South Korea has historically been reliant on foreign suppliers for the core technologies. Many of its advanced weapons systems are based on technologies developed outside South Korea.
To mitigate the dependence and facilitate the technological development of the defense sector the commercial R&D activities carried out by the state are increasingly being outsourced to the defense industries.
One way to bring in foreign technologies into the defense industrial ecosystem is to work with local partners, suppliers, trading companies, and manufacturers that already have a contract with the ADD (Agency for Defense and Development.)
You’ll also need to get through the International Traffic in Arms Regulations. I’ll have a follow-on post about ITAR.
Here are five ways to enter the Korean market:
- Work through a trading company. This method is used when the foreign entity is not interested in establishing an entity in Korea, but in testing out the market. A contract is drawn between the company sourcing the product and a domestic import/export partner. The trading company in the deal receives an estimate from the supplier, sign a sourcing agreement with clients, and receives a set fee. Then they work with domestic partners, customers of the product, and negotiate ($/unit, etc.)
- License out the technology. Licensing or outbound licensing is essentially selling the intellectual property of the technology to commercialize the IP into the business. This is useful if the supplier lacks market knowledge, infrastructure, and resources to bring the product to market without the related R&D costs. The key here is to set reasonable and nondiscriminatory terms to avoid the likelihood of future IP litigation.
- Set-up its own branch here in Korea. At Big Bang Angels, I worked on a fund model to help U.S. and Canadian tough-tech startups with IP protection but without access to the market, network, and investors, to make inroads into Asia. The thesis was that the startup could secure IP protection in the international finance hub of Asia, Singapore, or Hong Kong, to attract follow-on capital on the specific technology. Then form a team agile enough to navigate the Asian market. Risky, but an appealing method for startups, especially AI or SaaS companies, for its agility.
- Partner with a local manufacturer or supplier that could establish itself as a sales partner on the ground. This could be a one-stop-shop solution to localize the production of the technology. They can ideally deliver on the technical capabilities, integrate the product into the niche needs, and utilize the sales channel to get the product into the market.
- Form a joint venture. It’s an agreement between two companies with different areas of expertise in the creation of the new, separate business entity. By sharing the risk, revenue, and technical know-how of two business entities, they can enter the market much more effectively.
Forming a joint venture is a common method to set-up an entity in Korea between two companies from two countries. They share different cultural capital, market know-how, and through the JV, they share their areas of expertise in the creation of the new, separate business entity.
I recently had a conversation with a family member who grew a joint venture, or a business entity created by two or more parties with shared ownership, into a ~$690 million USD figure business in Korea.
Vacuum pumps used to remove air, gas, or oil particles from a device or equipment that can corrode the internal parts of a machine. It is used for various industrial applications in manufacturing units for optimal processing environments such as semiconducting materials, glass coating, etc. They are used even in medical applications that require suction.
In the beginning, he received an offer from the company to set-up a venture here in Korea with around 15% or so market share. When he began his business, he found that machinery malfunctions. The problem was that the company knew how to sell, not to engineer.
The Korea office would field complaint calls about tech malfunctions. Even if the specific equipment is around $50K or $100K USD per unit and the technology it supports is $10 Mns USD, it will not operate if the supporting tech does not work.
When he found the issue in the supply chain, the company did not have the capacity to fix the equipment but just to carry it into the country. And instead of delaying the issue, he created a study program for engineering students. In turn, they would help troubleshoot the mechanics.
The slogan became — “Fix First, Fighting Later.” As in, fix the equipment before they make the sales. They created a one-stop-shop to smooth out the process inventory to procurement. Competitors did not.
Eventually, the company sustained its customers and slowly increased its market share. The most popular use for the vacuum pump was in suppliers of semiconductors and flash memory chips. They began receiving offers investments from the parent company and the client companies like SK Hynix and Samsung Electronics, the South Korean memory chip powerhouse. It built its own facility to manufacture the pumps then exporting it from overseas and hired electrical engineers and field engineers. Engineering support was no longer a simple value-add, but its main competitive advantage to help design and set-up the system from ground zero.
There certainly many elements to the equation — the careful maneuvering of relationship management in penetrating the market, the internal R&D to continue improving the deployment systems piling on its many IPs, and others. But what gave the company the kick it needed to get off the ground was resetting priorities, creating another value-proposition, and building it into a core asset in the company.