Using an Agent or Distributor (Return to top)
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 an Individual Company Profile http://export.gov/southkorea/servicesforuscompanies/icp/index.asp (ICP) 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 worked with. If, after a period of time the 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, Commercial Service (CS) in Seoul, like our offices around the world, offers the Gold Key Service http://export.gov/southkorea/servicesforuscompanies/gks/index.asp (GKS) to assist U.S. companies in finding a good partner in Korea. Contact the nearest U.S. Export Assistance Centers http://export.gov/usoffices/index.asp (USEACs) to begin the process.
The GKS provides:
CS Korea strongly recommends that:
Establishing an Office (Return to top)
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 towards 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 a Korean employment agencies before hiring.
Franchising (Return to top)
The franchise market in 2009 was valued at an estimated USD 70.2 billion (franchise, sub-franchise fees and royalties, product and service revenues, consulting fees, and related product sales, and equipment; Ministry of Knowledge Economy).
Nearly 2,400 franchises were registered in Korea in 2010 of which 14,000 were convenience stores (2010 Yearbook of Retail Industry), 1400 were food service franchises, and 252 were education-related franchises. On average, a franchise operates 70 stores across its industry sector in Korea.
Franchisors interested in this market must:
The Korea – U.S. FTA will positively affect this industry in many ways, to include:
Korea’s large retail players report (2012) interest in opening numerous mega malls outside the Seoul metropolitan area in the next three to five years. These highly respected (mostly chaebol) retailers seek retail anchor stores, franchise food service, 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 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, senior day care, homecare, home delivery services (all sectors), home child care, child care, human resource training and pet service providers, to name a few.
Korean franchisees are reluctant to pay the high franchising fees (USD90,000 to 180,000) and royalties 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. franchisers 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 that may offer great promise in other markets.
Korean franchisees prefer to do business with U.S. franchisers that offer established brand names to Korean consumers as well as offering American-style, systematic operations and management skills.
There are three different types of franchise investors in Korea:
U.S. investors should seek an experienced work force they can mentor and monitor in this mature market.
Direct Marketing (Return to top)
According to the Overview and Forecast of Online Shopping Industry 2011 published by the Korea Online Shopping Association (KOLSA), there were over 30,064 online shopping websites in 2011, and Korean consumers spend nearly USD 27.6 billion (US 1$ = KRW 1,150) in purchases. This is a 16 percent increase vis-a-vis 2010 (USD 23.7 billion). 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 and a robust multi-level marketing sector. Internet shopping sales account for 80 percent among the four direct marketing sales (catalog sales, TV home shopping, internet shopping, and mobile commerce market)
The major door-to-door sales items include home education materials, books, household consumer goods, cosmetics, health foods, sporting goods, and service products, such as insurance counseling. According to the Korea Direct Selling Association (KDSA: http://www.kdsa.or.kr/), the Korean door-to-door sales market is approximately USD 6.8 billion (US 1$ = KRW 1,150) in 2010. Updated figures on 2011 will be released in May 2012.
Multi-level Marketing (MLM)
Korea’s multi-level sales for 2010 approached USD 2.2 billion (US 1$ = KRW 1,150). Nearly 80 multi-level marketing (MLM) registered companies employed about 3.5 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 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 in 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 officials, consumer ‘watchdog’ groups, or industry groups.
Joint Ventures (JV) /Licensing (Return to top)
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 (Spring 2012) of the KORUS-FTA greater cooperation and encouragement of FDI is expected.
When considering a 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. firms’ success in Korea. Cultural differences surrounding the expectations of a contractual agreement, and how you successfully arrive at a mutually agreed upon agreement is often the basis of consternation and problems.
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:
Selling to the Government (Return to top)
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’s 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/.
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 launched a Government e-Procurement System (GePS) at http://www.pps.go.kr/english/. In part, the process includes:
The soon to be implemented (March 15, 2012) KORUS-FTA 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 who sell both to foreign and U.S. military should be cognizant of the importance given to military procurement in 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 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 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 DAPA; a 10 day process. Consult: https://www.d2b.go.kr/English/jsp/pcb/HI_PCB_Main.jsp.
