V. MARKETING U.S. PRODUCTS AND SERVICES Distribution and sales channels Local representation is essential for foreign firms hoping to be successful in the Korean market. This is especially true in a market in which business relationships are built upon personal ones, and in which much of the major third-country competition is only a few hours flight away. Distribution methods and the number and functions of middlemen vary widely by product area and local conditions. The market for most consumer products is concentrated in the major cities. Retail distribution is accomplished through a highly complex network of outlets, the majority of which are small family-run stores, stalls in markets or street vendors. There are many large department stores in Seoul and Pusan, which represent one of the best means to get foreign products before consumers. Lately, retailing concepts such as the general merchandising and CVS chain store, shopping centers and high-volume discount stores ("hypermarkets") have been attracting interest. Modernization of the distribution system is coming as a result of Korean government deregulation and incentives for this sector as well as the appreciation by the major conglomerates of the great promise which this long-neglected sector holds. The current interest in this sector offers not only the promise of a more efficient distribution system offering greater accessibility to imports but also business opportunities in the near term to U.S. wholesaler/retailers and those firms servicing the distribution industry with logistics and automation technology. Use of agents/distributors; finding a partner The most common means of representation include: appointing a registered commission (or "offer") agent on an exclusive or non- exclusive basis, naming a registered trading firm as agent, and establishing a branch sales office managed by home office personnel. Only traders registered by the government are authorized to import goods in their own names. Appointing a registered trader (rather than an "offer agent") as agent has the advantage that such agents can handle all the paperwork of importing and import for their own account. As the registered traders tend to be larger firms and to split their business between exports and imports, however, they may be less attentive to building the U.S. supplier's business. Similarly, while the general trading companies may be influential and well known in the market, they also may not devote as much attention to a single principal as do smaller firms. A good place to begin for U.S. suppliers is with the screening of agent candidates, offered for a fee through the district offices of the U.S. Department of Commerce and carried out by the industry specialists of FCS Seoul's local staff. Upon receipt of an annotated listing of potentially qualified representatives, the next logical step is to plan a visit to Korea, perhaps calling upon FCS Seoul to arrange market briefings, a meeting schedule, an interpreter/secretary and office space under the fee-based Korea Gold Key (or special Green Key program for environment-related firms) service. Another good resource is the Association of Foreign Trading Agents of Korea (AFTAK), a 24-year old private trade association established under government auspices as the only entity dedicated to increasing imports into Korea. Under Korean law only companies who have registered with AFTAK are allowed to present sell offers in Korea on behalf of foreign suppliers. As of June 1994 8,600 Korean agents and distributors, together representing some 11,000 American firms, were members of AFTAK. On average AFTAK members account for about 82% of all of Korea's imports. To fulfill its mission of promoting balanced trade AFTAK helps execute Korea's import diversification (away from Japanese sources) plan, leads annual purchasing missions to the U.S., Latin America and Europe, and holds monthly meetings between member agents and foreign commercial officers (including FCS Seoul). American businesses can contact AFTAK by sending their catalog with a letter specifying the items for which they are seeking an agent or visit the AFTAK office directly. Catalogs are displayed in the AFTAK library and inquiries are published free of charge in the associations monthly, AFTAK TRADE NEWS. For American firms whose interests include sourcing Korean products for import into the U.S., the Korea Trade Promotion Corporation (KOTRA), a non-profit government-affiliated organization which functions as the rough counterpart of the US&FCS, is a prime resource. In addition to its headquarters in the Korea World Trade Center, KOTRA maintains seven Korea Trade Centers in Chicago, Dallas, Los Angeles, Miami, New York, San Francisco and New York. KOTRA's general referral number is: 1- 800-KOTRA-4-U. Franchising The franchising industry is developing rapidly in Korea and is expected to grow continuously with the full opening of the distribution market in January 1996. Franchising businesses will increase due to growing consumer demand for variety and well- known brands. Growing income levels, a desire for convenience and luxury, and increased numbers of the relatively wealthier older generation will be major factors affecting the franchise service market in Korea. Best prospects in franchising will be fast food/family restaurants, retailing, hotels, automotive parts and service, travel, and amusement businesses. Franchise agreements involving licensing and royalty payments are considered as technology inducement under Korean law. Technology inducement is regulated by the Foreign Capital Inducement Act and requires report acceptance by