6 February 2018 — South Korea is known as a rapidly growing prosperous economy, home to global conglomerates called chaebols. However, the actual opportunities and challenges of the South Korean market remain unknown to most foreign companies. Yet recent developments in the South Korean economy are opening new opportunities for market entry.
South Korea is actively searching for new paths to future prosperity, as it is increasingly challenged by other Asian countries. Southeast Asian countries are on the rise, and at the same time Koreans have learned the hard way that China is not always easy to deal with. South Korea is seeking new paths for growth, and reaching out to new markets. However, Korean companies are also looking for new forms of partnerships and collaboration. At the same time, the local market is developing. Understanding the South Korean economy, its opportunities and future direction is thus a very timely subject.
A democracy characterized by a coordinated drive for growth
South Korea has been one of the fastest growing economies in the world since the 1950s. It possesses a significant domestic market with a population of 50 million and is close to the bigger Asian markets of China and Japan. As opposed to China, South Korea is a developed democracy that offers a less risky business environment for those looking to enter the Asian market. On the other hand, the country is more dynamic than Japan and has a more entrepreneurial and aggressive corporate culture.
The South Korean democratic model operates under a two-party system, that recently has seen many changes. The recent forceful albeit democratic change of presidency has had a big effect on the political landscape. The presidency still carries a lot of power, but from the fall of President Park Geun-hye the country has learned that excessive executive power is not always a good thing.
In the past, the nation gave the impression of being steered from the top down in an efficient way that an outsider could easily deem as post-militaristic. When the president was elected, he set an ambitious five-year vision for the country. The plan of President Lee Myung-bak, is known as 747: 7% annual growth, 40000USD GDP per capita and raising South Korea to the 7th largest economy in the world. He also set Green Growth as the new national development paradigm with the aim of turning the nation into a global leader in green technology. Unfortunately, this plan failed, and so did the attempts to make a strong five-year vision of his successor, President Park Geun-hye. The Park Geun-hye era of "creative economy" still prevails, but it is fair to say that the nation is still looking for ways to step back up to the kind of growth it has seen earlier during its industrial phase.
The chaebols, large Korean conglomerates, have in the past supported the execution of the national vision by setting their own growth targets accordingly. For example, following President Lee, Samsung announced an ambition to be number one in solar energy by 2015 and invested $20 billion in new innovation in solar cells, rechargeable cells for hybrid electric cars and LED technology; Daewoo built the world’s largest tidal power plants on the South Korean coastline, and Hyundai are invested heavily in solar and wind power around the world. However, as the weakness of centrally set plans has become increasingly evident, chaebols are now seeking their own path for growth. The collaboration between the political powers and chaebols is still very close, but the ability of the government to exert pressure on these large conglomerates is today clearly weaker. The fall of President Park Geun-hye also demonstrated the dangers of collaborating too closely, leading to the one year imprisonment of the Samsung heir Lee Jae-yong for corruption. His recent release shows that chaebols still have forces to be reckoned, but most certainly top management will thread more cautiously going forward.
Culture of ‘han’ pushing the nation
South Korea is not a low-cost labor country, especially if compared to countries such as China, Vietnam or Thailand. Although wages are still low outside the biggest cities, and for low skill jobs in general, higher level jobs have salaries comparable to Western standards. Thus for companies looking at South Korea as a potential operations base, the main benefits lie in its ambitious and educated workforce, and a strong working culture, rather than just labor cost arbitrage. Foreign companies should be aware that they may find a cost disadvantage compared to local companies, and also that labor rules at times hit them harder than domestic players.
Koreans possess a remarkably ambitious mindset. Having a high-reaching long-term target is of great importance in Korean culture, reflected not only in national and corporate target setting but on all levels of society. Koreans use the word ’han’ to describe this urge to overcome obstacles and injustices suffered, reaching out for victory. Unlike its Finnish counterpart ‘sisu’, ‘han’ is not just mere perseverance but includes the element of pursuing greatness. This culture of ambition is visible everywhere: in working culture, education as well as everyday life. It comes as no surprise that Koreans work more hours per capita than any other OECD nation.
Furthermore, based on OECD statistics, Koreans have one of the highest levels of education in the world. A vast majority of family income is typically spent on ensuring the best possible education for the children. Ambition is also visible in educational institutions. Many top Korean universities communicate bold visions, such as becoming one of the top universities in global rankings or having a large number of graduates continuing their studies in Ivy League universities. Korean universities also actively pursue exchange programs with foreign universities, ensuring knowledge transfer.