Distribution and Sales Channels (Return to top)
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, the 3,000 kilometers of highways, and air routes that criss-cross the country.
Incheon, Gimpo, and Busan’s first class airports and ports are POEs 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. About 70 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.
Korea’s major cities have numerous extremely 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 Price Costco which entered the Korean FDS market 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.
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 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.
Selling Factors/Techniques (Return to top)
Korea is a country with intense, demanding and eager consumers. U.S. companies wanting to sell into this market should follow these guidelines.
Electronic Commerce (Return to top)
E-Commerce is a key component of the overall consumer market. Korea is 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 (See the previous section Direct Marketing)
Characteristics of E-Commerce in Korea include:
Trade Promotion and Advertising (Return to top)
The U.S. Department of Commerce’s (USDOC) International Trade Administration (ITA) and the Commercial Service (CS) section of the U.S. Embassy in Korea is the U.S. government’s primary trade promotion agency. Consult: http://www.export.gov/southkora
In Korea, the USDOC/CS works with numerous trading and commercial entities to include:
Korea hosts many trade shows and exhibitions every year. Historically however, many shows are highly focused on B2C activities and are thus not attractive to U.S. firms interested in meeting qualified companies, not end-users.
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 mediums to capture the consumers’ attention.
Aspects of Korea’s advertising market include:
Pricing (Return to top)
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 believe that U.S. goods:
Pricing in Korea:
Sales Service/Customer Support (Return to top)
Considered secondary to product and price considerations, after-sales service often lacks attention; it shouldn’t. A carryover from pre-Korean war times Koreans often use improvisation, and self-reliance, when handling service issues. This should be discouraged 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:
Protecting Your Intellectual Property (Return to top)
Introduction on Intellectual Property Rights in Korea
In Korea, registration of patents and trademarks is 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 Department of Commerce provides one hour of free legal advice for "SME IP Advisory Program" through 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 who are experts 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 we can do if the rights holders have not taken these fundamental steps necessary to securing and enforcing their IP in a timely fashion. Moreover, in many countries, rights holders who delay enforcing their rights on 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 limitations, 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 itself 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 the incentive) of would-be bad actors. Projects and sales in Korea require constant attention. Work with legal counsel familiar with Korean laws 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 together with trade associations and organizations to support efforts to protect IP and stop counterfeiting. There are a number of these organizations, both Korea-based or 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:
Due Diligence (Return to top)
Conducting a thorough due diligence check is critical when selecting a local partner for JV, licensing, and distribution.
A due diligence check should include:
CS Korea offers a fee-based service named the International Country Profile (ICP) http://export.gov/southkorea/servicesforuscompanies/icp/index.asp. The ICP includes the above information obtained by CS Seoul trade commercial specialist who 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, Inc. (http://www.kroll.com/) both which also provide due diligence reports.
Local Professional Services (Return to top)
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: http://export.gov/southkorea/usefullinks/majorrealestateaccountinghrfirmsinkorea/index.asp
Major newspaper contacts: http://export.gov/southkorea/usefullinks/majornewspapersbusinessjournals/index.asp
The “Featured US Exporters (FUSE)” site provides information on how you can advertise your products on our worldwide website in various languages for a small fee. Click on http://export.gov/fuse/.
Web Resources (Return to top)
Busan Exhibition and Convention Center (BEXCO):
Agents or Distributors in Korea: http://export.gov/southkorea/usefullinks/usefulcontactsregardingagentsdistributors/index.asp
Convention and Exhibition Center (COEX):
Daegu Exhibition and Convention Center (EXCO Daegu):
Defense Acquisition and Procurement Agency (DAPA):
Dun and Bradstreet, Korea:
Featured US Exporters (FUSE):
Government e-Procurement Service (GePS):
International Company Profile:
KITA NY 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: