Indirect selling can be one of the least expensive and lowest risk strategies. Among American firms selling into Korea are offshore companies that use local distributors.
Often, foreign companies organically grow their operations throughout Asia by contracting local companies before setting up a representative office and hiring their own local staff. This approach offers obvious advantages, but also contains many hidden pitfalls. Before entering into any kind of international distribution agreement with a Korean distributor, for example, it may be wise to ask oneself just why one is entering the Korean market rather than using the same resources to expand in existing markets.
If the rationale is purely opportunistic, chances are your firm may not truly exceed beyond getting one or a few customers who are well known to your distributor. While the go or no-go decision criteria for selling through offshore channels may be less demanding than calculating the return on investment through a direct presence, several factors should still be carefully considered. Enthusiasm for Foreign Products Koreans are enthusiastically curious about foreign goods and services.
As may be expected, the more enhancing and least disruptive goods and services will fare best. Other products may be intrinsically disruptive, if only for the overall good of the user, but thereby require much more selling and after-sales support. In this case, Koreans naturally will consider if there are cheaper, local alternatives with sufficient Korean-speaking after-sales support. While price is often an overbearing consideration, there are foreign products that compete in Korea on their unique values–even if they cost more than local competing products or solutions. In any event, it is critical to concretely identify your competitive advantage from the Korean perspective rather than that of your marketing department. Finding a distributor in Korea is easy. But, finding an effective one can be difficult.
The good news is that many individuals and firms can assist you in this task. Since this is a compact business society, one can say that almost everyone knows everyone else, one or two people removed. It is not wise, therefore, to select an English-speaking distributor or market entry specialist primarily because he “knows all the key players.” Most folks who have 10 years or more experience and have been reasonably successful can qualify by that criterion alone.
What actually makes a good distributor may vary from industry to industry. However, a safe bet is to find one that is already selling profitably to market leaders. The ideal distributor should be well known and respected, but not so large as to consider your product as simply another arrow in its sales quiver. I know of any number of war stories—those of foreign firms coming to Korea and being attracted to some of the biggest names in their field. The stories vary but share a common theme. At the beginning, everything looks extremely positive.
The distributor’s staff are very bright, many speak decent or even very good English, and they are already working with or at least very familiar with your target companies. Then one day, the foreign firm receives communication introducing them to a new product manager or even a new product team within their distributor. What the foreign firm did not realize or take into adequate account was that very large distributors often rotate their staff every couple of years—and sometimes even more frequently.
Consequently, prior investment in training the distributor’s sales and after-sales staff can suddenly disappear within one of these frequent organizational reshuffles. On the other hand, it can be equally disastrous to collaborate with too small of a distributor, financially over-dependent on the success of your product. While such a distributor may offer the fullest measure of dedication to your product line, they may not have the financial or human resource capacity to expand once they start selling. More than once I have seen customers delay payments to the distributor for large capital asset sales until the customer is fully satisfied with the purchase.
This has often resulted in enterprise-threatening cash flow problems for these small firms. While there is no magic criteria that applies to all industries, one should evaluate multiple candidates and consider finding a mid-sized firm that has a strong reputation, an appropriate customer base, and one that is already profitably selling complementary, or at least not competing, products. The goal is to find a distributor that has enough skin and flexibility to survive both types of challenges.
The Deal It is not uncommon for a Korean distributor to go to his foreign partner and ask for so-called “one-time, special” pricing discounts on the first deal and to demand that the foreigner to send his support staff for the duration of the project given the lack of product understanding of the local after-sales staff.
This can easily happen even when there has been a clear, prior agreement as to the level of support to be provided by the foreign partner. What often happens is that the foreign firm makes a pricing concession for a market entry deal while not realizing that they may have set the benchmark by which all other deals will be closed in this tight-knit business community. When it comes to sending support personnel to Korea, the foreign partner draws the line and agrees only to send support staff for limited amounts of time during the course of the project. Usually the ensuing confusion from the lack of on-site spot support, regardless of the amount of off-shore phone support, leads both parties to agree in retrospect that it would have been cheaper to have kept a foreign partner’s support staff on-site the entire time.
How Korean firms look at written agreements can be at odds with their foreign partners. Korean firms look at such agreements as generally acceptable guidelines on how to approach an uncertain future. In the Korean businessman’s mind, one must be flexible to deal with discovered realities—even if such accommodation may run against the core of the foreigner’s agreement. If the foreign firm is unfamiliar with doing business in Korea, it becomes exasperatingly difficult to know when to concede in deference to local market requirements and when to say “no.” Usually the vendor-distributor relationship is still green.
The matter of trust becomes a serious issue with both sides where the foreigners start wondering if they are being “taken for a ride,” while their Korean counterparts start fuming that the foreigners are reneging on prior assurances of being competent and worthy partners Normally one can hide from the customers the temporary disruption or suffering of vendor-distributor relations. However, if one does not quickly and sufficiently address the matter, word will leak out into the market. And in Korea, where personal relationships insist that friends share almost everything, businesses may find that there are no secrets.
War Stories In one war story involving partnerships with local distributors, the distributor purposely price gouged their customers while it possessed a monopoly in the market for a high-tech system. Not stopping there, the distributor disabled some of the product’s functionality in order to sell multiples of the product, when a single, fully functional product could have addressed each customer’s multiple needs.
The distributor in the meantime reverse-engineered the core product with the intent of introducing a competing, “Made in Korea” product that would be not only cheaper but more fully functional. In another, the local software distributor provided excessive customized services as a way to sell its services rather than working closely with foreign vendor’s development staff.
After several years, the totally “Koreanized” solution was so overwhelmingly localized that the core product had become barely recognizable. Consequently, while the rest of the foreign vendor’s overseas markets were moving along onto next-generation products, Korean customers lagged behind and often dropped use of the foreign products since there was little incentive to upgrade. In both worst-case scenarios, the common denominator was that there was no one on the ground watching out for the foreign vendors’ best interests.
Sending rescue operatives late into the game can be an exercise in futility since local past practices can position the foreign product as being too expensive, thereby creating major marketing headaches for expanding the customer base. Furthermore, customers may already be accustomed to using the products in inappropriate or inefficient ways. Taking corrective measures may cause a great deal of embarrassment within customer organizations. Therefore, much consideration must be given toward building successful partnerships with distributors. Possible Roles The single, biggest cause of failure in the partnerships between foreign companies and distributors must be conflicting expectations of the each other. Rarely does an in-depth conversation take place. While one would assume that this would be resolved in the course of negotiating a sales distribution agreement, too often does this turn out not to be the case. Take, for example, the role of the distributor.
The two most common types of roles played are the midwife and the full representative.
By midwife, it is meant a distributor who basically knows the marketplace and introduces your sales and support staff to the customers during and following the sales cycle. Commonly found in the case of cutting-edge products and technologies and often expensive, this model allows the foreign company to get close to the customer base and have greater control of how the customer base buys and implements your product. This knowledge can in the end be critical as it may be very difficult–if not impossible–to move the customer base along to the next generation of products and services in the case the distributor improperly sells or implements the product.
A full representative, on the other hand, is a distributor who is fully trained and able to conduct the entire sales cycle and is also capable of providing primary or level-one technical or after-sales support to local customers. It is often applicable to a product or service that may be unique in terms of features and functions, but is already familiar to the market and is composed of qualities or technologies well understood by the after-sales staff. The obvious drawback with the full representative is that it essentially “owns” its share of the market and will often keep the foreign firm away from the customer base out of fear that the foreign partner may go around it in the future. Also, while end-user pricing methods undisclosed to the foreign firm may bring short-term windfalls to the distributor, it may deny the foreign firm of future sales as the local market seeks less expensive alternatives.
Getting Up to Speed In any event, the end goal for foreign firms is to have their distributors be as competent as possible. Too often foreign firms believe that by training the sales and after-sales staff in their product or service they can soon be able to rely on the distributor. Yet, when the first strategic, major sales opportunity takes place, the distributor and the foreign firm suddenly find themselves at odds, no matter how clearly the distribution agreement may have been written. Even if there is full review between the foreign firm and distributor, both sides often underestimate the difficulty in getting the local staff properly trained.
Local employees tend to be a bit overconfident in their knowledge attainment and foreign firms tend to be a bit too eager to accept their Korean partners’ assurances. The biggest cause of disappointment may be the communication barrier between foreign support staff and local line staff. While local employees can read English fairly or extremely well, they usually find themselves at a total loss when it comes to phone conferences. Furthermore, they may seem to understand during product training, when in fact they may be getting less than half of the delivered content. All of which has a nasty way of being revealed when the pressure is on to meet what a foreign firm may consider as an unrealistic or overly aggressive deadline established by (or sales promises given to) the prospective customer.
Keys to Success Given the above, one may wonder how one can be successful in Korea without a direct presence. One way is to limit your expectations of success and allow someone whom you may have met at a trade show or whomever to sell the least difficult product to a small part of the market. The danger with this strategy, of course, is that you may end up with expensive support of one-off sales in Korea while missing a potentially larger and more profitable market. A more effective alternative is to find an agent who has a fair appreciation for the ways of doing business in Korea and abroad and who can actively keep you in touch with your distributor and the marketplace. Working with the distributor at least on a weekly basis, the agent stays up-to-date on the distributor’s staff, prospects and customers in order to advise both foreign firm and local partner on small, conflicting matters before they fester into major issues. A good example of this involves the timeliness of communication.
In a culture that stresses, “Just do it now!” Koreans are often exasperated by the slow response they get from their foreign partners. Time differences in global partnerships can be equally irritating between partners, but often it is difficult for Koreans to appreciate that the foreign partner is trying to systematically service concurrent, multiple market needs and that their demands are not cued to the front upon demand. At the same time, foreign partners are often slow to understand and appreciate the time and emotional demands that customers and prospects routinely place on local distributors.
With concise and timely communication of issues, the agent allows for the foreign firm to make effective decisions, and in the meantime, assists the local distributor to understand the benefits behind certain management practices (frequent sales forecasts, adherence to business plans, etc.). Upgrading performance through experience-based consulting—including the evaluation or suggestion of alternative sales strategies, uncovering hidden conflicting agendas, and provision of results-oriented sales training—is also a possibility. Foreign firms and their distributors tend to spend a great deal of resources on product training and assume the sales staff already possess effective skills from their years of experience.
Also, while “relationship selling” is essential to sales strategy in both Korea (friendship weighted) and the United States (“professionalism” weighted), engaging in just one form of relationship selling may very possibly result in market areas inadequately explored. In the end, the decision to establish indirect sales in Korea must be made in conjunction with the question: “Who is going to keep an eye out on the store?” After all, your local partner will be selling your product, advancing your brand, and largely determining the success of your company in the world’s 11th or 12th largest economy.
by Tom Coyner. Senior Advisor for IPG Legal
Sean Hayes is co-chair of the Korea Practice Team at IPG Legal. He is the only non-Korean to have worked as an attorney for the Korean court system (Constitutional Court of Korea) and one of the first non-Koreans to be a regular member of a Korean law faculty.
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