7 Musts to Succeed in Business in Korea

We have the unique pleasure to have a bird's-eye view of numerous clients' businesses in Korea.  At this stage of our experience in Korea we are, typically, able to determine which companies will succeed and which companies will fail. 

Companies that succeed in Korea, normally, do/have the following 7 Things:

1.  Comprehensive Understanding of the Korean Market by a Neutral Local Consultant

This understanding, normally, comes from one of the few business consultants, in Korea, that are
capable of providing a decent market overview with a detailed list of potential targets and contacts within these targets.  We work with a handful of consultants, since many don't have the skills necessary, but still sell market research reports that seemed to be, only, obtained through a Google search.

2.  Great Initial Representative Director for the Korean Venture

The first representative director doesn't, necessarily, need to be a permanent hire.  Often, when a company is, initially,  growing a six month specialist to open an office is necessary, then, the specialist may bring in a permanent representative director.  This is the same for winding-up a company. 

3.  Good Cultural Understanding of Korea

We see too many companies handle matters in a way similar to the way they handle matters in Japan and China.  Japanese and Chinese are different nuts to crack, than, Koreans.  Maybe Japanese and Chinese look similar to Koreans, but they definetly don't think or act in a similar manner to Koreans, thus, don't rely on other Asian experience as a guide for doing work in Korea.

4.  Risk Assessment Tailored to Korea

Your business in China and Japan have different risks and compliance requirements than you will have in Korea.  Thus, your in house lawyer or outside counsel should not be utilizing the same agreements, compliance system etc.  as what was used in other Asian companies. 

5.  Full Commitment to Korea

Korea is an opportunity, but don't even think about coming into Korea if you are looking to enter on the cheap.  If you don't have the resources, time, personnel and patience you will find the "opportunity" a fast closing door.  Also, the home office should be fully behind the effort and should be willing to place a home office guy or local expat hire on the ground in Korea.  Too many people think that opening an office and hiring a sales manager is enough-----it is not enough. 

6.  Comprehensive Cost Assessment

Do you know how much it will cost to hire, run an office and manage your staff in Korea? Marketing budget?  Consultant budget? Contingency budget?

7.  Make a Concerted Effort to Avoid the: Top 10 Mistakes of Companies Doing Business in Korea

SeanHayes@ipglegal.com

IPG is engaged in projects for companies and entrepreneurs doing business in Bangladesh, Cambodia, China, Korea, Laos, Myanmar, the Philippines, Vietnam and the U.S. www.ipglegal.com

How May the Visit by Obama to Myanmar Help Your Company?

Myanmar is opening to foreign investment and the visit by Obama will increase trade and investment opportunities for Western companies. At present most investment is coming from other Asian nations and some large players in the oil and gas industry. The next decade will see a far different Myanmar than we see today. Prior to the present government, Myanmar was the second richest nation in Southeast Asia. As experience in Southeast Asia predicts, these opportunities will be largely won by those that enter the Myanmar market first. The best JV partners will be, largely, won over the next few years. Additionally, the best concessions will be given to first comers. A visit to a hotel in the capital, that just a few years ago contained only a handful of foreign tourists, is now full of foreign business people mainly from Europe, America and East Asia. Some hotels are, now, fully booked. This situation was unheard of only last year. At present, international sanctions in Myanmar prohibit most exports from the country, however, few imports are prohibited from being exported to Myanmar and America and otehr nations have been lifting sanctions of the nation. However, few companies have been willing to export to Myanmar because of fear that selling to the nation may harm companies brand image and the wrongful impression that few export opportunities exist. Once all major sanctions are lifted, it is expected that American, European, Southeast Asian and East Asian companies will follow the handful of companies doing business in Myanmar at this time. The nation has large reserves of oil, gas, timber, fish, rice, and precious and semi-precious gems that have not been exploited effectively in decades. The major challenge to exploitation, as is normally the case, in this part of the world, is infrastructure. The World Bank and Asian development bank are working on projects at this time. The nation, additionally, desperately needs basic consumer products, industrial machinery, and skilled professionals in the service sectors. The country has the resources to purchase these goods and services, but few are selling. At present only a handful of international companies are selling products to Myanmar. The companies include Unilever, Total SA, PTT, CNOOC, and Jebsen & Jessen. China's CNOOC seems to have a very active presence in Myanmar, but the details of their projects are not known. Also, it seems Myanmar businesses have not had good experiences dealing with the Chinese. We will be writing more articles on Myanmar on this blog over the next couple of weeks. As a law firm that loves to do work in Myanmar and loves the kind people, we are looking forward to more benefits trickling down to the people, while assisting clients entering a country with a bright future, proud past and an energetic population. ______ SeanHayes@ipglegal.com IPG is engaged in projects for companies and entrepreneurs doing business in Bangladesh, Cambodia, China, Korea, Laos, Myanmar, the Philippines, Vietnam and the U.S. www.ipglegal.com

Corruption Not to End Soon in Korea: Why?

