Transcript: East Asia Market Realities South Korea

Jack Stenhouse, NZTE Trade Commissioner, South Korea: Today I’m going to quickly run over a few basics about the South Korean F&B market and then we'll talk more specifically about the FTA that was ratified the end of 2015, and also a few things that you should be aware of to take advantage of FTAs in general and some difficulties that you may come up against, specifically talking about regulations and a few figures.

So just to start off, South Korea is a relatively large market. Some people don’t quite get the scale of the market. It’s the 11th largest economy in the world, the fifth largest goods export market for New Zealand, so it’s primarily in primary goods and commodities that we do very well, about 40 percent F&B.

About 70 percent of all food and beverage items in Korea are imported directly as finished consumer goods, or processed using imported ingredients locally. When you consider the fact that New Zealand exports more than 50 percent of its total food and beverage production you can see they really are natural partners in that respect. 

Again, to give you an idea of the scale of the market, we are one of the top two markets in the world for deer velvet, second largest market for frozen green shell mussels after the USA, fifth largest market for beef, second largest export market for avocados, and also a very significant market for buttercup squash, so we’re sizeable.

South Korea is a mature market with an F&B industry that’s showing slow but consistent growth. The slow growth is, in part, due to low birth rates and low levels of immigration. As such, many of the larger Korean F&B companies are trying to take more of the local value chain, which is something that we'll touch on a little bit later, and also more proactively looking to develop their export markets. 

Moving on to the FTA, the FTA deal which was ratified at the end of 2015 went into effect immediately so we’re currently on our fourth step-down in tariffs. You’ll find that each FTA has a very different situation so they’re not all a magic potion. With the case of South Korea it’s not a game-changer for us in that it puts us very far ahead of all of our competitor countries in all categories, but it does put us back on the level playing field with some of our major competitors. So, if you look at the case of Australia, Canada, the EU, US, Chile, they all had ratified FTAs with South Korea a year or two before we did.

If you look at our overall export for F&B to South Korea, until about 2014/15 we were increasing very significantly and consistently. Because of the other ratified FTAs at that stage we started to flatten off and actually drop down a bit. That’s since rectified itself. In the first two years of the FTA we’ve seen F&B exports increase by 30 percent from New Zealand so we really are aback on a level playing field. By 2030, we'll see 98 percent of all tariffs removed. Of course not all categories are affected equally. There were some big winners and there are some others that didn’t win to the same extent. Dairy and horticulture were two categories that we fought very hard for. We’re expecting dairy to see savings of around $89 million annually. 

Kiwifruit was another big winner, had its 45 percent tariff reduced over six stages - we’re now at stage number four, so we’re almost there. Wine had a 15 percent tariff removed on effect, cherries 24 percent tariff removed on effect, buttercup squash 27 percent tariff removed over five stages – again a stage four so [unintelligible] down on that one, and you can see that dairy has increased by 28 percent and fruit by 32 percent in the first two years, so big winners there.

Outside of those big winners there are three categories that are more difficult that I think you should be aware of. Number one is an obvious one, categories that have been excluded. Not all categories are included in the South Korea FTA. Honey was a big one for us that was left out completely. A lot of fresh fruit and vegetables that have no access to the market so categories like apples, pears, onions, for example, are not included in the FTA, also frozen deer velvet, frozen squid were left out.

The second and third areas to be aware of are very much related to competing FTAs that have been ratified and this applies to all FTAs not just South Korea. So the second one would be where we’ve achieved a strong result in line with our competitor countries but they’ve achieved the same result and ratified before us, so with the example of New Zealand beef we achieved the result in line with our competitors and 40 percent tariff removed over 15 years. However, the US ratified three years before us, Australia ratified one year before us so for that 15-year period we’ll constantly have a small disadvantage with tariffs.

The third example is with tariff reduced quotas so New Zealand has tariff reduced quotas for five products. That’s milk powder, infant formula, cheese, butter and frozen green shell mussels. We achieved some good results there. Some will be removed as the tariff drops down to zero, some will be permanently capped as is the case with milk powder and frozen green shell mussels. 

You need to be aware that while you may have access to a good quota, your competitor countries may have access to a larger quota so, for example, with infant formula, Australia has a quota that’s quite a bit bigger than ours. When Korean manufacturers are looking at the opportunity of working with New Zealand or Australia, if they’ve got the opportunity to potentially bring in quite a bit more product at a lower tariff, it can be more attractive for them to go with another country. The US, again, has more than us for milk powder by quite a way and also the US and Canada have access to FTA-related quotas for honey, which we do not.

So the first step is to understand what are your tariffs and what are your declining rates for your FTA with South Korea and with any of our markets in the world. If you search ‘tariff finder NZ’ on the internet, ‘tariff finder NZ’ that will give you a direct link to the Ministry of Foreign Affairs and Trade website which has information for all FTAs that we currently have all our tariff rates and declining rates. 

Step two is to understand what your competitor country rates are, so number one, what’s the current tariff rate, what’s the declining rate and what quotas do they have access to, what are the size of them? You can do that with a little bit of simple desktop research or you can get in touch with NZTE and we can fill you out with those.

The next point for taking advantage of the FTA is to really maximise the advantages while you can. We call this the golden window and we never know how long it’s going to last for so it very much depends on the format of your product. The first format which you’ll see most immediate wins in is if you’re working with primary goods or commodities because they’re more price-sensitive. You may see an uptick in sales very quickly. That’s your opportunity to really double down and build your foundation with your in-market partners and your buyers. We cannot guarantee how long that advantage is going to last for. If you have a three or four year gap, really go on there and build the relationships that will pay dividends in the long run.

