South Korea feeling the impact of THAAD
While here in the US, we have our own set of international relationship problems, South Korea is facing sanctions from China for establishing the US Army’s THAAD[1] anti-ballistic missile program to protect itself from North Korea’s aggressive ballistic missile and nuclear warhead programs. The system, which began to be deployed yesterday, has already spurred the ire of the Chinese government, who sees the system as a way to contain China’s military, although the system is not configured to intercept Chinese missiles theoretically headed toward the US.
South Korea however has already seen Chinese authorities shut down four South Korean Lotte (023530.KS) Mart’s on the mainland and has banned (unofficially) South Korean game companies from releasing new games in China. While these are merely tokens, the real impact will likely be felt among South Korea’s largest corporations, of which Samsung Electronics would be on the top of the list.
From a broad perspective, China is South Korea’s largest trading partner, with South Korean exports to China representing ~25% of total country exports, and China holds 18% of all South Korean government bonds but ~20% of the sales of the 4 largest South Korean conglomerates comes from their Chinese subsidiaries, with Samsung Electronics (005930.KS) at 23.1% for the 1st three quarters of 2016 and SK Hynix (000660.KS) (not in the top 4) having 34.7% of its sales in China during the same period. On the other side of the ledger, South Korea was the 4th largest market for Chinese exporters, only behind the US, Hong Kong, and Japan and 78% of South Korea’s exports to China were for intermediary goods, essential to Chinese manufacturers.
As the defense system continues to be deployed, we would expect to see further sanctions from China, and while it will be a bit difficult to see a direct correlation to any shortfalls seen by South Korean manufacturers, we note that while the Chinese CE market has made significant strides toward self-sufficiency, we estimate that Chinese panel producers will represent only 24.7% of the worldwide market this year, while South Korea will represent 35.4%. China’s dependence on South Korea’s display production capabilities is still a reality, and direct sanctions against companies like Samsung Electronics by the Chinese government would be walking a slippery slope, but trade sanctions and tariffs seem to be the current tool for establishing who wears the biggest pants in the neighborhood. Perhaps looking at the THAAD system as a way to protect a nation from a psychopathic lunatic that lives on the other side of a 2.5 mile wide DMZ might serve China better in the long run.
[1] Terminal High Altitude Area Defense
South Korea however has already seen Chinese authorities shut down four South Korean Lotte (023530.KS) Mart’s on the mainland and has banned (unofficially) South Korean game companies from releasing new games in China. While these are merely tokens, the real impact will likely be felt among South Korea’s largest corporations, of which Samsung Electronics would be on the top of the list.
From a broad perspective, China is South Korea’s largest trading partner, with South Korean exports to China representing ~25% of total country exports, and China holds 18% of all South Korean government bonds but ~20% of the sales of the 4 largest South Korean conglomerates comes from their Chinese subsidiaries, with Samsung Electronics (005930.KS) at 23.1% for the 1st three quarters of 2016 and SK Hynix (000660.KS) (not in the top 4) having 34.7% of its sales in China during the same period. On the other side of the ledger, South Korea was the 4th largest market for Chinese exporters, only behind the US, Hong Kong, and Japan and 78% of South Korea’s exports to China were for intermediary goods, essential to Chinese manufacturers.
As the defense system continues to be deployed, we would expect to see further sanctions from China, and while it will be a bit difficult to see a direct correlation to any shortfalls seen by South Korean manufacturers, we note that while the Chinese CE market has made significant strides toward self-sufficiency, we estimate that Chinese panel producers will represent only 24.7% of the worldwide market this year, while South Korea will represent 35.4%. China’s dependence on South Korea’s display production capabilities is still a reality, and direct sanctions against companies like Samsung Electronics by the Chinese government would be walking a slippery slope, but trade sanctions and tariffs seem to be the current tool for establishing who wears the biggest pants in the neighborhood. Perhaps looking at the THAAD system as a way to protect a nation from a psychopathic lunatic that lives on the other side of a 2.5 mile wide DMZ might serve China better in the long run.
[1] Terminal High Altitude Area Defense
Korean DMZ - Source: Rishhobh Tatiraju 9/2017
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