Before entering into a contractual relationship with a Korean manufacturers/commission representative (agent) or distributor, U.S. firms should conduct a thorough due diligence on a prospective business partner. A contract with an agent or distributor should be handled with care and with the assistance of an attorney. The Commercial Service in Korea can assist by providing companies with an Individual Company Profile (ICP) (Consult: http://export.gov/southkorea/servicesforuscompanies/icp/index.asp) report, which provides detailed financial and related business information on the company you seek to work with.
The most common means of product or service representation in Korea are:
Performance of your agent/distributor should be regularly/frequently monitored. An under-performing or non-performing agent/distributor should be counseled and properly guided. If, after a period of time, performance is still poor (and only after careful consideration of all legal and contractual obligations), a termination of contract should be considered. Once a termination is legally binding, the U.S. firm should begin searching for a new distributor.
Finding a Good Partner in Korea
The U.S. Dept. of Commerce’s Commercial Service (CS) office in Seoul, like CS offices around the world, offers the Gold Key Service (GKS) (See: http://export.gov/southkorea/servicesforuscompanies/gks/index.asp) to assist U.S. companies in finding a good partner in Korea.
U.S. exporters are urged to contact one of over 100 U.S. Export Assistance Centers (USEACs; please contact the USEAC closest to your business). Consult: http://export.gov/usoffices/index.asp to begin the process.
The GKS provides:
CS Korea strongly recommends that:
The dynamism and maturity of the Korean market, coupled with its strategic location in East Asia, may lead U.S. companies to consider opening an office in Korea. The following options exist:
Basic guidelines to setting-up an office in Korea include:
Korea has a large pool of conscientious and highly-educated workers. Female employees are especially strong candidates, given their educational achievements, language abilities, and the prevalence of traditional Korean cultural attitudes toward female employees (which have historically prevented them from progressing as quickly as they would in a U.S. company).
Due to differences in U.S. and Korean employment practices, CS Korea recommends consulting Korean employment agencies before hiring.
The franchise market in 2012 was valued at an estimated USD 84.3 billion (franchise, sub-franchise fees and royalties, product and service revenues, consulting fees, related product sales and equipment; Ministry of Trade, Industry and Energy).
Nearly 3,034 franchises were registered in Korea in 2011. Some 1,240,000 employees are currently working in this industry. There are some 21,121 convenience store franchises operating in Korea (2012 Yearbook of Retail Industry), of which 5,085 opened in 2011. Nearly 2,145 were food service franchises, 276 were retail franchises, and 613 were service franchises. On average, a franchise operates 68.5 stores across its industry in Korea.
Franchisors interested in this market must:
The Korea-U.S. FTA (KORUS) will positively affect this industry in many ways, to include:
In 2012, Korea’s large retail players reported interest in opening numerous mega malls outside the Seoul metropolitan area, over the next three to five years. These highly respected (mostly Chaebol) retailers seek retail anchor stores, franchise food service establishments and restaurants with a unique concept or theme for their expansion projects. Several companies are interested in becoming master franchisors of U.S. franchise brands, as well as wanting U.S. franchise tenants for their new malls/stores.
Opportunities exist for franchises in: wellness/well-being, environmentally friendly products, sports and leisure activities, personal service, green growth, children’s services, education, laundry service, auto maintenance, hair care, senior day care, homecare, home delivery services (all sectors), home child care, human resource training and pet service, to name a few.
Korean franchisees are reluctant to pay the high franchising fees (USD 90,000 to 180,000) and royalties often required by U.S. companies. Domestic chains are popular because they do not require much capital or large royalty fee payments.
Minimum facility size and number of store openings required by U.S. franchisors are also a challenge for the Korean franchisee. The unique and expensive nature of the commercial real estate sector in Korea can affect the feasibility of a project which may otherwise offer great promise in other markets.
Korean franchisees prefer to do business with U.S. franchisors that offer established brand names to Korean consumers, as well as offering American-style, systematic operations and management skills.
There are three basic types of franchise investors in Korea:
U.S. investors should seek an experienced workforce which they can mentor and monitor in this mature market.
