“Business Development in Korea Made Easy(er)”
Peter Underwood is a long-time business consultant in Seoul. Peter is a partner at IRC, a company that has been guiding the way for foreign companies to succeed in Korea since 1982.
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Full Transcript of the Interview
Tom: Hello once again, and thanks for joining us today at KoreaBusinessCentral.com for our podcast interview series. My name is Tom Tucker. I’m the host. Today’s guest is Peter Underwood. He’s a long time resident of Korea with family ties that date back all the way to the late 19th century.
He’s currently a partner at IRC in Seoul and his consultancy focuses on a number of areas including business development services, and also market entry services and organizational improvement. IRC does, in fact, concentrate on helping Western companies do business in Korea. Peter, thanks for joining us. It’s a pleasure to have you with us today.
Peter: My pleasure.
Tom: You’ve lived in Korea almost your entire life and you must have seen lots of interesting changes over the years. How has business in Korea changed in your lifetime?
Peter: Well Korea, of course, has developed substantially during my lifetime. When I was young the standard of living was roughly equivalent to Burkina Faso. Now, it’s the 13th largest economy in the world. So, commensurate with that tremendous development, the practices of business have developed tremendously as well.
When I was a child, there was a very subservient attitude where Koreans considered themselves inferior to most of the world. Whereas now, there’s a distinct level of confidence and, perhaps, even a touch of arrogance in the attitude, so certainly a lot of pride for what Korea has achieved over that timeframe.
When I was a kid, it was very much an atmosphere of austerity. People were frugal and reused and were very, very careful about using resources. Now, there’s definitely an attitude of affluence; certainly, an appreciation for luxury goods and expensive items as well.
So, I think that the economy has changed tremendously, the people have changed as well and I think the younger generation, in particular, is much more similar to Western people. They have similar attitudes to Westerners. They’re much more open and global minded. A little bit of the negative that comes with that is they’re a bit self-centered and selfish as well. So, the change in the economy and business practices, it’s just night and day compared to what it was, say, 46 years ago.
Tom: It must have been a remarkable transformation to watch in such a relatively short period of time.
Peter: Absolutely, and I think I was lucky to be alive at this period of time to be a witness to the tremendous growth and development of this country.
Tom: Korea has a reputation as one of the most difficult markets in the world for foreign companies to enter, and this is exactly the kind of consulting support that you and your firm provide on a regular basis. What are some of the reasons that foreign companies fail in trying to crack the Korean market?
Peter: Well, we like to look at the other side of the coin. Rather than why do companies fail, what do companies have to do to be successful? I think the most important thing is to recognize that the Korean market is different. Many people say, “Oh, we do business all the way around the world. We can do it the same way in Korea.”
But, in fact, Korea is very, very homogeneous. The people have kind of a code when they communicate. They don’t even know they have this code, but because they share a common culture, a common history, a common background, that there’s a short hand in communication. I think we need to appreciate that and we need to take the extra step and make sure that we communicate clearly when we talk with Koreans and with each other.
I think that you need to really do your homework. What is this market like? What are the drivers? What make people act the way they do? So, I think that before you even consider doing business in Korea, you need to make sure you understand the lay of the land, so to speak, and do your homework.
Definitely, a key component here is relationships. You have to invest in relationships. I know that relationships are important all over the world, but they’re particularly true here in Korea, particularly important here. And you need to build your own relationships rather than relying on other people.
In Korea, you definitely need to mix business with pleasure. You have to spend time with your counterparts outside of the office. Korea is very famous for the drinking culture, but it’s certainly not limited to drinking; sharing a meal, going hiking, playing golf, sharing time with your colleagues, with your customers, with your counterparts. I think you really have to prioritize developing these relationships.
And most importantly, when you enter the market, make sure you allocate adequate resources to it. If you start with enough people, enough money, enough investigation and research into your market, you’re likely to be successful. If you come in on a shoestring and then supplement it later, it’ll end up costing you much more money and taking much more time.
So, I think these are the steps that you need to be successful in Korea. You could write a book about it, but key highlights: relationships, investing from the beginning and understanding your market are the key concepts for being successful.
