South Korean companies face own ‘Squid Game’ in Xi Jinping’s China


The blockbuster success of Netflix fantasy series Squid Game, in which the characters have to navigate a series of brutal “children’s games” to survive, has once again highlighted South Korea’s prowess in the global entertainment industry.

But, in reality, the country’s cultural industries, typified by other hits such as K-pop superstars BTS, are facing a battle of their own — this time in their biggest growth market of China as President Xi Jinping cracks down on the country’s tech, gaming and entertainment industries.

Some of Korea’s richest and most innovative companies are quietly rewriting corporate strategies to avoid the brunt of Beijing’s regulatory offensive, which has wiped hundreds of billions of dollars from the value of China’s dominant tech groups and is hurting Korean groups in the process.

“China can no longer be where Korean companies focus,” said Choi Kwang-wook, president of J&J Asset Management, an investor in South Korean entertainment and gaming groups. “Now, they need to expand beyond China to south-east Asia, the US and Europe for their future growth.”

The popularity of South Korea’s music, television, film and gaming industries, known as the “Korean wave”, or hallyu, has propelled the country to global renown and netted an annual $107bn in revenues worldwide, according to the state-run Korea Creative Content Agency.

But South Korea’s gaming developers have been among the worst-hit by Xi’s crackdown on gaming. Described by Chinese state media as “spiritual opium”, the government has imposed a three-hour weekly limit on online gaming for young players. The South Korean gaming industry had counted on greater China for $3.5bn in annual exports, more than half of its total.

Shares in leading Korean gaming group Krafton, known for the global hit title PlayerUnknown’s Battlegrounds, have fallen below their initial public offering price.

Tree map showing sales revenue of South Korea’s content industry

The stock of Pearl Abyss, another games developer, has fallen more than 10 per cent since the end of August. Meanwhile, Nexon, whose title Dungeon Fighter Online has been one of the most popular games in China since its release in 2005, had given up hope of approval for its mobile version, a company official said.

Now, Krafton is accelerating plans in India, where the gaming market, the world’s second-biggest after China’s, more than doubled in size from $360m in 2015 to $885m in 2019, according to figures from Meritz Securities. It is also looking to reinvent itself as a broader content house, focusing on animated movies as well as games.

“China used to be a land of opportunity for Korean game makers,” said one gaming executive. “But things have completely changed . . . we are now trying to focus on south-east Asia and western markets and to develop non-gaming content like dramas, film and animation.”

Visual entertainment has already proved fertile ground for South Korean companies. Recent films Parasite and Minari have won international critical acclaim, while Squid Game, a dystopian parable of inequality that has captivated audiences this year, was on track to be Netflix’s most popular show ever and generated $891m for the streaming giant, Bloomberg reported.

The prospects of South Korea’s $13.7bn cosmetics industry have also dimmed as Chinese authorities ramped up a campaign against so-called effeminate fashion trends popularised by South Korean celebrities. Officials have lambasted the proliferation of plastic surgery among young men and targeted online fan groups of K-pop acts in recent months.

Even BTS, perhaps South Korea’s most visible cultural ambassadors, have been caught up in the fray. The group was dropped by South Korean companies, including Samsung and Hyundai, from Chinese marketing campaigns late last year after a singer referenced the Korean war. Hundreds of thousands of Chinese died in the conflict.

Pie chart showing South Korea's content industry exports by region

It was not the first time a South Korean company had encountered nationalist headwinds in China. In 2016, retailer Lotte was forced to exit China and Hyundai’s market share fell amid a consumer backlash over Seoul’s installation of a US missile shield.

Lee Jae-soo, at the Federation of Korean Industries, said that while the allure of South Korean music and TV dramas had previously given the country’s consumer goods a cachet in China, local rivals were now offering increasingly high-quality products at lower prices.

South Korean companies “need to focus on premium products for differentiation to move up the value chain”, Lee said.

Cosmetics company AmorePacific is turning to its premium brand Sulwhasoo in China, after closing 276 stores of lower-end Innisfree brand since the beginning of last year. It is also pivoting to North America and Europe, where its second-quarter sales increased 56 per cent and 67 per cent respectively year on year.

Line chart of share price (rebased) showing South Korean gaming groups were hammered by Beijing’s crackdown

Chan Lee, managing partner at Petra Capital Management, a Seoul-based hedge fund, said that South Korean companies would be better served by accelerating plans to expand in markets other than China.

“Those who make the strategic shift can make another leap forward while others will fall behind,” Lee said.

When executives at K-pop agency RBW were recently recruiting for new girl pop group Purple Kiss, they made a decision that could prove emblematic of south Korean companies’ sentiments: they decided against adding a Chinese member.

“We are no longer doing business with just China and Japan in mind,” said Kim Jin-woo, RBW president. “Instead, we are now looking at the global market.”

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