The economy is booming. Although in transition, it is still expected to have grown by more than six percent by the end of 1997. The huge demand for every kind of industrial and commercial product is expected only to keep growing in the years ahead. Burgeoning though it is, the market has been difficult for outsiders to penetrate. How then to capitalize upon one of the world's most exciting business opportunities? Many investors have discovered the surest way to grasp the brass ring of the Korean economy is to lock into a local source of expertise concerning markets, labour, government, and secure a way of sharing risk. In short, they find a partner. For many years the joint venture was synonymous with investment in Korea since many areas of the economy were closed to foreign control. Save for a few areas deemed essential for national security they be left in Korean hands (such as broadcasting and the fishery), a steady process of liberalization has freed up the majority of the economy to foreign investment, rendering the need for partnership in this regard, at least, as obsolete. Neither are there statutes in Korea requiring investing foreign companies to form JVs with Korean firms. Still this form of business cooperation continues to persist. What is the continuing attraction of the JV for both the foreign and the Korean parent and what safeguards are necessary to avoid a clash of cultures at senior management level to ensure the partnership does not unravel? What are the ingredients of a successful JV, what particular benefits derive from it and when is it time for both parties to call it a day and go their separate ways? "The advantages of a JV for the Korean side is access to technology and additional products which can be distributed. From the North American side, it's market access," says Phillip York, president of Tong Yang Systemhouse, an information system JV which he manages on behalf of its North American parent. Last year he undertook a survey of those members of the American Chamber of Commerce in Korea engaged in joint ventures. On the past nature of foreign direct investment in Korea he notes: "Some foreign companies couldn't do it alone; it was forbidden," he said. "They would not set up just for Korea; it could be your number one Asian site."

A case in point regarding the sharing of technology and the use of Korea as a base to approach other markets is Visteon Automotive Systems, formerly Ford Automotive Products Operation. The company operates three JVs in conjunction with business conglomerates.

Two JVs are with Halla Group subsidiary Mando Machinery; one is with Hanwha. Halla Climate Control is 35 percent owned by Ford, 35 percent owned by Mando Machinery, part of the Halla Group, and 30 percent owned by the public. Launched in 1986 the company has two plants employing 1,700 people and produces air-conditioning systems, heaters and radiators, sells mainly to Korean Automotive manufacturers as well as to Ford in in other countries.

Halla Electronics is a 50/50 is two-year-old JV making sensors, and printed and integrated circuit boards. It employs 500 and opened a new factory in Chungwon this year. Hanwha Automotive Components was launched in 1989 and manufactures water and oil pumps and employs 150 people at its Chonan facility. The company is 49 percent owned by Ford and 51 percent by Hanwha and supplies the local market as well as exporting to Ford in Europe and the US. Major customers are Ford and Ssangyong.

Michael Cann, director of Visteon's Korea Programs Office credits Ford's advanced technology playing a strong role in gaining the company entry to the Korean market. While Ford brought the technology, its partners brought infrastructure and contacts to the JVs. "In all the cases, the companies were existing businesses," pointed out Mr. Cann. "Mando was making climate control systems but didn't have the latest technology. They had the customer base and brought facilities and local people who had the expertise, the engineering and the manufacturing skills but were working with older technology." Having a Korean partner may also boost the JV company's chances of accessing local capital markets. Control of Halla Climate was formerly split evenly between Halla and Ford until last year when ownership was cut back to 35/35 and 30 percent floated to the public. The stock now trades on the Seoul Bourse.

"Generally, foreign companies come in trying catch an opportunity in a market," said Gerry Fisher, Representative Director and President of ICI Korea. "If they are a global player, they will have technology which the Korean company will want to have. They will have the plant, the people, the contacts in business and government."

