Before entering into a contractual relationship with a Korean manufacturer’s/commissioned representative (agent) or distributor, U.S. firms should conduct a thorough due diligence check 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 International 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:
The performance of your agent/distributor should be regularly/frequently monitored. An underperforming 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 the termination is legally binding, the U.S. firm should begin searching for a new distributor.
Finding a Good Partner in Korea
The U.S. Department 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 encouraged 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.
U.S. exporters of food and agricultural products can also find assistance from one of USDA’s State Regional Trade Groups; please consult: http://www.fas.usda.gov/programs/market-access-program-map/state-regional-trade-groups. Also inquire directly to the Agricultural Trade Office in Seoul, Korea: www.atoseoul.com/
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.
According to Korea FTC (Fair Trade Commission), in 2014, nearly 3,482 franchises were registered in Korea (i.e., approximately 2,521 were food service franchises, 313 were retail franchises, and 648 were service franchises).
Franchisors interested in this market should take into consideration the following:
Korean franchisees are reluctant to pay high franchising fees and royalties often required by U.S. companies. Minimum facility size and number of store openings required by some U.S. franchisors are also a challenge for the Korean franchisees. The expensive nature of the commercial real estate sector in Korea can potentially 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.
Generally, there are four types of franchise investors in Korea:
Potential franchisors should also be aware of issues relating to the Korean Commission for Corporate Partnership (KCCP). One of KCCP’s important roles is the designation of the industries reserved for small and medium enterprises (SMEs). Once designated, store expansions can be limited to certain geographic areas or nationwide expansion can be limited to certain of number of stores. In 2013, the KCCP designated several business sectors, including bakeries and restaurants, and some manufacturing industries as reserved for SMEs. The restrictions applicable to the relevant industries are valid for 3 years and can be renewed for an additional 3 years.
Despite a very intense brick-and-mortar retail environment -- over 70 percent of direct sales in Korea are made via the Internet and the mobile commerce market. For more information on internet and mobile commerce, please read the eCommerce leading sector in Chapter 4 of this 2015 Korea CCG.
Door-to-door sales and multi-level marketing are other important direct sales channels. According to the Korea Direct Selling Association (KDSA: http://www.kdsa.or.kr), door-to-door sales and multi-level marketing sales reached approximately USD 12 billion in 2013 up from USD 11 billion in 2012. The most common products sold through direct selling are: wellness products (38 percent), cosmetics & personal care products (24 percent), and household goods and durable products (13 percent).
Chart 1: Consumer Sales in Korea via ‘Direct Selling’ by Product Category – 2014
Source: World Foundation of Direct Selling Association (WFDSA), 2014
Door-to-door sales remained at USD 8 billion from 2011 to 2013. According to the Korea Direct Selling Association (KDSA: http://www.kdsa.or.kr), the number of companies registered as door-to-door sales company decreased to 22,537 in 2013 from 26,711 in 2012 due to ‘market restructuring’ and the growth of eCommerce. This stagnant growth trend would remain in the future and could be a by-product of the growth in eCommerce.
Multi-Level Marketing (MLM)
Korea’s multi-level marketing sales for 2013 approached USD 3.9 billion, which is a 27% increase from 2012 (USD 3.1 billion). The number of registered multi-level marketing companies in Korea has increased to more than 100. It is reported that these 100-plus multi-level marketing companies employ some 4 million sellers/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 MLM product labels. Oversight of the MLM industry is the responsibility of the Korean Fair Trade Commission (KFTC).
Chart 2: Consumer Sales in Korea via ‘Multi-Level Marketing’- 2013 (in billions of USD)
Source: Korean Fair Trade Commission (FTC)
MLM activity for U.S. products is concentrated in the cosmetics, cleaning products, health and wellness products, and kitchenware industries -- and has been expanding. MLM companies should promote their products and services appropriately and efficiently by carefully analyzing Korean market trends and sophisticated and mature Korean consumer. Accurate knowledge of the Korean retail and consumer market can prevent unnecessary conflicts with government agencies, consumer ‘watchdog’ groups, or industry groups. There are numerous consumer, business and industry associations, governmental groups and think-tanks which regularly collect valuable information on consumers and consumer-trends.