As part of Korea’s efforts in 2012 and into 2013 to bring about economic democratization, the National Commission for Corporate Partnership (NCCP) recommended that regulations be imposed on large companies/conglomerates to provide opportunities and raise the competitiveness of SMEs in the franchise sector. The NCCP classifies large companies/conglomerates as those with annual sales over 20 billion won, with more than 200 employees, under the Minor Enterprise Basic Law. A whole series of restrictions, such as denying a conglomerate the ability to open a new store located less than 500 meters from an existing shop of the same brand, is scheduled to go into force in 2013. At present, there are no exceptions for foreign companies operating in Korea, if their annual sales are over 20 billion won and with more than 200 employees.
The NCCP’s new regulations will be in effect for approximately three years, from approximately May 2013 to March 2016. Franchise brands must follow these rules or will be penalized with fines imposed by Korea’s Small and Medium Business Administration (KSMBA). At this writing, with the regulations still in draft form, it is assumed that about 30 companies (Chaebols) will be affected by these regulations or semi-official rules. Chaebols are already proving unwilling to ‘rock-the-boat’ in reference to these regulations.
While the effects of economic democratization and the NCCP’s new regulations will indeed have a dampening effect on U.S. franchisors, opportunities do exist in Korea’s nearly half-dozen new cities or communities which are growing and gaining momentum. In this case, U.S. franchises would need to make their own investments in these new cities, for a two-to-four year period, until a Korean master franchisee is identified and/or until the NCCP regulations expire.
The 2012 Retail Industry Yearbook indicates that the online shopping industry is consistently growing and was estimated to be USD 39.9 billion (US 1$=KRW 1,126.28). This is a 15 percent increase from 2011 (USD 35.1 billion, US 1$=KRW 1,126.28). Direct marketing primarily takes the form of catalog sales, TV home shopping, internet shopping, and the mobile commerce market. Korea also has a large market for door-to-door sales, as well as a robust multi-level marketing sector. Internet sales account for nearly 80 percent of all sales among the four direct sales channels (catalog sales, TV home shopping, internet shopping, and mobile commerce). U.S. companies are encouraged to take seriously all four sales channels in this highly consumer-oriented market.
The major door-to-door sales items include home education materials, books, household consumer goods, cosmetics, health food, sporting goods, and services (such as insurance). According to the Korea Direct Selling Association (KDSA: http://www.kdsa.or.kr/), the Korean door-to-door sales market was approximately USD 7.3 billion (US 1$=KRW 1,126.28) in 2011.
Multi-Level Marketing (MLM)
Korea’s multi-level marketing sales for 2011 approached USD 2.5 billion (US 1$=KRW 1,126.28). Nearly 100 registered multi-level marketing companies employed about 4 million active distributors.
The Korean government reduced restrictions on MLM companies by passing legislation eliminating most existing market barriers against MLM products, such as the obligation to disclose retail prices on the MLM product label. Oversight of the MLM industry is the responsibility of the Korean Fair Trade Commission (FTC).
MLM activities by U.S. firms in the cosmetics, cleaning products, and kitchenware industries have been expanding. MLM activities by U.S. firms within these sectors should promote their products and services appropriately and efficiently by analyzing Korean market trends. Knowledge of the market can prevent unnecessary conflicts with government agencies, consumer ‘watchdog’ groups, or industry groups.
Koreans prefer to maintain local control of JV operations with foreign entities. Thus, the financial goals, internal organization and key management issues of a JV must be agreed upon by all involved parties as early as possible.
Foreign direct investment (FDI) is encouraged and promoted by the Korean government. With the ratification and implementation of the KORUS FTA, greater cooperation and encouragement of FDI is expected.
When considering FDI in Korea, it is important to consider the following:
Contractual Agreements in Korea
Well-written, well-understood, and well-executed contractual agreements are the basis and backbone to a U.S. firm’s success in Korea. Cultural differences surrounding the expectations of a contractual agreement and how one successfully arrives at a mutually beneficial agreement is often the basis of consternation and challenges.
Contract negotiations in Korea must be viewed as an on-going process of dialogue and should have the following objectives:
Additionally, the following precautions should be addressed:
Korea is an established member of the World Trade Organization’s Government Procurement Agency (GPA) protocols, establishing non-discriminatory government procurement procedures.
