South Korea:
Innovative U.S.
Trading Partner
- US Commercial
Service, South
Korea
- As originally
appearing in
Export America,
May/June 2004
The
Republic of Korea is a
market of many
opportunities for
American companies of
all sizes. In 2003,
South Korea was
America's seventh
largest export market,
sixth largest trading
partner, fifth largest
export market for
agricultural products,
and fifth largest
market for high
technology goods.
South Korean imports
of U.S. products and
services exceed those
of: France, Taiwan,
the Netherlands, and
Australia.
South
Korea continues to be
an economic leader
in Asia and is the
third largest economy
in East Asia. Situated
between China and
Japan, South Korea is
well integrated into
both markets. In 2002,
China became South
Korea's largest export
market. Although GDP
growth slowed to an
estimated 3.1 percent
in 2003, the economy
is expected to turn
around with projected
real GDP growth of
between 4.8 and 5.5
percent in 2004. The
growth in the economy
will be driven by
exports, especially
with South Korean
companies continuing
to move their
production lines to
China. Export growth
will also be stronger
due to the improving
economic situation in
the global economy.
Slowly recovering
domestic demand in
2004 will provide some
balance to strong
South Korean exports.
This projected growth
in exports and in
domestic demand
provides good
opportunities for
American companies to
sell to the South
Korean market.
RECOVERING
FROM CRISIS
Although
economic growth will
hover around five
percent in 2004, South
Korea still suffers
from structural
impediments that could
constrain long-term
growth. The South
Korean government has
been taking action to
improve the economy
over a number of
years. Financial
reform, improved
corporate governance
and labor market
flexibility are the
main areas that need
to be addressed in
order to strengthen
domestic demand and to
create a more open
economy.
The
government is also
undertaking specific
measures to improve
the economy by
supporting small and
medium-sized
enterprises and the
development of technology,
especially through
start-ups. To promote
the long-term
development of an
international business
environment, South
Korea is taking steps
to improve
intellectual property
rights. However, IPR
is an area where U.S.
companies need to
remain vigilant and
ensure that their technology
is protected through
registration and
monitoring of the use
of technology by
clients and partners
in South Korea. On
January 8, 2004 South
Korea was placed on
the Priority Watch
List by the Office of
the U.S. Trade
Representative (USTR)
as a result of the lax
protection of film and
music. Protection of
software is improving
but there is still
some distance to go.
The government is
addressing corruption
more aggressively, but
it is still a factor
in South Korea.
NEW
OPPORTUNITIES
Traditionally,
the South Korean
Government has pursued
conservative
macroeconomic
policies. It has
worked to keep the GDP
share of government
spending and taxes at
a comparatively low
level by international
standards, averaging
about 21-22
percent in the
past few years. Prior
to the 1997-98 Asian
financial crisis,
during which South
Korea went into
recession, the budget
was virtually in balance.
The quality of public
expenditure is high
with an emphasis on
education and public
works rather than
transfer payments.
As a result of the
1998 agreement with
the International
Monetary Fund to deal
with the financial
crisis, South Korea
largely opened its
financial and
corporate sectors to
foreign investment and
removed controls on
overseas capital
transactions. Such
actions have placed
South Korea's economy
on a more
marker-driven commercial
footing.
A
YOUNG BUT SUCCESSFUL
DEMOCRACY
Politically,
South Korea has been a
democracy since 1987,
when the first
elections for
President were held.
Since that time there
have been four other
elections that have
been free, open and
fair. The President is
directly elected and
serves for a five-year
nonrenewable term.
There is a unicameral
National Assembly
selected every four
years through direct
elections.
A
continuously pressing
political issue is the
relationship between
the Republic of Korea
and the Democratic
People's Republic of
Korea (North Korea),
in particular, North
Korea's program to
develop and
manufacture nuclear
weapons and the large
army it still
maintains. Recent six
party talks among the
United States, South
Korea, China, Japan,
Russia, and North
Korea have provided a
forum to work on these
issues, as well as
serving as one to
expose North Korea to
a wider international
environment both
politically and
economically. Economic
initiatives, such as
the re-linking of the
main rail line between
South and North,
establishing a Special
Economic Zone at
Kaesong in North Korea
and opening a land
route for southern
tourists to the scenic
tourist zone of Mt.
