Jul 25, 2010

Chinese Aren't Coming

Korea Times (July 23, 2010) By Sean Hayes

Willie Sutton, the famous 1940s bank robber, was attributed with answering a reporter’s questions concerning why he robs banks with: ``that is where the money is.”

The Japanese, knowing that China is where the money is, loves China ― why don’t the Koreans?

The Chinese knowing that Japan is developing a vibrant ``Chapanese” economy love Japan ― why don’t the Chinese love Korea?

Overwhelmingly, Korean employees and shareholders believe that the Chinese will enter the market to steal technology, lay off workers, and abuse their dominant world power. Chinese investors are not dumb; they know this perception by the Koreans.

China only accounts for 1.4 percent of the total foreign direct investment (FDI) in Korea, according to government data. While, China accounts for 11.1 percent of Japanese FDI with only the U.K., Canada, Germany and the United States surpassing Chinese investment in Japan, according to Japanese government data.

The Chinese have controlling interests in numerous Japanese companies including well-known golf club manufacturer Honma, die-maker Ogihara, electric technology company Nikko Electrics, and information services company SJI Inc.

Wealthy Chinese are gobbling up Japanese and other foreign products in Japan at a rate that makes even wealthy American consumers blush. The number of wealthy Chinese surpasses, in number, the entire Korean population.

This Korean situation is alarming and worrying considering that Korea is only a stone’s throw from China. China is one of the world’s largest economies and Korea bills itself as the ``Hub of Asia.”

These impressions by the Chinese come from, in part, the Ssangyong Motors disaster. Ssangyong Motors is a former Chinese-controlled Korean company. A controlling share of Ssangyong was sold to the Shanghai Automotive Industry Corporation (SAIC) in order to save the company from liquidation.

The SAIC attempted to avoid liquidation through reorganization. Members of the Korean Federation of Trade Unions and the Korean Metal Union Workers, unwilling to compromise with the company, led a 77-day seizure of the Pyeongtaek Ssangyong Motors’ plant.

Union members and hired thugs tossed fire bombs and projectiles from slingshots at police and caused significant damage to the plant and the reputation of Korea.

The then very unpopular Lee administration, out of fear of being perceived as too right-leaning, made few moves to end this strike until almost two months into the fiasco. The situation made a lasting impression on many foreign investors, not just the Chinese.

Why is the situation much different in Japan? The Japanese government has made a concerted effort to attract Chinese investment and the Japanese are much less nationalistic than Koreans. This nationalism is hurting the chances for the government to have a true sustainable growth rate.

We should no longer consider companies as national enterprises. Most major Korean companies manufacture more of their goods outside Korea and these and all multinational companies’ primary concern is profit, not promoting the nation of the management’s best interests. Nationalist company management is the rare exception and definitely far from the rule.

With this in mind, the Lee administration must make a government-wide effort to educate the population and officials to think with their minds first and not with their hearts and thus realize that Korea must focus on ``where the money is.”

A great start is the recent revision of the visa rules for Chinese visitors, but no true change will occur without a change in the hearts of the population, this will only come through a collective raising of consciousness and a realization as in the words of Thomas Friedman that: ``The historical debate is over. The answer is free-market capitalism.”

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SeanHayes@ipglegal.com

Jul 5, 2010

Korean Outsourcing: Legal Basics

So you have decided to outsource the manufacturing of your products to Korea. Good choice in choosing quality-focused Korea over quantity-focused China, but don't make the bad choice of not even taking the basic legal steps necessary to protect your good name, technology, brand and the future of your business.

If you plan on just dealing through a purchase order (PO) in Korea, you are heading down a path that will invariably lead to a kick in the tail.

The recession has hit small/medium-sized manufacturers even harder than large manufacturers. Many of these SMEs have decided that the only way to survive is OEM (original equipment manufacturing) outsourcing to China, India, Korea and other parts of Asia.

I, also, do a good deal of enjoyable work in China and India. I am, however, always happy to see clients choose Korea over India and China, since many of the headaches you will experience in China and India will never be felt in Korea.

The legal system, in Korea, is generally transparent, fair, and the judges tend, with a little guidance, to be able to understand commercial disputes. Also, I have been told that Korean manufacturers need much less guidance than Indian and Chinese manufacturers and the cost of doing business in Korea is not substantially greater, for high quality products.

This situation being known, foreign companies often make the poorest of choices when doing business with Korean companies. Korea is still far behind the United States and the West in terms of business ethics, protection of intellectual property and legal transparency. Many risks, not even considered potential risks in the West, are regularly realized in Korea.

Before entering into any Korean OEM agreements, please consider and follow these very basic pieces of advice. As in an article I wrote for a Korean daily entitled Listen to your Mother -- always look both ways before crossing the street, carry an umbrella in the spring and don't go out alone at night.

