So you have decided to outsource the manufacturing of your products to Korea. Good choice in choosing quality-focused Korea over quantity-focused China, but don’t make the bad choice of not considering basic basic legal due diligence necessary to protect your good name, technology, brand and the future of your business. If you plan on just dealing through a purchase order (PO) in Korea, you are heading down a path that may lead to a kick in the behind.
The recession hit small/medium-sized manufacturers even harder than large manufacturers. Many of these SMEs have decided that the only way to survive is OEM (original equipment manufacturing) outsourcing to China, India, and other parts of Asia. I, also, do a good deal of enjoyable work in China. I am, however, always happy to see clients choose Korea over China, since many of the headaches you will experience in China and India will never be felt in Korea.
The legal system, in Korea, is generally transparent, fair, and judges tend, with proactive guidance, to be able to understand commercial disputes. Also, I have been told that Korean manufacturers need much less guidance than Chinese manufacturers and the cost of doing business in Korea is not substantially greater, for high quality products, than that of China.
This situation being known, foreign companies often make the poorest of choices when doing business with Korean companies. Korea is, generally, still behind the United States and the West in terms of business ethics and the protection of intellectual property. Many risks, not even considered potential risks in the West, are regularly realized in Korea.
Before entering into any Korean OEM Agreement, please consider and follow these very basic pieces of advice. As in an article I wrote for a Korean daily entitled Listen to your Mother — always look both ways before crossing the street, carry an umbrella in the spring and don’t go out alone at night.
- Request and obtain the company’s business registration number and perform a credit check on the company. A basic credit check can be obtained through the Korean Investors Service (www.kisrating.com).
- Register all your intellectual property rights (copyright, patents, trademarks etc.) in Korea. Registration shall help to prevent your competitor, a disgruntled distributor, or your manufacturer from counterfeiting your goods and exporting your product from Korea to your customers and potential customers. Registration in the United States and Europe does not guarantee that your intellectual property rights are protected in Korea. IP treaties only provide you a window of time to register in a member state.
- Your Korean license, distribution, OEM agreements and other agreements used in other nations are not adequate for Korea. All “standard” distribution, license, OEM agreements and other agreements should only be used as guides in Korea. Korea has a unique legal system with unique business risks. If you are planning to deal only through a purchase order (PO), you are a goat waiting to be milked.
- All agreements, to avoid any initial misunderstandings, should be drafted in English and Korean. A well drafted Korean OEM agreement is not complete until it is translated. Even the best English speaking Koreans, are ill prepared to understand agreements of this nature. Clear misunderstandings upfront and avoid legal fees down the road. In some cases, a translation is not necessary, however, this is the exception – not the rule.
- Know-how, trade secrets and the like should be protected through a written agreement. A standard non-disclosure agreement (NDA) is not enough. This agreement should be signed prior to any course of dealing and normally should include confidentiality, non-use, non-circumvention, non-competition clauses with a liquidated damage clause.
- For at least the first few shipments, don’t pay until the goods are inspected. For the first shipment, check the goods at the port yourself. Afterwards, procedures can be put in place that guarantees the quality, quantity and delivery time through local channels.
- Get a local to manage the logistics for you. It is sometimes advisable to an inspection prior to shipping.
- Ask for referrals from other customers of the seller. If the company doesn’t have experience with foreign buyers – this may be a huge red flag. We understand that in some businesses- referrals may be impossible, because of confidentiality concerns.
- Talk withe the powers to be at the company, not simply a sales person. Often sales people make promises that they can not deliver on – get guarantees straight from the top.
- Have a legal procedure in place (lawyer on call) to attach assets of the seller.
If you heed these simple pieces of advice you are well on your way to having a successful relationship with a Korean manufacturer.
- Legal Basics on Outsourcing from Korea
- Liquidated (Penalty) Damages Necessary in Most Korean NDA and Non-Compete Agreements
- Amendment to Korea’s Intellectual Property Registration System: Korea IP Law Updates
- Finding a Korean Distributor: Top 10 Things to Know Before you Jump into Bed with an Agent in Korea
- Starting a Manufacturing Business in South Korea: Top 14 Things to Know Before you Start a Business in Korea
- Establishing Business with Korea via an Agent: Korean Agency Law Basics
- How to Successfully Manufacture OEM in Korea: Break Products Down to the Threads
- Korean Compliance Checklist for your Business in Korea
- Finding a Distributor or Agent to Sell/Market Your Products in the South Korean Market
- Attaching Assets in Korea: Security on Movable Property and Receivables in Korea