Whenever I read a news item regarding Korean corruption, I have mixed feelings. Usually the article is based on the latest finding by a well-meaning NGO that focuses on corrupting influence of big business on government without adequately addressing the root causes or even the breadth of corruption. Korean corruption doesn’t limit itself to envelopes and car trunks of cash being paid by business people to government officers.

So one may ask oneself, "Can Korea end its many forms of corruption?" That is the essential question, and the obvious answer is "no."

I don't mean that as a cynical observation. Rather as much as I recognize Korean corruption having greatly disappeared from its much higher levels of thirty years ago, the very nature of Korean society precludes corruption from being significantly reduced from its present levels.

When I was a Peace Corps Volunteer in the Korean countryside of the 1970s, virtually everyone lived in poverty by US standards. Some lived in squalor, but the overwhelming majority lived simply and frugally. Those who were considered well off at that time and place would nonetheless have been considered to be poor by then American standards. However, the relatively well off often had an attitude that could be haughty given their well being was measured within the context of their villages and towns.

At the other end of the scale, Korean public servants were paid ridiculously low wages, as is the case of many developing countries. They actually needed outside income to live relatively comfortably and to send their children to schools and universities. Often, the only plausible means for this large societal segment was to receive "gratuities." One could normally count on having to pay a pretty consistent ten percent as unofficial gratuity to get various matters handled. Eventually, the Korean government realized that low public sector wages were a poor value.

Today, Korean public sector workers overall get decent wages, steady employment and superior retirement benefits - so much so, the competition to get these jobs by often over-qualified applicants is quite severe. In any case, wealth, which many people may assume to the end goal of corruption, is only relative and not absolute. Rather social power, again as defined within one's social context, is the real corrupting influence. And the corruption is not limited between government officials and business tycoons. NGO executives, particularly when the left wing is in power, find themselves in privileged positions; and unsurprisingly, as we witnessed under Presidents Kim Dae-Jung and Roh Moo-hyun, there was a ten-year spike in corruption involving NGOs.

If corruption was measured by money or goods, we may consider a limit on luxury handbags and gold watches. But the fact is, on the other extreme, if someone has ten gold watches and two dozen luxury handbags, etc., there will be a quest for even more. One may say the motivation is greed, but it's obviously not greed for yet more handbags and watches. More likely these well off individuals are driven by envy, should there be anyone else possessing the same number or greater number of goods and of newer or higher quality or status.

The fundamental problem is that being a member of South Korean society is very much a status-conscious undertaking, partially based on insecurity as to whether any individual or family truly deserves its presumptive ranking. What is less controversial is whether a Korean is in possession of enviable goods or amounts of money. And to make matters even more competitive; success, achievement, and social ranking are more narrowly defined in South Korean than in many western and advanced societies. Consequently, once an individual or family feels secure they are not in danger of being left behind from the mass average, they immediately recalibrate their insecurity so as to try to catch up to, if not lead, other people in the next higher levels of society.

Ergo, my conclusion is this: Some improvements in reducing corruption will likely be made by new legislation, regulations, enforcement, etc. But, until South Koreans essentially ease up on themselves and learn to be happier with who they are and what they possess, envy and insecurity will drive otherwise intelligent individuals to partaking in foolish acts -- including corruption.
So can corruption be effectively reduced in large measure from present levels? Perhaps. Will we see substantial reductions? I’m doubtful.

On the other hand, South Koreans have surprised both the world and themselves many times over. At the same time, the causes of corruption rest on the bedrock of Korean cultural and group psychology fundamentals. At best, I can only hope matters may improve over time. And who knows? They just may.

by Tom Coyner.  Senior Adviser to IPG.
_________
SeanHayes@ipglegal.com

IPG is engaged in projects for companies and entrepreneurs doing business in Bangladesh, Cambodia, China, Korea, Laos, Myanmar, the Philippines, Vietnam and the U.S.

www.ipglegal.com

Manufacturing Agreements in Korea: Limit your Risk through Payment Terms

My friends over at the China Law Blog has a good post entitled China Manufacturing Payment Terms.  Limit Your Risks.  We find a similar situation occurs with goods manufactured in Korea, but the situation in Korea is less dire, than, in China, since Korea has a much more transparent legal system and much more efficient pretrial enforcement mechanisms.

