In an economic zone close to the North Korean border stands a factory that makes high-quality steel tubes. It opened on the outskirts of Hunchun to great fanfare in 1996, the municipal government and local people proud that they had persuaded the Hyundai Group, a Fortune 500 company, to invest in their remote city in the northeast province of Jilin. But things did not go well. Its products, durable and of good quality, were undercut by cheap local steel, some of it fake, and the plant closed in 1999. Hyundai has tried to find a buyer but in vain. The factory lies idle, much of its expensive equipment in place, tended by a single guard. Hyundai's experience in Hunchun is not unusual. An increasing number of South Korean companies are pulling out of China because they cannot compete in the local market, they picked the wrong product and the wrong partner and have financial troubles at home. In the first five months, South Korean companies invested US$163 million in China and closed factories and withdrew capital totalling US$113 million, according to figures from the Korean Import-Export Bank. In 1998, the amount of such capital leaving was US$11.45 million and last year rose to US$60.74 million. In 1995, China accounted for 27 per cent of overseas investment by South Korean companies, and the figure last year fell to 8 per cent. 'Most of those who left were small and medium-size enterprises [SMEs]. Their bosses thought that it would be good to invest in China and they made the decision too easily and too quickly,' said K.S. Ko, chief representative of the Korea International Trade Association in Beijing. 'They expected cheap labour and a big market. But they found that, in the eastern parts of China, wages are higher than they expected and the market is not so accessible. The Chinese market has its own special characteristics and is not like the rest of the world. 'If we understand this, it is no problem. But many small and medium-size companies did not understand this. The big Korean companies were more careful. They took advice from lawyers and consultants before investing,' he said. These SMEs invested in factories to make consumer products like toys, garments and electronic goods, mainly in Shandong, Liaoning and Jilin, the provinces closest to Korea. When they came, they expected a ready market for their goods in China, with production costs substantially lower than at home. But they found that Chinese manufacturers were increasingly competitive and the quality of their goods improving. For example, domestic producers of white goods, like colour televisions, refrigerators, air-conditioners and VCDs, have made remarkable progress in the past 10 years, capturing a majority of the local market at the expense of foreign brands, especially Japanese and Korean. The same process, at an earlier stage, is under way with personal computers and mobile telephones, in which Chinese companies are investing and marketing heavily to challenge the foreign brands. Another factor in the Korean withdrawal was the Asian financial crisis from the autumn of 1997 that hit South Korea very hard. Facing a cash crunch at home, many Korean firms chose to close their foreign operations. In addition, some Korean companies are looking at North Korea, which is making efforts, if erratic, to attract them. The responsibility for the departure of the Korean firms must be laid in part at the door of the Chinese side, in terms of protectionism of local firms, fake products and infringement of copyright and levying of illegal fees and taxes. 'When I visit Chinese provinces, I find that they want big foreign firms as investors,' Mr Ko said. 'But SMEs are better in that they employ more people, while big firms use more automation. I also find that most Chinese officials want IT companies, but in many places, the conditions do not exist for them, like a skilled workforce and related industries.' Park Min-soon, chief researcher at the Samsung Economic Research Institute, said that up to now, South Korean investment in China had concentrated on low-cost, labour-intensive products in which it was hard to make a profit. 'What Korean firms should do is give up these uncompetitive products and invest in higher-technology goods, as they are doing at home,' he said. Mr Ko said that in contrast, many large South Korean firms had prospered in China, such as Samsung and the LG group. 'Samsung and LG have done well in mobile phones, electronics and television tubes. Samsung has invested in the northeast, Tianjin, Suzhou and Shanghai. It did enough research before investing,' he said. The issue overshadowing this investment is the increasing competition between China and South Korea after Beijing joins the World Trade Organisation, expected by the end of this year. 'Most Koreans worry about this,' Mr Ko said. 'We already compete in many products and this will intensify as China exercises a more powerful influence in the world market. Korean goods will have to move to a higher level.' Caroline Cooper, director of congressional affairs and trade policy with the Korea Economic Institute in Washington, said that after China's WTO entry, South Korea would confront greater competition from China in industries such as steel, textiles and apparel. 'In the early 1990s, trade between the two countries was largely complementary,' she said. 'The majority of Korean exports to China were intermediate goods, while China exported mostly consumer goods to Korea. 'In recent years, trade has become more competitive. This has led to a number of trade disputes between the two countries. In the case of steel, for example, China and Korea continue to feud over allegations by the Chinese Government that Korean companies are dumping products on the Chinese market,' she said. On the other hand, South Korea has much to gain from the opening of China's telecommunications market, particularly in wireless, with leading players like Samsung, LG Group and SK Telecom having already established a foothold in China's CDMA market, she said. These three firms are competing hard to participate in the development of a CDMA network by China Unicom, the country's second mobile carrier. Mr Ko said that WTO entry would be good for his country in so far as it would open China wider to foreign firms, giving them more opportunity, reducing restrictions and making a better business environment. So what are the products that will enable South Korea to survive the increasing economic threat of its giant neighbour? 'That is a state secret,' he said. 'Look at Europe. It has large economies, like Germany, France and Britain. But there is a place in the sun for the smaller countries like Switzerland, Finland and Belgium. They are smaller than we are but they prosper. 'We have to face the world as it is. This is the process of history.'