SEOUL, KOREA – Korean SMEs have been suffering from unfair corporate practices of global companies. Recently, a software company, placed in a difficult situation for continuous ‘channel stuffing’, filed a complaint with the Korea Fair Trade Commission against IBM Korea. Channel stuffing refers to a deceptive business practice where a company inflates its sales figures by forcing more products through a distribution channel than retailers are able to sell.
KSTEC, spun off from POSCO ICT in 1998, is a specialized firm focusing on software development and business consulting, signed an exclusive sales contract in 2003 with ILOG, an international software company founded in France. ILOG products are comprised of optimization, visualization software component and business rule management system(BRMS). KSTEC worked hard to expand the domestic market as an exclusive sales distributor in Korea. However, things didn’t turn out well.
“At the end of every quarter, Mr. Foo, a regional executive for the Asia Pacific branch of ILOG based in Singapore, visited Korea to supervise sales activities and performance. One day, he began to push us to purchase the difference in sales targets we were not able to sell,” said Seungdo Lee, CEO of KSTEC. Sales managers normally receive bonuses for reaching their sales target. “As our business mostly relied on ILOG, we reluctantly accepted IBM’s alleged dumping of its software products even though there were no clients, and stocks subsequently piled up.” With the stocks snowballing for several years and financial pressure intensifying, he asked Mr. Foo for help, explaining the difficult situation. However, the executive kept saying ‘wait’ and channel stuffing continued.
In 2008, ILOG informed KSTEC that they would be acquired by IBM. Worrying that the stocks might be useless, Mr. Lee sent a letter to Mr. Foo asking to settle the stock problems during IBM’s due diligence. However, his request was declined and the exclusive distributorship agreement was unilaterally terminated. Even after the acquisition, IBM Korea continued channel stuffing, also not providing license keys for the piled-up software. Without the keys, KSTEC could not sell the software and all of the stocks became worthless.
Now, the cost of damage has been assessed at around 6.3 billion (USD 6 million) won, combining stocks (4.7 billion won) and financial cost (1.6 billion). Unable to withstand the financial pressure, KSTEC filed a complaint with the Korea Fair Trade Mediation Agency (KOFAIR) against IBM Korea in September 2011. Last April, KOFAIR advised IBM Korea to pay 1 billion won (USD 1 million) in compensation, saying “it can be interpreted that Foo JongTong forced Demurrant to issue POs and make payment before signing a final contact with end users” Both refused, and the case was handed over to the Korea Fair Trade Commission under the title of “IBM Korea’s Misuse of Its Position”.
Last month, Won-jin Cho, a lawmaker of the Saenuri Party, raised this unfair issue regarding global companies at the parliamentary inspection of the administration of Fair Trade Commission. Taking the case of KSTEC, he said that, “Global companies are granting exclusive contracts to Korean SMEs to expand the market. Once securing the market to some extent, they are taking away the company’s rights. Such tyranny of global companies that sponge off small companies and discard them should be eradicated.” Cho called for specific action from the Korea Fair Trade Commission.