The China Law Blog post notes that:

"Many companies continue to purchase container load quantities of product from small manufacturers located on the southern coast of China. This trade has developed a standard form of payment, often termed 30/70 TT. This means: 30 percent down payment on placement of the order, with the remaining 70% due upon shipment. This means 30% of the price is paid before the product is manufactured and 100% of the price is paid before the product is shipped.
Here are some common result of this system:

• Product arrives in the United States. Upon inspection, it is determined that a substantial percentage of the product is defective. The buyer demands a refund and the Chinese manufacturer refuses. In the alternative, the manufacturer offers a discount on the next order. If this offer is accepted, the buyer is forced to continue to do business with a manufacturer that makes defective product.
• The buyer arranges for an inspection during the production process or prior to shipment. The inspection reveals a substantial number of defects. The buyer demands a refund of the deposit and the manufacturer refuses, stating that they have already spent the deposit to manufacture the disputed goods. In the alternative, the manufacturer offers to correct the defects and provide a discount on the existing order. If this offer is accepted, the buyer is forced to continue to do business with a manufacturer that makes defective product.

The foreign (usually U.S.) company buying the product then contacts my law firm about filing a lawsuit against the Chinese manufacturer, rather than accept the unacceptable terms. In virtually every case, however, the buyer ultimately determines that the cost of litigation is not justified by the amount of the potential recovery. The buyer is then forced either to abandon the manufacturer and take its losses or accept the terms proposed and continue to work with a bad manufacturer."

The China Law Blog's answer for this conundrum:

• Do not make the second, 70% payment until after an inspection of the goods. In this way, the buyer’s risk is limited to the 30% down payment.
• Inspect the product as early possible. Time is a major factor in China business. If you find defects early, it is possible that you will be able to resolve the issue in time to save the shipment. If the issue cannot be resolved, then you at least can probably move on to a different manufacturer early enough to obtain acceptable product in time to meet your business needs.
• Treat the 30/70 TT method as the price for testing out the Chinese manufacturing system. As soon as possible, move to a different method of payment. Use one that does not require payment of any funds until after an inspection has been made. There are many alternative methods of payment in China. Of course, the use of such a method will require a quantity and timing commitment from the buyer that extends beyond the spot, single container type of purchase that is typical for the 30/70 TT method of payment. If you are not Wal-Mart, you are not going to get Wal-Mart like terms.

I completely agree with the assessment and the answer to the assessment, for Korea, but I would add that it is best to have someone on the ground in Korea to assist with the inspection when the products are being manufactured and, also, have a Korean-tailored agreement.  Agreements may be less important in China than in Korea, thus, I agree that "foreign companies operating in China (replace Korea with China) must account for these risks in their business planning,"  but, for Korea, I must note that the risk must, also, be reflected in the supply agreement, since Korean court system, often, is a useful tool for resolving disputes. 

Other articles that may be of interest to the reader:

• Top 10 Mistakes of Companies Doing Business in Korea
• Korean Outsourcing: Legal Basics
• Top 10 Things to Do Before Manufacturing in Korea

SeanHayes@ipglegal.com

IPG is engaged in projects for companies and entrepreneurs doing business in Bangladesh, Cambodia, China, Korea, Laos, Myanmar, the Philippines, Vietnam and the U.S.

www.ipglegal.com

Will Korea Bite Apple's Double Irish with Dutch Sandwich

Apple employs a popular tax reduction scheme called a Double Irish with a Dutch Sandwich.  The scheme is legal under Korean law.  Some media sources, in Korea, have been engaging in a relentless assault on Apple, possibly, motivated by issues that Samsung is having in courts abroad.  I worry that Korea will, again, harm its reputation abroad by engaging in some reactionary measures against Apple and other foreign competitors of Korean conglomerates.  The Lone Star fiasco has done its damage and another handling of a matter in such a fashion may, again, damage the image of Korea as foreign-capital friendly nation.

The Double Irish with a Dutch Sandwich is a well-known strategy to reduce the tax liabilities of companies headquartered in nations with high corporate tax rates.  The strategy has allowed Apple to pay low corporate taxes in the United States and most of the countries that it operates in through this strategy.  

How to make a Double Irish with a Dutch Sandwich.

Ingredients for Double Irish

1. Irish Company with a tax residence in Bermuda
2. Irish Company with a tax residence in Ireland
3. High Corporate Tax Nation 

Ingredients for a Dutch Sandwich

1. Irish Company with a tax residence in Bermuda (Top Slice of Bread)
2. Dutch Company (Slice of Cheese)
3. Irish Company with a tax residence in Ireland (Bottom Slice of Bread)
4. High Corporate Tax Nation Company

Basic Receipt for a Double Irish with a Dutch Sandwich.  
You won't find this one in Starbucks.