Great investments in education and an ambitious hard-working population have been vital in the country’s growth. South Korea’s real GDP grew from 2.7 billion USD in the 1960s to over one trillion in the 2000s. The country has also continued its growth in the last few years, despite the financial crises. Unlike Finland, South Korea only suffered a minor dip in 2008-2010 and has since resumed its previous growth path albeit at a somewhat lower rate. More recently the company has faced challenges with its exports, partially due to global economy and partially due to political disagreements with China.
Chaebols, culture and language creating high barriers to entry
The large chaebols contribute to most of the GDP growth of the country. They continue to be very tightly linked to the government, partly owing to the country’s history. This coupled with the fact that the conglomerates compete fiercely both among themselves as well as with any foreign entrants, has made it difficult for big foreign companies to enter the South Korean market. As an example, Nokia failed in its Korean market entry efforts due to government intervention and competition from LG Electronics and Samsung, according to a 2003 study conducted at the University of Tennessee.
Another challenge for foreign companies lies in attracting the best people. Most Koreans still see the large chaebols as the most attractive employers. Among Korean university graduates, chaebols are seen as the most respected places to work in the society, offering high wages and a lifelong career path. In Korean culture, respect of authority, seniority, and dedication to one’s job are central. Employees are motivated and encouraged to pursue long careers in the same organization. The employees of the chaebols execute the corporate vision by aligning their own ambitious targets with those of the company. A new entry-level recruit at a major chaebol spends the first work weeks planning his own vision for his career development. The new employee is then assigned a mentor whom he meets on a monthly basis to revisit his career progress vis-à-vis the set out goals.
Operating in South Korea can also be a challenge due to the country’s business culture. The widely encountered sense of nationalism extends beyond job selection. A foreign company may have trouble finding clients; South Korean major corporations often prefer local production and Korean suppliers. For a country dominated by a large number of international conglomerates, the business environment has surprisingly little cultural diversity. Knowledge of the Korean language is a requirement for a foreign market entrant as Korean is still the main business language. Furthermore, the society is very networked and knowing the right people is essential to build business relationships. Thus both language and cultural barriers are high. Many Korean companies address this by appointing a Korean native country manager, but this can have the negative side effect that a local culture emerges, which does not connect well with the company's international culture and way of working.
Demographic trends, free-trade agreements and student exchange increasing openness
The South Korean economy has recently started to show signs of internationalization, opening up possibilities for foreign companies. One reason is demographics; the population is aging and the workforce is shrinking. At current fertility rates, each generation is roughly 40% smaller than the previous one. South Korea will have to open its doors to foreign workforce and business to be able to maintain its prosperity as its domestic demand decreases.
During 2011, South Korea has signed important free-trade agreements (FTAs) with both the U.S. and the EU, opening up new opportunities for international commerce. The FTA with the U.S., signed in November 2011, removed tariffs on 95% of the goods within five years. The FTA with the EU has been provisionally applied since July 2011. Estimates of its impact on export levels were as much as 30-40 billion euros bilaterally, but it is unclear if this really has been reached. It may well be that the opportunities offered by the FTAs, while aggressively utilized by Korean companies, are not equally leveraged by Western players due to the perceived soft barriers such as language and culture. Understanding South Korea better, and seeing how it is developing is crucial for bilateral success.
The South Korean internationalization trend is further emphasized by the growing number of young Koreans studying abroad. English language education is deemed very important in today’s South Korea and many Koreans spend extended periods abroad to hone their English skills. There are currently more than 100 000 Korean students in U.S. universities, making Korea the top student-sending country in the world. This is lowering the language barrier and opening new opportunities for foreign companies seeking multi-language employees.
Younger Koreans have also learned the benefits of an international environment and are not protectionists to the extent of the generations before them. While the economy has developed thanks to the prevalence of the chaebols, admiration for them is decreasing; the benefits of the chaebols to the economy and the job market are being questioned more and more. Koreans, particularly those who have spent time abroad, often have new, less conventional ideas about their employment prospects. The large chaebols only employ 10 % of the population. At the same time, 40% of university students remained unemployed four months after graduation, according to a study conducted in August 2011. While landing a job in a prestigious chaebol is still the ultimate goal for most young graduates, a small but growing number of them are now looking for employment in the startup sector, or starting their own companies. These entrepreneurs rebel against traditional values in this country where job title is the main metric for success. The new generation is also increasingly adopting a more Western work culture. Many tend to value a more balanced work life, instead of the long hours employees put in at the chaebols.
Opportunities exist but require a solid entry strategy and understanding of the market
Chaebols dominate the South Korean business environment and direct competition with them is challenging. A market entrant could, however, prosper by targeting a niche that is too specialized for the big chaebols to enter, either directly or through their supplier network. Recent developments in the country’s rising IT-startup sector may also open up new opportunities for foreign companies interested in entering the South Korean market.