Among other manufacturing activities, ICI Korea has been involved since 1985 in Woobang ICI, an auxiliary textile chemical manufacturing JV company. The British-based multinational is now negotiating the formation of a JV with Dongsung Chemicals, a $200 to $250 million company which manufactures polyurethane footwear. The JV will produce polyols used in the production of polyurethane, a substance widely used in the automotive industry in the production of steering wheels, bumpers, seat cushions. An MOU was signed March 1997 and the target date for operations to commence is Jan. 1st 1998. "In the case of Dongsung Chemicals, they had the plant and the people," said Mr. Fisher. "Everything was fully-operational. They needed new technology and new products. For us, it was very simple to move in. A 'greenfield' situation where you have to build the plant and hire the people is much more difficult."

In the projected JV the responsibilities, objectives and inputs of both sides are clearly defined. Mr. Fisher said whereas Dongsung has a need for MDIs, a vital component along with polyols in the manufacture of polyure-thane, ICI has a need for polyols. "They had a polyol plant which needed help; we brought the technology to help them. We need polyols in other parts of Asia which we will export," he said. "They need MDIs which we will import, most likely from our plant in Holland." In essence, "the strategic fit and objectives must be brought to the [JV] agreement up front. Generally, partners like to see an addition of new technology as it's developed from the multinational and the development of new products." But what of the "cultural fit" by foreign employees brought to work in a society often quite different from their own? Mr. Fisher stresses the need for investing companies and their expatriate staff to expend "time and patience" in dealing with their Korean partners and to keeping their people in place longer. "Two, two-and-half years and they're gone," he said. "We move our people too quickly. They should be here five years." Every ICI Korea employee is required to sign an ethics statement. "We don't buy business," said Mr. Fisher. "I think we will gain the respect of our customers in the end." The issue of ethics cuts both ways; Mr. Fisher emphasizes the need for openness on the part of foreigners and for them to keep their promises. "The joint venture must be looked upon as a marriage," he said.

Ultimately, the central issue of any partnership is control, vested ultimately in and expressed through the JV's board of directors. ICI has a majority 60 percent controling interest in its JV with Woobang Trading. "The question of finance, who controls the purse strings is very important to foreigners," said Mr. Fisher. "Multinationals want to take money out; Koreans want to leave money in for growth," he said. "We prefer a debt-to-equity ratio of 40 to 60 percent; a chaebol's debt ratio may be 300 to 2,000 percent. Asians may accept a one-percent profit margin because they want to build market share. We are more attuned to a return on net assets, a certain investment rate like 20 percent. So, there can be disagreements."

Hewlett-Packard Korea is a JV between Hewlett-Packard and Samsung in which HP has a majority 55/45 percent controling interest. The JV was formed in 1984 to increase sales and ensure an effective distribution network for HP's high-tech computer products in Korea, at a time of rapid market growth for information and instrument products and solutions in Korea. "Before HP established a formal JV there was a seven-year relationship with Samsung," said Choi Joon-keun, President of Hewlett-Packard Korea, formerly known as Samsung Hewlett-Packard. "The period gave each company the opportunity to learn about each other and determine whether a deeper relationship could be successful - sort of like a courtship before a marriage." Samsung's interest's were in technology transfer, exports, manufacturing, HP's reputation and management expertise; while HP sought increased access to the Korean market plus access to low-cost products through R&D, manufacturing and purchasing. The JV also manufactures test and measuring equipment for engineering applications for the local and world market at a factory in western most edge of Seoul in Kuro-gu. In total, the Hewlett-Packard Korea employees 1,000 people, sells $700 million per year locally and exports the same amount.

On the subject of control Choi Joon-keun, President, Hewlett-Packard Korea comments: "The majority ownership issue is important to note because many JVs are formed 50 percent by each partner. I've seen this kind of structure with shared management responsibility, lead to serious problems. In reality, no one is in charge and in many cases critical decisions are delayed, or worse, made for political reasons which are not in the best interest of the JV company."

While placing importance on definitive control, HP took a number of initiatives through its JV partner to localize its corporate culture. Mr. Choi credits among factors contributing to the success of the JV the staffing and management of the company by Korean nationals, the use of local value-added elements such as training, consulting, hardware, software, and literature, and the focus of English skills to facilitate communication with HP operations worldwide. "Samsung management assisted in establishing government and industry relationships and understanding the culture. They also helped in localizing HP administration and personnel practices," he said. "I want to point out that HP processes and practices were put in place from the start and then localized, rather than the other way around. I saw many companies that began with local systems and then had a difficult time changing them to the parent company ones."

Mr. Choi views the question of corporate culture and its local adaptation as paramount. "In fact, when someone asks me what is the most important factor in the company's success, I say it's the employees bringing back the HP culture and practices from their numerous visits," he said. "From what I can see, [our factory] is an HP operation. The name, values, management style, products," notes Roland Noz, general manager of the Hewlett-Packard Korea facility at Kuro-gu. "I'm not aware we sell any Samsung products, but Samsung is one of our biggest customers in Korea. I know many HP operations the world over, and here, it's the same values and company culture. HP integrates many different nationalities and cultures."

Meanwhile, all lines of reporting from the factory go directly to Hewlett-Packard in the United States, as does reporting from the sales organization. There are no reporting lines to Samsung.

The history of the JV in Korea demonstrates the continued potential for the development of additional lines of business, responses both to the continuing industrialization of the country and the increasing sophistication of its consumer base. Based on the investment community's ranking of business by profitability, financial status, corporate image, management strength and marketing achievement the Yuhan-Kimberly JV formed in 1970 between pharmaceutical company Yu-Han Corporation and American tissue manufacturer Kimberly-Clark is one of the top ten most successful joint-venture companies in Korea. Y-K has not only progressively expanded to supply the Korean market with the full Kimberly-Clark product range, but has also evolved to the point where it now has an on-going business of exporting paper-making machinery and services to Kimberly-Clark affiliates and licensees worldwide.

Y-K's first mill at opened at Anyang near corporate headquarters in Seoul producing Kotex feminine pads and later Kleenex facial and bathroom tissue; its Popee brand of bathroom tissue became, and remains, the most popular in Korea. The Anyang mill was expanded in 1973 and two years later the company introduced the first adhesive brand of feminine pad in Korea, and afterwards its Neena brand of feminine pads which became a market leader for 10 years. A second mill was built in Kimcheon in 1980 and later the same year Y-K, became the country's first producer of disposable diapers under the Kleen Bebe brand name.

Over the next five years, paper towels, industrial wipers, non-woven fabrics and Huggies disposable diapers were added to the Y-K product line. A third mill was built in 1994 to meet the rising demand for disposable diapers and feminine pads. The company's annual sales now top US$500 million.

Despite the elements of control, an adapted corporate culture, longevity, and even profitability, quite frequently a time comes in the life of a JV when both partners decide to go their separate ways. Many JV contracts have provisions for dissolution by either party. "JVs don't last for ever. They have a definite shelf life," said Mr. York. "Often they are dissolved but there is presently a trend for the foreign parent to buy out its Korean partner and operate the concern as a wholly-owned subsidiary." He points to the purchase by Coca-Cola of its distributor. In addition, Rhone Poulenc bought out its 50/50 partner Oriental Chemical in its Kofran Co. JV, and Akzo Nobel bought out both its Korean JV partners, one of whom was the chaebol Han Wha.

Dow Corning formerly operated a JV with the Lucky chaebol which operates a variety of businesses including electronics, chemicals, and construction. Established in 1983 under the name Lucky-DC Silicone Co., the JV was dissolved in 1995. Jim F. Bartlett Vice-President of Dow Corning Korea said his company has been following a process of globalization since the 1950s and opted for the JV format in coming to Korea since "we were required to do business through some kind of alliance and that's the way DC Lucky began. There was the feeling Lucky could give access since it had production in other industries which use silicone." He said the company approach was to "come in right away and that's what we would've done, but I don't think it was that easy. In the early 1980s we started a trading company, so the quickest way to do business was with a partner of pre-eminence." The embryo sales/marketing/ customer service company drew support in the form of materials production, new technology, product development, from Dow companies in Europe, the U.S. and Japan, where Dow has had a JV since the 1960s. Product lines made in the US and Europe would be brought in bulk and the local operation would finish compounds for specific companies.