With finished consumer goods it may take a little longer to see an uptick in sales. When you do, that’s your opportunity to really reinvest and build the brand, build the brand awareness, again build those foundations, expand the distribution while you can in that golden window. It may be gone within a few years, especially in the case of South Korea; the South Korean government has a very aggressive stance in expanding its FTA network so you may find that your competitor nations come down to a similar level after a few years.

Next point on this one is specific to South Korea is new demands from changing structures. The South Korean retail structure will change very quickly, sometimes within one year or two years it can be quite different from what you’ve seen before. Traditionally, South Korea for finished consumer goods has been a market that’s been dominated by local brands. This has changed very quickly over the last 18 months. Because a lot of these large food companies are seeing less growth than they would previously they’re trying to get more of the value chain and these large hypermarkets are moving very quickly towards direct import so in categories such as infant formula where until 18 months ago we saw 90-95 percent of the shelf space completely dominated by local brands, it’s now a 50-50 split. 

We’ve seen brands like GMP, Dairy Kuala come to the market for the first time. The same thing has happened with cheese. We’ve seen Dairy Works products come to the market for the first time. The same thing has sharpened with butter; we’ve seen Westland butter come to the market for the first time so it does change very quickly and it’s important to be aware that, whilst traditionally there may not have been many opportunities in a lot of these sectors they are coming up for finished consumer brands so it’s good to take an interest in the Korean market in that respect.

And just to finish off with a couple of challenges that are not just specific challenges that are not just specific to South Korea but you should be aware of for all FTAs and taking advantage of them, especially if you’re looking at getting into the market for the first time. The first is that for South Korea many New Zealand fresh fruits and vegetables have yet to obtain access but there are also other categories. It’s important that you check these obviously before you send your product out. We actually had a case a few years back of a finished New Zealand product with some pork in it where we had two containers sent to Korea; they sat on the docks for a week or so before the in-market partner realised that we don’t currently have any access for pork products and they were sent back so there are a few things like that that you should be aware of.

It’s also important to be aware of that the access possibilities are for your competitor countries and their products. For New Zealand and Australia we achieve very strong results for fresh cherries in the FTA. We saw the export numbers uptick quite quickly for one or two years. At that stage Chilean cherries got access to the market and took quite a big chunk out of the gains that we had so it’s always important to be aware of what the access possibilities are for your competitor countries as well.

There are also certain food additives that are approved for use in New Zealand that may not be allowed in Korea. You need to check these out first, work very closely with your in-market partner to understand what the requirements are here. We’ve currently got some product that has some beef in it and some food additives that are approved for use in New Zealand but are a little bit difficult to get through in Korea that’s been sitting on the docks for the last three weeks, so it’s best to check the stuff in advance.

The Korean government also makes very frequent changes to food safety and labelling standards. These can be kind of a two- or three-week notice period often. What we’ve seen with alcohol is a few changes over the last couple of years and literally a notice period of two weeks so we’ve had a few customers that already had product on the water when they’ve been alerted that they needed to change the labelling which can be a little bit complex or sometimes not even possible, depending on the requirement. Again, staying close touch with MPI, NZTE and your in-market partners to understand what’s happening here.

We also had a case with Kiwifruit and avocados with the [unintelligible] standards were changed a couple of years back and it was to the point that [unintelligible] Korea had one dedicated member of staff checking the website of the Ministry of Food Drug Safety every day because they had no idea when it was going to come out and what it was going to say so it can be difficult to get up-to-date information and you need to keep  those communication lines open.

Tariff reduction quotas: these sound great but they can be very difficult to navigate, so again need to work closely with your in-market partner to understand these. We currently have access to, as I mentioned before, five products for tariff reduction quotas. These were administered by three different agencies. Each agency has a different process for allocation. The only commonality they have is that you need to be a registered Korean importer in order to take part in the allocation process. You won’t be able to get any quota on behalf of your in-market partner. 

Two of them use blind option processes whereby you don’t know what the base price is, you don’t know what the winning price is; you just know who bid and whether or not they won and how much they won. Because of that it can be a little bit difficult to understand what’s going on. Your in-market partners will generally have a much better sense of roughly where the price will sit but it’s not made public.

There are also quotas that are available outside of the FTA so, for example, honey has a WTO quota that’s available to all countries. Again this is a blind option process so we don’t know what the base price is or the winning price is. Because of this you’ll see a lot of very large, well-established companies miss out on quota every year and have to buy that quota off some very small, less well-established companies, which is quite an interesting situation.

Last point I want to touch on here in terms of taking advantage of the FTA for Korea and I think in general, is that while price is a very important aspect to the Korean market, it is a price sensitive market, relationships are equally as important. During this golden period that you have, this golden window of availability, make sure that you invest in relationships and that means an in-market presence so it’s really foundational that you get into the market once a year if you can, twice is amazing, twice is much better, and not just to see your buyers but also to maintain the communications with your in-market partners. That’s not just emails; that should also be phone calls, video conferencing, face-to-face if you can.

The reason behind it is a cultural one. You need that constant communication to build the trust in the Korean context. Without that trust, you won’t be  able to get the information that you need when you need it, and you won’t be able to have those really rich strategic conversations so communications, in-market presence and relationship building is everything in terms of taking advantage of the FTA while you can.