Caught in the Middle
by David S. Lee and Brad Glosserman
The Lotte Group, one of South Korea’s largest conglomerates, was optimistic about entering the Chinese market, and planned a long-term strategy that included shopping malls, supermarkets, and large entertainment complexes across the country. It eventually built more than 100 of its eponymous supermarkets, Lotte Mart, in China.1 All seemed to be going well, as Lotte, like other South Korean companies, benefitted from the glow created by the global popularity of South Korean music, media, and culture.
South Korean pop music (K-Pop) regularly played in Chinese stores and restaurants while TV shows (K-Dramas) were aired on Chinese television. Movie theaters in Beijing and Shanghai showed South Korean movies, and Chinese consumers eager to own the latest Korean products frequented the growing number of South Korean stores and shopping malls found in many Chinese cities. The tourist industry was another beneficiary of South Korea’s coolness as Chinese flocked to South Korea. In 2016, the peak of Chinese tourism to South Korea, nearly one out of every two visitors to the country came from China.2 This fascination transformed the bilateral relationship: China emerged as South Korea’s largest trading and economic partner, accounting for approximately 25% of South Korean trade.3
The boom wouldn’t last. In fact, the summer of 2016 marked the end of the Golden Era of ROK-China relations. Those halcyon days ended abruptly when South Korea and the US announced the deployment of the Terminal High Altitude Area Defense (THAAD) anti-missile system.4 THAAD, a defensive system designed to shoot down missiles, was sent to South Korea to counter advances in North Korea’s ballistic missile program. Announced in July 2016 and deployed the following year, THAAD greatly enhanced the ability to monitor and, if necessary, interdict North Korean ballistic missiles that posed an ever more deadly threat to South Korea and the US forces stationed there to protect the country.
China, however, was greatly alarmed by the THAAD deployment. Its chief concern, at least officially, was that the system’s powerful radar could be configured to monitor locations as far as 3,000 kilometers away, providing the ability to scan deep into China, potentially neutralizing Beijing’s own ballistic missile capabilities.5 Despite repeated efforts by US officials and experts to allay Chinese concerns, Beijing remained unmoved.
Instead of responding against the US, Beijing focused its anger on South Korea. Though the catalyst was a security issue defined alternatively as between North and South Korea (and the US) or between the US and China, China applied pressure on South Korea, and South Korean companies bore the brunt. Shortly after Seoul announced THAAD's deployment, South Korean business interests in China were hammered. Concerts and performances by South Korean music groups in China were restricted and broadcasts of South Korean shows and music were curtailed.6 South Korean movies were no longer available in cinemas, South Korean products were boycotted, and the once never-ending tour groups that inundated Seoul and other locations in South Korea slowed to a trickle.7
Undaunted, South Korea continued plans for deployment. The government identified a piece of land as an ideal location for the initial THAAD battery: part of a golf course, distant from any urban area. The South Korean government proposed a deal with the owner of the golf course that would swap the piece of land for another owned by the government. Both sides agreed and the land was exchanged. Lotte, owner of the golf course, had little idea what it was getting itself into; a tremendous backlash ensued in China as consumers avoided their stores and ongoing projects were halted or subject to administrative delays.
Having invested billions of dollars in the China market, Lotte waited — hoping the storm would pass. It soon learned that the patriotism of Chinese consumers and their willingness to boycott Lotte goods surpassed Lotte’s capital and patience, compelling many of its subsidiaries to exit the Chinese market, including its Lotte Mart business, ongoing construction projects, and several factories.8 It is estimated that the THAAD debacle cost Lotte some US $7 billion.9
Until the summer of 2016, the average Korean business person had no idea what THAAD was or why it was necessary. The idea that consumer product executives might have to prepare for any business risk related to a missile defense system was even more remote. But by the end of the summer, most business leaders in Korea, and every Korean business person engaged in some way with the Chinese market was well aware of THAAD and the weight it had assumed in its business calculations.
On its face, the decision to deploy THAAD does not involve China or the average Chinese consumer that shops at a Lotte supermarket. As details of China’s objection to the missile deployment emerged, however, Lotte was dragged into a geopolitical conundrum that included China, North Korea, South Korea, and the US. A Lotte source shared, “We agonized over whether to accept the government’s proposal.... But we were unable to say ‘no’ because it was related to national security. If we say no to the government, we can’t do business in Korea.”10
Meanwhile, Lotte confronted a backlash in China. In its boardroom and among its senior strategists, it is highly unlikely that Lotte’s leadership ever considered that it would rise to a level where they would effectively exit the China market over a real estate transaction, especially after committing so much time and capital to expanding there. Unfortunately for Lotte, not only was the risk unclear but so were its compound effects. This is the reality and risk of the new national security economy for global businesses.
References
1 “Lotte Mart to Exit the Chinese Market.” ChinaDaily.com, 18 October 2018.
2 Yonhap. “Number of Chinese Tourists to S. Korea Dips 30% over THAAD Row.” The Korea Herald, 20 July 2020.
3 Bo-eun, Kim. “South Korea Looks to Break China Import Dependence and Establish ‘Supply Chain Alliances.’” South China Morning Post, 19 May 2022.
4 Sang-hun, Choe. “South Korea and the US Agree to Deploy Missile Defense System.” The New York Times, 7 July 2016.
5 Meick, Ethan, and Nargiza Salidjanova. “China’s Response to U.S.-South Korean Missile Defense System Deployment and its Implication.” US-China Economic and Security Review Commission, 26 July 2017.
6 Na, Erika. “As South Korean Dramas and Films Ride Wave of International Success, How Long Will China Remain Off-Limits?” China Macro Economy, 27 January 2022.
7 Harris, Bryan, Jung-a Song, and Tom Hancock. “China Bans Tour Groups to South Korea as Defence Spat Worsens.” Financial Times, 3 March 2017.
8 “South Korea's Lotte Seeks to Exit China After Investing $9.6 Billion, as Thaad Fallout Ensues.” The Straits Times, 13 March 2019.
9 The Straits Times (see 8).
10 Kim, Cynthia, and Hyunjoo Jin. “With China Dream Shattered over Missile Land Deal, Lotte Faces Costly Overhaul.” Reuters, 25 October 2017.
©2023 David S. Lee & Brad Glosserman. All rights reserved.