Chaebols use generic suppliers in areas where they cannot obtain economies of scale, and a player entering such a specialized market could fly under the conglomerates’ radar or even be seen as a crucial partner. Typically such a niche is highly specialized, and the volumes are not big enough to mandate serving only one chaebol. As an example of a successful market entry using this strategy, consider a Nordic company in the construction sector. It entered a niche market where volume was too small to attract chaebol entry and where developing a product from scratch would have been too time consuming. The market was further boosted due to the effects of a government five year plan at the time. The company has managed to build a significant market position, serving several major chaebols, by offering a top-quality product and serving Korean customers while paying attention to the local cultural requirements.
Local manufacturing content also plays a big role, both for government procurement and major chaebols tightly linked to the government. Leveraging this, a Northern European industrial equipment manufacturer has succeeded in penetrating the South Korean market by acquiring local production facilities and developing the manufacturing process to world-class (partly by learning from top chaebols in the auto industry). Today, the company is in a position to provide their high-quality equipment to multiple conglomerates across several market sectors. The production facility also serves as a global production base for this specific product category, indicating that despite the somewhat higher labor cost, the South Korean plant has managed to reach a cost competitive position even on a global level. Success for this company builds on systematic development of a world class production process, bringing top quality products to the market and working close in a mutually beneficial approach with major chaebols.
In the IT-sector, the emergence of the Android and iPhone mobile platforms started a revolution that has opened up new opportunities for startup ventures to flourish. While previously tightly controlled by the chaebols, the ecosystems these new operating systems offer provide easy market access to independent innovative players. This has lead to multiple new local IT companies emerging, now followed by the entry of venture capital players seeking to reinforce the trend. A foreign IT-startup in South Korea could benefit from the large domestic market and the continued start-up and venturing boom. This sector does not (at least yet) suffer from hyper-competition, partially due to the fairly limited history of startup entrepreneurship in South Korea. The local market is very advanced with South Koreans actively using their mobile devices for gaming, social networking, and anything else application developers can offer. Although Nokia failed in its Korean market entry, Finnish Supercell with its Clash of Clans game became well known among Koreans. The telecom, wireless broadband, cable and IT-infrastructure in South Korea are also highly developed. South Korea has the third highest Internet penetration in the world and ranks at the top in Asia.
Recruiting and marketing processes are crucial in the initial phase
The nature of the South Korean business environment makes recruiting the right people an essential factor of a successful market entry. The best Korean employees are unlikely to apply for work with an unknown foreign company lacking brand and credibility. On the other hand, the business culture depends highly on personal relationships, making it a difficult market unless the company has a top-notch staff accustomed to the local business culture and with the right networks in place.
Consider the case of a Finnish industrial goods company. A market opportunity was seen for its products, but setting up a sales office took much longer than expected, mainly due to staffing difficulties. After a great deal of challenges, a senior manager willing to work for the relatively unknown company was found. Unfortunately, the manager was “too senior” to drive crucial early stage frontline sales work, and evidently also lacked any real access to key decision makers. Finnish mid-level management was sent over to push the local operations forward, but has so far been unable to change the situation markedly as they do not have the required networks.
Successful recruiting requires developing a strong company brand and word of mouth, so that one is able to compete with the better-known local players. The company’s vision for the future must be credible; often marketing messages have to be tailored to meet the unique characteristics of the South Korean business environment. Topping this off by offering a better work-life balance can switch the recruiting advantage to the foreign company. A Finnish company that succeeded in setting up its South Korean sales company found an entrepreneurial sales manager in his mid-30s with solid international experience and good knowledge of the Korean market. The manager preferred employment in an international company due to the better working culture and saw the opportunity to build his own career in the company. The company had a good reputation, world class products, and focused on markets where demand was building up yet no chaebols or their suppliers operated. In addition, Finnish senior management members had spent considerable time in Asia, and understood the unique characteristics of the market.
South Korea offers interesting learning opportunities and a gateway to larger Asia
South Korea remains relatively unknown to foreign companies and its potential is perhaps too often neglected. Granted, this country represents a fairly closed economy, and due to language and cultural barriers it is a hard one to enter. Nevertheless, the unique characteristics of this market offers the courageous entrant interesting learning opportunities, and a gateway to the larger Asian markets. Success will require careful attention to efficiency and quality, as well as recruiting, marketing and brand building (often through informal networks), and further obstacles are likely to be found on the way. For those who survive the entry, the reward lies in working with one of the most dynamic economies in the world, having access to a highly educated, hard working and ambitious staff, and collaborating with some of the largest and fastest growing global corporations.