As time went on, Korea and the whole of Asia gained in significance. "As your markets grow you have to react to meet customers demands and requirements. Accordingly, you have to upgrade your manufacturing abilities," said Mr. Bartlett. "We went through those changes in the last 12 to 14 years, to put in place a significant manufacturing operation. And it was not only to support the Korean market. We support the rest of Asia; this is the fastest growing market in the world." Dow is now the largest silicone manufacturer in Korea and the dominant supplier in Asia. The split came when the government put the number of businesses a chaebol could be involved in under consideration at a time Dow was moving toward a preference for 100 percent ownership, as is its company in China. "Fortunately, the two came together," said Mr. Bartlett. "It was enough of a catalyst to make us switch from a JV to 100 percent ownership."

Explained Mr. Bartlett: "Certainly, it's a unique situation when two companies have the same goals and needs. Oftentimes, the companies are putting different values in. Whose putting the technology in? Whose putting capital in? This happens particularly if the parents are in totally different markets."

For Dow the JV provided introductions and a learning experience about doing business in Korea. For Lucky, "they probably came away with a better understanding of the silicone chemical industry than what they would've had if they had just been a customer of DC," said Mr. Bartlett. He noted since 1943 Dow had introduced silicone to the world by forming alliances. "Now we're competing with our former partners," he said. "We put Rhone-Poulenc in business. We put ICI in business. They got the competence but we got our name in front of the world."

In the meantime Lucky continues to be a customer for silicones from Dow and is in the process of forming another venture with a German company to develop silicone products. "After a JV is dissolved, the Americans have the market access and the Koreans get the technology," said Mr. York. "North Americans are looking short term, the Koreans long term, but both sides get what they want." He noted also that for foreign firms wanting to manufacture in Korea, "at one time the JV was your only choice. Now you have many choices."

Even among corporations which have not chosen to operate a JV in Korea, the benefits of this form of partnership receive endorsement. Texas Instruments Korea operates a wholly-owned plant in Chinchon which produces motor controls for consumer electrical goods, sensors for the automotive market and burn-in test sockets for the semiconductor industry.

TI is also in the business of marketing semiconductors and to this end has established a technology transfer partnership with the Anam Group. Anam manufactures high-market growth non-memory chips under TI technology at a wholly-owned plant of its own.

Under the agreement which involves no licensing, TI gets 100 percent of the output, retains 70 percent at a guaranteed price to Anam which is allowed to take the remaining 30 percent to sell elsewhere. While operating JVs in Singapore, Italy, Japan, and Thailand, Texas Instruments, Korea President and Representative Director Thomas L. Simms notes the arrangement with Anam is "not a JV. It's an offshoot of a JV. However, if you're new to Korea the JV is good way to learn the market." While knowledge of the market and introduction to a new business culture can be invaluable to newcomers, Mr. Simms believes there is a powerful motivation for the Korean business world to seek out joint ventures with their overseas counterparts by virtue of the opportunities they afford. "I recommend Korean companies exploit the JV option to its fullest extent because of the opportunities it affords to acquire technology," he said. "The key thing about our arrangement is TI is offering its technology."

Mr. York is optimistic about the future of the JV in Korea. "I don't think JVs will disappear as a form," he said. "We'll see North American firms having several agreements: there'll be a distribution agreement, a market licensing agreement, and a joint venture. The JVs that we do see will be more Asia-broad and multi-national following the example in Japan of Fuji and Xerox." Whether market key or market education, local or pan-national, the constant lure of East Asia for the world's investment community plus the unceasing quest for technology by Korean corporations will ensure the future of the joint-venture company in Korea for some to come.

by Charles Duerden