1. Irish Company with tax residence in Ireland wholly owns the Irish Company with tax residence in Bermuda.
2. Transfer IP from High Corporate Tax Nation Company to Irish Company with a tax residence in Bermuda.  No transfer price concerns under Irish Tax Law.  Have a cost sharing relationship between the two companies.  Irish Company with tax residence in Bermuda does not have a tax residence in Ireland, since Irish Tax Law specifies that a company's tax home is where a company's management resides - not the place of incorporation.
3. Sub license the IP held by the Irish Company with a tax residence in Bermuda to the Irish Company with tax residence in Ireland in exchange for royalties.  No transfer price concerns under Irish Tax Law.  Now we have some deductible expenses and taxes under the Irish 12.5% corporate tax rate. 
4. Irish Company with tax residence in Bermuda licenses the IP to a Dutch Company in exchange for royalties. No transfer price issues under Irish Law and exclusion under Irish law for withholding taxes for Dutch companies.  Book the production costs within the Dutch company.
5. Irish Company with tax residence in Ireland sub licenses the IP to companies outside of Ireland.

A detailed article on this tax structure can be found at: The U.S. Companies & Their Use of The Double Irish Dutch Sandwich

Get a tax lawyer to do this to avoid the Subpart F Income (Controlled Foreign Corporations) and please don't look for one in Starbucks.
_________
SeanHayes@ipglegal.com

IPG is engaged in projects for companies and entrepreneurs doing business in Bangladesh, Cambodia, China, Korea, Laos, Myanmar, the Philippines, Vietnam and the U.S. www.ipglegal.com

Seoul International Arbitration Center to Open in Korea

The London Court of International Arbitration, Singapore International Arbitration Center, Singapore International Arbitration Center and the Korean Bar Association has come to an agreement that the Seoul International Dispute Resolution Center (Seoul IDRC) will be formed.  The government has approved the formation of the Seoul IDRC and the center will be housed in the Seoul Global Tower Building.

The Korean language Legal Times has reported, in part, that:

"By providing an international arbitration space for the worldwide arbitration agencies, the Seoul IDRC is acting as a ‘department store for international arbitration.’

The role model for South Korea was Singapore’s Maxwell Chamber, a 5 story international arbitration facility that opened in 2011, hosting the American Arbitration Association (AAA), International Centre for Dispute Resolution (ICDR), International Chamber of Commerce (ICC) etc.  Maxwell Chamber has rose to become Asia’s leading center for international arbitration.

Byung-Joo Lee, the coordinate and planning director of the KBA state that: 'As Korean corporations are expanding overseas, international arbitration cases have increased greatly. The Korean Commercial Arbitration Board (KCAB) is also ranked 6th~7th in the world for arbitration cases. The fact that South Korea is going to be the first to have an international arbitration center, which was nonexistent in Northeast Asia, is a significant act showing that it is going to be a center of legal activities in Eastern Asia.'

The Korean Commercial Arbitration Board (Director Dae-su Kwon) is an international arbitration agency just like HKIAC.  However, Seoul IDRC has the notion of ‘sharing facilities’ for international arbitration cases, which will act to supplement each other. Once the Seoul IDRC opens, the international arbitration fees that were usually remitted overseas can now be remitted into Korea. As Korean companies are expanding overseas, the legal problems overseas are also increasing.  These companies, presently, are seeking only foreign law firms, which result in a deficit of USD 500 million. . . 

Do-il Sohn, international director at KBA, noted that: 'Before, Korean companies used foreign arbitrators from foreign law firms even for cases they were directly involved in. However, if international arbitrators take care of the arbitration cases in Seoul, there is a higher possibility for them to use arbitrators from local law firms.'

Once the Seoul IDRC opens, we can also see an indirect economical effect of international arbitrators visiting Korea. The coordinate and planning director said,              'Maxwell Chamber has allowed many arbitrators to visit Singapore and brought in foreign law firms that helped to vitalize the market.  KCAB, the only local arbitration agency is excited to market with other international arbitration agencies coming into Korea.

Hyun-suk Oh, manager of KCAB, said 'By educating and marketing with foreign arbitration agencies, we can expand the international arbitration market as well as see an increase of having the place of arbitration as ‘KCAB’ or ‘Seoul’ in contracts between local and foreign companies.

