door.

The company in December will break ground on a $1.2 billion complex capable of cranking out 600,000 tons of polypropylene annually in the Southeast Asian country. The facility will offer all-inclusive production, using propane gas to make propylene and then using that to turn out polypropylene.

Located in Vietnam's southeastern province of Ba Ria-Vung Tau, the production hub -- Hyosung's first overseas plant -- is expected to start operating at the end of 2019. Together with an existing factory in Ulsan, South Korea, the company's total yearly capacity will jump to 1.3 million tons.

That would transform Seoul-based Hyosung into the largest South Korean maker of polypropylene, besting domestic rivals like Lotte, which has an estimated production capacity of 1.1 million tons.

Hyosung seeks sales of about 2 trillion won ($1.83 billion) in 2020 from its polypropylene business, up from the roughly 1 trillion won seen logged in 2016. For that, it is positioning the Vietnamese plant as a gateway to the Japanese market.

Breaking in

Some 100,000 tons of the polypropylene produced in Vietnam will be shipped to Japan. Japanese automakers are increasingly adopting plastics in auto bodies to improve fuel efficiency, and Hyosung aims to capture some of that demand.

Hyosung first established its Japanese arm, Hyosung Japan, over three decades ago, but the unit's annual polypropylene sales are stuck at around 10,000 tons.

"Exporting from South Korea to Japan carries an up to 6.5% tariff," said a source close to the group.

But Vietnam and Japan signed an economic partnership agreement, and other deals, that eliminated duties between the two countries. By setting up shop in Vietnam, Hyosung expects to improve cost competitiveness and boost sales.

Japan will also serve as a staging area for "showing the world the quality of [Hyosung's] products," said the same source. The 100,000 tons of polypropylene planned for Japan would only amount to about 4% of the Japanese market, but a positive outcome in Japan would equate to a marketing coup for the global stage.

Ripe for competition

Last year, 2.47 million tons of polypropylene were produced in Japan, down 20% in a decade, data from the Japan Petrochemical Industry Association shows. Although domestic factory utilization tops 90%, supply is seen struggling to catch up with healthy demand, mainly for food packaging and trays.

On top of that, Mitsubishi Chemical Holdings unit Japan Polypropylene in September had to partially suspend production at a plant in Ibaraki Prefecture due to technical issues. Autoparts makers and other clients are finding it hard to procure the polymer elsewhere. The companies are believed to be considering deals with overseas sources due to the tight supply picture.

One-stop trade hub

Vietnam is fast becoming a popular destination for direct investment by multinationals due to its free trade agreements with various countries. The nation also boasts cheap labor costs and a location optimal for Chinese and Thai supply chains.

Thailand's Siam Cement Group earlier this year lifted its stake in the Long Son petrochemical complex set for construction in southern Vietnam. Among Japanese companies, Sekisui Chemical picked up a 15% stake in Tien Phong Plastic. Idemitsu Kosan will fire up an oil refinery in the central province of Thanh Hoa in 2018.

South Korea was the biggest direct investor in Vietnam between 2014 and 2016. Samsung Electronics runs two factories in the country responsible for 30% of the group's global smartphone production. Samsung also plans to ramp up production of televisions, refrigerators and other household appliances in Vietnam. LG Group and other South Korean concerns are actively investing as well.

Electronic component exports quadrupled to $18.9 billion in 2016, and textiles jumped 70% the same year. The 11-member Trans-Pacific Partnership trade deal is expected to pull those numbers up if and when it is ratified. When the ASEAN Economic Community goes into full effect in January, tariffs in the region will be largely eliminated.

Additional reporting by Nikkei staff writers Atsushi Tomiyama in Hanoi and Yuta Koyanagi in Tokyo.

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