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. Reaching such an ‘agreement’ can take time.
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. Korea will offer strong incentives to potential foreign investors in a bid to attract more foreign direct investment into Korea. President Park has assured the government’s strong will to improve the foreign business environment and attract more FDI.
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, with non-discriminatory government procurement procedures.
Korea’s GPA commitments include:
U.S. companies interested in Korean government procurement must work with Korea’s Public Procurement Service (PPS). It is highly recommended that U.S. firms have, and maintain, a reputable representative or agent in-country to carefully monitor PPS tender opportunities. Consult: http://www.pps.go.kr/english/.
PPS supports domestic/indigenous equipment and supplies. It is also 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. There are nine provinces in Korea, seven metropolitan cities, as well as numerous ‘new cities’ (Sejong City, Songdo City, and Hwaseong Dongtan, to name a few).
Bidders must register with PPS at least 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 Korea On-line E-Procurement System (KONEPS) at www.g2b.go.kr. In part, this system includes:
The 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 both to foreign and U.S. military 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/mbshome/mbs/dapa_eng/) is responsible for Korean defense procurement and was established to ensure transparency in the process. 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 62-year U.S.-ROK defense partnership.
ROK defense products/equipment are acquired through a fairly sophisticated and mature procurement system which includes direct purchase, sales agents, and importer channels. U.S. manufacturers/suppliers of defense equipment should use a well-qualified/vetted Korean agent, 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). CS Korea, through our Gold Key Service program, can assist U.S. defense companies in identifying a potential, well-qualified representative. Former (retired) 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. Consult: https://www.d2b.go.kr/English/jsp/index.jsp.
A well-selected representative will be able to provide their U.S. supplier/manufacturer with information about the status of defense bids and procurement plans. This is a very mature defense community. Thus, U.S. defense suppliers should only consider this market if they have a proven track record in the U.S. and/or in other Tier I countries.
Companies wanting to supply their products/systems to Korea’s military are required to register with DAPA; this is a 10 day process. Consult: https://www.d2b.go.kr/English/jsp/index.jsp.
In 2011, the Korean Importers Association (KOIMA: http://www.import.or.kr/) became DAPA’s sole source for legacy supplies and parts.
South Korea is 70 percent mountains, forcing it’s nearly 50 million people into key population centers: Seoul metro area: 10+ million; Busan metro area: 3.5 million; Incheon metro area: 2.9 million; Daegu metro area: 2.5 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 15 airports. Eight are international 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 (See Chapter 4 of this CCG and the Leading Aerospace Sector for additional information on Korea’s airports).
The Port of Busan is the world’s fifth largest cargo port. As well, Incheon Airport is building a new terminal (to be completed in 2017) and a new airport is being contemplated for Korea’s southeastern Region presently being served by Busan’s Gimhae Airport.
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.
In mid-2012, as part of Korea’s efforts to protect small “mom-and-pop” stores, under the auspices of “economic democratization,” the government imposed a rule closing big-box discount chains on Sundays. Many major retailers initially ignored the restriction. The government then imposed financial penalties, which eventually led to compliance, with major retailers closing stores on the second and fourth Sunday of each month as of 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 in 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 as well as Homeplus by TESCO, a UK retailer.
The 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 not dealing with a meaningful volume of product, cannot be guaranteed a steady source of income. The legitimate exclusive distributor still has considerable advantages in Korea.
A handful of Korea’s highly successful and sophisticated retailers contacted CS Korea in from 2012 to the present seeking introductions to U.S. name-brand retailers and anchor stores for their three to five year mall construction plans.
