Doing Business in Korea today and into the next century.
11/01/1997
Doing business in Korea today and into the next century
Robert G. Postle, PRI Automation, Billerica, Massachusetts
In today`s global economy, capital equipment suppliers no longer have the luxury of focusing on one or two major markets. In fact, the success of each of our companies is inextricably linked to our ability to adapt to differing cultures and to provide specific value-added products and services to each of the worldwide market regions. This article will attempt to focus on the unique characteristics of securing and sustaining business in Korea.
The growth experienced by the Korean semiconductor industry over the last 10 years illustrates perhaps one of the most dramatic success stories within our industry. From virtually zero revenue in the mid 1980s, major Korean wafer fabricators, including Samsung, Hyundai, and LG Semicon, have risen to become the major DRAM suppliers in the world. In the first two quarters of 1994, they accounted for more than 25% of total semiconductor equipment consumption worldwide.
Figure 1 and Table 1 illustrate semiconductor equipment consumption for the period 1995-2001. Although capital spending is projected to be flat or down during 1997, Korean wafer fabs are expected to resume high growth in 1998 and sustain this growth through the remainder of the decade. A significant amount of this growth will be driven by the need to expand nonmemory product lines and by more rapid technological advancement. These moves will be initiated to shield Korean manufacturers from fixed DRAM market cycles and to diminish the impact of industry downturns on the companies` financial positions.
Although the potential revenue gains for equipment manufacturers are great, the price of achieving success is often as high. Proficiency in equipment design, cultural adaptation, pricing flexibility, and the structure to effectively support installed equipment will be key metrics in the drive to secure market share.
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Figure 1. Semiconductor equipment consumption distributed by region (%).
E = estimate; F = forecast. Some figures may total more than 100% due to rounding.
Cultural background
Over 5000 years of Korean history have led to a series of unique challenges for suppliers of capital equipment. More than 36 years of military occupation have created an attitude of mistrust and self reliance. Unlike the US, where a manager`s orders are often questioned, Korean subordinates are trained to accomplish the task no matter what it takes. During the last 10 years, Korean engineers have been primarily trained by Japanese equipment suppliers. As they share close cultural ties with the Japanese, the Koreans feel that overall risk is more effectively managed by maintaining primary supply chains with Japan.
In contrast, US and European engineers have been primarily trained by US equipment suppliers. Western engineers generally place a greater importance on equipment flexibility than do Koreans, where system reliability is the primary driving force. To achieve even modest levels of success in the Korean marketplace, US and European suppliers must understand the people and culture, and learn to do business the Korean way.
One of the more important lessons that needs to be learned is the cultural emphasis on commitment and trust. Within the realm of the Korean culture, commitment includes a number of metrics such as rapid response, local manufacturing, or value-added assembly and aggressive pricing. As manufacturers of high- volume DRAM devices, Korean engineers are looking to their suppliers to offer cost-effective solutions capable of delivering the repeatability and reliability needed to maintain their market leadership position.
Business relationships
In Korea, emotion plays an enormous role in the decision-making process. Although quantitative data are required, emotional considerations far outweigh them. For example, the key factor in successfully conducting business in Korea is the establishment of long-term relationships. Once formed, these relationships create the necessary level of confidence to allow Korean decision makers to entrust billion-dollar factories to a given supplier.
In the US and Europe, decisions are quantitatively driven to a much greater extent. Although relationships are clearly important in any selling situation, their importance and impact is far greater within the Korean marketplace. These relationships must be established at all levels within the targeted company. Ignoring high-level purchasing contacts in favor of engineering or general management personnel could be a serious error. Access to high-level individuals is also more readily available in the US and European markets.
Often fab personnel who have risen through the ranks of domestic corporations are long- time friends or associates of sales personnel. In Korea, business meetings are dependent on having representative or direct personnel who are in some way connected to high-level managers. It is extremely important for a company`s country manager to have graduated from the right university and to have come from a high-level position in one of the country`s major "chaebols." Strong ties are also derived simply from coming from the same town as an individual with whom you desire a meeting.
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Decision making
Korean decisions are made primarily at the engineering level. A common mistake made by US and European equipment suppliers is to overemphasize the importance of high- level selling. Although senior-level managers clearly have influence over a particular sale, they will rarely overturn an engineering decision unless there are compelling reasons to do so. Therefore, when working with decision makers, it is extremely important to understand the program format and not rush things.
