China orders Hershey-Lotte candy factory to halt operations

Lotte Shanghai Foods, a joint venture between Hershey Co. and South Korea’s Lotte Group, has been told by Chinese authorities to stop production at its factory for a month, joining a growing list of South Korean businesses in China that have been ordered to suspend operations.

The latest order, confirmed by Lotte Group, comes as South Korean companies say they are facing economic retaliation from China for their country’s decision to deploy a missile defense system to counter North Korea’s provocations, including the test firing of four ballistic missiles on March 6.

Lotte Group and its affiliates have incurred the brunt of the recent actions against South Korean businesses after Lotte agreed to provide a golf course that the U.S. will use to deploy the Terminal High Altitude Area Defense missile system. 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.

Chinese authorities ordered the production stoppage because of alleged safety violations, according to a Lotte representative, who asked not to be identified, citing company policy. The month-long halt could cost the joint venture about 4 billion won (USD3.5 million) in lost sales, according to the company official. 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.

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 U.S., 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 program aimed at boosting profit margins, with the layoffs focused on hourly employees outside the U.S. Michele Buck, a company veteran who took over as chief executive officer on March 1, said earlier this month that growth in the Chinese chocolate market will be slower than the company anticipated.

The broader Chinese retaliation may hurt South Korea’s economy. The China National Tourism Administration has ordered travel agents to stop selling tour packages to South Korea starting March 15, according to the state-run Korea Tourism Organization. South Korean government officials also said Chinese customs are rejecting certain cosmetic shipments.

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.

South Korea is closely monitoring the situation with China and will work to minimize any negative impact to Korean citizens and companies by expanding economic and diplomatic efforts, Finance Minister Yoo Il-ho said last week after a meeting with government ministers.

Shares of Lotte Confectionary Co., the Lotte unit that runs the Shanghai chocolate-making joint venture, fell last week in Seoul. Heejin Kim, Sohee Kim, Craig Giammona, MDT/Bloomberg