Kumgang, have
progressed, albeit
slowly. Currently,
there are limited
official contacts
between the
governments of South
and North Korea, and
government-sanctioned
private exchanges
continue. Restrictions
on U.S. companies
doing business in
North Korea were
lifted in 2000 and
some American
businesses have
started to explore
that new market.
South
Korea and the United
States have been
strong friends,
partners and allies
since World War II.
The two countries
continue to work
together, both in the
region and the rest of
the world, to combat
international terror
and to advance
democratization and
human rights.
DOING
BUSINESS IN SOUTH
KOREA
South
Korea is a very
modern, advanced
country with an
excellent
transportation
infrastructure, modern
architecture, highly
advanced
telecommunications and
excellent hotels.
Although the country
appears to be very
westernized, it
remains very
traditional. South
Koreans have a great
respect for family,
age and hierarchy, and
such elements come
into play when selling
into the market. The
American
businessperson, as a
foreigner, is
generally exempt from
these social constraints.
However, one should be
prepared to answer
rather probing
questions as to age,
marital status and
education, which are
asked in order to
establish a social
hierarchy. Business
and pleasure are mixed
together since
business relationships
are based on personal
ones.
Confucianism
is still the strongest
ethic in South Korea
and reinforces
thinking on behalf of
the group.
Individualism is
regarded as selfish.
So, when negotiating
in South Korea it is
worth bearing in mind
that proposals will
probably fare better
if they are presented
in the context of
benefiting the group.
Relationships are
all-important.
Consequently,
"cold
calling" is not
recommended in this
market. Introductions are
an absolute prerequisite
to setting up a
meeting. Therefore, it
is important that
American companies be
introduced into the
market by a third
party-be it a private
consulting firm or a
government agency
like the u.s.
Commercial Service in
South Korea. The staff
of the Commercial
Service in South Korea
has a wealth of
contacts that have
been established
over decades and the
staff is ready and
willing to assist
American companies in
opening doors to
future business.
Properly
formatted business
cards are a must in
South Korea. Including
individual name,
position title, and
company name are
imperative. The
position title will
dictate at what level
a South Korean company
will receive you. The
giving and receiving
of business cards is
important and it is
customary to show
respect for the
business card you are
to receive by
accepting it with both
hands. Cards are also
presented with both
hands. Bilingual
business cards are
preferable.
Negotiating
style is more
important in South
Korea than in the
United States. An
abrupt or demanding
style may cause a
company to lose the
business regardless of
the better price or
excellent technology
that may be offered.
South Korean
negotiators are second
to none, so use every
advantage to seal the
deal. A market entry
strategy should
include working with
an organization within
South Korea, such as
the Commercial Service
to identify
appropriate business
partners and to obtain
market and business
information. Other
excellent sources of
information include
the American Chamber
of Commerce in South
Korea, as well as
South Korean
Government organizations
such as the Ministry
of Commerce, Industry
and Energy (MOCIE),
the Korea
Trade-Investment
Promotion Agency (KOTRA)
as well as the
non-government Korea
Importers Association
(KOIMA).
Contracts
in South Korea are not
as ironclad as in the
United States, and
usually regarded as a
loosely structured
consensus statement
that broadly defines
what has been agreed
but also permits flexibility
and adjustment in
interpretation. The
concept of a contract,
in the Western sense,
is an issue the South
Korean government has
been addressing by
providing model
contracts for South
Korean companies,
especially in the
areas of technology
licensing. At a
minimum, both parties
must be in agreement
that the obligations
in the contract are
fully understood and
intended. Above all,
as in any market, seek
legal counsel prior to
signing any contract.
Korean
names have three parts
with the surname
usually being given
first. Since there are
so many people with
the same last name, it
is useful to know the
person's entire name
as well as formal
title so as to keep
confusion to a
minimum.
South
Korea is not a market
where success will be
achieved over the
short-term. A company
needs to plan to be
there for the long
haul. At the same
time, the South Korean
market can be very
lucrative and well
worth the effort.