When working in a foreign environment, it is critical to follow the customer`s lead, to use all available resources, and above all to maintain high levels of professionalism and courtesy. Table 2 illustrates the relative perceptions of authority as viewed by US and Korean equipment suppliers. Final decision making is dependent upon achieving consensus among the various intercompany departments.
Purchasing can have a great deal of influence on the final decision within certain organizations. This situation arises because of the specific way in which Korean customers conduct business. Major Korean semiconductor manufacturers always qualify more than one vendor, and they are fully prepared to accept either as their supplier of choice. During the engineering review process, and even into the final negotiation session, suppliers competing for a particular job are never aware of who is favored. In fact, purchasing managers are quite skilled at making someone believe that they are not the supplier of choice. This tactic works heavily in purchasing`s favor as they attempt to secure the best possible price for their company. Margin erosion due to Korean purchasing skills is severe. Typically, one can expect to achieve gross margin results of between 10-12% below US and European sales.
Still another factor that must be considered when selling to Korea is that price is highly inelastic. The price set in 1996 may also be the price in 1999. Furthermore, expected product delivery time is shorter than anywhere else in the world. Korean customers will expect their suppliers to be capable of handling their high-volume requirements, and therefore, they will tend to disregard stated lead times. It is extremely important that an organization is fully prepared to deal with these issues prior to entering the market. If such expertise does not exist within a company, outside help should be sought before beginning the process. Remember, Korean customers are intolerant of failure. Equipment failure or poor after-sale support could result in a company being denied any further access for a period of time ranging from 1-2 years.
In contrast, decisions in the US and Europe are primarily made at the manager level or above. Unlike the Korean evaluation process which involves a relatively large engineering team, the evaluation process in the western market is usually performed by one or two engineers. At the conclusion of the evaluation process, purchasing will finalize pricing but will have little or no voice in actual vendor selection. The process of negotiating itself is significantly shorter, as is the pressure to substantially reduce the price. In fact, US and European customers are more willing to allow equipment suppliers to achieve reasonable gross margin levels. Within the framework of the Western evaluation process, the favored supplier is almost always aware of its position prior to the final price negotiation. In the absence of formal corporate contracts, the price negotiated for a particular order does not absolutely commit you to that same price for subsequent orders. Finally, Western customers can be considered to some degree to be fault tolerant. Vendors often receive second or third opportunities to succeed as long as a well-thought-out plan providing corrective action is provided to the customer.
Other considerations
As discussed earlier, Korean customers demand extremely high levels of support in both the pre- and post-sales cycles. Asian customers respond most favorably to dedicated team selling. Supplier teams generally consist of sales, marketing, support, project management, and engineering personnel. It is imperative that these teams remain constant throughout the entire sales process. With typical sales evaluation cycles ranging between 6-9 months, this requirement places a huge burden on the organization as well as the individuals. However, this effort is needed to establish a strong relationship and to build trust.
The team must have a certain range of authority to answer on an engineering and corporate level those questions and requests that are made by the customer. If this authority is not granted, the customer will experience increasing levels of frustration and will eventually determine that the supplier is not yet adequately prepared to do business in Korea. In any selling situation, it is important to understand the way in which business is conducted. Korean companies, having been schooled by Japanese suppliers, have come to expect information to be presented in a given format and within a specified period of time. Japanese supplier teams typically possess complete authority to act on behalf of the company across the full range of operational issues. This authority provides the customer with a high degree of confidence that following system installation, the supplier will continue to respond in a timely fashion should the need arise.
Korean customers are currently driving towards the development of their own supplier base. It is imperative for US and European companies to establish a strong local presence if they are to remain competitive over the long term. Ideally, suppliers should be prepared to make a long-term commitment to the region both from a financial and logistical point of view.
Most suppliers begin activity in Korea using agents or trading companies. Agents, however, rarely possess sufficient technical knowledge to satisfy customer requirements. In addition, commission rates approximating 20% for sales and service activity will put a substantial strain on a company`s ability to compete in this price-sensitive market. The supplier must frequently dispatch technical sales teams to Korea during any evaluation process. A one-week visit for a five-member team can easily cost the company $35,000-$45,000, making this type of activity sustainable for only a short period of time.