Korea’s GPA commitments include:
U.S. companies interested in Korean government procurement must also work with Korea’s Public Procurement Service (PPS). Consult: http://www.pps.go.kr/english/.
The PPS supports domestic equipment and supplies and is responsible for the purchase of goods and incidental services required by central and sub-central government entities, government construction contracts and the stockpiling of raw materials.
Bidders must register with PPS one business day prior to the date of an opening bid. Foreign bidders can register with PPS (Korean language only) prior to entering into a contract. Failure to register constitutes cause for rejection of the bid.
Korea has launched its Government e-Procurement System (GePS) at http://www.pps.go.kr/english/. In part, the system includes:
The newly-minted KORUS FTA, in effect since March 15, 2012, has a chapter devoted to government procurement. Consult: http://www.ustr.gov/.
Defense procurement is an active part of CS Korea’s portfolio. U.S. companies which sell to foreign and U.S. militaries should be cognizant of the importance given to military procurement on the Korean peninsula.
The Defense Acquisition Program Administration (DAPA: http://www.dapa.go.kr/eng/index.jsp) is responsible for Korean defense procurement and was established to ensure transparency in defense procurement. DAPA consolidates eight procurement and technology development organizations under the Ministry of National Defense (MND: www.mnd.go.kr/mndEng/main/index.jsp) and various military services. Although a civilian agency under the authority of the Executive Office of the President of Korea, DAPA works directly with the Minister of Defense and the service branches.
U.S. defense industry equipment standards are accepted in Korea as most Korean defense systems are based on American standards. Interoperability of systems is critical in what is now a sixty-year U.S./ROK defense partnership.
Defense equipment is marketed by direct purchase, sales agents, and importer channels. U.S. manufacturers/suppliers of defense equipment should use a well-qualified/vetted Korean agent who is familiar with the ROK defense system and also knowledgeable of key members of the country’s Air Force (ROKAF), Navy (ROKN), Army (ROKA), and Agency for Defense Development (ADD). Former ROKAF, ROKN, and ROK A officials have good potential as commissioned representatives in Korea. Local representatives must register and be certified by DAPA to supply their products and services to the MND.
In 2011 the Korean Importers Association (KOIMA: http://www.import.or.kr/) became DAPA’s sole source for legacy supplies and parts.
A well-selected representative can provide U.S. suppliers with information about the status of defense bids and procurement plans. Companies wanting to supply their products/systems to DAPA are required to register with this agency, typically a 10-day process. Consult: https://www.d2b.go.kr/English/jsp/regi/HI_HPD_E_regi_Main.jsp?md=311&cfn=HI_HPD_E_regi_01.
South Korea is 70 percent mountains, forcing it’s nearly 50 million people into key population centers: Seoul metro area: 11 million; Busan metro area: 4 million; Daegu metro area: 3 million; and Daejeon metro area: 2 million. Most freight forwarders use an extensive network of first-class railways, 3,000 kilometers of highways, and air routes that crisscross the country.
Incheon, Gimpo, and Busan’s first class airports and ports are the points of entry for most products. Products are then transferred by first-tier roads and railways to major modern distribution centers in Seoul, Busan, Incheon, Daegu, and Gwangyang. South Korea has eight international airports and seven domestic airports, including the world-class Incheon International Airport. Around 77 international passenger and cargo airlines operate frequent flights between Korea and many nations around the world.
Distribution methods and the function of intermediaries vary widely by product in this mature market. Traditional retail distribution networks of small family-run stores, stalls in markets, and street vendors are being replaced by large discount stores.
As part of Korea’s efforts to protect small “mom-and-pop” stores, under the auspices of “economic democratization,” in mid-2012 the government imposed a rule closing big-box discount chains on Sunday. The U.S. Costco (Korea being one of Costco’s most lucrative markets) and other retailers initially ignored the restriction. The government then imposed financial penalties on Costco and other discount stores, which eventually began complying by closing its stores on the second and fourth Sunday of each month in late 2012.