Tom: As you know, not all foreign companies fail in Korea. There’s been numerous successes including companies like McDonald’s, Starbucks, Tesco, Citibank, and Kimberly-Clark. Those are just a few that come to mind. What are some of the other companies, maybe they’re not household brand names that everyone knows of, but what are some of those other companies that have been successful in Korea?
Peter: Well, I would venture that more companies have been successful than unsuccessful. It’s the unsuccessful ones that make the news and that you hear about. And the non-household names, as you mentioned it, would be mostly industrial products. I do a lot of work in the auto industry and companies like Bosch and Siemens are very, very evident, very present here and very, very successful.
You mentioned Citibank. There’s also Prudential Insurance and other international insurance. MetLife, ING Insurance, these companies are quite successful. Among our own success stories, of companies that we’ve helped, we’ve helped a wear protection company called Ehrlich and Balzers based in Lichtenstein. They do wear protection for tools and wear parts.
They entered Korea at the peak of the IMF crisis, the financial crisis of 1997-1998. In fact, they launched their business in December of 1997. And yet, this company has been able to grow every single quarter since they first launched in Korea. Now their operation in Korea is number three out of their 37 operations around the world.
In 2009, in spite of the crisis, they grew their business and were highly profitable in Korea. So, this is a small industrial company that has found success in Korea and even more success in Korea than in many other markets around the world.
We helped another British paper conversion company. They were providing products to the ceramics industry. They found a small competitor in Korea that was spoiling the market for them. So, they came in and, with our help, acquired this competitor, and then used the Korean production base to export to China where the market was growing very, very rapidly. So, here’s an example of a British company that came and acquired a small Korean operation and used that as a bridgehead to successfully penetrate the Chinese market. There are many, many examples like that, but that’s two good examples for you.
Tom: You also do some work with the state of Georgia. Talk about that a little bit.
Peter: Yes, this is a very unique, but important client for us. The state of Georgia tries to attract Korean investment into the United States and we’ve been serving as their representative office in Korea. Georgia has experienced the greatest amount of Korean investment than any state in the United States outside of California.
There are many, many Korean companies that have located there. Most recently, the Kia automotive plant in Westport, Georgia, which opened last month, is a prime example of the kind of business we try to attract to our state.
Tom: We, just a moment ago, talked about a number of companies that have been successful in Korea. Of all these companies, all these corporations, what are some of the commonalities that you see in terms of their strategies that they have utilized to be successful in Korea? What are the commonalities in all these different companies?
Peter: I think when you’re looking at Korea, you need to have a long-term vision, a long-term strategy. It takes time to get things set up properly in Korea and you need to have a commitment that you’re in it for the long haul. Another important thing is having the right partner in Korea or the right staff in Korea.
It’s important that your local face be credible, that the credibility of your partner or your local executives is incredibly important. Also, it’s not just focused on their specific technical or commercial capabilities. Their status and position in Korean society is very, very important.
Also, Korea is a global marketplace. You have competitors from around the world. So, you need to have a compelling product or service offering. It has to be world class; not just yesterday’s technology.
So, having a good relationship, good partner in Korea, being in it for the long haul and having a competitive or a compelling product offering, these I think are key components of being successful here.
Tom: When business people think about the challenges that non-Korean companies face entering the market in Korea, there might be things like language barriers, maybe cultural conflicts, closed human networks and maybe even, in some cases, phobia.
Do you think foreign companies in Korea talk too much about these soft factors and maybe don’t spend enough time on the nuts and bolts of building a proper business in Korea?
Peter: Well, I think you make a very good point here. I think those issues you mentioned are important. But the key, really, is having the fundamentals of good business, providing a good product or service. As I mentioned earlier, the compelling offer that you have to have is a product that appeals to the Korean buyer, the Korean customer.
I’ve seen many cases where foreign businessmen have blamed Korean culture and the difficulties of language or closed society. And I wonder how much this is just covering up for their inability to achieve their company’s objectives in Korea. But, still, it would be a big mistake to underestimate the importance of Korean culture.