the ministry responsible for the particular industry. However, effective July 1, 1994 franchise agreements involving solely foreign direct investment without royalty payments need only report to any of Korean commercial banks which deal with foreign exchange. Direct marketing Door-to-door sales is a well established practice in Korea for everything from books and cutlery to water purifiers and yoghurt drinks. Catalog and mail order businesses are in their infancy. The main problems in direct sales in Korea have centered upon restrictions placed on multi-level sales (MLS). Over the past three years Korean authorities have criticized MLS as an undesirable or inappropriate business form for Korea, one which is prone to consumer safety negligence, "excessive" profitability, or abuse of the tight Korean social fabric through "pyramid schemes." To check the rapid inroads by multi-level sellers, notably U.S. firms active in the areas of health and cleaning products, the Korean Door-to-Door Sales Act was implemented in late 1991. In addition to being arguably the world's most restrictive laws on multi-level sales, certain provisions were vague or contradictory and led to criminal charges being brought against two American companies. MOTIE has committed to pushing for a revision of the law in the fall of 1994 to bring it more in line with international norms. It is hoped that the new clauses aimed at qualifying legitimate MLS businesses and clarifying how distributors can be trained and compensated will clear the way for unimpeded multi-level selling in Korea from 1995. Joint ventures/licensing Approval of foreign investment is controlled by the Ministry of Finance governed through the Foreign Capital Inducement Act (FCIA). Depending on the nature of the investment, other Korean Ministries might also be involved in the approval process. Selecting the appropriate partner is one of the most difficult and crucial aspects of initiating a joint venture in Korea. Although the chaebols still exercise considerable influence, the Korean Government's policy shift toward support of small and medium sized businesses means that the participation of a chaebol in a joint venture could create additional obstacles in terms of obtaining necessary approvals and local financing. Also, the chaebol's tend to be insistent on operating a joint venture in accordance with the overall policies and business culture of the group, sometimes to the detriment of the foreign shareholder's interest. Compatibility of goals between the partners is a crucial elements to the Joint venture's success. Conflicts often arise because of the conflict between the foreign investor's goal of sending profit dividends offshore and the Korean investor's goal of growth of the company in Korea. The Korean attitudes are rooted in social and cultural factors, such as an aversion to excessive profits and a continuing family orientation on part of many companies. Seeking an agreement in advance on the joint venture company's dividend policy is way to help alleviate this problem. To Koreans, a contract represents the current understanding of the "deal." The contract is viewed as a written expression of that understanding at the time of its execution. If there are omissions or points that do not accurately express the understanding of the original deal under changing circumstances, then problems will arise. The same is true if the contracting parties change. This has led many foreigners to believe that Koreans do not place the same importance on a written contract. Therefore, contract negotiations with Koreans should be viewed as a process of extensive dialogue with the objectives of first reaching a common understanding on the deal and of each party, second putting that detailed understanding on paper, and third being prepared to modify the meanings of the terms afterwards as conditions change. Management control must be looked at on three levels: 1) shareholder equity; 2) representation on the board of directors; and 3) active management (Representative Director and subordinate management). Since board meetings in Korea can only be legally held by a physical meeting of a quorum of the directors, if a foreign investor intends to exercise day-to-day management by appointing a Representative Director, that individual must be expected to reside in Korea. Also, in order to carry out the intentions of the foreign investor, the Representative Director will need the support of key functional areas of the company which are crucial to those intentions. Therefore, the detail of the internal organization of a joint venture company should be settled and key management appointments agreed upon in the early stages. Certain terms of the commercial relationship between the joint venture and the partners, such as technology transfer, raw material supply, marketing and distribution, should be agreed upon in detail concurrently with the negotiation of the joint venture agreement. Under the FCIA, the foreign investor need only report a license agreement to the concerned ministry. However, the Korean Government (particularly the Fair Trade Office) may require changes in the terms of the agreement and may show interest with the basic commercial terms, such as the amount of royalties. Often these changes are requested retroactively when a financial commitment has already been made. Establishing an office Land Purchase: The Korean Government has recently expanded the scope of land that foreign investors can purchase, as well as streamlined the land acquisition procedures. Land acquisition by foreigners is governed by the Enforcement Decree of the Alien Land