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Trade war

South Korean blue chips bruised by Chinese slump

Profit down 23% at big exporters as Moon rushes to nurture startups

South Korea relies on China as a buyer for about one-quarter of exports from major conglomerates like Hyundai Motor.   © Reuters

SEOUL -- Major South Korean exporters like Samsung Electronics and Hyundai Motor have fallen on tough times as the trade war chills China's economy, producing profit declines at companies often viewed as the canaries in a global coal mine.

The downturns at conglomerates that form the core of South Korea's economy also are spurring Seoul to intensify its promotion of startups that could forge a path forward in new fields.

Aggregate operating profit for the October-December quarter plummeted 23% on the year to 21 trillion won ($18.6 billion) among 33 components of the Nikkei Asia300 Index that are listed on the Korea Exchange and reported earnings by Friday, Nikkei has calculated. The list excludes financial and state-run enterprises.

Twenty-one of the companies faced either losses or profit declines. Even excluding the massive Samsung, which heavily sways the overall tally, would leave operating profit down 17%. The decrease marks a sharp turnaround from the previous quarter's 16% rise to about 33 trillion won.

These businesses have a towering presence in South Korea's economy, making up roughly 70% of the collective operating profit among all 530 or so companies on the Seoul bourse in the fourth quarter of 2017.

They export a plethora of goods including semiconductors, cars, iron, steel, ships and chemicals. South Korea relies on China as a buyer for about one-quarter of its overall exports. But in December, China-bound exports dropped 14% on the year to $11.9 billion. Quarterly earnings fell despite continued growth in shipments to the U.S. and Europe, putting the focus on China.

Such South Korean businesses are viewed as a leading indicator for the global economy, because the health of their exports reflects worldwide demand.

"Your outlook seems optimistic," an executive at one Japanese company told the chief of a Seoul branch who returned home last month to report on its fiscal 2019 business plan. "If you sense risk, say so outright."

The company, which deals heavily with the likes of Samsung and Hyundai, uses clients' capital investment activity as a benchmark for its economic forecasts.

Semiconductors and chemicals faced particularly steep drops in the October-December quarter. Samsung's operating profit from the chip business plunged 29% to 7.77 trillion won, its first on-year decline in about two years.

"Some clients held off buying semiconductors because they expect prices to drop this year," a Samsung official said.

Chinese information technology leaders like Tencent Holdings "have a dim view of China's economic prospects, and so have trimmed semiconductor purchases," said one South Korean analyst, noting the impact of the U.S.-China trade war.

Commodity-grade plastics for appliances and daily goods make up many of the South's chemical products. This high proportion of basic products left the chemical field exposed to falling crude oil prices, which caused paper losses on inventories.

For Lotte Chemical, which faced an 85% decline in operating profit, "shipments of plastic materials fell in accordance with temporary production adjustments by Chinese manufacturers," a representative said.

Meanwhile, Hyundai's group operating profit skidded 35% on the year to 501 billion won. Chinese unit sales dropped 18% to 221,000 as the trade war slashed demand and sales competition intensified. But Hyundai's decrease in profit came on a roughly 5% increase in overall revenue to 25.67 trillion won, as the automaker used incentives that propped up unit sales but ate into profit.

Chasing sales and market share above all else is a trend among big South Korean businesses. Profits declined on rising sales at 13 of the companies Nikkei tracked, or about 40%.

A bright spot in the earnings gloom came from the South's leading steelmaker, Posco, which lifted quarterly operating profit by 10% amid a relatively stable steel market. But a continued Chinese slowdown likely will sap demand for steel materials, hurting prices.

South Korean President Moon Jae-in is cultivating startups, hoping to spur growth for new industries. Government-run financial institutions are offering venture capital funding to help up-and-coming sectors flourish.

Fresh investment in rising companies soared about 40% to 3.42 trillion won in 2018, as the country sought to advance fields like biotechnology and artificial intelligence.

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