1. Request and obtain the company’s business registration number and perform a credit check on the company. A basic credit check can be obtained through the Korean Investors Service (www.kisrating.com).

2. Register all your intellectual property rights (copyright, patents, trademarks etc.) in Korea. Registration will help to prevent your competitor, a disgruntled distributor, or your manufacturer from counterfeiting your goods and exporting your product from Korea to your customers and potential customers. Registration in the United States and Europe does not guarantee that your intellectual property rights are protected in Korea. IP treaties only provide you a window of time to register in a member state.

3. Your Korean license, distribution, OEM agreements and other agreements used in other nations are not adequate for Korea.  All “standard” distribution, license, OEM agreements and other agreements should only be used as guides in Korea. Korea has a unique legal system with unique business risks. If you are planning to deal only through a purchase order (PO), you are a goat waiting to be milked.

4. All agreements, to avoid any initial misunderstandings, should be drafted in English and Korean.  A well drafted Korean OEM agreement is not complete until it is translated.  Even the best English speaking Koreans, are ill prepared to understand agreements of this nature.  Clear misunderstandings upfront and avoid legal fees down the road.

5. Know-how, trade secrets and the like should be protected through a written agreement. A standard non-disclosure agreement (NDA) is not enough. This agreement should be signed prior to any course of dealing and normally should include confidentiality, non-use, non-circumvention, non-competition clauses with a liquidated damage clause.

6. For at least the first few shipments, don’t pay until the goods are inspected. For the first shipment, check the goods at the port yourself. Afterwards, procedures can be put in place that guarantees the quality, quantity and delivery time through local channels.

If you heed these simple pieces of advice you are well on your way to having a successful relationship with a Korean manufacturer.

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SeanHayes@ipglegal.com

Jul 3, 2010

Korean Law Firm's Competition from American/British Law Firms

The Donga-Ilbo reported that 83% of the Korean companies surveyed would utilize foreign law firms for domestic matters if foreign firms operated in Korea. The local Korean newspaper surveyed 50 Korean companies, state-run enterprises, law firms and financial institutions.

At present no American, British, French, German or any other foriegn law firms are allowed to operate in the Korean market.

However, a number of foreign lawyers in Korea have taken on senior roles at Korean law firms and many Korean law firms have standing relationships with American and British law firms.

The biggest fear for Korean law firms and lawyers was always thought to be the loss of foreign clients, however, it seems likely that even Korean companies may also be lost to foreign law firms without a drastic improvement in the quality and efficiency of representation by Korean attorneys.

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SeanHayes@ipglegal.com

Debt Collection in Korea

With the recent economic crisis, my Korean law firm has received a noted increase in the number of calls concerning collecting debts from Korean debtors. The debts have been mainly from small U.S. & British importers. Most of the matters concerned unpaid invoices and commercial loans.   A few of the calls concerned, simply, scams by Korean exporters.

A few basics steps can help your company not to be duped by Korean businesses and obtain the money you are owed.
  • Request the Korean company’s business registration number and registered business address.  If they claim not to have a business registration number -- run.  Check that the number and address is correct.

  • Make sure the person you are talking to is actually working for the company that you believe you are doing business with. Call the main company number and send an email to the main company email address listed on the company's website.  If you smell a rat, you probably found a rat. If you smell a rat -- don't eat the rat, get someone in Korea to check the situation out for you. I found two situations, this year, where an individual fraudulently represented himself as a member of a company.  One was found prior to contracting, the other individual was not and is no where to be found. 

  • Obtain a credit rating report on all Korean company you intend to do business.  The reports can be obtained through one of the various commercial rating agencies. Smaller companies reports are often not available in the English language. Some of the ratings can be found at http://www.kisrating.com/.  Ratings for larger companies are very good. Some of the data for smaller companies is not complete, but can still be very useful. 

  • Have all your Korean license agreements and other agreements reviewed by a legal professional with knowledge of the Korean business and legal landscape. A contract drafted by a U.S. law firm is rarely adequate for use in Korea.

  • If a dispute arises, have a firm immediately send a warning and then a demand letter. In most situations, if you have a good lawyer and a debtor with assets, the matter will be solved through the letters. The fee for this service, in most cases, is minimal and can often be obtained for a small upfront fee and percentage of the amount collected.

  • Make sure the demand letter is drafted in English and translated into Korean. I have seen too many times the lack of care and understanding of the facts of the matter leading to negative outcomes in court. Often Korean lawyers seem to understand what you are saying, but often don’t actually understand - so make sure they got the story down by having them first draft the letters in English.  Make sure this is agreed to before you sign the retainer, since this is added work for the attorney.  I strongly advise having a native or at least near native English speaking attorney work on the case with you.  Some firms can still perform well without these attorneys, but this is the exception and far from the rule.  Also, often a foreign educated lawyer is advisable.  I have written articles on this blog and in local media sources concerning the reasons for this and the ineptness of far too many Korean attorneys.  If you are interested, a quick search will locate numerous articles on this issue.

