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Enter the Consultants

The multi-faceted nature of foreign investment into Korea has created a boom in demand for the services of a new class of expert on the Korean business landscape - the consultant

The need for secrecy was paramount. The Otto Group of Hamburg, Germany's leading direct marketing organization, had successfully formed the Otto-Doosan Mail Order Ltd., joint  venture with leading Korean mail order and home delivery company, Doosan Corp.

While the venture was mass-market oriented, Otto looked to focus its considerable resources on the lucrative upscale Korean mail order fashion trade. The easiest way was a further acquisition, but how could Otto assess the market to find who was interested in selling without incurring a huge increase in asking prices that such inquiries were automatically bound to spark?

Otto's approach was to enlist the help of the German-Korean Chamber of Commerce of which Otto-Doosan was a member. On Otto's behalf,  the chamber contacted individual top-end players in the Korean mail order market without revealing the identity of the interested party.  The chamber located a prime candidate for acquisition in Nextore Co., a mail order operation launched by Daewoo in 1999. The company had been spun off in the wake of the chaebol's collapse and had since run into cash-flow problems. Said Christian Stolba, Nextore Co. senior advisor, the chamber "Accessed all information on Nextore related to due diligence such as share capital,  dividends, through its company registration file, while the financial side was handled by KPMG Korea."

The role of chamber points to the growing role of consultants in helping foreign companies gain entry to the Korean market. In this regard, many have found having a third party working for them on the ground can be vital to the success of their aims. Often nationality specific like the chamber and frequently working in cooperation with the Korea Investment Service Center (KISC), consultants serve as the interface between the foreign  company and the Korean business environment.

Chamber secretary general Florian Schuffner defined the role of his organization in acting as an investment consultant as, "To help foreign business with any kind of difficulty, to advise on fields of investment. We will also advise whether to form a joint venture with, or take a majority position in, a target company, plus overlook their joint venture and other contracts." Driving this interest by foreign companies said Mr. Schuffner is "The local market and its position in East Asia, its proximity to China and Japan." Whereas potential investors were deterred from investing in Japan because of the expense and in China because of its low level of development and unreliable workforce, "Koreans are very reliable and production costs can be as low as one-third those of Europe depending on the field."

Peter Underwood, senior director of International Research Consultants (IRC) Limited specializing in market development, said Korea is of increasing interest to European and American investors since it has the "Largest and most developed economy in Asia after Japan, that of China being so big and fragmented. Korean GDP is equal to that of the whole of ASEAN (the Association of Southeast Asian Nations), minus  Indonesia's oil." IRC has operated in Seoul for 18 years providing services to the overseas business community in the fields of market entry, auto parts sourcing and supply, representation and the formation of consortia to build heavy metal structures.

So what will a consultant do to get a foreign investor established in Korea? Mr. Underwood cited the example of a major glassware producer that approached IRC with a view to entering the Korean market and said his company's first step was to undertake a market survey. "There were four areas to consider," he said. "The first was regulatory - what the law allows and does not allow you to do." He noted while this was once  a major part of surveys, the Korean regulatory environment has changed dramatically to the point that while the "Core of the regulatory issue" has disappeared, some areas of business remain restricted.

IRC then looked at the competitive environment. Mr. Underwood said, "We asked 'How healthy are our client's competitors? What's their capability? Are they part of a chaebol''' The third element in the marketing survey was how sales and marketing were handled within the industry. "We looked at how products got from the producer to the consumer, the extent of joint development between producers and  customers and the terms and conditions of sale," said Mr. Underwood. "Is settlement made by cash or a three-month promissory note?"

Supporting Market Entry

The fourth area of the survey listed the recommendations on how market entry might be best effected. "It covered whom we should be looking at for partners, particular market segments," said Mr. Underwood. "Far more fun," he said, "is the business development itself; once we have 'the map,' it's a case of 'Let's do it!" On a few occasions IRC might counsel a prospective investor that the market is not ready for their product or perhaps pricing might be unattractive. However, "Most times there is an opportunity to a greater or a lesser degree for acquiring a company, starting a greenfield operation, supporting a company's market entry process."

In working as a consultant on behalf of Italian companies seeking to enter the Korean market Matteo Picariello, commissioner of the Italian Trade Commission (ITC) said his organization provides a two-fold service. "The first part of our job is providing information and in this regard the ITC's quarterly newsletter covers investment information on North and South Korea," he said. "Italy was the first G-7 country to open diplomatic relations with the Democratic People's Republic of Korea (DPRK) and Italian companies are very interested in that  market." Mr. Picariello said the aim of the ITC and that of the Italian government is to set up agreements or joint ventures for Italian businesses in the DPRK through South Korean companies, "Especially in the area of textiles, both in the final product and production machinery."