Korea’s major cities have numerous fashionable and expensive large department stores and boutiques. Thousands of second-tier and third-tier retail stores also abound. Full-Line Discount Stores (FDS) have gained popularity, as have U.S.-based Costco, which entered the Korean FDS market more than 10 years ago and is successfully competing against Korean rivals E-mart and Lotte Mart.
Rapid expansion of discount chain stores is planned nationwide, with suburban satellite cities attracting the greatest number of stores. Distribution of goods through large discount chains is one of the best ways to market foreign products to Korean consumers.
It should also be noted that parallel imports can legally enter Korea. Many U.S. companies continue to give exclusive contracts, since territorial limits in neighboring countries enhance the value of an exclusive area in any one country. Any parallel importer in Korea not receiving the support of the OEM, and which does not deal in a meaningful volume, cannot be guaranteed a steady source of supply. The legitimate exclusive distributor still has considerable advantages in Korea.
A handful of Korea’s highly successful and sophisticated retailers have called CS Korea over the past 12 months, seeking introductions to U.S. name-brand retailers and anchor stores for their three- to five-year mall construction plans.
Korea is a country with intense, demanding and eager consumers. U.S. companies wanting to sell into this market should endeavor to follow these guidelines:
E-Commerce is a key component of the overall consumer market in Korea, a country where 98 percent of its population (15 million households) is connected to the web, making e-commerce a key component of Korea’s overall consumer market (also see the previous section on Direct Marketing). Characteristics of e-commerce in Korea include:
The U.S. Department of Commerce’s (USDOC) International Trade Administration (ITA) and the Commercial Service (CS) office in the U.S. Embassy in Seoul is the U.S. Government’s primary trade promotion agency. Consult: http://www.export.gov/southkorea.
In Korea, the Commercial Service works with numerous trading and commercial entities, to include:
Korea hosts many trade shows and exhibitions each year. Historically, many of these shows are highly focused on B2C activities and, thus, are not necessarily attractive to U.S. firms interested in meeting qualified companies, versus end-users. The following trade facilities and event schedules may be of interest to U.S. firms:
A geographically small country, Korea is an exciting place to launch effective, sophisticated, state-of-the-art advertising. Korean advertisers are highly creative and utilize a host of media to capture the consumer’s attention.
Particular aspects of Korea’s advertising market include:
Internet advertising offers significant market growth potential. Currently 15 million households, or 98 percent of all households, use the internet.
In Korea’s export-driven, raw-material dependent economy, price competitiveness is a serious driver. Korean manufacturers believe it essential to buy the lowest-priced raw materials or equipment, even at the expense of quality. Manufacturers often offset labor costs with low-cost inputs. Japanese goods are considered to be ‘better buys.’
Korean buyers generally believe that U.S. goods:
Pricing in Korea:
Commissions in Korea are dependent upon the type of product and the transaction amount:
For larger contracts, commissions generally decline as the contract value for a major purchase/acquisition/contract increases.
Considered secondary to product and price considerations, after-sales service in Korea is often found lacking. A carryover from pre-Korean War times, Koreans often use improvisation and/or expect self-reliance when handling service issues. This should be managed closely, especially given the competition of third countries in this market. Servicing is/should be an important component of the ‘sale.’
The best approaches to after-sales service and customer support include:
Introduction on Intellectual Property Rights in Korea
In Korea, registration of patents and trademarks is on a first-in-time, first-in-right basis. Consider applying for trademark and patent protection before selling your products or services in Korea.
For U.S. small- and medium-size companies, the U.S. Department of Commerce provides one hour of free legal advice via the "SME IP Advisory Program" of the American Bar Association. Consult: http://apps.americanbar.org/intlaw/intlproj/iprprogram_consultation.html.
Protecting Your Intellectual Property in the Republic of Korea
Several general principles are important for effective management of intellectual property (IP) rights in Korea. First, it is important to have an overall strategy to protect your IP. Second, IP is protected differently in the Korean market than in the U.S. Third, rights must be registered and enforced in Korea, under local laws.
Your U.S. trademark and patent registrations will not protect you in the Korean market. There is no such thing as an “international copyright” that will automatically protect an author’s writings throughout the entire world. Protection against unauthorized use in a particular country depends, basically, on the national laws of that country. However, most countries do offer copyright protection to foreign works under certain conditions, and these conditions have been greatly simplified by international copyright treaties and conventions.
