Di Chen

Mary Kay (China) Cosmetics Co., Ltd., China

On December 20, 2015, the China-South Korea Free Trade Agreement (FTA) officially came into force. Today,with the rapid growth of the Chinese economy, South Korea, a neighbor of China in the Northeast Asia economic circle, is gradually developing China into its most important overseas cosmetics market. Pop culture has helped spread their reputation, beauty products are often integrated into popular Korean dramas and Korean cosmetics have successfully entered into the Chinese market, and become popular among millions of Chinese women, leading a new“Korean fashion” in the Chinese cosmetics market.

Overview of China-South Korea trade and China-South Korea cosmetics trade

Trade overview

In 2014, the total trade between China and South Korea was 290.56 billion USD. Currently, China is South Korea’s largest trade partner, and largest export and imports destination of South Korea, while South Korea is China’s second largest trade partner after the United States. According to the statistics of the Korea International Trade Association, the bilateral trade between the two countries has increased 55 times, from $ 5 billion in 1992 to$ 274.2 billion in 2013. From January to May, 2014, Korean investment in China increased significantly by 87% despite the adverse environment. South Korea’s trade with China had already surpassed total trade with the United States,Japan, and Europe, accounting for 25.5% of South Korea’s total foreign trade. In the last quarter of 2015, South Korea’s imports from China increased by 1% from a year ago to$ 101.38 billion whereas China’s exports to Japan decreased by 9.2%. This resulted in a decline in South Korea’s trade surplus with respect to China. Specifcally, the surplus fell$ 16.8 billion year on year to $ 73.1 billion last year.

In the meantime, South Korea’s exports to China decreased from 8.2% to $178.5 billion in that quarter while China’s total imports fell 14.1% and Japan’s exports to China declined 12.2%. Under the circumstances, South Korean companies’ share in the Chinese import market reached 10.4%, recording a double digit for the first time.

In 2015, South Korea surpassed Japan for the first time in eight years in investment in China, too. Between January to November, South Korea’s investment in China,approximately reached $3.7 billion, exceeded Japan’s by a margin of $700 million. The association explained that the trade and investment between South Korea and China are likely to continue to exceed those between Japan and China with the China-South Korea FTA in effect.

On June 1, 2015, China and South Korea signed a bilateral Free Trade Agreement(FTA). According to the China-South Korea FTA, it carried out the first tariff reduction on December 20, 2015, and the second on January 1, 2016. On January 1, 2016, the number of tariff items with zero tariff imposed by China accounted for 20%,mainly including some electronic, chemical and mineral products; the number of tax items with zero tariff imposed by Korea accounted for 50%, mainly including some electromechanical, steel and chemical products. Under the accord, after a transitional period of 20 years, 92% of Korea’s export items and 93% of China’s will enjoy zero tariffs in bilateral trade.

The FTA covers 17 areas including trade in goods,service, investment and teade rules, as well as e-commerce and government procurement. The FTA will enable a common market with a GDP of $12 trillion. Shampoo,bath and skin care products will see a reduced tariff of 20%～35% in the next 5 years; certain household, electrical,appliances cosmetic instruments, will see the current 15%tariff eliminated within 10 years; oral care products such as toothpaste will see the current 10% tariff eliminated within 10 years. Korean economists believe that the Sino-Korean economic cooperation is a kind of vertical complementary cooperation with division of work between the upstream and downstream, and the implementation of the Sino-Korea Free Trade Agreement will transform this relationship towards horizontal cooperation, promote competition-driven development, and further reinforce bilateral economic and trade relations.

Current status of cosmetics trade

After the Second World War, the South Korean cosmetic industry involved mostly small-scale manual production through family workshops. In the 1960s, the South Korean economy began to rise, the high technology encouraged the development of export-oriented economy, and gradually led to industrial modernization. Korean cosmetic enterprises also benefited from the rapid economic development.From the end of the 1980s, Korean cosmetics began to enter the mainland China market via Hong Kong.

In 1995, Korean cosmetics made a big push into the Chinese market, that is marked by the establishment of Hangzhou Lejin Cosmetics Co., Ltd., a joint venture between LG and Zhejiang Handicraft production Cooperative. Along with the popularity of the Korean dramas, Korean cosmetics gradually had a place in the Chinese market, driven by the increasing popularity of Korean fashion. Influenced by Korean dramas and stars,as well as the reasonable prices and practicability of the products, Korean cosmetics attracted more young Chinese consumers, and its sales began to grow stably.

