Executive Cases: Interviews with Senior Executives of Early-Stage Companies:
Interpark – South Korea
Prepared by George Foster and Sandy Plunkett
Interpark, one of the first-generation start-up companies in the online shopping mall market, was established in November 1995 as an internal venture company of Dacom.12 It opened the first online shopping mall in Korea in June 1996. One year later, Interpark was spun off from Dacom and was listed on the KOSDAQ in July 1999. As the first online commerce company in Korea, Interpark has been recording an average compound annual growth rate of 18%. In 2011, Interpark took over iMarketKorea, one of the biggest Korean maintenance, repair and operation (MRO) companies, from the Samsung Group. Following the acquisition of iMarketKorea, Interpark now has two core business portfolios: B2C and B2B businesses. The B2C business is an online shopping mall business targeting individual customers, while the B2B business is an MRO business aimed at companies.
The total sales volume of the B2C business in 2012 was about US$ 2 billion. The B2C business can be divided into two areas: a general shopping mall which sells products to consumers; and other malls that sell products such as books, performing arts and sports tickets and travel products. Interpark is the second biggest player in the domestic online book sales market, but in the areas of ticket sales and air flights, it is number one in Korea.
In 2012, iMarketKorea’s MRO business registered annual revenue of over US$ 2 billion. The company has attempted to secure further customers in addition to its existing customers such as the Samsung Group, and to expand to various regions like the People’s Republic of China, the United States, Europe and Vietnam.
Interpark has been opening new businesses and taking on new investments in many areas in order to find new opportunities. As a typical example, it started Gmarket (a Korean online open market) as an in-house venture capital company and listed it on NASDAQ. Interpark sold off Gmarket to eBay in 2009. At present, Interpark is a pure holding company, with a total of 22 subsidiaries working on B2C and B2B businesses.
Q1: What was the source of the initial idea, and how did that idea evolve into a viable growing company? How did it change over time?
Lee: “The initial idea for this business came from Ki-hyung Lee, the founder of Interpark. He and I were working for Dacom, a Korean telecommunications company providing network services and Internet communication services along with the local/international telecom service which was the company’s cash cow. Mr Lee and I were convinced that the Internet had big potential as a common network. We chose an online shopping mall business as the best business model that could be realized with low capital and high public leverage. At first, we focused on books because books are fairly standardized products. And considering the fact that the logistics infrastructure was not yet fully set up then, we also focused on the potential of immaterial products like tickets and travel products as they don’t require a heavy logistics system since tickets are light and small. We started this business as an in-house venture capital company by funding and supporting human resources from Dacom. After a year and a half, we were able to stand on our own two feet thanks to the support we had received. Even though we considered being an application service provider or a system integrator for shopping malls, given the financial problems in the early stages, the essential business idea never changed.”
Q2: What were the major growth accelerators for your company in the early years of high growth?
Lee: “In fact, our growth was not so fast in the early stages. There were a lot of problems related to online shopping such as the delay in the proliferation of Internet infrastructure, the slow speed of the network and ineffective methods for calculating rates. Businesses connected to the value chain of online shopping malls, such as logistics systems and payments, had difficulties, too. An express delivery service was in its initial phase of growth, and the use of Internet banking, credit cards and security programmes for accounts was minimal. The economic environment was very tough and Korea applied to the International Monetary Fund for a bailout in 1997, the very year we started our business.
Our growth started to speed up in earnest from 1999. The main factor behind this growth was an improvement in the speed of the Internet. ADSL had spread very fast following a drive by the government. The government and carriers focused on Internet business and invested large amounts of capital. As a result, our confidence that the Internet would be the common network proved well founded, even though it came a little bit later than we had expected.
Such a proliferation of the Internet led to an expansion of the market and Interpark was able to benefit as a pioneer of this market. However, it didn’t mean we were able to take all of the spoils because other large companies also saw the potential and quickly entered the market.”
Q3: What role did key aspects of the entrepreneurial ecosystem surrounding your company play in the growth of your company?
Lee: “The most important factor in the surrounding ecosystem was a funding system for start-up companies to secure their operating capital. We went public in 1999 through KOSDAQ, which was started in July 1996. We were able to lighten our financial burden and conduct a sustainable business through the money raised from KOSDAQ, and investors wanted to invest in us because we were listed on KOSDAQ. Nowadays, KOSDAQ emphasizes protecting investors. At that time, it focused on the potential growth of companies, providing them with support. Thanks to that approach, we had the opportunity to grow.
