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Focus: The Foxconns of fast beauty propel South Korean cosmetics' success in China

Reuters  |  SEOUL 

By and Hyunjoo Jin

SEOUL (Reuters) - At a factory two hours south of Seoul, women clad in plastic caps and masks put peach-coloured eye-shadow into cases, right next to a machine churning out a skin-colour face powder.

The difference between the two lines: the first is supplying one of France's best-known premium cosmetic brands, while the second is serving a South Korean budget firm.

The plant is operated by Cosmecca Korea, the country's third-biggest contract maker, which produces a range of products for more than 300 customers, all the way from high-end brands like to nimble domestic firms such as Clio and

It is factories like this that have made the epicentre of fast beauty, a world in which the time it takes to get a product idea onto store shelves has dropped dramatically, often by years. This is vital as fickle millennial consumers can easily leave last year's hits as this year's busts.

Their dominance of the world of for may have become as important to the industry as has been for

Some of the major Korean brands they work for have been acquired by global companies such as and Unilever, and according to people with direct knowledge of the matter, the manufacturers themselves have received investment offers, some from foreign cosmetics firms.

South Korea's three largest contract manufacturers - Cosmax, Kolmar and Cosmecca - have all been approached by foreign investors about buying a minoritystake in recent years, three people with direct knowledge of thesituations told The sources asked for anonymity anddeclined to elaborate further citing confidentiality of theapproaches.

One of the sources said one of the manufacturers had rejected a 2016 offer from an overseas cosmetics company for a minority stake, partly due to concerns that such an alliance could upset its broader customer base.

Representatives for the companies declined to comment.

DEMAND FROM CHINESE BRANDS

Though largely staying in the background with little publicrecognition themselves, contract manufacturers stand to benefitas Korean brands they work for rapidly grow in China's $53.5billion cosmetics market. That's thanks to their value for moneyimage, fast turnaround times for new products, and China's own fast-growing cosmetics brands, albeit still small, are also driving the revenue growth of South Korean manufacturers, although margins on these contracts can be low, company officials say.

The stock market performance of the three has been mixed, though they have all outperformed the main benchmark in

Shares of global No.1 Cosmax, has gained 34percent year to date, far outpacing a 8 percent drop in the wider South Korean market.

Cosmecca shares rose 8 percent and second-ranked fell 3 percent in the same period.

All three have, though, outperformed the 21 percent decline in shares of Amorepacific Group, South Korea's largest cosmetics powerhouse.

Amorepacific, which uses both in-house and contract manufacturing, reported revenue fell 10 percent and operating profit slumped by nearly 30 percent in the first three months of2018. Its brands include the top-end Sulwhasoo, mass market Innis free, and young makeup offering

Even as all the top three contract firms, which are also known as original equipment manufacturers (OEM), posted revenue growth in the same period.

"The surge of smaller players gives tough times to beauty giants like Amorepacific. By contrast, this is a favourable environment for OEM," said Park Jong-dae, an at & Securities. "While brand companies have up and downs, OEM garner stable earnings. They are most suited to the industry's structural changes - Asian growth and diversified distribution channels."

STRUGGLING TO CATCH-UP

In particular, they are central to the success in the high growth market of small Korean brands with new ideas but no production or research capabilities, industry executives and experts say.

When French LVMH's private equity arm was conducting due diligence on Clio before buying a stake in2016, among its key questions was: "How do you come up with new products at such a fast speed?," said Lim Mira, a at Clio's strategic planning team.

Contract manufacturers such as deliver on orders much more quickly, in as fast as three months compared to about a year overseas contract manufacturers require, Lim said.

The firm used to source products from an Italian in the past, but has now shifted to Korean manufacturers, she said.

"Many global players are struggling to catch up as the life cycle of any success has shortened, pushing them to come up with new innovations at a much faster speed," said Laura Chu, a China-based

In China, Unilever's share declined from 3.2 percent in 2014to 2.8 percent in 2017, while L'Oreal's share fell from 9.4percent to 8.5 percent during the same period, according to research firm Seeking to turn the tables, both and L'Oreal, as well as other European and American majors, have paid big premiums in the last two years to scoop up South Korean brands thriving in

announced a 2.27 billion euro ($2.67 billion) deal for in September - maker of the A.H.C. cosmetics brand, whose sales rose more than 30 percent in 2017,according to

"Geographically it will enable us to strength our position in two of the top five largest markets - China and Korea," Lizzy Chen, a U.K.-based at Unilever, told

South Korea-based Nanda, which was acquired by for an undisclosed sum in May, saw sales of its flagship cosmetics brand 3CE double in China last year.

The strong performance was particularly notable given that last year a major spat between Seoul and over South Korea's installation of a new U.S. missile defense system led to an unofficial boycott of South Korean brands in China.

South Korean contract manufacturers have been expanding China production to meet surging demand.

Cosmecca's said that in recent years it has been running its factories in China at full throttle. It is planning to open a third factory there.

"China's cosmetics demand is growing enormously," he said in an interview with ($1 = 0.8514 euros)

(Reporting by and Hyunjoo Jin; Additional reporting by Dahee Kim; Editing by and Martin Howell)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Mon, July 09 2018. 11:47 IST
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