In July 2015, the overseas sales of all Korean industries decreased by 4.9% in total, while the overseas sales of the Korean cosmetics industry stood out from the rest with an increase of approximately 73%. Most of Korea’s socalled “flagship” export products such as chemicals, steel and automobiles experienced a sales reduction, and were overshadowed by the rapid growth of cosmetic sales.Export of South Korean cosmetics and beauty products to mainland China doubled in 2015 to a record high of$1.088 billion. In 2014, the size of the Korean brand-name cosmetics market reached $44 billion, accounted for more than 20% of global market share. With the popularity of the Korean dramas My Love from the Star and Inheritors in mainland China, sales of the same style cosmetics placements in the dramas, such as lipstick, air cushion powder and foundation, are further increasing. According to relevant statistics, in 2014, the South Korean trade balance for cosmetic industry was surplus for the first time,with exports of $1.92 billion, an increase of 50.4% over the year of 2013, and with 129 export regions. Actually, the popularity of Korean cosmetics remains primarily an “Asia Phenomenon”. The cosmetic exports to China accounts for 54.7% of the total Korean cosmetic exports.

On June 1, 2015, the Chinese government announced a reduction in the import tariff on skin care products from 5% to 2%, prompting AmorePacific, a Korean cosmetic company to lower the prices of products sold in the Chinese market. According to the China-South Korea FTA, Korea agrees to remove tariffs up to 92% of tariffs headings,accounting for 91% of China-South Korea export value.China promises an overall tariff concession with 91% of tariff headings, covering 85% of South Korea-China export value. The tariff reduction timeline shall be last more than 20 years. Taking the importation of cosmetics as an example, the prices of cosmetics imported from Korea are expected to reduce by about 20% by then. With the continuous price reduction, it can be foreseen that Korean cosmetics will continue to maintain rapid growth in the Chinese market.

Analysis of the influence factors behind the rapid growth of Korean cosmetics

Influence of South Korean culture

How the Korean Wave is influencing Korean cosmetics?A research conducted by Professor Young-Jae Lee from the Jewelry and Fashion Design Department of Hanyang University shows that two thirds of foreign tourists who purchase Korean cosmetics are influenced by the Korean Wave, and the most popular cosmetic brands for foreign consumers include Laneige, Innisfree, and the Face Shop.

Demands for Korean cosmentics is soaring in China,and sources now reckon this is thanks in large parts to the influx of Korean TV drama in the country. The influence of cultural export has helped the reputation of the South Korean cosmetics. In particular, the strong appeal of Korean stars as spokespersons has driven the sales of Korean cosmetics in China and other parts of Asia. Korean cosmentics are often integrated into popular K-dramas. Korean dramas such as Endless Love, Dae Jang Geum, Full House, Secret Garden, and My Love From The Star have constantly stimulated the cultural demand of audiences in Asia. Many fans yearn for the exquisite and elegant look and style as well as the romantic love story of the heroes and heroines in the dramas, and the product placement used in K-dramas can be an effective way of promotimg products PPL on South Korean TV shows boosted cosmetics sales.

Korean cosmetics have also become highly popular in China. Korean drama fans pay more than 1.98 million visits to Koreayh every day, and the number of visits to Chinese websites such as Youku, Sogou, Tudou, Sohu and iQIYI is even larger, which shows the popularity of the Korean Wave in China. The fans overseas are really interested in what kind of makeup their favorite Korean actresses are wearing on TV, which in trun raises the popularity of Korean cosmetic brands in China. It has become a hot craze in Asia to adapt Cheon Song Yi’s stylish looks from the extremely popular drama My Love From The Star. The makeup of Cheon Song-Yi, such as IOPE lipstick, IOPE air cushion BB cream, Hanyul aqua essence mist spray, and Amore hair care essential oil, have once become the most popular products that be warmly welcomed by most Chinese consumers. The sales of the same series of Korean cosmetics subsequently increased in the Chinese market, and their popularity was also further enhanced as a result.

In addition, high-end Korean cosmetic brands have been continuously penetrating the Chinese market by virtue of Korean drama stars. Famous Korean actors,actresses or singers are taking part in numerous advertisements campaigns. For example, Lee Young-Ae as the spokesperson for Whoo, Kim Tae-Hee as the spokesperson for HERA, Song Hye-kyo as the spokesperson for Laneige,and Kim Soo-hyun as the spokesperson for the Face Shop are all well-known in China, and the Korean brands they represent are gradually being accepted by more and more Chinese consumers.

Influence of technological innovation

Why are Korean cosmetics able to exert such huge influence in the Chinese market? Firstly, Korea is pumping out products fast and furiously. The way that H&M and Zara will get catwalk styles in quickly, South Korean retailers will do the same with cosmetics. Korean cosmetic companies constantly introduce new products such as air cushion BB cream, air cushion CC cream,lip gloss, and lipstick, so that consumers can quickly experience the new products. Secondly, compared to European and American cosmetics, the Korean brands are made for Asian skin, and effectively cater to the mind of Asian female consumers from the perspectives of skin type and skin tone, makeup style, packaging color, natural ingredients, etc. They are very quick to use catchy new ingredients, thick textures and they’re very careful with their pricing.

The vitality of Korean cosmetic brands comes from their innovation capability. South Korea overpassed Japan as the innovation leader since its brand invented the allin-one BB cream. The launch of new Korean cosmetic products at a crazy speed in recent years has inevitably disturbed the plans of European and American brands.The types of cream have quickly enjoyed great popularity in the global market. Now, both Lanc?me and Guerlain have introduced BB cream products.