Acquisition and Management Law. Administrative guidance is then given on the renting and use of the purchased land. Under this law, foreign invested companies (more than 50% foreign ownership is considered foreign) are also required to obtain approval from the heads of local governments in order to buy land. Land acquisition by foreign invested companies operating manufacturing businesses are now only subject to notification instead of approval. Finally, foreign invested firms can now purchase a maximum of 660 square meters of land for housing management and staff. Rental Rates: The rental rates for office space in Seoul, by comparison, are not as high as East Asian capitals such as Tokyo or Hong Kong, but are generally higher than New York or San Francisco. The American Chamber of Commerce in Korea maintains a referral list for real estate and relocation firms in Seoul who can be consulted for current rental rates. A recent spot survey indicated a range of rents in popular Seoul commercial buildings from $44-$106 per pyong (equal to 3.3 square meters). These rates are inclusive of maintenance fees and based upon gross floor area, which includes common areas. Another major cost item is the substantial deposit payment (or "key money"), a one-time charge which is refundable without interest upon termination of a lease, required by almost all landlords. Deposits for the rentals quoted above range from $313-$863 per pyong. Office parking is another scarce commodity in Seoul, with monthly charges in the $31-$338 range. Location: Foreign companies in Seoul tend to cluster in perhaps four well-known districts: City Hall -- the old downtown where the U.S. Embassy and a few Korean ministries can be found; Yoido -- the "Manhattan Island" in the Han River where the financial firms and the National Assembly are located; Kangnam -- the expansive, bustling, new city center south of the river which also includes the World Trade Center complex; and the Mapo district -- halfway between Yoido and City Hall. While taxis and rush hour traffic are an ongoing source of frustration and delay, Seoul has an excellent public transportation grid such that newly arriving firms can freely consider various location options. Personnel: The complete dedication to the company by Korean workers is slowly disappearing. Company loyalty does still exist but these attributes and high productivity do not result automatically. The employer, if foreign, must first earn the respect of his/her Korean employees. Foreign managers have had success using recognition and increased pay for increased productivity, but the more basic requirements of earning loyalty, respect and friendship gained by the foreigner's own personal efforts will pay greater dividends. Often, Koreans view the long-term prospects of advancement in a smaller foreign company as not as appealing as those in a larger permanent Korean company. Attractive factors to local workers can include higher salary, higher position earlier in one's career, opportunities for travel, the chance to learn and use English, and the opportunity for transfer to the home office or other foreign branch offices. Korea also has a large pool of conscientious, highly educated woman workers who usually cannot find equivalent employment in Korean companies due to traditional cultural attitudes. Selling factors/techniques Three practices are essential to success in the Korean market: adapting products and procedures to Korean tastes and conditions, staying in close communication with Korean business partners and customers, and consistently exhibiting a firm commitment to the Korean market. In selling to manufacturers, personal contact is important not only because of the value placed on direct discussion and on building long-term relationships but also because such contact brings the end-user in touch with new processes and equipment. In light of the competition offered by Japanese suppliers, who often visit potential and existing customers throughout Korea, U.S. suppliers should consider (1) making visits to Korea to augment the efforts of the local representative; (2) bringing representatives back to the home office periodically to ensure they are fully informed, motivated and up-to-date on the supplier and its offerings; (3) holding more demonstrations, seminars and exhibitions of their products in Korea, utilizing the facilitates at FCS Seoul; (4) increasing the distribution of technical data and descriptive brochures (the American Business Center can assist with catalog displays, translations and mailings); and (5) improving the follow-up on initial sales leads. Advertising and trade promotion The Korean Government began a phased liberalization of its domestic advertising industry in 1987. By 1991, the market was completely opened to 100% foreign equity participation. As a result, a large number of joint venture agreements between major international advertising agencies and local Korean advertising firms were established. Today, all the major international agencies are present in Korea. Total expenditures on advertising in Korea, which includes broadcasting, print media, out-bound (overseas), outdoor advertising, sales promotion and production, amounted to W2,816 billion in 1992, representing an increase of 17.6% over 1991. Television advertising expenditures were W836 billion, magazines W121 billion and newspapers W1,141. A shortage of television air time has contributed to a consistent inability for advertisers to obtain sufficient time to advertise their products. There are two established broadcast networks in Korea, KBS I and KBS II, which are Korean government owned