South Korean companies face their own squid game in Xi Jinpings in China

The hit hit of the Netflix fantasy series Squid game, in which the characters must navigate a series of brutal children’s games to survive, once again highlighted South Korea’s prowess in the global entertainment industry.

But, in reality, the country’s cultural industries, characterized by other successes such as K-pop superstars BTS, are facing an existential battle this time around in their biggest growth market in China as President Xi Jinping is attacking the country’s technology, game and entertainment industries.

Some of Korea’s richest and most innovative companies are quietly rewriting their business strategies to avoid the shock of Beijing regulatory offensive, who has wiped out hundreds of billions of dollars of the value of China’s dominant technology groups and hurts Korean groups in the process.

China may no longer be the place where Korean companies are focused, said Choi Kwang-wook, chairman of J&J Asset Management, an investor in South Korean entertainment and games groups. Now, they need to expand beyond China to Southeast Asia, the United States and Europe for their future growth.

The popularity of South Korea’s music, television, film and games industries, known as the Korean Wave, or hallyu, propelled the country to global fame and generated an annual turnover of 107 billion dollars worldwide, according to the government agency Korea Creative Content Agency.

But game developers in South Korea have been among the hardest hit by Xis’ crackdown on games. Described by Chinese state media as spiritual opium, the government imposed a three hours weekly limit on online games for young players. The South Korean gaming industry had relied on Greater China for $ 3.5 billion in annual exports, more than half of its total.

Shares in leading Korean video game group Krafton, known for the worldwide hit title PlayerUnknowns Battlegrounds, fell below their IPO price.

The stock of Pearl Abyss, another game developer, has fallen more than 10% since the end of August. Meanwhile, Nexon, whose title Dungeon fighter In line 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 stepping up plans in India, where the gaming market, the world’s second after China, has more than doubled from $ 360 million in 2015 to $ 885 million in 2019, according to figures from Meritz Securities. It’s also looking to reinvent itself as a larger content house, focusing on animated films as well as games.

China was once a land of opportunity for Korean game makers, a game executive said. But things have changed completely… now we are trying to focus on Southeast Asia and Western markets and develop non-game content such as dramas, films and animation.

Visual entertainment has already proven to be fertile ground for South Korean businesses. Recent Movies Parasite and To menace have received international critical acclaim, while Squid game, a dystopian parable of inequality that captivated audiences this year, was set to become Netflix’s most popular show and grossed $ 891 million for the streaming giant, Bloomberg reported.

The outlook for South Korea’s $ 13.7 billion cosmetics industry has also darkened as Chinese authorities intensify a campaign against the so-called effeminate fashion trends popularized by South Korean celebrities. Authorities blasted the plastic surgery overgrowth among young men and online fan groups targeted for K-pop acts in recent months.

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

It was not the first time that a South Korean company had encountered nationalist headwinds in China. In 2016, retailer Lotte was forced out of China, and Hyundai’s market share plummeted amid a negative consumer reaction on the installation in Seoul of an American anti-missile shield.

Lee Jae-soo, Federation of Korean Industries, said that while the lure of South Korean music and television series had previously given the country’s consumer goods a cachet in China, local rivals are now offering products more and more high quality at lower prices.

South Korean companies need to focus on high-end products to differentiate themselves and move up the ranks of the value chain, Lee said.

Cosmetics company AmorePacific is turning to its premium Sulwhasoo brand in China, having closed 276 low-end Innisfree-branded stores since the start of last year. It is also pivoting to North America and Europe, where its second-quarter sales increased 56% and 67% year-on-year, respectively.

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

Those who make the strategic change can take another leap forward while others fall behind, Lee said.

When the executives of K-pop agency RBW were recently recruiting for new girl-pop group Purple Kiss, they made a decision that may prove emblematic of the sentiments of South Korean businesses: They decided not to add a Chinese member.

We no longer only do business with China and Japan, said Kim Jin-woo, president of RBW. Instead, we are now looking at the global market.