Human relationships are critical, as I mentioned earlier. Foreign companies tend not to spend adequate time nurturing these relationships. The cultural conflicts are, in fact, real. Foreign companies, Korean companies as well, but foreign companies need to build a corporate culture of respect, of trust, of open communication so that the Korean staff know that they are appreciated, and know that their contributions are appreciated and that they’re rewarded for their contributions.
So, if you have a genuine and honest merit-based management system, I think that the Koreans perform very, very well and you can have a very, very successful company in Korea.
Tom: Let’s look for a second at some of the hard factors that business has to deal with in Korea starting with dealing with the legal framework in the country. What are some of the main legal challenges, or legal considerations that foreign companies face? What are one or two most important things that you would say companies need to keep in mind here from the legal standpoint?
Peter: The United States in particular, and the West in general, is very legalistic in that we base everything on contracts and that’s the primary consideration, the primary issue. Korea, as I mentioned earlier, is much, much more relationship oriented, how people relate to each other. And contracts are just part of the bigger process in Korea rather than being the beginning or the end, the definitive definition of the relationship.
I think counting on a contract to be the same as it is in a Western country would be an error. Laws in Korea are very often ambiguous to permit latitude in enforcement. So, given that framework, you need to work on the relationships and make sure that when law is being enforced, when a contract is being implemented, that the people who are making decisions are aware of your position and relationship, and they’re sympathetic to you.
So, I think we need to focus, very much more on the relationships and realize that the legal framework might be secondary to the social framework.
Tom: In addition to legal, we also have to think about issues like accounting and taxation. How about a couple of things to keep in mind there?
Peter: Accounting and taxation are another big challenge because Korean accounting practices and Western accounting practices are different in many ways. Most companies require keeping at least two sets of books; one to comply with Korean tax law and the other two meet the requirements of their head office.
I think accounting is also a useful management tool to drive your business and achieve your performance objectives and therefore, very often, you’ll need to manage your accounts also to focus on particular business lines or product lines so you can use it as a tool to drive the performance of your staff as well.
So, you need to be very, very flexible and be aware of multiple accounting practices and taxation requirements to manage a company in Korea.
Tom: Other things for companies to keep in mind include market barriers. Is it true that Korea puts up excessive barriers to foreign goods?
Peter: Excessive, of course, is a bit of a judgmental word. There certainly are barriers here. I’m not sure that they’re intentionally placed as barriers to foreign products, but certainly that’s the impact. There was a time when Korea had a ban on the import of Japanese cars. It was legal, but a very blatant restriction. That’s been lifted, of course.
I think some prime examples of barriers to foreign goods would be, for example, Blackberry and the iPhone were blocked for many years and were unable to enter the Korean market. And many people believed that this was an intentional plan by the Korean government to allow Samsung, LG and others to develop a competitive product.
We see a similar thing in the automotive sector where I mentioned Bosch and Siemens might develop a new technology whether it’s emissions control, or fuel efficiency, or whatever technology and they want to introduce it into Korea, but the regulations are slow to change.
Again, the perception is that this is to allow Hyundai to develop their own capabilities and to give them equal competition level with these international companies.
Another example in the financial sector is that financial data must be processed in Korea. And for Korean banks, that’s not an issue because, of course, this is where they keep all their computers.
But, for international banks, they may have a central processing location in Singapore or, perhaps, even in Europe and they want to process all of the information there and the requirement to process it in Korea adds cost and complications to foreign banks.
So, these regulations, whether overtly designed to block foreign products and services or not, that’s in fact the impact that it has.
Tom: So, what strategy then would you say would be available for overcoming these market barriers?
Peter: Well, some of them are legal issues and, therefore, you need to go through your embassy or your home country government to try and put pressure on the Korean government to change the laws.
In other cases, the problems can be overcome by developing what I call a Korean face to your company. You make it look very Korean. Sometimes, you have to comply and carry out these activities in Korea as may be required.
But again, it comes down to relationships. You have to talk with the regulators, get them to know you, get them to appreciate what value you can contribute to the Korean economy by being permitted to import your goods and services.
Tom: The current Korean government is talking quite a bit about eliminating corruption from the system. Can foreign companies expect to do business aboveboard and succeed or fail simply based on the merits of their business plan and their execution?