METHODS
FOR MARKET ENTRY
There
are many methods of
entering the South
Korean market. For
most companies just
coming into the
market, securing local
representation is the
best way to reach
consumers. Aside from
being a good business
practice, firms
bidding on government
procurement projects
must be registered
with the South Korean
government and have a
base in South Korea.
There
are several preferred
modes of market entry.
The first is to
appoint a registered
commissioned agent,
known as an
"offer
agent" on an
exclusive or
non-exclusive basis.
Another option is to
name a registered
trading company as an
agent. If the foreign
company prefers to
have more control, it
can establish a branch
sales office managed
by home office
personnel and South
Korean staff. Joint
ventures and licensing
agreements are also
potential market entry
strategies, but it is
recommended that
companies considering
such arrangements be
certain that their
product has a good
market in South Korea
and have sufficient
resources to sustain
such operations.
Conducting a due
diligence review on
any partner is
essential, as is
taking the appropriate
steps to protect
intellectual property.
Distribution
systems are very
advanced in South
Korea, and retails
outlets are plentiful.
In addition to large
local retail stores
and small family-run
businesses, foreign
retailing giants such
as Wal-Mart and Costco
have successfully
entered the South
Korean market. Direct
selling and
multi-level marketing
are also permitted in
this market. Price
will be the primary
consideration when
selling into the
market since U.S. cost
structures may be
higher than those in
South Korea. On
average, South Korean
agents require a 10
percent commission
with lower commissions
(5 to 7 percent) for
general machinery and
higher margins (IS to
18 percent) for high
technology items such
as medical equipment.
Consumer product
mark-ups range from 50
to 100 percent.
Companies should also
consider adapting
their products to
South Korean tastes.
 BEST
PROSPECTS
Infrastructure and
Construction
The
South Korean
construction market is
driven by
government-initiated
infrastructure
projects and public
and private housing
construction projects.
Expenditures in the
South Korean
construction market
are expected to reach
an estimated $10
billion in 2004.
Infrastructure
spending is projected
to be $170 billion
over the next 15 to 20
years. The best
prospects lie in the
remodeling industry,
intelligent building
systems, and cyber
apartments. Power
generation capacity is
expected to double in
ten years. In the next
five to 10 years, $159
billion will be spent
on transportation
construction, $6
billion on airport
development
opportunities, and $6
billion on
environmental
projects.
American
companies are already
participating in the
development bonanza.
The New Jersey-based
Gale Company is
proceeding with the
New Songdo City Free
Economic Zone project,
a large-scale real
estate development and
construction project
with expenditures
estimated to total $10
billion over the next
five years. New Songdo
City, a suburb of
Incheon, and home of
the main international
airport, is being
developed into an
international
business center.
Port
development is also a
priority with new
berths under
construction at Pusan
New Port, at an
estimated cost of $5
billion. CSX World
Terminal, based in
North Carolina, has
been awarded the
contract to operate 3
million TEUs of
container cargo per
year, worth $168 million.
Pusan New Port will
open in 2007.
Information
Technology and
Telecommunications
The
market for information
technology is
projected to grow at
15.7 percent annually
reaching a high of
$230 billion. For
software and related
services alone, the
market is forecast to
grow at an average
annual rate of 20
percent, from a base
of $12.8 billion in
2002. Localization is
required for software.
A new IT complex is
being planned to
attract both
manufacturing and
research and
development
investment. In terms
of telecommunications,
South Korea has the
highest broadband
penetration rates in
the world and
leadership in wireless
local area network
services. It also has
the world's most wired
population with 33
million South Koreans
owning mobile phones
out of 47.6 million
people. South Korea is
an ideal test bed for
U.S. suppliers,
especially for IT
products. For
additional information
about the ICT sector,
please see http://www.emich.edu/ict_usa/KOREA.htm,
a project of the US
Department of
Commerce's ICT Team.
Medical
Equipment and
Pharmaceuticals
South
Korea has one of the
fastest growing health
care markets in Asia.
The growth rate for
medical devices is
projected to be 10-15
percent annually over
the next several
years. International
companies currently
supply about 60
percent of total
market demand. Total
imports were $1.1
billion, in 2003 with
American companies
holding 40 percent
of market share. Some
of the best prospects
include orthopedic
joints, magnetic
resonance imaging
systems, diagnostic
ultrasound scanners,
endoscopes, patient
monitors, sterilizers,
and cardiac devices. A
full list of best
prospects is available
from the Country
Commercial Guide for
South Korea at http://www.buyusa.gov/korea.