The location of the international arbitration center was originally to be in Songdo with the help of the Songdo government, as this was president Young-Moo Shin’s campaign promise. However, because of international awareness and accessibility reasons, Seoul was decided to be the site location. The chairman of the board of Seoul IDRC will be president Shin and the chief operating officer will be Hee-Taek Shin (60, 7th class), professor at the law school at Seoul National University."

The full article, in Korean, may be found at the website of Legal Times. 
________

SeanHayes@ipglegal.com IPG is engaged in projects for companies and entrepreneurs doing business in Bangladesh, Cambodia, China, Korea, Laos, Myanmar, the Philippines, Vietnam and the U.S. www.ipglegal.com

Top 10 Destinations in Asia for FDI in 2012 According to Financial Times

The Financial Times, yearly,  posts on its Financial Intelligence site a ranking of the top 10 destinations in Asia for Foreign Direct Investment.  One Korean city appears on the list, three Chinese cities and four Australian cities along with the usual characters.  

1.   Singapore
2.   Melbourne
3.   Hong Kong
4.   Brisbane
5.   Sydney
6.   Busan
7.   Auckland
8.   Perth
9.   Guangzhou
10. Chengdu

SeanHayes@ipglegal.com
IPG is engaged in projects for companies and entrepreneurs doing business in Bangladesh, Cambodia, China, Korea, Laos, Myanmar, the Philippines, Vietnam and the U.S. www.ipglegal.com

Contracts with Korean Companies

If you would like to avoid court expenses and headaches related to your business in Korea, please do yourself a favor and have a contract drafted by an experienced professional prior to conducting any business with a company in Korea.

We handle litigation and arbitration matters for many clients that have either used an attorney without adequate experience in Korea or that have foregone the use of an attorney in favor of form contracts they find on the internet. The matter is, often, complicated because of these, too often, poorly drafted agreements and lack of some basic clauses that would add protections for a non-breaching party.

Any client that pleads that the fee to draft the agreement is too high or that they will just download a form agreement from the internet is immediately sent the following.

The primary reason to have a carefully tailored Korean-specific agreement drafted is the following:

1.  Parties Understand Who They are Going to Bed with and What will Happen under the Covers.  We, often, see a party to a dispute jump into bed with a Korean company before knowing what is under the covers and what will happen when they are both under the covers.  A carefully drafted and explained agreement will allow the parties to know what are the obligations of the parties and, also, know the remedy for not meeting these obligations.  Prior to even discussing any relationship with a party, please don't forget our post entitled: Listen to My Mother: JVs in Asia.

For example, lets say that you contract with a Korean company to provide you with 100 widgets every 90 days.  Without a clause setting out the damages for delay, often the Korean company will sign the agreement and, then, note that they thought this 90 days was, simply, a guideline.  The penalty clause makes the Korean party understand the seriousness of delay.

Also, do not forget due diligence comes before the deal - NOT after the deal is completed.  Sometimes it is better to forgo an opportunity in order to avoid unnecessary risk, expense and headaches . Korea Due Diligence: Not So Different than China.

2.  Non-Breaching Parties Have Remedies through a Korean Court or Arbitrator
The Korean courts will enforce written agreements, but are skeptical to enforce oral promises or relationships based on course of dealings.  A carefully drafted agreement will, normally, consider the major arguments that, typically, occur in Korea and, thus, the issues that may arise in the future will likely be addressed in the agreement.  This, allows, the potentially breaching party to reconsider breaching because of the likely damage from the breach, while, also, providing a remedy for breach.  Thus, in all but the most rare of cases, will an agreement, in Korea, be simply one of these three pagers pulled off the internet.

The Korean courts are ranked Second by the World Bank for the enforcement of contracts.  The ranking maybe be found at: World Bank: Doing Business Ranking of Economies.

3.   Liquidated Damages & Related Remedy Clauses Are Your Friends
Liquidated damages clauses should be utilized in most agreements.  Without an agreement with liquidated damages clauses it is, often, difficult for the non-breaching party to establish damages that equal the actual damages.  For a post on liquidated damages take a look at:  Liquidated Damages Necessary in Most Korean NDAs and Non-Compete Agreements.

4.  Korean Companies Fear Lawyers
Korean companies that know that you have an attorney are less likely to play footsies under the covers.  When having a contract drafted make sure the attorney is capable of, also, negotiating the agreement. 

_________

SeanHayes@ipglegal.com

IPG is engaged in projects for companies and entrepreneurs doing business in Bangladesh, Cambodia, China, Korea, Laos, Myanmar, the Philippines, Vietnam and the U.S. www.ipglegal.com