Struggling to catch-up

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

When French luxury giant LVMH’s private equity arm was conducting due diligence on Clio before buying a stake in 2016, among its key questions was: “How do you come up with new products at such a fast speed?,” said Lim Mira, a manager at Clio’s strategic planning team.

Contract manufacturers such as Cosmax 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 contract manufacturer in the past, but has now shifted to Korean manufacturers, she said. “Many global players are struggling to catch up as the lifecycle of any success has shortened, pushing them to come up with new innovations at a much faster speed,” said Laura Chu, a Chinabased account director at researcher Kantar International.

In China, Unilever’s share declined from 3.2 per cent in 2014 to 2.8 per cent in 2017, while L’Oreal’s share fell from 9.4 per cent to 8.5 per cent during the same period, according to research firm Euromonitor.

Seeking to turn the tables, both Unilever 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 China.

Unilever announced a 2.27 billion euro ($2.67 billion) deal for Carver Korea in September - maker of the A.H.C. cosmetics brand, whose China sales rose more than 30 per cent in 2017, according to Kantar International.

“Geographically it will enable us to strength our position in two of the top five largest skin care markets - China and Korea,” Lizzy Chen, a UK-based executive at Unilever, told Reuters.

South Korea-based Nanda, which was acquired by L’Oreal 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 Beijing over South Korea’s installation of a new US missile defence 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 chairman Cho Im-rae 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 Reuters.