Case · Guide to Entering Korea
Illustrative scenarioA composite scenario built from recurring situations. It is not a description of a specific client engagement.
From Distributor to Korean Subsidiary Without Losing Customers
An illustrative composite scenario of a foreign industrial-equipment company replacing a long-standing Korean distributor with its own subsidiary.
How can a foreign company move from a distributor to its own Korean subsidiary?
A foreign company can move from a Korean distributor to its own subsidiary by treating the change as a negotiated transition rather than a termination. In this illustrative scenario, that means deciding which customers and functions the subsidiary takes over and in what order, negotiating customer transfer, service and inventory terms with the distributor, keeping the distributor in a defined role during the transition, and confirming the legal, tax and employment questions with qualified advisers before customers are told.
The situation
A foreign manufacturer of industrial equipment has sold in Korea for many years through a single Korean distributor. The distributor holds the customer relationships, employs the service engineers who install and maintain the equipment, stocks spare parts and, in practice, sets local prices. The arrangement built the Korean business, and relations between the two companies are cordial.
Headquarters now wants direct relationships with its largest Korean accounts, visibility of end-customer pricing and control of service quality, which customers increasingly raise in their own supplier audits. The distributor agreement is exclusive and renews periodically, and its termination and post-termination terms were drafted with little thought of a transition. The distributor also carries other manufacturers' lines, so its interests are not tied to this product alone.
What needed to be solved
01 Customer and service continuity
Installed equipment needs maintenance and parts without interruption. Customers will judge the change by whether service continues, and some have contracts with the distributor rather than with the manufacturer.
02 A distributor agreement that was not written for change
Exclusivity, notice, the treatment of inventory and any claim the distributor might have on termination have to be understood before the distributor is approached. These are questions for Korean counsel, not assumptions for the commercial team.
03 Local capability built in the right order
The subsidiary needs people who can sell, service and invoice. Any product registrations or certifications held in the distributor's name have to be identified, and whether they can be transferred confirmed with counsel.
The structure
The structure chosen is a Korean subsidiary in the form of a stock company (jusik hoesa) that takes over key accounts, service and parts in stages, with the distributor retained under a new, shorter agreement for a defined transition period. During that period the distributor continues to serve smaller and regional customers as a non-exclusive reseller, supports the handover of service, and sells its spare-parts inventory to the subsidiary on agreed terms. The parent's equity investment into the subsidiary is sized and structured with counsel, since whether it counts as foreign investment depends on its amount and form [1].
Two alternatives are set aside. Terminating outright and building a service team from nothing would put installed customers at risk and invite a dispute. Acquiring the distributor's business is examined, but its other product lines mean the manufacturer would buy far more than it needs. A negotiated transition keeps the distributor commercially engaged long enough to hand customers over cleanly — the pattern described in the comparison of a Korean subsidiary and a distributor.
How the work runs
- Diagnose
Diagnose the Korean business as it actually runs
The work involves mapping customers by revenue, contracting party and dependence on service; reading the distributor agreement with counsel; identifying registrations, certifications and warranties and who holds them; and establishing what headquarters must control and what it can leave to a partner.
- Structure
Design the subsidiary and the transition
The work involves sequencing which accounts and functions move and when, defining the distributor's transitional role and economics, framing the investment, employment and tax questions for affiliated legal, tax and accounting firms that contract directly with the client, and agreeing internally the terms that will not be conceded.
- Connect
Negotiate with the distributor and build the team
The work involves presenting the transition to the distributor as a structured proposal rather than a notice, negotiating customer transfer, inventory and service handover terms, and recruiting the subsidiary's first sales and service staff in a way that respects any non-solicitation terms and the employment rules counsel has confirmed.
- Execute
Run the handover under one plan
The work involves incorporating the subsidiary, completing investment reporting and registrations with counsel, informing customers jointly with the distributor, moving service and parts in the agreed order, and tracking each customer until its contract, service and invoicing sit with the subsidiary.
What the structure made possible
In a scenario like this, the structure makes it possible to take over the most important customer relationships without a gap in service, and to keep the distributor cooperative because its transitional role and economics are defined rather than left to a dispute. Headquarters gains pricing visibility and a local entity that can contract, hire and hold registrations in its own name. The Korea market entry practice and the complete guide to entering Korea explain how such a structure fits the wider entry decision.
Several points would remain to be confirmed with qualified advisers: whether the distributor has any claim on termination and how the transition agreement addresses it, whether each registration or certification can be transferred or must be obtained again, the tax treatment of the inventory purchase, and the employment position of any staff moving from the distributor. Whether customers stay depends on the service they receive during the handover, which no document settles in advance. For a company in a similar position, the quick market entry diagnosis is a practical starting point.
Lessons
- The distributor agreement signed at entry sets the cost of leaving it; transition terms are cheapest to agree on the first day.
- Customers judge a channel change by service continuity, so service and parts should move before, or together with, sales.
- A distributor with a defined, paid role in the transition is usually a better ally than one handed a termination notice.
- Registrations, certifications and warranties held in a partner's name are part of the structure, not an administrative detail.
Read next
Sources
- Under the Enforcement Decree of the Foreign Investment Promotion Act, an equity investment generally qualifies as “foreign investment” when the amount is KRW 100 million or more and the foreign investor holds at least 10% of the voting shares, or holds shares and dispatches or appoints officers to the Korean company. Enforcement Decree of the Foreign Investment Promotion Act, Article 2(2) (retrieved 13 September 2026)
Summary for orientation only. Application to a specific transaction requires confirmation by qualified Korean counsel.