Competition is set to become intense between cosmetics and medical equipment firms in Korea and the European Union after the two regions’ free trade agreement came into effect on July 1.

Though it will take up to seven years until all the tariffs are eliminated, Korean manufacturers are stoking fears that cheaper European products will erode their competitiveness in the market.

European leaders, on the other hand, are pinning high hopes on the Korean partner as its rapidly aging population drives up demand for beauty and health care products.

Imported brands led by European beauty houses account for about 40 percent of the Korean cosmetics market reaching 12 trillion won last year.

Asia’s fourth-largest medical device market has grown at double-digit rates every year since 2005, nearing 3 billion euros ($4.3 billion) in 2010, according to the European Union Chamber of Commerce in Korea. Foreign makers supply more than 60 percent of the country’s needs.

Under the trade deal, 6.5 percent of tariffs on toners and baby products have already been erased. Those on other cosmetics will be eliminated over three to five years.

It has also wiped out 6-8 percent tariffs on 97 EU-made medical devices and will gradually eliminate duties on 37 more over seven years.

Output losses are estimated at 180 billion won ($169 million) in the Korean cosmetics sector and 136 billion won in medical equipment over the next five years, a government analysis showed, widening trade deficits with the EU.

In a bid to prop up the local industries, the government outlined a set of measures last year with 170 billion won of funds for the next five years, ranging from building infrastructure and regulation reforms to support small and medium-size firms.

Cheaper Chanel

The local cosmetics makers are expected to be among the hardest hit by the pact as the world’s best-known names such as Chanel, Lancome, Christian Dior and Guerlain are poised to bite into their stakes in the market.

The EU’s cosmetics exports to Korea reached $357 million last year, more than 35 times greater than Korea’s $10 million to the EU.

Though the high value-added industry is quickly booming here, it still hovers between 60 and 70 percent of EU levels, according to the government.

Some experts said the FTA could lead Korean leaders including AmorePacific and LG Household & Health Care to see their dominance toppled as their price competitiveness weakens.

“Shares of local and foreign brands might be reversed when the tariffs are completely gone in five years,” an official at the Korea Cosmetic Association said. “Companies that have not entered the Korean market because of the duties will scramble to launch their products.”

France-based Sephora and Marionnaud and Germany’s Douglas are among the names on the table. If they arrive here, they would likely strike a blow to small local firms ― the multinational beauty retailers operate between 800 and 1,000 stores in Europe alone.

In the government package, 70 billion won is allocated for infrastructure and R&D projects by 2015, nearly 10 percent of which this year.

The government said it will also nurture small- and mid-sized cosmetics manufacturers while easing regulations and improving standards.

On the other side, European exporters are bracing for keen rivalry with their counterparts here.

Korea’s global competitiveness is growing stronger on the back of the Korean Wave known as Hallyu, the EUCCK said in a report.

“The industry is continuing to grow despite the global economic recession thanks to higher levels of income and stronger need for quality of life,” the organization said.

Some officials claimed that the FTA would have limited impact, saying the European companies would not slash much retail prices regardless of the elimination of the tariffs.

“It’s their strategy to keep their brands ‘premium,’” said an official at a local cosmetics company declining to be named. “But if they spend spare cash on promotion and distribution instead, it could amplify the marketing effect too.”

Others noted that rising recognition of Korean labels and the saturated market left little room for the foreign firms to secure more distribution channels.

AmorePacific’s Sulwhasoo, the longtime best-seller, is branching out abroad. Other big and smaller players including LG, Able C&C and Nature Republic are vying for a bigger piece of the pie.

“We’re not anticipating a big shock because Korean firms have also built up solid retail networks and product lineups on their own,” another industry official said.

Medical devices

The Korean health care industry is causing concerns with its already frail standing in the medical equipment market dominated by foreign companies led by Siemens and Philips.

EU-made products account for 31 percent of the import-dependent local market, according to the EUCCK. Germany is the top exporter with a 13-percent stake, followed by Ireland, Switzerland, the U.K. and France.

Diagnostic imaging tools are the top seller, accounting for 32 percent. Consumables, orthopedic and implantable devices, and dental products come next with 15 percent, 12 percent and 7 percent, respectively.

The latest trade deal is projected to spike imports in the latter half of the year as tariffs are cut.

Reckoned with such jitters, the government said it allocated 100 billion by 2015 to support companies and institutions for their R&D programs, establish infrastructure and advance regulations and policies.

It also promised investment in 25 target medical devices and materials that are high value-added and could create large markets as well as synergy between medical care and information technology.

Meanwhile, European companies are urging the Korean government to let down non-tariff barriers limiting access to the market such as complex regulations and disparities in standards.

“Korea doesn’t accept all the test results provided by European companies, which is their major concern,” Maxim Mamin, chairman of the EUCCK’s healthcare-medical devices committee, said at the chamber’s media event in Seoul last month. “A major impact on patients and customers is that companies may not introduce the newest products to Korea.”

In a report, the chamber stressed the need for transparency in Korea’s pricing and reimbursement practices.

“Officials apply regulations on a selective basis, arbitrarily enforcing them at random, against specific targets,” said Jean Marie Hurtiger, EUCCK president and Renault Samsung Motors chief executive.

The government said it was working to improve the current regulatory regime to boost confidence between the two trade partners. They plan to launch a working group consisting of officials from both sides for collaboration.

By Shin Hyon-hee (heeshin@heraldcorp.com)