Who knew that we'd have to be concerned about geopolitics in Asia when thinking about our Korean beauty products. If you haven't been following the situation between China and Korea, no worries. Here's a quick summary and possible implications to the K-Beauty market in the US and globally.
South Korea is highly (highly) economically dependent on China
China is Korea's biggest trade partner with exports to China accounting for about $142B in 2014. Geographically, they're neighbors and the Chinese have a strong affinity to Korean goods cultural and otherwise. Korean dramas in China were so popular that the Chinese government had to issue a warning against consuming too much of it. That's how addicted the Chinese are to Korean pop culture and they. drive. sales. TONS OF IT.
China and North Korea (South Korea's enemy) are friendly
North Korea, the isolationist country ruled by a crazy family-born dictator, is South Korea's neighbor to the north. The pesky thing about them is they make a lot of threats of the nuclear kind which tends to disturb global peace and stability. The fact that China and North Korea are friendly puts South Korea in a pickle - their economic lifeline is friends with their enemy. Hmmmm.
The US and South Korea are friendly
Given the recent brouhaha from North Korea over nuclear threats, missile firings, and general threats of destabilizing global peace, South Korea's now-impeached President Park Geun Hye (more on this below) had allowed the US to put an anti-ballistic missile system in the country to shoot down any missile that came from North Korea. This anti-ballistic missile system is called THAAD (Terminal High Altitude Area Defense).
China is not happy about this situation. You can read more about why here.
China is retaliating against Korea in a way that hurts - by hitting the wallet
As mentioned before, Korea does a lot of business with China and China is making sure that Korea feels the pain of their THAAD decision. Chinese authorities have closed half of South Korea's main retail brand, Lotte stores, citing "safety violations".
There's a travel ban to Korea instituted by the Chinese National Tourism Administration which has instructed travel agencies to cancel and stop all group tours. If you've been to Korea in the past few years, you know that Chinese tourists make up a significant part of the tourism industry.
There have been articles stating that the Chinese government is blocking Korean pop culture - K-dramas, music, etc. - trying to stamp down the rise and popularity of Korean culture to strangle sales of these items.
All of this is causing a rise of nationalism in China and general protest against Korea fueled by government propaganda. Sales of Korean goods are taking a major hit.
South Korea is in a political vacuum
President Park Geun Hye, Korea's first female president was officially impeached a few weeks ago on March 10, 2017 after a court upheld the decision to remove her from power. She was found to be complicit in helping her childhood friend extort money, take bribes, and fraudulently raise money for a sketchy foundation, amongst other things. The country must now elect a new president in 60 days and the thinking is that politics will shift to be warmer towards North Korea and China and colder to the United States. Currently, they are without an elected presidential leader.
Everyone is nervous and unsure what will happen and whether the tension with China is temporary and will be assuaged after the new election or will last for years.
So what does this all mean?
Remember the part about Korea being highly economically dependent on China? That means almost all Korean beauty companies are currently suffering, as their biggest market has always been China.
In a Business of Fashion article, they say that "Global Blue reported that in January alone, travel retail sales in Seoul declined by an alarming 19 percent year-on-year and by 15 percent year-on-year for January and February combined. Earlier this month, shares of companies trading in cosmetics and travel dropped sharply in Seoul and, in January, the Baidu Index reported a 25 percent decline in growth for Korean beauty brands in China."
Korean beauty companies are either seeing their sales plummet or are preparing for it, as sales from Chinese tourists and exports to China are on the decline. There is a sense of mild panic and anxiety and the downsides of depending so heavily on China are brought to the surface.
How does this impact K-Beauty in the US?
It can cut two ways. First, it's possible that we will see more Korean brands in the US as brands look to diversify their portfolio. Now that they realize that being so dependent on China comes with a lot of risks, they may start to really focus on expanding to other markets. I am already seeing evidence of this. The US is a great market because major retailers are embracing K-Beauty left, right, and center. Europe, Middle East, and South America are all potential markets that Korean beauty companies may turn to as well.
Second, I'm seeing brands cut costs to make up for the China shortfall. They're cutting PR budgets, marketing budgets, downsizing, etc in the US. This may mean you won't be seeing a lot of splashy promotion of product but a bigger focus on easy win strategies like distribution. Again, I wrote about the downfalls of Korean brands not investing in marketing in the US, which I see as a very short-sighted strategy.
So, is this a blip that will find its footing once again? Will geopolitics in Asia become stabilized and therefore bring peace to the K-Beauty turmoil? Or will we see a new normal on the Korean beauty global stage? This is like a Korean drama in and of itself. Only time will tell.
The next time you reach for your Korean beauty product, you can know that politics are playing a big role right about now.