  • If the demand letters fails, you should, normally, obtain an attachment order before trial. Real property and movable property can both be attached. The Korean courts require large refundable deposits for the attachment of movable properties often greater than 1/3 of the value of the movable. A part of the sum may be through bond.  I personally enjoy attaching automobiles.  A company president that is used to a driver and car is often lost when the car is being towed to a government lot.  In one of my favorite cases the president begged us to take the money today and get the car back, since his wife was not too amused by the fact that she was not able to go on her weekend shopping trip to Yeoju Outlet with the husband's car and driver.   

Only hire an attorney that has significant experience with international clients and business litigation.  Make sure the attorney you hire will actually work on the matter and not simply hand it off to a junior attorney.  Also, please realise that the attorney is always more important than the firm.

Recently, two new clients first hired international collections agencies that claimed to specialize in Korean debt collection. The agency failed through demand letters and phone calls and noted that it is best to hire an attorney. Beware debt collectors that advertise that they are internationally experienced in debt collection.  It is possible that some of these agencies can obtain results, but in Korea, and I believe throughout Asia, lawyers can exert strong pressure on a debtors to pay, a debt collection agency, does not seem to have this same pressure unless they have good local attorneys retained.  

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SeanHayes@ipglegal.com

Korea may Introduce U.S. Grand Jury System

Prosecutor General Joon-gyu KIM, in reaction to a recent bribery/sex scandal involving over 100 current and former Korean prosecutors, announced that Korea should adopt a U.S. grand jury system. The Korean prosecutor general vowed that for major cases he will initiate citizen-review panels immediately.

Grand juries, in United States federal courts, comprise groups of between 16 and 23 citizens. The prosecution must present evidence to the grand jury before the prosecution can indict. In the U.S. federal system, 12 jurors must vote that the evidence is sufficient for the prosecution to indict and thus for a case to go to trial.

The United States is one of the only legal systems to still utilize the system. The protections afforded by the grand jury, in U.S. federal court, are guaranteed by the 5th Amendment to the United States Constitution.

The major advantage of the grand jury system, in Korea, will be that the system may assist in returning confidence in the Korean legal system to some foreigner investors, while providing an added safeguard against abuse of the system by prosecutors and politicians. The introduction of the system could also provide an escape value for prosecutors that often feel overwhelming pressure to indict even on the most weak of evidence.

During the last few administrations a few questionable criminal investigation have given the Korean legal system, in the eyes of many foreign and local investors, an impression that Korea is not a foreign capital-friendly destination. Prosecutors, overall, realized this sentiment, but pressure from outside sources often led the prosecution to choice less choices.

In these cases, the prosecution, often, feels overwhelming pressure to investigate and indict. The pressure, normally, comes from the administration and press. The prosecution, if the grand jury was available, could present available evidence to the grand jury and the grand jury would have the opportunity to dismiss the charges based on the lack of evidence, thus, giving the prosecution an added tool to avoid a case they may believe has a low possibility of receiving a conviction on.

Without the grand jury, the prosecution in the most public of cases will continue to have overwhelming pressure to indict even on the weakest of evidence.

A J & S Law Firm (International Practice Group) client was the victim of this pressure on the prosecution.

My firm is presently engaged by a well-known multi-national company. The prosecutor had overwhelming pressure to investigate and indict foreign and domestic employees. Some of the foreign employees were subjected to multiple lengthy interrogations on evidence that amounted to nothing more than the speculation of a disgruntled former employee. The prosecution, since the case was referred by a government agency, had overwhelming pressure to do a "complete" investigation and indict.

The case ended well, but not after the loss of trust in the Korean legal system by senior management at the parent company. The parent will not consider additional investment in Korea in the near future, because of perceived transparency fairness issues evident in the Korean criminal justice system. The situation is a regular occurrence that is often mentioned by clients and foreign investors. Clients have noted that these issues are not apparent in most of Korea's Asia-Pacific competitors including Hong Kong, Singapore, Japan, Malaysia, Indonesia and Australia.

Hopefully, the grand jury system will be introduced to the Korean legal system and the system will allow defendants and key witnesses requested by the defense to testify at the grand jury.

The U.S. Attorney Manual notes that not allowing a witness to testify can lead citizens to believe that the system is unfair. Without allowing defendants and witnesses to testify this system will simply be used as a rubberstamp for prosecutors, since prosecutors will have nearly total control of the evidence presented.

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SeanHayes@ipglegal.com