K-wave
Korean Wave or “hallyu” refers to the growing popularity of South Korean culture, entertainment and music in South East Asia. These cultural exports are contributing significantly to the growth of South Korea’s (EWY) economy in the form of tourism, media and export related consumer products. The South Korean government has also seen a window of opportunity and taken steps to capitalize on the “K-Wave” by supporting the promotion of its media, beauty and cosmetic exports. The government has set up a $1 billion investment fund to promote these industries in addition to introducing a slew of tax incentives. 
Exports of Cosmetics is a key driver for South Korea’s economy
The export boom following the K-Wave has become key to South Korea’s economic growth in the past few years. The country has become the third largest exporter of cosmetics and beauty products in the world.
In 2016, South Korean exports of health care and cosmetic products crossed the $10 billion milestone. As per reports by the Ministry of Health and Welfare in South Korea, annual exports grew an average of 19.4% between 2012 and 2016. This rise in demand for South Korean products has been primarily driven by the popularity of K-pop culture in South East nations, and China in particular.
Publicly listed equities in the cosmetics and tourism sectors in South Korea have gained 19.9% and 6.9% YTD. In comparison, the South Korean benchmark KOSPI Index has surged 17.9% while the iShares MSCI South Korea Capped ETF (EWY) is up 26.5% YTD.
China is key to South Korean beauty products; but caution prevails
China (FXI) is the largest export market for South Korea’s beauty products contributing 33% to total exports in 2016. However, in 2017, exports to China have dwindled as China came in conflict with South Korea over deployment of US missile defense system THAAD in the country. A recent report by Bloomberg highlights the changing tastes of Chinese consumers that could be a worry for the Korean cosmetics industry.
China has traditionally been the largest consumer of South Korean make-up products but their sales of late have been dropping at duty free outlets. Macquarie reports suggest that in May, Korean sales of skin care products dropped at duty free outlets as Chinese consumers are beginning to prefer colored makeup from American brands. However, the trend of Korean beauty products is now picking up in western European countries including Italy (EWI) and France (EWQ).
Sohn Mun-gi, vice minister of food and drug safety said, “The K-Beauty has seen a rapid growth thanks mainly to the government’s effort to improve regulations and support programs, including the expansion of functional cosmetics regions. We will continuously help domestic cosmetics products export smoothly to other countries and ease procedural regulations unrelated to safety through talks with regulators in the future so that the beauty hallyu can spread all over the world.”
The Korean Customs department has labeled five product lines as “Hallyu” products to include culture, living, food, clothing and accessories, home appliances, and computers.
In 2016, South Korea’s cosmetic industry crossed a trade surplus of 3 trillion won ($2.6 billion). The Ministry of Food and Drug Safety in South Korea reported that in 2016 the country’s cosmetics production grew 20% to 13.05 trillion won ($11.5 billion). Exports of cosmetics products surged 61% year over year to $4.2 billion last year. China was the biggest market for South Korean beauty products. Exports to China increased 33% year over year to 1.72 trillion won ($1.5 billion) last year contributing to 37.6% of total exports. Exports to Hong Kong and the United States (SPY) also grew 81% and 45.6% to 1.37 trillion won ($1.2 billion) and 343.69 billion won ($300 million) respectively.