Another option available is establishing a branch office. Although this provides a local presence, it comes with a number of restrictions. For example, formal approval from the Bank of Korea is required prior to establishing the office, and profits cannot be remitted back to the company for the first three years. In the following five years, return of profits will be limited to 20%. Although these criteria are presented as firm, most, if not all of them, are negotiable. Table 3 illustrates the typical cost structure associated with the establishment of a branch office.
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The final option would be to set up a stock-based company in the form of a joint venture or a wholly owned subsidiary. When establishing a joint venture, it is important to fully evaluate the strength of the partner and to understand the partner`s long-term objectives. It is also essential to seek legal counsel to understand issues relating to the joint venture`s establishment. Under this scenario, stock is granted to the partnering company. Issues relating to the Western partner`s ability to fully control day-to-day operations of the venture must be thoroughly investigated. Certainly one of the more common structures for establishing a presence in foreign countries is to establish a wholly owned subsidiary.
A supplier`s commitment will be judged upon the investment level that is ultimately made. The higher the investment level, the more the Korean customer base will believe that the company is there for the long term, and consequently, the more willing they will be to commit business. As previously stated, Korea is developing its own supplier base, with support from a number of incentive programs funded by government and industry. Therefore, the ability to first assemble and later manufacture products locally will be key to a supplier`s long-term success. Still another reason for establishing a strong local presence would be to overcome response delays associated with differences in time zones. Suppliers can partially overcome this obstacle by establishing dedicated technical support teams in their headquarters location that are available during all or part of the Korean work day.
Communication
Perhaps the most daunting challenge to successfully doing business in Korea is effective communications. In this regard, the most important point to remember is that written communications should always be short and simple. Wherever possible, a supplier should attempt to use the customer`s words and terminology. When preparing technical reports, written descriptions should be minimized in favor of graphs and charts. It is also important to communicate frequently, and to develop an effective means of tracking all communication between companies.
It is essential to know what not to say when communicating with a Korean customer. Whether a supplier is in a technical or commercial negotiation, one does not have to say yes; however, one should never say no. Saying no is sign of inflexibility or an unwillingness to look at alternative points of view. When a question is asked, it is important to sincerely and fully explore the request that is being made. If the request is unreasonable, the customer`s perspective needs to be acknowledged before the drawbacks to taking such an approach can be expressed. This approach allows the customer to reach the same conclusion, and, having worked through a problem in this way, the customer will respect the supplier for giving the proposal due consideration. Respect will go a long way towards building essential trust and relationships.
Finally, establishing the proper protocol for meetings is critical to accomplishing business objectives. Title and age are extremely important. Supplier and customer meetings must take place with individuals of similar title and rank. Most high- level managers will be wary of speaking openly in front of their subordinates. Therefore, during introductory meetings, questions must not be asked that may put the host in a compromising position. Once a strong relationship has been established, a manager will be much more forthcoming in his comments and recommendations.
All suppliers must be prepared to accept criticism, in particular in the early stages of the evaluation process. In many cases, this criticism is simply a test to determine how committed the supplier is to doing business in Korea. It is extremely important that the supplier accept comments gracefully and endeavor to fulfill requests no matter how unreasonable they may seem. The agenda should be formalized before the meeting takes place, and the customer should be given the opportunity to make additions. Following these simple rules will insure success in navigating through Korean business practices both in the short and the long term.
Conclusion
The Korean marketplace offers tremendous opportunity for growth for those suppliers who are willing to make the effort to truly become "Korean." While there are certainly unique cultural and business rules to learn, success in the Korean semiconductor industry is ultimately quite achievable. Providing world-class products and services at competitive prices is a necessity to penetrate this market. Surviving and succeeding over the long term requires understanding the unique complexities of customers, and implementing support and service systems designed specifically for the Korean market. Endurance, patience, and proper communications will provide the keys to business success. What is learned in Korea can be effectively applied to other foreign markets, leading to a competitive advantage anywhere in the world.
ROBERT (BOB) G. POSTLE received his BS degree in business administration from State University of New York, Brockport. He is vice president, marketing and sales, for PRI Automation. He was founder and president of Xertronix (Estek) Corp., a semiconductor products company that he sold to Eastman Kodak Co. in 1985. He has traveled extensively throughout Europe and Asia. PRI Automation, 805 Middlesex Turnpike, Billerica, MA 01821; ph 508/663-8555, fax 508/663-9755, e-mail [email protected].