CS Korea, in 2013, completed a 15-page Industry Sector Analysis (ISA) on the Retail Sector. This document can be found under ‘market research’ on CS Korea’s website www.export.gov/souothkorea, or by going to: http://www.buyusainfo.net/docs/x_5923414.pdf.
As well, CS Korea in April 2015 completed a 16-page International Market Insight (IMI) describing how Koreans make purchases from foreign online retailers. This IMI document can be found under ‘market research’ on the CS Korea’s website www.export.gov/southkorea, or by going to: http://buyusainfo.net/docs/x_958961.pdf.
Korea is a country with intense, demanding and eager consumers. As well, Korea’s retail sector is popular among the over 6M Chinese visitors (as of 2014) that visit Korea every year (up from 4.3M in 2013). 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 with nearly 100 percent broadband Internet penetration, and over 70 percent smartphone phone penetration.
The domestic eCommerce industry in 2014 was $43 billion, up from $36 billion in 2013. Korea’s eCommerce industry is about 16.9 percent of Korea’s total retail industry and is worth about $253 billion. Given Koreans’ propensity to do everything on-line, eCommerce is expected to continue to grow in the coming years.
Online purchases from foreign, non-Korean retailers have also been rapidly increasing as Koreans find less expensive prices on overseas websites even after adding-in international shipping fees and import duties. Online purchases by Koreans reached $1.5 billion in 2014, up from $274 million in 2010. In 2015, on-line purchases from foreign retailers are expected to grow to become one percent of Korea’s total retail industry.
Many Koreans plan to increase their foreign, on-line purchases which are expected to reach $8 billion by 2018. U.S. firms should carefully develop a thorough strategy for promoting their products to Korean consumers via E-commerce.
CS Korea completed a 16-page International Market Insight (IMI; April 2015) describing how Koreans make purchases from foreign online retailers. This IMI document can be found under ‘market research’ on the CS Korea’s website www.export.gov/southkorea, or by going to: http://buyusainfo.net/docs/x_958961.pdf.
The U.S. Government’s primary trade promotion agency in South Korea is the U.S. Commercial Service. Located at the U.S. Embassy in Seoul, it is an agency within the Department of Commerce, International Trade Administration.
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, 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:
Launched on December 1, 2011, four new nationwide general networks supplement existing conventional free-to-air TV networks like KBS, MBC, SBS and other smaller channels. Unlike land-based television channels, new comprehensive programming channels can be broadcast for 24 hours and commercial breaks are allowed. In Korea, over 80% of the population is watching cable or satellite TV, so the influence of these comprehensive programming channels is strong.
In Korea’s export-driven economy, price competitiveness is a sensitive factor. Korean manufacturers try to purchase lower-priced raw materials or equipment, while also looking for quality.
Korean buyers generally consider that U.S. goods:
Pricing in Korea:
1. Denomination, use, ingredients, material quality, performance, size, price, capacity, permitted number of goods and contents of services
2. Name (including address and telephone number) of the enterprise that has manufactured, imported, sold or provided goods, etc., and the origin of the goods
3. Method of use, matters of caution and warning in use and keeping
4. Date of manufacture, quality guarantee period or, in case of goods such as foods, medicine etc., which are apt to be altered in the course of distribution, the validity period of such goods
5. Dimension, location and method of indication, and
6. Organization (including its address and telephone number) and method of settlement for any complaint on goods etc., or any consumer’s damage due to goods, etc.
Commissions in Korea are dependent upon the type of products 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 by foreign suppliers. After-sales service and customer support by Korea’s big conglomerates such as Samsung and LG are often seen as better than that offered by global enterprises or international SMEs. Korean consumers are very demanding in terms of customer support. After sales service and customer service 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_attorneys.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-sized 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 joint venture, 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 to 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: http://export.gov/southkorea/usefullinks/majornewspapersbusinessjournals/index.asp
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://www.export.gov/fuse/ 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