Tuesday, February 22, 2000

Country Profile: Handling Credit and Collection Issues When Exporting to South Korea

Country Profile: Handling Credit and Collection Issues When Exporting to South Korea

By Paul Beretz

(Reprinted with permission from IOMA's Report on Managing International Credit and Collections, February 2000 issue. Prepared by Paul Beretz, Editorial Advisory Board Member of IOMA'a "Managing International Credit and Collections publication.)

Rebound, what a rebound! And for you basketball fans, we are talking about key indicators in South Korea, which will show considerable improvement over this New Year from the decline that began in late 1997. But, as in basketball, never think the game is over until the final horn sounds. Two years after South Korea went to the IMF and received $58 billion, President Kim Dae-jung declared last November that South Korea had overcome the Asian currency crisis. His rationale:
  • The economy should grow 9% this year compared to a 5.8% contraction in 1998.
  • Inflation is expected to be less than 2% for the year.
  • Unemployment is down to 4.8% from almost 9% after over 22,000 companies failed in 1998.
However, credit managers are aware that the chaebols (conglomerates) still control many un-profitable businesses, although they have promised to restructure by the end of 2000. Direct for-eign investment in South Korea hit a record high in 1999, helping to push country year-end for-eign reserves to a high level.

Credit

Customer and bank risks will continue, which should require close analysis for finance managers. Many credit managers indicate continuing issues with the South Korean banking system. Careful credit analysis is essential (only accept certified financial reports), and while credit rating agencies have upgraded Korean sovereign debt to investment grade, LCs generally are still appropriate. Should the LCs be confirmed? Take my advice and ask your U.S. bank if it confirms LCs to South Korea-if the answer is yes, then don't confirm your LC (but certainly insist that it be irrevocable).

Open account is suggested only when a strong distributor relationship exists with the South Korean customer, where you know company management and have access to regular operating results. There are banks that will buy discounted paper for open-account sales. Those companies selling only on LC, however, would be wise to stay close to both their customer and the coun-try's economic situation, as competition will undoubtedly heat up. This normally puts pressure on the credit manager to look at open account in order to maintain the company's market share.

Credit Insurance

Ex-Im Bank is offering cover for private and public sector buyers (http://www.exim.gov/).

Always Be Aware of Your Neighbors!

For most of the 1990s, many economists and officials in the United States and South Korea were predicting that North Korea would "implode" from a decade of economic disasters. How-ever, the once-slipping North Korean economy has shown a remarkable turnaround-a strength-ening military, support from China, and the possibility of improved relations with both the United States and Japan. North Korea has seen five years of floods end, which had impacted food and fuel availability.

The concept of reunification with South Korea may be shelved as the potential for increasing hostilities could detract from the economic recovery that is taking place in South Korea. South Korea has reopened an operational plan known as "5027," which calls for a counterattack if North Korea were to take serious military action. Those interested in a further analysis of the history, economics, politics, culture and-according to the author-demise of North Korea, can read The End of North Korea, by Nicholas Eberstadt (AEI Press).

Culture and Courtesies

In Korea, priorities are family, respect for authority, formality, class, and rank. Koreans can be aggressive, hardworking, friendly, and hospitable. In social settings, always remember to pour the drink of your Korean host (whether the person is from your local Korean office or a cus-tomer). Koreans will negotiate with Americans from a position of strength. Compared to the Japanese, they have a negotiating style that seems more straightforward to Americans.

Koreans respect status: In Seoul, hire a chauffeur and emphasize your link with Fortune 500 companies. A bow is the traditional greeting, usually accompanied by a handshake between men. Professionals meeting for the first time exchange business cards, presenting and accepting the card with both hands. A common greeting is Annyong haseyo? (Are you at peace?).

The Future

Looking briefly at three major South Korean industries should give the international credit manager some idea of what may unfold in 2000.
  • Automotive. Prior to the Asian financial crisis, the Korean auto market was closed to out-side investors. Western automobile manufacturers now indicate Asia will account for the bulk of the auto industry growth-Korea is very attractive, especially due to a local, low-cost manufac-turing labor base for exporting to the rest of Asia, Europe, and North America. A large debt-$5 billion-continues to be owed by Samsung Motors to over 10,000 vendors. (In mid99, Samsung Group's automobile company became a political challenge that could have hurt President Kim's economic reforms since they could have added to the loss of jobs.) The Daewoo Group is at-tempting a restructuring of debt to foreign creditors at the beginning of 2000 and recently has been courting interested automobile manufacturers from the United States and Europe.

  • Semiconductors. The industry is now beginning to show turnaround with the rest of Asia semiconductor manufacturers. However, the NASDAQ slide during the first week of 2000, fueled by high-tech stock swings, bears watching as European and American companies consider investment in new and existing facilities of Korean semiconductor manufacturers. The NASDAQ is a good indication for South Korean markets, as the Korean composite index often follows its ups and downs. Overall business from North American semiconductor suppliers selling to South Korea is up 25% to 40% over last year.

  • Telecom-Internet. The worldwide growth and competitive aspect of the Internet during 1999 will provide opportunities in South Korea for partnerships, mergers, and acquisitions in 2000. In January of this year, South Korea's Hanaro Telecom signed a $100 million contract with Hewlett-Packard in project finance for Internet data.
Useful Web Sites

http://www.koreaemb.org/
http://www.tradeport.org/ts/countries/skorea/
http://www.chosun.com/
http://www.pacbizsolutions.com/

Useful Numbers

American Chamber of Commerce in Seoul: 82-2-752-3061
Consulate at Pusan: 82-51-246-7791
Embassy of the Republic of Korea in Washington, DC: 202-939-5600
FCIB: 410-423-1840
Pacific Business Solutions: 925-672-2644
Show/Hide Navigation

Pacific Business Solutions | PO Box 215 | Clayton, CA 94517 | 925.672.2644