The ITC secondly provides practical help by matchmaking for Italian firms. "We make a brief survey of the market and search for partners  as well," said Mr. Picariello. The commission will prepare all the necessary documentation for incoming Italian firms but will not undertake due diligence. Mr. Picariello noted that Italian business is showing greater interest in the Korean market.

"Since the crisis, Italian companies have come to the realization that  if they want to keep their market share, they must be based here  permanently," he said. Among the Italian companies assisted by the ITC are small-scale multinationals typical of the Italian industrial structure, which specialize in intermediate goods. They include Manuli Rubber Industries SpA, which established a joint-venture in 1998 with the Korean company Keasan of Changwon City to form Keasan Manuli Corporation, and Arneg SpA, which linked with Samsung to  produce refrigerated displays. The ITC is presently assisting Societe Ingiene Territorio SpA (SIT) form a joint venture to produce a security valve for use in heating applications.

Joseph Day, president and   representative director of Entry Management Services Co., Ltd. (EMS) said that need for the consultant has arisen because of the gulf between the Korean and foreign business communities. "In spite of Korea's rapid growth, development and international stature, Korea still lingers under the influence of the 'Hermit Kingdom' it once was," he said. "Many Korean businessmen involved in joint ventures have little or no knowledge of the outside world. A company like mine can help bridge the gap between these businessmen and their foreign  partners." On the foreign side, "Most of the companies coming in are  profoundly ignorant of Korea."

As a result of this experience he developed the idea of EMS as a one-stop service company for companies coming into Korea from abroad. "We look for introductions, select agents, licensees and even joint venture partners," said Mr. Day. EMS will also undertake due  diligence. "Over the past four-and-a-half years the most used part of our business has been that concerned with human resources - involving everything short of headhunting."

Mr. Day said that in general his clients broke down into two categories: new companies coming into Korea and those already here, "Who have not got it quite right." He explained this latter group is seeking a management change, or the "Country manager may be new and does understand or like certain things." Mr. Day said EMS provides a "Full understanding in Korean labor practices to ensure a new company is set up correctly in that regard." This particular focus of EMS illustrates perhaps the most pressing need  for expertise by incoming foreign  companies. Mr. Schuffner said the questions most asked by his chamber's clients concern labor. "The union area is the more serious concern for most investors," he said.

Doing Reality Checks

"In all the surveys we do of foreign managers, human resource development is always the issue that ranks highest in their priority, but in which their achievement is lowest," said Tony Michell, managing director, Asia, for Euro-Asian Business Consultancy Ltd. (EABC). "We mostly work with people who  have been in Korea a long time, struggling to keep their company modern in a very fast-changing environment," he said. "Compared to a new investor in Korea, a country manager taking over the running of an existing operation has a double problem," said Mr., Michell. "A new investor can adapt to the world of 2001 whereas the country manager must work with a legacy structure, which may or may not be up to date, particularly in relation to staff."

Mr. Michell said "When a company comes to us we look at whether a company setup will run as intended, how we can make an investment into a really successful company." Since the crisis year of 1998, EABC has been heavily involved in merger and acquisition (M&A) work. "Typically a foreign company will come to us to know if there are opportunities in Korea. We then do a screening survey of possible M&A candidates on a no-name basis and then approach individual Korean companies to  ask if they would be interested." Through the Economist Conferences that EABC holds and participates in throughout Asia-Pacific, the company has become familiar with the Asian staffs of the Fortune 500. "We get people regularly 'taking the Korean temperature' to see if this is the right time for them to invest," said Mr. Michell.

The assessment of the Korean market by EABC that interested foreign investors receive is at once frank and optimistic. "We tell them that this is a difficult market but there are companies that have been extraordinarily successful, and if [they] can get the magic right, they too can have extraordinary success," said Mr. Michell. With the signing of an accord between North and South Korea in 1991, EABC broadened its perspectives to include the entire peninsula. After it opened its office in the DPRK capital of Pyongyang in 1993, the first by a foreign company, EABC negotiated more than 30 commercial agreements on behalf of foreign companies, including joint ventures.

Above all, a consultant can provide the dual role of providing badly needed expertise while acting as  an objective observer. Mr. Michell noted that, "A company of 1,000 employees wouldn't need a company like ours since it could undertake  all the necessary work in-house, but a company of 50 to 100 employees would." At the same time a company such as EABC can "Do reality checks. We can help a country manager make a case to head office for expansion or change." He said it was ironic that a head office having  put an expensive ex-pat in place in Korea often don't believe him. "Some things," said Mr. Michell, "need to be said by a consultant."

 Updated January  3rd 2001, By Charles Duerden ( cad@kotra.or.kr )