Peter: I think that the level of corruption in Korea has dropped dramatically. It certainly has not been eliminated. In fact, I think eliminating corruption is a dream. We have corruption in every country in the world. It just takes a little bit of different forms and different approaches. But, corruption is pervasive everywhere.
Yes, I do believe you can do business aboveboard and fairly. I’ve spoken with many businessmen who are very proud of the fact that they have refused to succumb to bribes and under the table payments; maybe a little bit less obvious are the bribes involving socializing and going to room salons and so forth. But they’ve been able to do good business by offering a good product or good service and the customer — many customers — appreciate honest business as well.
So, I think it is possible to be aboveboard and honest in the way you do business in Korea and be successful at the same time. Don’t forget, though, what I call the soft bribes; the personal relationships, the interacting with your customers and your stakeholders, going out to dinner, playing golf, etc. These relationship-building type of activities are required and I don’t see them disappearing any time soon.
Tom: Let’s consider a couple cases related to Korean market entry. Let’s first talk about Carrefour for a minute. What did they do wrong that, maybe, Tesco did right?
Peter: Those are good case studies that you’ve mentioned. Tesco teamed up with a very, very strong partner in Korea. They’re working with the Samsung group which has very, very high quality staff, very good reputation in the marketplace. They localized their senior management and their CEO is an ex-Samsung man. They have only six foreigners in Korea, I believe, out of several thousand employees.
Carrefour had a very, very French-centric management team. Your success depends on selling to Korean customers. So, you need to listen to Korean consumers and have products and offerings in your market, in your stores, that meet the needs of Korean consumers and Koreans are going to know that better than foreigners will.
So, I think that Tesco came in and tried to be quite Korean and were very, very cautious about introducing changes and Western practices. So, I think that the fundamental approach between the two companies was different, and Tesco has been much, much more successful than Carrefour was. In fact, I heard a statistic recently that Tesco achieved two billion pounds sales in Korea in less than ten years and it took them 64 years to achieve two billion pounds of sales in the UK. So, I believe it’s a very classical success story that is a good model for others to copy.
Tom: Another case study that a lot of us could learn much from had to do with the anti-US beef demonstrations that happened back in 2008 in Korea. And as you watched these events unfold, what did it tell you about the nature of the Korean market and how foreign companies should side step such difficulties like that?
Peter: The beef demonstrations were a failure to manage a perception by the public. Koreans are very, very emotional and, therefore, you need to appeal to the emotion to be successful. You need to appeal to the emotion of the Korean public. I’m not talking about being emotional in your response.
When you have a public outrage or a public concern, like they did with the BSE crisis, it’s important to act very, very quickly to get the right PR, the right public message out there, the right spin on it. You need to nip the problem in the bud and address it immediately. I think that they allowed it to build and to get out of hand before attempting to address different issues and the Korean public felt that they were being fed poisonous meat from the United States, and this emotion got carried away and was very, very difficult to control.
I think a classic example, again, was the two high school girls that were run over by the US military on an exercise back in — I think it was 2002. Again, the protest starting building and the US military reacted in a very American way and said all of these behaviors, the practices of the US soldiers were proper, that they were just acting according to proper procedures rather than stepping in and trying to nip it in the bud and acknowledging that there was a mistake; making a big public apology and so on.
About a year later, there was a similar case where an elderly Korean woman was raped by a US soldier — allegedly raped by a US soldier — and the military immediately apologized and went and talked to the family and the whole incident blew away and blew over in a short period of time.
So, when you’re faced with a potentially emotional and publicly embarrassing issue, to immediately step in, and address the issue, and show your sincerity and apologize for the incident, even if you don’t acknowledge your own guilt by any means, you don’t need to do that, but you need to apologize for the incident and I think you’ll find that these problems don’t need to blow up into huge candlelight protests that last for months. It’s a different attitude than we have in the West.
Tom: Yeah. I think the strategies that you described there are basically good rules for effective crisis management.
Tom: And I think, a lot of times, those rules are universal in many cultures.
Peter: Absolutely. I would say that Toyota made exactly the same error in the United States with their vehicle problems; that they didn’t step up to the plate and address the issue quick enough. So, I think in Korea, the emotion is much stronger and the protest wave will grow much more quickly. But, I think that you’re quite correct. It’s a crisis management approach that’s applicable around the world.
