There is a perception out there that Korea is a difficult country in which to do business. Although from Korea's perspective markets are opening and barriers are falling, neither are happening at a pace satisfactory to some of today's global companies seeking to do business here. And as partners, Korean companies often come across as aggressive, ambitious and tough to negotiate with.
British Petroleum is one company that is breaking those stereotypes and prospering in Korea. The company has chosen a path to success that could well serve as a model for others wanting to enter this market and seek real collaboration with Korea's industrial giants.
BP, itself among the largest industrial concerns in the world, has become involved in several joint ventures and cooperative efforts with Korea's largest conglomerates. Hyundai Heavy Industries launched BP's massive 24,000-ton Harding drilling and production platform bound for the North Sea in July of 1995; BP is working with Korea Alcohol and two Japanese companies to produce ethyl acetate in Ulsan; Another new joint venture with Samsung and Union Carbide makes vinyl acetate monomer; Samsung Heavy Industries is building three BP Suez-max tankers in their shipyards of Koje Island; BP and LG have joined forces to begin importing Alaskan crude oil to Korea; BP licenses technology to Korean companies for polyethylene manufacturing; and other projects are in the pipeline.
BP's concentration in Korea is in chemicals, and their biggest project is a joint venture with Samsung that manufactures 200,000 tons of acetic acid per year in Ulsan. The venture has thus far been a satisfying one for BP, and the plant is currently being expanded to a 350,000-ton capacity.
Choosing Korea
British Petroleum opened a representative office in 1983, but it wasn't until the end of 1988 that the
company decided to put assets on the ground in Korea. Samsung-BP Chemicals was formed then and
had their acetic acid plant up and running in 1991.
The plant was built in Korea for a number of reasons, basically to meet the rising demand for the chemical in Korea and around East Asia. BP Korea's president, Jim Graham, explains, "We knew the growth in demand for the product in Korea was possibly higher than in any other market, with the possible exception of Taiwan. In addition, Korea has a well-recognized ability to manage technology, and we were satisfied that the companies we were considering as partners could handle the technology safely and responsibly. But at the end of the day, everything becomes a balance between achieving your absolute requirements in terms of structure and control, and the need to have safe, reliable operations."
Acetic acid is a chemical raw material that, to one end, is used to make terephthalic acid (TPA) that goes into polyester fiber. It also finds its way into common products like pharmaceuticals, cosmetics, paints, cigarette filter tips, food preservatives and herbicides. "There are five million tons of acetic acid produced in the world, and growth in demand for the product is a little higher than global GDP," Graham explains. "However, regionally, growth rates vary widely. The demand for polyester fiber in East Asia is growing somewhere between 8 and 10 percent per annum. So when you look at the world and decide how to create maximum value from some technology, you need to get as close to market as possible. Manufacturing in Korea was our decided strategy as we wanted to dredge value out of technology."
BP is the owner of the primary technology used to make acetic acid and the company prefers to invest in the manufacturing process itself rather than license it. BP is the largest producer and seller of the chemical, and currently, over half of the world's acetic acid manufacturing technology uses BP technology. Upon entry into Korea, because of the proposed project's classification as high-tech, BP was able to receive some financial incentives from the central governemnt reserved for such investments.
"We had to evaluate the available incentives, the encouragement given, and the ease or difficulty of doing business in Korea. When you make such a large investment, you want to make sure that there is an underlying demand for your product, that you can take profit out of the country, that you will have a long-term, stable joint venture, and that the government won't suddenly decide to change the laws and insist that majority-owned foreign joint ventures are no longer acceptable," says Graham. "These plants are expensive pieces of equipment, so you don't build them without intending to stay with them for many, many years. We also needed to find a place where BP could do business and protect its reputation. Korea was not the only country we looked at, but Korea, and Samsung in particular, made it very clear that they were extremely keen to do business with us. And that obviously had an effect."
A Profitable Partnership
The Samsung-BP joint venture is 51 percent owned by BP, with 49 percent belonging to Samsung.
Because of its global position in this particular chemical, it was important for BP to control marketing and the
plant operation rate, as well as any expansion plans. Apart from that Samsung runs everything. In fact, among
the 214 people working in the joint venture, only three are BP.
 Jim G. Graham, President, BP Korea |
|---|
There was also the issue of guaranteed demand for the product. That was one of the factors that finally made BP lean in the direction of Samsung General Chemical. It was a young and very ambitious company that, along with the other companies within the Samsung Group, was also the largest consumer of acetic acid in Korea.
