Asia Society's 14th Asian Corporate Conference



Envisioning the World's Next Great Market: Korea and the Economic Future of Northeast Asia Asia Society Dow Jones

Korea’s Sophisticated Consumer Marketplace:
Understanding the Opportunity

John Gledhill
Managing Director, Philip Morris Korea Inc.

Prime Minister Goh,
Deputy Prime Minister Lee,
Distinguished participants,
Ladies and gentlemen,

First of all, I would like to say that I am very grateful to the Asia Society for its invitation to address this prominent gathering and share some of my thoughts about the increasingly sophisticated Korean market.

Many in Asia are aware of the new Korea. Young people in China, Japan and Southeast Asia think Korea is hip. They love its pop culture, watch its movies and TV soaps, and visit for the skiing, the shopping and the nightlife.

In western countries, people are becoming more aware of the economic and technological changes, rather than the cultural sophistication. Korea is known as probably the most wired country in the world. It’s perceived as a leader in Internet use and in hi-tech industries such as mobile telephones, LCDs and semi-conductors.
There’s a passion for innovation here, a passion for new tastes and new experiences, a passion for democracy and advocacy. In short, this is a very dynamic place and to succeed in business, you have to stay alert and engaged.

Within Philip Morris International, Korea is well known for sophistication in terms of brand choice and consumer taste. In response to this, in March, we designed a new brand of cigarette specifically for this market. Called Elan, it is low-tar in taste and superslim in shape. This type of cigarette which in, say, Europe, would be for the occasional smoker and more popular with women than men, is very popular with regular male smokers here. This is the third such product we have launched specifically to meet Korean consumer preferences just in the last year and it has changed the character of the product portfolio that sustained us since we entered the market 15 years ago.

Recently, at Philip Morris Korea, we conducted a nationwide survey to get an updated sense of how people here view us as a company.

I’m happy to report that the number of people who view us favorably has doubled since 2001, when we did the last survey. Believe me, when you’re a tobacco company, that’s a nice statistical trend!

At the same time, though, a number of people remain unfavourable to us. As you know, we manufacture a product that is harmful to health. So this kind of response is understandable. But what surprised me was that, when the unfavorable people were asked why they didn’t like us, the main reason given was that we were “foreign”.

That came like a punch in the stomach, because like many companies who have been here for a while, we have started to think of ourselves as, if not Korean, at least very much part of the local scene.

I myself, in case you hadn’t noticed, am a foreigner.

If you’re wondering about my accent, I’m from Liverpool in England, and I went to the same high school as The Beatles, so I can’t pretend to be Korean. But in the 15 years that we’ve been here, our managing directors have all been Korean. Indeed, one became the president of the Philip Morris Asia region and another is the president of our office in Kazakhstan. All but a handful of our 400 employees are Korean. We pay local taxes, of course, and we conduct our business in Korean, except for my meetings, which we do in English with a Liverpool accent.

So, what can we do about this problem of being perceived as “foreign”? On one side, we note that Korea is becoming increasingly comfortable with the presence of foreign companies in industries that were previously closed. So, we expect this negativity to dissipate with time. At the same time, though, we need to make greater efforts to highlight our involvement with, and long-term commitment to, Korea.

One way to do this is to work closely with the community to develop programs that would address its needs. For example, we are involved in programs in Korea to combat hunger. We are also very active in supporting NGOs who deal with the issue of domestic violence. We also have environmental projects that include beach cleaning and wetland preservation campaigns.

On the business side, we have been recognized as one of the 10 best employers in Korea. We employ over 400 people in our factory and head office, and another 600 are employed by our distributors. We believe that we have also played a significant role working with regulators and the industry to level the playing field for international tobacco companies in the market.

I do think that there is some progress still to be made on this front and I would not want to let the opportunity offered by this public forum – and the presence of the deputy prime minister – go without making my case. So please forgive me for speaking candidly.

Since the liberalization of the tobacco industry in 2001 and, subsequently, the setting up of our green field factory in South Gyeongsang Province in 2002, there remain hurdles to our business. Such hurdles mostly stem from what we would like to call the "unfinished" liberalization process. Prior to the liberalization of the industry, the retail licensing system and local trade practices favored the national tobacco company. Today, they still do.

I believe that a solution needs to be found that would provide equal opportunity to all existing and future players within the industry.

I do not believe that foreign companies are discriminated against because they are “foreign.” But I do believe that this sentiment causes a slowdown in the country’s efforts to detect and deal with the unfair business practices that get in the way of its ambitions to be a regional business hub.

One factor in business is uncertainty or, if you like, unpredictability. It is a risk that needs to be minimized as much as possible. In Korea, government has historically introduced new regulations with little debate, creating an uncertainty which prevents many companies, Korean and foreign, from developing real long-term visions for their future. Let me give an example from our business, regarding taxation.

As I have said, as a tobacco company, we recognize that cigarettes are products that are harmful to health. We recognize that many governments opt for taxation and pricing measures to reduce tobacco consumption and advance public health objectives. We fully respect the public health goals of the Korean government and believe that the country should have strong and effective regulations on tobacco, towards which we are ready to work with all interested parties.

However, what we consider to be counter-productive to all concerned are drastic tax increases. We believe that tax increases, be they for government revenue purposes or for tobacco control purposes, should be regular and incremental. Predictability and the ability to plan for the future is the cornerstone for all businesses. Unpredictable change is difficult to manage and can seriously damage our business and the employees and partner companies that depend on it. To this end, Philip Morris Korea is in the process of developing a tax proposal for consideration by the government.

When I say that we fully respect the government’s public health goals, I do not speak lightly. We wish to have the opportunity to work with the government, the public health community, NGOs and all interested parties towards this end. In the meantime, we do our part to remind consumers of the health effects and addictiveness of smoking and to help prevent young people from smoking. We work closely with our trade partners, especially at the retail level, to prevent sales to minors. We also sponsor a very active youth smoking prevention program, which involves seminars for teachers and parents, discussing ways to prevent young people from smoking.

This may seem contradictory, but we are engaged in such activities because we know that these are the things that society expects of us and we also believe that it is the right thing for us to do as a responsible tobacco company.

Philip Morris, and indeed all international companies, support the government’s efforts to introduce effective and rational regulations as Korea strives to become a truly open market and begins to qualify as a regional business hub. At the same time, I would add that it is important that such regulations be enforced in an appropriately vigorous, fair and transparent manner. I am confident that, with such a commitment by government, market practices will soon catch up with the current level of sophistication of the Korean consumer.

I am also confident that, as our company’s presence here deepens and lengthens, we international businesses will be perceived more and more as part of the Korean scene and less and less as “foreign.”

Thank you