Tom: Let’s talk about markets in Korea that are, maybe, too sensitive to the Korean heart to ever be cracked by a foreign company. Are there such markets?
Peter: I don’t like that word “ever” very much. Ever is a long time and Korea is a country with a capacity for very, very rapid change. So, things that are unheard of today become possible tomorrow. Sensitive products — the most obvious one is rice. Koreans are very protective of rice. Nobody’s rice tastes as good as Korean rice which, by the way, I share that opinion.
But, I think when countries try and negotiate the opening of the rice market, that’s a very, very sensitive area. We mentioned already personal financial data. There’s a feeling that if banks process personal financial data in Singapore, suddenly the personal information of every Kim, Lee, and Park will be exploited by the rest of the world. So, that’s a very sensitive area.
Education is another one. Even though Koreans send their children overseas to be educated, there seems to be resistance to having foreign involvement in core education here in Korea. Childcare is another area I think is quite sensitive. At the same time, and kind of a contradictory reality, is that there are many, many foreign maids in Korea that Korean families use, whether they’re Filipino or Chinese maids, to take care of their house and take care of their children.
So, I guess in the long run, that there are no absolute taboos. I think that there’s some difficulties now, but don’t expect that to last forever. Things that are impossible today become possible tomorrow.
Tom: One major area of focus for you is the automotive sector and US automakers have complained for decades about how difficult the Japanese and Korean markets are. Is there something to that?
Peter: Certainly, Korea’s historical export-oriented policies have favored export strategies and made it difficult to import products. That’s been generally true overall. The auto sector has been particularly acute in this area. It was only in the early 1990s that auto imports were permitted and there are many accusations that Koreans make it difficult. For example, vehicles need to be retested when they come to Korea and there are some very, very overt, as well as not so obvious restrictions.
And nationalism is very, very strong. Koreans believed it was betraying their country to buy imported cars. I think many of those attitudes have largely changed. The markets are now relatively open. As you drive around Seoul, in particular, you see many imported cars that it has become quite commonplace. Nevertheless, I think the US has a particular handicap. Our market share is relatively small compared to the Europeans.
Tom: Why is that the case?
Peter: The imported cars have always been expensive. So, the Koreans started with the luxury brands; the Mercedes and the BMWs. And the United States doesn’t have a brand that really competes on the same level as Mercedes and BMW. An interesting example is the VW Phaeton, which has been quite successful in Korea even more than it has been in the US and other markets.
In other markets, Volkswagen doesn’t have a luxury image. In Korea, Volkswagen has no image at all. So, when they tried to introduce a luxury vehicle, there were no obstacles to introducing the luxury Phaeton here in Korea.
US cars are perceived as being very, very inefficient and very, very big and the ride quality is quite different. US cars were developed for highway driving and we have a lower portion of highway driving in Korea.
Finally, I think the US cars don’t have as many, what I’d call bells and whistles. They’re good cars and effective cars, but if you compare it to a Korean car, there are a lot more little — whether it’s on the dashboard or in the driver’s compartment — there are many, many little features.
I drive an American car. I drive a Chrysler and my wife drives an Avante, which is a much lower-level car, and yet her car has many features that my car doesn’t have, like a compartment for sunglasses, automatic wipers to adjust to the level of rain that’s falling on the windshield, little drawers and components and features on the dashboard.
So, I think that the American cars were designed with the American market in mind and in many ways, they don’t fit the Korean market. As I mentioned earlier, if you want to be successful here, you have to do your homework and find what are the features that Korean consumers are seeking when they buy a product, and that includes vehicles.
Tom: Let’s change gears a little bit and talk about foreign direct investment into Korea. The government there is always talking about attracting foreign direct investment. Does this mean that Korea is really looking for foreign involvement in local markets?
Peter: Yeah, I think they are. You have to remember that Korea started its development in the 60s as a centrally planned economy, and the model was to borrow money internationally and then allocate that to Korean industry.