The other attraction of working with Samsung was the compatible corporate culture and philosophy for running the company. The Korean conglomerates are generally focused on growth rather than on business streams, profitability or customers, and are huge, diversified businesses with rigid hierarchical management. That puts them on opposite ends of the spectrum from most Western companies in terms of management philosophy and technique. But Samsung has focused attention on developing an outward-looking management style, borrowed from the West, but fine-tuned to the Korean context. That set it somewhat apart from other Korean chaebol and more in line with BP's thinking.
"Of course there are differences--different cultures, different attitudes, different performance measures--but we accept that," says Graham. "In many cases our cultures are similar, even though the measure of success might be different. While Samsung is still a growth-oriented company, BP is more performance oriented. We have been driving our fortunes very much on the basis of profitable operations while Samsung's push is more about globalization and expansion and is driven by the incredible success of its electronics sector, which has allowed it to expand its interests into areas that are very different than its history. BP has done rather the reverse. We've tended to focus our activities in areas where we feel we have certain strengths and seasoned know-how, driven by the need to achieve very high levels of performance. We work well together, though, and we are expanding. Hopefully, we will become more profitable and grow together. There's a shared vision for the company.
Graham feels that BP's ventures in Korea are working very well based on an open exchange and sharing of experiences. BP's two other joint ventures in the country are located in Ulsan as well, which not only provide an outlet for the raw materials from the Samsung-BP plant, but are sharing other services and resources as well. In fact one of the companies doesn't have a single employee. It uses existing infrastructure and workforce from Samsung-BP, which operates the plant, but does not own it, and its sales and marketing are carried out by BP's existing sales channels throughout Asia.
"The whole strategy is to take value by synergy with the logistical operations and you just grow on what may be, in the beginning, a rather high cost base," says Graham. "The real payoff comes when you get more and more activity focused around that base. And that's very much the strategy for the future."
State of the Chemical Industry
The chemical industry, like many others, goes through cycles. Korea's economy has been in a
slowdown, and petrochemical fortunes have slumped for much of 1996. The industry is closely linked to the
fates of other industrial sectors, such as fibers, electronics, and automobiles, but rapid capacity expansion
by the petrochemical producers themselves led to a market glut of chemicals like ethylene, resulting in oversupply
and lower international prices.
Until the late 1980s, Korean producers were unable to keep up with the significant demand growth for many chemicals because raw materials were in short supply and production capacity was limited. Facility investment policies in the petrochemical industry were liberalized in 1990, and over the next two years, money was poured into expanding the industry's production capacity. While the expansion and successive investments elevated the industry to the world's fifth largest ethylene producer, the new capacity boosted production beyond dom-estic demand, and since 1991, there has been a continuous oversupply of most products, except for some synthetic fiber raw materials including TPA. Between 1988 and 1992, with the construction of eight new complexes, ethylene production capacity grew more than 600 percent to about 3 million metric tons per year. Derivative production grew in pace and Korea suddenly had become a major exporter of synthetic resins. Excess supply was exported, contributing to international price slumps in 1992-93. Poor financial results from Korea's producers led to the government imposing a ban in 1992 on capacity expansion through 1995, hoping that demand would catch up by then.
For the most part demand has caught up with supply, and despite some uncertainty in the international market, some major manufacturers, like Hyundai, have recently announced new investment projects including a naphtha-cracking center. Those manufacturers obviously have an optimistic outlook on the global petrochemical industry, particularly in Asia.
A recent report from the Korea Development Bank predicts that as demand for petrochemical products comes back in line with supply, Korea will take a major position in the export markets, since the country is believed to have a greater surplus than other mature commodity markets like Taiwan and Singapore. All of these countries should benefit from world-scale plants and relatively low-cost production, though, because they have removed many production bottlenecks rather than constructing new facilities up to capacity. A notable disadvantage for Asia's mature petrochemical producing countries is that "most manufacturers produce general-purpose products, while demand for high-grade products is the fastest growing. These countries, therefore, must upgrade their R&D capabilities by collaborating with advanced nations to respond appropriately to the demand," according to the report.
That is precisely what Samsung seems to have done in its venture with BP. Samsung-BP is the only producer of acetic acid in Korea, and since BP owns the primary technology used for making it, the market can be controlled to a certain extent. BP is also involved now in the only production facility of the vinyl acetate derivative product, so domestically, BP has somewhat of a monopoly on the products it makes.
