China restricts business operations of South Korea’s Lotte Group in China from December 2016.

Context

In early December 2016, the Chinese government reportedly launched multiple investigations into the business operations of South Korean chaebol Lotte Group in sites including Shanghai, Shenyang, Beijing and Chengdu. Lotte Group told press that these probes related to “fire, safety or tax investigations from the Chinese government”. Similarly, an unnamed South Korean government official stated that China “strengthened their interpretation of customs, fire inspections, security, sanitation, (and) tax issues”. Subsequently, by March 2017 74 of Lotte Group’s 99 China-based outlets had been closed down. A further 13 of these stores were voluntarily closed by Lotte Group due to a combination of restrictions and boycott. Additionally, Shanghai Foods (a joint venture between Lotte Group and US firm Hershey) was closed for a month, construction was halted on a planned Lotte Group shopping complex in Shenyang, and a cyber-attack linked toChinese IP addresses crashed the Lotte Duty Free website.

The context here is that in November 2016 Lotte Group agreed to provide land to the South Korean government as a site for the location of a battery of the US’ Terminal High Altitude Area Defense (THAAD) system. Washington and Seoul claimed that THAAD was wholly focused on tackling the North Korea threat, but Beijing was deeply opposed to the move, claiming that THAAD’s radar system could be used to monitor deep into Chinese territory.

Impact

Lotte Group’s sales in China reportedly amounted to US$2.6 billion in 2015, with the Chinese market reportedly amounting to almost 30% of its overseas sales. One analyst suggested that, due to these measures, Lotte Group was losing around W50 billion per quarter, and another called Lotte Group “[t]he headline victim of (China’s) economic retaliation”.

Responses  

i) South Korean government and industry responses.

In March 2017, Lotte Group was reportedly asking the South Korean government for support and assistance. In June 2017, it was reported that Lotte Group had addressed the regulatory issues around fire safety that had been cited as cause for the store closures. By September 2017, Lotte Group was actively seeking to sell its China-based stores as a result of the mechanisms. And in 2022 Lotte Group was reportedly ending its China-based operations.

(ii) Chinese government and industry responses

China did not officially acknowledge the measures. In March 2017, a spokesman from the Ministry of Foreign Affairs made seemingly contradictory public comments on the boycott of Lotte Group. He stated that (a) China firmly opposed the installation of THAAD, and (b) that while the Chinese government was determined to protect lawful interests of any foreign companies operating China, whether or not such companies would be successful in China depended entirely on market and customer sentiment.

Chinese state media commentary from February 2017 stated that “Lotte stands to lose Chinese customers and the Chinese market. That would be a very large slice out of their business pie.” And a September 2017 commentary from Chinese state media called on “the political and business leaders in the ROK (South Korea)  to reflect on the lessons to be learned from the Lotte case.” Protests were also organised outside Lotte Group’s China-based stores. One banner reportedly stated “South Korea’s Lotte has declared war on China. Lotte supports THAAD. Get the hell out of China”.

Status

In October 2017, South Korea made a series of pre-emptive concessions around the “three no’s” policy: South Korea would not place any additional THAAD batteries on its land, would not participate in a regional US missile defense system, and would not participate in a trilateral alliance with Tokyo and Washington. Lotte Group continued to face challenges, however, and appears to have significantly reduced its business operations in China as a result.

Reference list

Bloomberg News. “Hit by Political Crossfire, Lotte’s China Exit Stalls.” Bloomberg News. Available at: https://www.bloomberg.com/news/articles/2018-02-12/hit-by-political-crossfire-lotte-s-china-exit-said-to-stall?embedded-checkout=true

China Daily. 2017. “Seoul should recognize it is in same boat as Beijing.” China Daily. September 19. Available at: http://www.chinadaily.com.cn/opinion/2017-09/19/content_32186408.htm

GT Staff Reporters. “South Korea’s Lotte’s reported exit from China shows foreign business should embrace the changes and trends in Chinese economy: experts.” Global Times. March 21. Available at: https://www.globaltimes.cn/page/202203/ 1256442.shtml

Harris, B. and C. Clover. 2016. “China takes aim at South Korea’s Lotte after missile move.” Financial Times. December 9. Available at: https://www.ft.com/content/ 67198e52-bdb2-11e6-8b45-b8b81dd5d080

Jeong, E.Y. 2017. “Lotte Retreats From China as Beijing-Seoul Dispute Dents Business.” Wall Street Journal. September 14. Available at: https://www.wsj.com/articles/lotte-retreats-from-china-as-beijing-seoul-dispute-dents-business-1505389800

Ministry of Foreign Affairs of the People’s Republic of China. 2017. ‘Spokesman for the Ministry of Foreign Affairs, Geng Shuang, held a regular press conference on 02 March 2017’ [2017年3月2日外交部发言人洪磊主持例行记者会]. March 2, available at: https://www.mfa.gov.cn/web/wjb_673085/zzjg_673183/gjs_673893/gjzz_673897/lhgyffz_673913/fyrth_673921/201703/t20170302_10410290.shtml.

Kirk, D. 2017. “China Plays Hardball With Lotte For Playing Ball On THAAD.” Forbes. April 26. Available at: https://www.forbes.com/sites/donaldkirk/2017/04/26/china-plays-hardball-with-lotte-for-playing-ball-on-thaad/

Lee, J. and A. Jourdan. 2017. “South Korea’s Lotte reports store closures in China amid political stand-off.” Reuters. March 6. Available at: https://www.reuters.com/ article/business/south-koreas-lotte-reports-store-closures-in-china-amid-political-stand-off-idUSKBN16D03U/

Lim, D. 2019. “Chinese Economic Coercion during the THAAD Dispute.” The Asan Forum. December 28. Available at: https://theasanforum.org/chinese-economic-coercion-during-the-thaad-dispute/

Mullen, J. and S. Han. 2017. “One company is bearing the brunt of China’s anger over U.S. missile system.” CNN Money. March 7. Available at: https://money.cnn.com/ 2017/03/07/news/china-lotte-thaad-south-korea-tensions/

Yang, H. and H. Jin. 2017. “As missile row drags on, South Korea’s Lotte still stymied in China.” Reuters. June 16. Available at: https://www.reuters.com/article/business/as-missile-row-drags-on-south-koreas-lotte-still-stymied-in-china-idUSL3N1JC3BA/