and operated. Two other networks, MBC and SBS, are independent. All four networks' advertising time is sold through the exclusive government selling organization, Korea Broadcast Advertising Corporation (KOBACO). KOBACO controls broadcasting advertising by designating official broadcasting advertising agencies each year. KOBACO charges a 20% commission on all broadcast advertising and rebates 11% to the approved agencies. Under current KOBACO regulations, any advertising time purchased prior to January 1990 can be held indefinitely by the advertiser, or by an advertising agency on behalf of its client. This is known as "Permanent Time" and is sold on 52 week basis irrespective of client or product seasonality. In 1992, advertising expenditures in Korea broadcast media represented 34% of total advertising expenditures; between 70% and 90% of this time was still held under the Permanent Time category, with the majority of this by large Korean advertisers. If an advertiser ever relinquishes his Permanent Time, any new time can only be purchased on a three-month maximum basis, known as temporary time. In order to alleviate these problems, KOBACO has, among other things, reduced the amount of incumbent or "locked in time" by 30% on a rotation basis increased the number of 15 second spots to help increase the inventory of television time, issued twenty licenses for cable television (these will offer commercial time in 1995) and is considering a new private television station. All advertising on television is aired between programs with a maximum air time allowance of 8% of the program length. Advertising breaks during programs is not allowed [why?]. This results in long commercial breaks between the end of one program and the start of another which are, mainly, filled with anywhere between 20 and 30 fifteen seconds spots. In the print media, newspapers and to a lessor extent magazines, operate a cartel pressure system to ensure that all newspapers get a share of advertisers' budgets irrespective of their efficiency. Lack of circulation data has allowed newspapers to group themselves into major and minor groups: advertisers are expected to utilize all newspaper within a group and not to use one group to the exclusion of others. In most cases, when a local advertiser selects its advertising agency, the choice of local firm or multinational is usually pre- determined by the characteristics of the product. Thus, the multinationals often compete among themselves. In this business, cultural differences are frequently mentioned as a limiting factor for multinationals. Also, the strict censorship system in the local broadcast advertising field is another difficulty in the Koreanization of multinational advertising. The Korean Broadcasting Commission is the responsible governmental authority. On the other hand, the Korea Advertising Review Board (KARB) was established in 1991 under the control of the Korea Advertisers Association as a self-control organization in order to protect advertisers and ad agencies. The KARB, which is organized by advertising associations, societies and industry associations, completed work on advertising review regulations in 1991. Payment practice in the advertising field is divided into two types: 1) commission basis in the case of TV, radio, newspapers and magazines advertising, and 2) fee basis in the case of advertising production. Commissions generally range between 7 to 15 percent. Seoul has a world-class trade resource known as the Korea World Trade Center (KWTC). The KWTC consists of the 55 story Trade Tower and the Korea Exhibition Center, popularly known as "KOEX," which contains two large halls and an annex. The Trade Tower houses the offices of the Korea Trade Promotion Corporation (KOTRA), a wholly-owned corporation of the Korean Ministry of Trade, Industry and Energy. KOTRA is the main trade promotion organization of the Korean Government and has 81 offices throughout the world. The offices the Korean Foreign Traders Association (KFTA), Korea's largest and most important trade association, are also located here. KOEX is a profit-making, wholly-owned subsidiary of KFTA. It contains over 335,000 square feet of usable space, making it the largest trade show venue in Korea. The exhibition center hosts roughly 100 major trade shows a year, one third of which are organized by KOEX. An even larger exhibition hall is being constructed in Pusan and is scheduled for completion in ?. This new hall will more than double Korea's trade exhibition capacity. Pricing product U.S. goods have a reputation among Korean buyers for quality and performance; yet Koreans tend to be very price conscious and often regard the U.S. label as too expensive. In an export- oriented economy where finished products must be able to meet keen competition in the world market, many local manufacturers believe that it is essential to buy raw materials and equipment from the cheapest source. Goods from Japan and elsewhere are frequently considered to be better buys, even though their quality and durability may be acknowledged not to match that of the American item. As Korea continues to move toward higher-end and often manufacturer-branded exports -- as well as to combat perceptions of poor quality control of certain Korean products in recent years -- the precedence given to price as a buying factor may be tempered somewhat. Another characteristic of Korean price considerations, is the tendency to bundle and often under-value the "software" or engineering component, particularly in the procurement of major systems. U.S. exporters might consider (1) adapting their products to Korea by