Also the South Korean
dental device market
is the second largest
in the Asia Pacific
region, after Japan.
Imports from the
United States, the
European Union, and
Japan dominate the
market with the United
States holding the
largest share. The
South Korean market
for pharmaceuticals
was valued at $4.5
billion in 2003.
Recently, market
demand for
pharmaceuticals has
grown at eight to nine
percent annually in
South Korea, outpacing
growth in the global
market.
Travel
and Tourism
With
South Korean per
capita GDP at over
$12,000, South Korean
travelers have
discretionary income
that can be spent on
tourism. Although
there was a slight
decrease in the number
of South Koreans
traveling abroad in
2003, compared to
2002, approximately
7.08 million South
Koreans still decided
that tourism was a
preferred choice for
discretionary
spending. The United
States remained the
leading non-Asian
destination with
679,196 visitors who
spent $1.4 billion, an
average of $2,060
per visitor. South
Korea is currently
the fifth-largest
source of inbound
visitors to the United
States and the
second-largest source
of visitors among
Asian countries. The
United States was the
third most popular
destination, with a
9.6 percent market
share, after China and
Japan in 2003. Popular
destinations are Los
Angeles, San
Francisco, Las Vegas,
Seattle, Hawaii, Guam,
Florida, and the New
York-Washington DC
corridor.
Education and
Training Services
According
to the Ministry of
Education, South Korea
invests almost 7
percent of its GDP in
educational
expenditures, one of
the highest in the
world. The emphasis on
education is very much
in keeping with South
Korea's Confucian
culture, which also
benefits international
providers of education
services. In 2003,
over 51,000 South
Korean students
attended colleges and
universities in the
United States,
spending $1.55
billion, about $30,000
per student, a 10
percent increase in
real terms over the
previous year. The
traditional overseas
education market
continues to expand
and is being augmented
by distance learning
as well as business
training abroad.
Franchising
US.
Franchising interests
held a 55 percent
share out of a total
market of $55 billion
in 2003. Imports of
U.S. products and
services were $30.4
billion (70 percent
market share for
imports) in that year.
The market is
projected to grow 10
percent annually
through 2005. Food
service related
franchises led the
sector at 45 percent
($25 billion),
followed by education,
real estate, cleaning
services and mail
services at 30 percent
and the retail sector
at 25 percent. Growth
in the franchise
sector is due to the
affluence of South
Korean consumers whose
average monthly
spending on good and
services was $1,602 in
2003. Areas for major
growth include
cosmetics (beauty
services and
products), retail
outlets specializing
in organic and natural
products and sports
and leisure.
Cosmetics
The
U.S. share of the
South Korean cosmetics
market was about 5.6
percent out of a total
market of $4.5 billion
in 2003. Imports of
U.S. cosmetic products
were estimated to be
$251 million (35
percent market share
for total imports) in
that year. The market
is projected to grow
by 20 percent annually
through 2006, as South
Korean women have
become more receptive
to western products,
especially foreign
health and beauty
items. As more South
Korean women have
entered the labor
force and experienced
rising incomes, they
also have become avid
users of imported
cosmetics, yielding
significant gains for
U.S. suppliers. Growth
in the cosmetics
industry is due to
continued market
demand for
"prestige"
high-end, imported
cosmetics, the further
expansion of
cosmetics used by
South Korean men and a
modification of South
Korean government
regulations on
importing and testing
new cosmeceuticals.
Other
industries with
excellent prospects in
the South Korean
market include
non-memory
semiconductors,
electrical power
systems,
architectural/
engineering services,
digital TV broadcasting
equipment (for
terrestrial TV
services), pollution
control equipment,
automotive parts and
accessories, telematics
equipment and
solutions and agricultural
products. In terms of
investment related
projects, the energy
sector (power industry
and gas), port
development,
pharmaceuticals, and
biotechnology are
sectors that present
significant opportunities
in the South Korean
market. For additional
information on best
prospect industries,
please visit http://www.export.gov
or http://www.buyusa.gov/korea.
Date Updated: March 27, 2007
|