Registration of patents and trademarks is on a first-in-time, first-in-right basis, so you should consider applying for trademark and patent protection even before selling your products or services in the Korean market. It is vital that companies understand that intellectual property is primarily a private right and that the U.S. government generally cannot enforce rights for private individuals in Korea. It is the responsibility of the rights holders to register, protect, and enforce their rights where relevant, retaining their own counsel and advisors. Companies may wish to seek advice from local attorneys or IP consultants expert in Korean IPR law. The U.S. Commercial Service can provide a list of local lawyers upon request. Please consult: http://export.gov/southkorea/usefullinks/lawfirms/index.asp.
While the U.S. Government stands ready to assist, there is little that can be done if rights holders have not taken the fundamental steps necessary to secure and enforce their IP in a timely fashion. Moreover, in many countries, rights holders who delay enforcing rights in a mistaken belief that the USG can provide a political resolution to a legal problem may find that their rights have been eroded or abrogated due to legal doctrines such as statutes of limitation, laches, estoppel, or unreasonable delay in prosecuting a law suit. In no instance should U.S. Government advice be seen as a substitute for the obligation of a rights holder to promptly pursue its case.
It is always advisable to conduct due diligence on potential partners. Negotiate from the position of your partner and give your partner clear incentives to honor the contract. A good partner is an important ally in protecting IP rights. Consider carefully, however, whether to permit your partner to register your IP rights on your behalf. Doing so may create a risk that your partner will list himself as the IP owner and fail to transfer the rights should the partnership end. Keep an eye on your cost structure and reduce the margins (and incentive) of would-be bad actors. Projects and sales in Korea require constant attention. Work with legal counsel familiar with Korean law to create a solid contract that includes non-compete clauses and confidentiality/non-disclosure provisions.
It is also recommended that small- and medium-size companies understand the importance of working with trade associations and other organizations to support efforts to protect IP and stop counterfeiting. There are a number of these organizations, both Korea-based and U.S.-based. These include:
A wealth of information on protecting IP is freely available to U.S. rights holders. Some excellent resources for companies regarding intellectual property include the following:
Conducting a thorough due diligence check is critical when selecting a local partner for a JV, licensing, and distribution. A due diligence check should include:
CS Korea offers a fee-based service called the International Country Profile (ICP): http://export.gov/southkorea/servicesforuscompanies/icp/index.asp. The ICP includes the above information, obtained by the Commercial Service in Korea, in addition to a visit the office of the Korean company as well as obtaining financial information from D&B Korea Co., Ltd. (http://www.dnbasia.com/kr/english/sitemap/) and Kroll International (http://www.kroll.com/), both of which also provide due diligence reports.
Korea has a highly developed economy with a full range of professional services:
Major real estate and real estate consultancy firms, accounting companies and human resources firms:
Major newspaper contacts:
The “Featured U.S. Exporters” (FUSE) site provides information on how you can advertise products on our worldwide website, in various languages, for a small fee. Click http://export.gov/southkorea/bsp/index.asp for more information.
Busan Exhibition and Convention Center (BEXCO):
Agents or Distributors in Korea:
Convention and Exhibition Center (COEX):
Daegu Exhibition and Convention Center (EXCO Daegu):
Defense Acquisition and Procurement Agency (DAPA):
Dun & Bradstreet Korea
Featured U.S. Exporters (FUSE)
Government e-Procurement Service (GePS):
International Company Profile:
KITA New York Office:
KITA Washington Office:
Korea Broadcast Advertising Corporation (KOBACO):
Korean Commercial Arbitration Board:
Korea Importer’s Association (KOIMA)
Korea Intellectual Property Office (KIPO):
Korea’s Main Distribution Centers:
Korea Trade Investment Promotion Agency (KOTRA):
Public Procurement Service (PPS):
Law Firms in Korea:
Newspaper Agencies in Korea:
Real Estate Consultants, Accounting Firms and Human Resource Agencies:
Seoul Trade Exhibition Center (SETEC)
World Federation of Direct Selling Associations