When China adopted policies in the late 1970s to open the country to foreign investment, small and midsize South Korean businesses started engaging in nongovernmental trade activities along the mainland's coastal areas. On some levels, this activity was the first step toward the two countries' formal diplomatic relationship in 1992.

After official ties were established, three of South Korea's largest and most successful companies came to China to take advantage of its cheap labor, low tariffs and favorable investment terms such as buying or renting low-priced land from the government. Hyundai Motor Co., LG Electronics Inc. and Samsung Group built their own plants in China. During this time, other large South Korean firms also set up joint ventures with Chinese enterprises.

They have all come a long way since 1992, when South Korea's investment in China was only $210 million. By 2006, this amount had reached $35 billion. Now China is South Korea's biggest foreign investment destination, and South Korea is China's second biggest foreign investor. According to the South Korean Embassy in Beijing, there will be 43,000 South Korean enterprises in China by the end of 2007.

When South Korean companies come to China, they help promote the growth of the country's GDP, said Li Dunqiu, a top Chinese expert on the Korean Peninsula at the Chinese Academy of Social Sciences. Geographic closeness and cultural similarities between the two countries also attract South Korean companies, he said.

From manufacturing to hi-tech

In the beginning, South Korean companies mainly invested in labor-intensive industries such as the processing industry. But with China's rapid economic development, they turned to technology-intensive sectors, such as electronics and automobiles, and the service industry.

The Beijing operations of Hyundai, or Beijing Hyundai, were set up in the Linhe Industrial Development Zone in the capital's Shunyi District in October 2002 by Beijing Motor Investment Company Ltd. and Korea Hyundai Motor Company. Each invested about $24.7 million. Beijing Hyundai became the first automobile joint venture approved by the Chinese Government since China joined the World Trade Organization in 2001. It has a 30-year contract to operate the joint venture.

During the past four and half years, the company has sold more than 800,000 automobiles and had total sales of 90 million yuan, according to Beijing Hyundai. It has paid total taxes of more than 10 billion yuan to the Chinese Government.

Hyundai is one of many South Korean firms in China that import raw material and spare parts from South Korea and export the products to a third country after processing them in China. This increases both China's and South Korea's export volumes. As a joint venture, Hyundai's Chinese operation is responsible for internal management and production, while its South Korean partner oversees sales and purchases. The company produces 300,000 cars in five categories and 300,000 engines annually. Beijing Hyundai employs 50,000 workers.

Localizing their products

What accounts for Hyundai's success in China?

Beijing Hyundai adjusted its designs to meet the taste and needs of Chinese buyers. It also won long-term contracts to provide cars for taxi companies and the Beijing Municipal Government. It produces at least half of the more than 67,000 taxies in Beijing today. In December 2002, the year Beijing Hyundai was established, the company received government orders for more than 5,000 cars. Now, most of the police cars in the capital are manufactured by Beijing Hyundai.

Hyundai automobiles are only sold in China, but the company's engine products are supplied to Beijing Hyundai and Dongfeng Kia, a type of motor produced by Hyundai Motor Group China Ltd., a fully-owned subsidiary of Hyundai Corp., and are exported to Russia.

This year, Beijing Hyundai's production goal is 310,000 cars, the company said. China's rapid economic growth compelled Beijing Hyundai to begin setting up a second production zone and technology center in 2006. When construction is finished, it expects to produce 600,000 cars and 500,000 engines annually, with yearly sales exceeding 60 billion yuan. It also anticipates having more than 70,000 employees.

Other companies like Samsung and LG Electronics have followed suit and localized their products and operations in China. By the end of 2006, 20 Samsung Corp. subsidiaries had invested in China, and Samsung China Co. Ltd. had invested $5 billion in the country.

Nowadays, Samsung China has 119 units, including production facilities, chains and subsidiaries, involved in electronics, financing, trade, heavy industry, architecture, chemicals, textile and advertisement. It employs more than 54,000 Chinese workers. In 2006, its trade volume exceeded $20.5 billion. Its export volume was $12.3 billion, or 60 percent of the corporation's total sales volume that year, according to the company.

LG China, the local operations of LG Electronics, has also localized its products, production, research and development and personnel. It has tailored its products to the Chinese market and consumer demands. For instance, LG China now produces 90 percent of spare parts in China. In the future, this will rise to 100 percent, the company said. Its research and development activities are done mainly by Chinese technicians. The company also plans to hire more Chinese managers.

LG China has seen its sales grow steadily since 1993 when the company first set up operations here. In 2006, its sales were $9 billion, 85 percent of which came from exports. Sales of its household electronics here totaled 5 billion yuan. LG China has more than 30,000 employees, 98 percent of whom are Chinese.

More to come?

Shin Bong Kil, Economics Minister at South Korea's embassy in Beijing, said South Korean enterprises' investment in China is also a motive that promotes South Korea's economic development.

"Some South Korea companies were recharged and saw rapid development after they came to China," he said. Work experience in China has become an important evaluation factor for South Korean companies when they hire outstanding employees. As a result, many South Koreans who want to work for these companies have learned to speak Chinese, he added.

The picture isn't all rosy. Some South Korean enterprises will face challenges here in the near future, Shin said. Small and medium-sized South Korean enterprises in China already find competing with big companies difficult, especially in hi-tech product sectors, such as automobiles and electronics.

Some South Korean companies now are considering investing in Southeast Asian countries like Viet Nam and Indonesia, as China's labor costs rise along with its economic development.

As a further disincentive, China also will cancel its favorable tax policy for foreign companies in January 2008 and levy the same taxes on both domestic and foreign enterprises, Shin said. Currently, foreign enterprises pay 11 percent-15 percent tax, while domestic ones pay more than 30 percent. Both will pay 25 percent when the new law goes into effect.