"Of course that doesn't mean that we are not susceptible to normal business cycles," says Graham. "However, the business we run here, while in a very specific area within the chemical industry, is not totally focused internally. We do export a lot, so we have a broad based demand for our products. The major use for our products at the moment is TPA, which goes into polyester, and there has been a massive investment into that sector. In fact there has been a huge overinvestment in Asia in TPA, so the dynamics have changed dramatically. Whereas TPA was a very profitable business for many years, 1996 may have ended up a bad year for its producers because of the surge in new investment. For a year or two they may go through some difficult times, until demand catches up with supply, and that obviously spins back to the raw material suppliers like us."
"The whole essence of our success is reliable operations at the lowest possible costs. So we are always trying to squeeze cost out of the supply chain. We are trying to make our plants more efficient and to develop relationships with our customers that will enable us to survive these tough times in a way that will permit us to meet our customers' requirements as best we can for every item. Sometimes that's not easy. But we think that our reputation and record helps us enormously to get us through the bad times. That's the drive behind our marketing ethic in Asia as well as the rest of the world."
"The overall chemical industry in Korea is going through the same kind of cycle. Korean companies have been incredibly ambitious to grow--and perhaps they have grown a little too fast and too diversely. But Europe has gone through similar experiences. We've overinvested in the good times, and that creates a more severe cycle than may be desirable."
BP's Future in Korea
There is a lot of competition for investment around Asia, and since the time it established its first
Asian chemical investment in Korea, BP has set up manufacturing operations in China, Malaysia, Indonesia
and Singapore. So, in terms of BP's next big Asian investment, Jim Graham indicates that there are a lot of countries
and a lot of factors to consider.
"Our experience base is much broader now, so when we look at future investments, we again have to consider where Korea stands in terms of attractiveness versus some of the region's developing countries where demand is growing and there are different financial incentives," he says.
"The difficulties here are well known," Graham continues. "Although they are being eased, the financing restrictions were originally a problem for us, and still are to some extent. Costs have been escalating dramatically since we started our operations here, and that's a very short period of time. So there are some downsides. But there are positive factors as well. Korea is an incredibly strong economy that will continue to flourish and we now have a confidence about our ability to do business here, so it starts ahead in that sense versus going into a completely new market. The growth in demand for our products continues to be quite dramatic, so from the perspective of demand pull, Korea is in good shape."
BP is obviously deeply involved and deeply committed to Korea as evidenced in the three joint ventures and many projects underway here. The fact that the Samsung-BP acetic acid plant will be expanded, more than doubling its original capacity by the end of 1997 to 350,000 tons per year, indicates that the company is optimistic about its prospects in Korea.
| by Don Hackney |
In 1797 an English naval ship sailed into Pusan, marking the first British contact with Korea.
Two hundred years later, two-way trade between the countries exceeds $5.2 billion (1995) and investment,
both ways, is sizeable. Now, to celebrate the bicentennial in 1997, the British embassy will be mounting
a series of events in Korea designed to promote even closer economic and cultural ties.
Total British investment into Korea from 1962 through August 1996 amounted to just over $516 million in 112 cases. The investment patterns are described as "sketchy" by the embassy's first secretary-commercial, Adrian Stephens, meaning that it has been up and down over the years, but has shown no dramatic steady increase of late. The reason, he explains, is that a lot of industries where British companies are strong, like the financial, legal and information sectors, are those still relatively restricted in Korea. About 71 percent of British investment has gone into manufacturing (chemicals, medicine, petroleum, machinery), while 29 percent has been invested in services (finance, insurance, trading). "Besides companies like British Petroleum, Marks & Spencer, or British Airways, a lot of our investors are rather invisible," he says. "They are companies that operate 'behind the scenes.'"
On the other side of the coin, the U.K. has been attracting more investment than any country in the world, including announced cases involving semiconductors from LG Electronics and Hyundai Electronics, each worth over 1 billion pounds. First secretary (economic) Tim Flear explains, "The $4.09 billion in investments announced by Korean companies in 1996 is an amazing amount. It will directly create 7,800 jobs as well as downstream benefits for the local economies."
What lessons can Korea learn? "First," says second secretary (economic) Colin Crooks, "you need to treat the foreign investor as a domestic company, with all the rights and protection afforded any other company. The British government has really worked hard to create an environment friendly to all business, and now it's paying off."
