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Selling
Through Korean Distributors
Establishing Indirect Sales in Korea
By Tom Coyner
Soft Landing Korea, Ltd.
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.
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The Right Fit
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.
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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.
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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.
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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.
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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.
Top
Tom
Coyner is the president of
Soft Landing Korea, Ltd. (www.softlandingkorea.com), a firm
that specializes in assisting foreign firms to achieve maximum
sales potential through Korean distributors. He has over 20
years of experience in Japan and Korea working for American
firms as well as 7 years working for Japanese companies in the
United States. When employed by an American company in Korea,
he was twice salesperson of the year for Asia-Pacific largely
due to his success in working with Korean distributors.
He originally came to Korea as a Peace Corps Volunteer.
For more information, contact Tom at +82-11-9099-6195
or at tom@softlandingkorea.com.
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