marketing basic units; (2) taking into account in their price quotations, as their competitors do, the repeat business generated by the demand for spare parts and auxiliary equipment; and (3) emphasizing and selling the idea that superior quality of U.S. products ultimately results in lower production costs. Sales service/customer support Sales and after-sales service rank just after selection of the appropriate product or service and in-country representation in determining the success over time for U.S. suppliers to the Korean market. Just after the Korean War, when foreign exchange was exceedingly scarce, Korean plant operators learned to rely on their own resources or on the many small machine shops to service machinery. The tradition of self-reliance and improvisation remains, but, with heavy competition among foreign suppliers in the Korean market, servicing has become a much more important part of selling. Japan's proximity to Korea (not to mention cultural affinities which transcend deep political animosities) allow already stiff competitors from that country to send teams of specialists at little cost to offer skilled advice in installation, maintenance and repair. U.S. firms should consider establishing regional servicing facilities that can effectively service and support equipment sold in Korea. Short of that, the emphasis given recently by some American firms on training personnel, often through programs in the United States, has proved beneficial. Private traders and offer agents often have engineers available to install equipment. For specialized installations, however, the best sources of assistance include the government laboratories and resident foreign engineers whose services are available for contract. Selling to the government The Office of Supply, Republic of Korea (OSROK) supervises procurement by government agencies and most of the state-owned firms in which the government holds a majority share. (Korea Telecom and Korea Electric Power Company are the two largest entities not covered by OSROK procurement). OSROK covers roughly one-half of the total of Korean government non-defense procurement, valued at estimated $8.25 billion annually -- the eighth highest in the world. Government procurement needs are formulated by the ministries and agencies concerned, then screened by the Ministry of Trade and Industry to determine if the needs can be met by local sources. If not, MOF allocates the necessary foreign exchange. To encourage Korean firms to develop the needed technologies, OSROK has been releasing three-year forecasts of major requirements in April of each year. (For 1993 the "shopping list" was led by electronic switchboards, diesel locomotives/railway cars, circuit breakers, and various types of cables and electric wires). The system thus discriminates against all foreign suppliers in cases where goods or services are available domestically. However, foreign-invested companies manufacturing in Korea can qualify as a "domestic sources." It is estimated that total foreign procurement for 1992 will be valued at about $800 million. Foreign purchases are financed either by government-owned foreign exchange (KFX) or by loan and credit funds from international financial organizations and foreign aid programs (IBRD, ABD, OECF, etc.). The invitation to bid specifies the source of financing. Worldwide bidding under open, formal procedures is the norm, although occasionally OSROK is obligated to purchase under negotiated contract, as in the case of spare parts for specialized equipment. Specifications are drawn up by the requesting agency, which frequently consults with the Korean representatives of foreign suppliers. Thus, for American businessmen to effectively participate in the Korean Government market, it is very useful to have a local representative. Invitations for bids are announced every ten to fourteen days in the local English-language newspapers and mailed to FCS Seoul and OSROK's procurement officers overseas. In the United States contact the Procurement Officers located in the Korean Consulates General in San Francisco and New York. They will also make available on request annual procurement plans and bid forms and instructions. If an American firm wishes to bid directly from the United States, the bid must be certified by the Korean Consulate General or chamber of commerce located in the firm's area. Further, American suppliers not bidding through an OSROK- listed agent must register themselves with OSROK prior to completing the contract. Generally, the deadline for receiving bids is 40 calendar days after the invitation to bid is issued. As a result of the U.S.-Korea telecommunications talks in February 1992, the Korean government has agreed to gradually open the procurement market (OSROK, KT and MOC) for telecommunications goods and services under the principles and procedures embodied in the GATT Government Procurement Code. Pressure for this special opening had built because Korea is not a signatory to the GATT Government Procurement Code. However, Korea applied for accession in May 1990 to a possible new, expanded code. Accession would increase opportunities for American firms bidding on Korean government projects and qualify Korean companies to bid on U.S. Government-funded procurement covered under the Code. Protecting your product form IPR infringement Korean patent law is fairly comprehensive on paper, extensively protecting most products and technology. A patent may be granted to the first applicant to file in Korea, notwithstanding proof of development or international ownership. However, at 15 years calculated from the date of