In 2008, AmorePracific introduced the Air Cushion compact for the first time. In 2014, the brands sold one cushion compact every 1.2 seconds, with an annual sales volume of 26 million units, and the sales surpassed 200 billion KRW. The younger generation of consumers represented by those born in the 1990s and 2000s increasingly prefers a relaxed and free lifestyle and simple and fast products. The air cushion product invented in Korea integrates light-weight compact technology,package sealing technology, velvet-soft polyurethane porous foam powder puff technology, as well as the metal cover and metal box technology which can provide a“cool skin sensation”. With the increasing popularity of the air cushion compact technology, air cushion blusher,air cushion lip gloss and even air cushion liquid eyeliner have also emerged successively. Air cushion technology is applied almost everywhere, setting an example for technological innovation of makeup packaging.

Compared to European and American cosmetics which focus more on innovation of functions, formulas,etc., Korean cosmetics focus more on innovation with respect to upgrading of packaging technology, fashion trends, consumer behaviors, etc. The technologies we have today have already become relatively mature, and it is difficult to make great breakthroughs. Therefore, Korean innovation is well-received by consumers. The Western cosmetics emphasise their anti-aging effects, while Korean cosmetics emphasise the whitening and moisturizing effects, which cater more to the increasing needs for skin care products of Asian female consumers, and therefore can suitable for the Chinese cosmetic market.

Influence of the China-South Korea Free Trade Agreement

The China-South Korea FTA, which has been continuously pushed forward in the last 3 years, has led to rapid growth of Korean cosmetics in the Chinese market. The negotiation of the China-South Korea FTA started in May 2012. On November 10, 2014,China and South Korea signed a series of bilateral cooperation documents, which signified that the China-South Korea FTA negotiation officially came to an end, and the China-South Korea FTA was going to enter the substantial promotion phase. On June 1, 2015, the China-South Korea FTA was signed in Seoul. On November 30, 2015, the Korean Congress approved the China-South Korea FTA after discussion.The China-South Korea FTA with South Korea is also China’s largest bilateral FTA deal in term of trade volume and the most comprehensive scope to this date. On December 20, 2015, the China-South Korea FTA officially came into force, and more than 90% of products of the two countries would be subject to“zero tariff ” after the transitional period.

More and more Korean cosmetic companies have benefited from the China-South Korea FTA as it moves forward. Take the AmorePacific Group in China as an example. In 2014, the company achieved operating revenue of 4, 711.9 billion KRW (RMB 25.4 billion), and the sales in the Chinese market amounted to 467.3 billion KRW (RMB 2.52 billion), accounting for 10% of the total operating revenue of the group. In the past 10 years, the Chinese sales jump more than 40% a year, and China has become a central market in the overseas market to AmorePacific’s global business.

Prospect

Due to the enforcement of the China-South Korea FTA,Korean cosmetics are expected to maintain rapid growth in the Chinese market. Competitiveness advantage of Korea cosmetics in the Chinese market will be further enhanced.

Attentions should be paid to the possible crisis after rapid expansion. In the Korean cosmetic market, copycat cosmetics modelled after pricer brands, are gaining traction among young consumers in Korea. “Copycat”cosmetics which are similar to the original best-selling product in terms of product concept, external packaging design and even cream appearance will immediately emerge. Take bamboo gel, a hot-selling product in 2015,as an example. Several brands including TONY MOLY,the Face Shop and Beyond have successively introduced similar products, and every company claimed that it had independently developed the product, so it is hard to tell which brand is the “original” one. Many Korean cosmetic companies work with external manufacturers to produce a percentage of their products model. The inevitable result is that several enterprises share the same production line, and then put their own label on the product for sale. This will have a negative impact on the quality and brand improvement of Korean cosmetics.Korean cosmetic enterprises should continuously improve their independent development level, create a healthy competition environment, and strive to improve the overall popularity of Korean cosmetics.

[1] Unknown. China Becomes the Largest Cosmetics Export Destination of Korea. Domestic-Overseas Flavor Fragrance Cosmetic Information 2015, 11:2.

[2] Overseas Sales of Korean Cosmetics Increased by 73% by End of July. www.askci.com /news/chanye/2015/09/09/ 152613wga2.shtm l (Accessed Sep 9).

[3] Why Korean Cosmetics Quickly Become Popular in the Era of Consumer Sovereignty. www.qianzhan.com /a nalyst /detail/220/l51113- fOd3d84 l.html (Accessed Nov 13).

[4] Zhaozhi Peng. A Case Study on the Competitive Advantage of Korean Cosmetics in China. Brand Marketing 2015, 44, 89.

[5] 2014 Sales of Amore Pacific Group Reached 4, 711.9 Billion Won. finance.takungpao.com/gscy/q/2015/0213/2921703.html(Accessed Feb 13) .