Lotte Shanghai Foods, a joint venture between Hershey Co. and Lotte Group, has been ordered to stop production by Chinese authorities, escalating China’s economic retaliation for the deployment of a US missile-defense system in South Korea.
The suspension order marks the first time that a US company has also been pulled into the fray of a simmering political dispute between China and South Korea. The factory suspension is the latest move by China against South Korean companies.
Lotte and its affiliates have incurred the brunt of the recent Chinese actions after the South Korean conglomerate agreed to provide a golf course that the US will use to deploy the Terminal High Altitude Area Defense missile system to counter North Korea’s provocations, including the test firing of four ballistic missiles on March 6.
Chinese authorities ordered the production stoppage due to alleged safety violations, according to a Lotte representative, who asked not to be identified, citing company policy. The monthlong halt could cost the joint venture about 4 billion won ($3.5 million) in lost sales, the company official said. The factory makes chocolates and cocoa products.
Hershey suspended production at the facility to “perform maintenance activities,” according to a company statement.
“This action is being taken in connection with a routine inspection and we are working closely with the government on these matters,” the company said.
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Hershey established the joint venture with Lotte in 2007 and owns a 50 percent controlling stake, according to company filings. The shutdown is the latest trouble for the chocolate giant in China. Hershey generates almost all of its revenue selling chocolate in the US, though it has looked abroad for growth in recent years. In 2014, it bought Shanghai Golden Monkey to expand in China. But distribution and payment collection problems have weighed on that business, and Hershey’s international unit posted a loss in the past two years.
The chocolatier said last week it will cut about 15 percent of its workforce as part of a cost-savings programme aimed at boosting profit margins, with the layoffs focused on hourly employees outside the US Michele Buck, a company veteran who took over at chief executive officer on March 1, said earlier this month that growth in the Chinese chocolate market will be slower than the company anticipated.
Hershey shares were little changed at $108.57 at the close Wednesday in New York. The stock has gained 5 percent this year.
China’s backlash has also extended to other industries, with South Korean government officials saying Chinese authorities have verbally ordered local travel agencies to stop selling tour packages to South Korea starting March 15, and Chinese customs are rejecting certain cosmetic shipments. China’s major internet-streaming companies have pulled popular Korean programmes.
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China opposes the deployment, saying it undermines its own security. In recent weeks, Lotte’s Chinese website has been hacked and Chinese authorities, citing alleged fire safety violations, have suspended 55 Lotte Mart stores, or more than half of the shops Lotte operates in China. In addition, the Agricultural Bank of China, the country’s third-largest lender, asked branches to examine the lending it does with Lotte, according to people with knowledge of the matter.
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South Korea is closely monitoring the current situation with China and will work to minimise damages on Korean citizens and companies by expanding economic and diplomatic efforts, Finance minister Yoo Il-ho said Wednesday after a meeting with government ministers.
Shares of Lotte Confectionery, the unit that runs the Shanghai chocolate-making joint venture, fell 4.2 percent Wednesday in Seoul, compared with the benchmark Kospi Index’s 0.1 percent gain. Lotte Shopping Co., which operates department stores in Asia, dropped 0.7 percent, extending its decline to 9 percent since the government disclosed the land deal on February 27.