Foreign direct investment really didn’t begin until — we call it the IMF crisis – the financial crisis of 1997-98 when Korea suddenly realized they needed foreign capital and I think the foreign direct investment activities to date are still focused on attracting capital rather than some of the other benefits that come with FDI such as skills, and technology, and the employment of people. I think the Korean government should change its approach to attracting foreign investments, recognize these other benefits that come with foreign direct investment.
Furthermore, the incentives that the Korean government provides tend to be limited to foreign companies, and I think that any company that invests in Korea — foreign or Korean — should be offered the same incentives. Interestingly, 90% of Korean companies’ investment in manufacturing is all done offshore.
If the Korean government can’t attract Korean companies to invest in Korea, then why do they expect to be able to attract foreign companies to invest in Korea? And I think the fundamental incentive that the Korean government needs to provide is a good business environment, that if the environment is transparent, it’s fair, that it’s a level playing field, that companies would be much, much more willing to invest in Korea.
Tom: The government has announced the release of public funds for strategic economic sectors, things like IT, and green technology, and other hot industries. Is this a unique opportunity for non-Korean companies to crack the Korean market?
Peter: Yeah, it certainly will be helpful, but why do companies invest in Korea or anywhere? They need a market. They want to sell their goods and services. So, the key thing is: Does Korea make good sense as an investment location? And that’s determined by whether or not there’s a market in Korea. If there is a market, then these various incentives will make Korea a little bit more attractive than some other countries.
I’m always a little cautious about funding in particular industries as it, in my opinion, distorts that industry. Good companies that fail to get funding become less competitive, whereas inferior companies that are successful at getting funding become more competitive and, therefore, the natural process of survival of the fittest, success of the best companies, the companies with the best technologies, is distorted.
So, I think the Korean government, as well as governments all over the world should be very, very careful about how they make funding available and how they allocate funding to even sectors that we all acknowledge should be developed in our key for the future.
Tom: We’re getting near the end here and one thing I wanted to ask you about has to do with advice that you would offer other entrepreneurs, other companies looking to start up business in Korea. Of course, we have the resource here, KoreaBusinessCentral.com and your firm IRC.
But, what would be some other recommendations you would make in terms of resources or tools that entrepreneurs and businesses should consider or take advantage of in planning their own entry into the Korean marketplace?
Peter: Well, I think you’ve mentioned the two most important: Korea Business Central and IRC, of course. But, joking aside, there are many resources here in Korea. As I mentioned right at the beginning, I think it’s important to understand the market before you venture here. Understand the size of the market. Is it growing? If so, how much? Who are the players? Most importantly, what unmet needs exist in Korea that you can take advantage of? And what are the key success factors that you need in order to be successful here?
I think that there are chambers of commerce, there are different embassies of different governments. There are Korean organizations such as Invest Korea and KOTRA where you can get some basic information about Korea and about the Korean market.
But, it’s important that the potential investor, the company interested in doing business in Korea, take responsibility themselves to fully understand the market.
And involve yourself in that process rather than entrusting it to third parties. Obviously, there are law firms and accountancies here that also are resources for information and how to do business practices. I would strongly urge you to talk to people that are doing business in Korea and learn from them.
So, there are many resources that are available and I think it’s important that the companies take advantage of those resources, that they make the effort to learn about the market before trying to enter the Korean market.
Tom: Certainly great advice from someone who knows. Our guest today has been Peter Underwood. He is a partner at the IRC consultancy in Seoul.
Peter:, it’s been great visiting with you today and we’ll look forward to, certainly, following up with you in the future.
Peter: Very good. I think there are many, many attractive opportunities in Korea and I hope that there are foreign companies that would be interested in offering what value propositions they have.
And if they make the correct approach to this market, I’m sure that they will be successful here. I know that you would and I’m sure that we would be happy to help them and to guide their way to be successful in the Korean market. Thanks, Tom.
Tom: Alright. Well, that’s wonderful and I’m sure all of our listeners will appreciate the thoughts and the information that you shared today. Peter, we’ll look forward to visiting with you again in the future.
My name is Tom Tucker. I’m the host for this podcast series here at KoreaBusinessCentral.com. Thanks for listening today and we’ll look forward to visiting again with you in the future. Have a great day!