publication, patent life falls short of the international standard of 20 years from the date of application. Patent applicants must request an examination of their application within five years of filing. Korea maintains a system for compulsory licensing of patents. If a patent has not been worked continuously and substantially for a period of three years, a second party may seek to work the patent by requesting a non-exclusive license by the patent holder. If no license is granted, the second party may request arbitration by the patent commissioner. The patent commissioner may decide to grant a non-exclusive license. The right of the patent holder may be canceled altogether if the patent is not continuously worked for two or more years from the date on which arbitration granted a non-exclusive license. Compulsory licenses may also be issued by the patent commissioner if the invention is deemed necessary for national defense, for public interest, or for the protection of a dependent patent. Violators of patent rights are liable under civil and criminal law. The Universal Copyright Convention (UCC), to which Korea acceded in 1987, obliges Korea to treat works from participating countries as it does its own. Copyright protection is generally provided for under the Copyright Law, but several other laws pertain to non-printed material. Copyrights expire 50 years after the author's death and are derived from the work itself; no registration is required. Copyrights on performances, recordings, and broadcasts currently expire 20 years after initial public display. However, the new copyright law amendments, effective as of July 1, 1994, will extend the protection to 50 years after initial public display. In a 1986 bilateral agreement with the U.S., Korea agreed to provide retroactive protection to all computer software, audio recordings and video recordings copyrighted in the U.S. The same treatment was given to printed material copyrighted and published in the United States within the 10 years prior to 1987. Until 1993, however, enforcement of the provisions concerning non- printed material was virtually non-existent. In 1993, the Korean government set up a review system for licenses that has proved much more effective in enforcing the claims of legitimate rights- holders. In 1989, the Computer Program Protection Act (CPPA) extended copyright protection to computer software. Protection is afforded for a period of 50 years, dating from authorship, and applies only to computer programs written after the law went into effect (1989). The 1994 revision of the Copyright Law, effective July 1, recognizes data base compilations as copyrighted works. The revisions to the CPPA, effective July 5, 1994, entitle the authors of computer programs to authorize rentals of their works. Under the act, only civil remedies are available in case of violations. Also Legislation to protect semiconductor mask works was passed in 1991 and took effect at the beginning of 1994 providing some downstream protection. U.S. industry has expressed concern over the compulsory licensing provisions of the law. The Trademark Law extends protection only if registration has taken place in Korea. This provision has worked to disadvantage U.S. rights holders who attempt to enter the market relatively late but discover that their marks have already been registered by Korean firms. The U.S.-Korea 1986 bilateral agreement obligates the Korean Industrial Property Office, to protect under administrative practice U.S. trademarks not registered in Korea, whether or not they are considered "well-known." However, the Korean government historically has not enforced this provision and recently disputed this interpretation of the bilateral agreement. Trademark infringement is punishable by imprisonment of up to five years and by a fine of up to 20 million won ($25,000). Trademark registration is good for 10 years and renewable in subsequent 10 year periods. To retain validity, trademarks must be used. 1990 revisions to the Trademark Law extended the period of non-use to three years from the previous period of one year. Korea is a signatory to the World Intellectual Property Organization, the Universal Copyright Convention, the Budapest Treaty on the International Recognition of the Deposit of Microorganisms (March 1988), the Paris Convention for the Protection of Industrial Property (May 1980), and the Patent Cooperation Treaty (August 1984). Need for a local attorney Most experts advise engaging a local attorney before making major business decisions in your dealing with Korean companies. The legal advice that Korean firms with international experience can provide can be very important. In addition to advice on structuring deals or arranging contracts, Korean firms are usually well plugged into the power structure and have extensive contacts in the government ministries whose approval often means life or death to the foreign company. A list of well-known attorneys is maintained at the Embassy's Commercial Section. Although it is important to have legal representation when your business in Korea reaches even a modest level of complexity it is important to remember two things. First, the Korean law firm's capabilities will go well beyond strictly legal work and will likely include functions more often performed by consultants or public relations firms in the United States. Second, although major Korean firms have extensive and excellent contacts with the Korean bureaucracy, for anyone planning long term business involvement in Korea, it is often useful to establish direct contacts with the officials who oversee any given industry.