In addition, as I mentioned above, government policy and the development of infrastructure were other important factors. High-speed Internet which started to spread from 1999 was one of the key elements for our business. As a result, the funds from KOSDAQ and the dramatic improvement in Internet infrastructure were the core sources of growth from the ecosystem.”
Q4: What key aspects of the entrepreneurial ecosystem surrounding your company that were absent (or existed only in a weak form) created the greatest challenges for growing your company? Please describe and discuss how you met/were impacted by these gaps in the ecosystem and their resultant challenges?
Lee: “I was disappointed that the government didn’t have business-friendly policies for start-up companies. As I mentioned above, we were not able to enjoy the benefits of being the first player to enter the market. Many Korean companies were fascinated by Internet business following the development of Internet infrastructures after 1999. Major companies in particular tried to seize the market by employing large amounts of capital and outstanding personnel. As a result of this competition, the market couldn’t guarantee stable profits to companies working in this market. Interpark also lost some growth potential although the total market was bigger than before. That’s why I believe the Korean government should set up more rational regulations for large companies when they are entering a market.
We also experienced difficulties resourcing talented people. Most university graduates wanted to work for large companies as a soft landing into society, and working for start-up companies was regarded as something risky. This is probably linked to Korean culture, with stable jobs preferred to ones considered risky. Finding and securing the right people was absolutely one of the key missing factors for Interpark.”
Q5: At what stage did you invest significant resources seeking to grow your company internationally/beyond your domestic country or region? What factors were pivotal in deciding when to seek growth internationally and where to seek that growth?
Choi: “We first invested in the global market in the early 2000s. We considered regional expansion to be a valid method for organic growth for three reasons: (i) we wanted to test our business model, which was pretty successful in Korea, in bigger markets; (ii) an Internet business has no borders; and (iii) there were potential advantages as a first mover given that online shopping markets were in their early stages in most countries. We chose Japan as the first country for our expansion on account of the more developed business environment, market size and cultural similarities. So we opened our subsidiary in Japan in 2001, which we operated for two years.”
Q6: What were the biggest challenges in building growth internationally? How did you meet or adapt to those challenges?
Choi: “The biggest challenges as a start-up company were: entering a closely knit distribution system in Japan; communicating with customers, including buyers and sellers using different languages; and overcoming an emotional barrier between Korea and Japan. The most difficult for us was entering Japan’s tightly structured distribution system. We were not able to have competitive prices because distributors were reluctant to provide us with products at a good price because of worries over credibility. The only way to cope with this problem was to build up trust with providers, taking a long-term perspective.
However, we had to put our plan to operate our own online shopping mall in Japan on hold because we had trouble assigning the necessary time and resources to Japan given the fierce competition in Korea. For now, we are just following the market trend as one of the sellers of big Internet shopping malls.”
Q7: What major role, if any, did key aspects of the ecosystem in the country (or countries) you first sought international growth either promote or impede your ability to grow in those international markets?
Choi: “The biggest barrier presented by the ecosystem in Japan was the undeveloped Internet infrastructure. The high price of ADSL prevented customers from coming to our website, and the low penetration rate of network was another serious obstacle to our business. In addition, high living costs in Japan made it very difficult to rent offices and to secure basic infrastructures to start a business. Just at the right time, the Korean National IT Industry Promotion Agency rented some centrally-located offices in Japan, and sublet them at half price to Korean companies with the purpose of supporting Korean companies’ global expansion. Interpark was able to set up its subsidiary in Japan thanks to this opportunity. It would have cost us much more in terms of money and time if it had not been for the support provided by this programme.”
Q8: Seeking international growth often has both high moments and dark (low) moments. Briefly describe one high moment and one dark (low) moment in seeking international growth.
Lee: “Interpark has been seeking opportunities to expand abroad since the early 2000s. We have continued to try to enter global markets as a supplier on the value chain of online shopping malls after entering and retreating from the Japanese market. We found positive possibilities in the distribution of luxury goods, and now we’re sourcing general products as well as luxury goods from many countries including Italy and the People’s Republic of China, and selling them in Korea and Japan. We have also identified some opportunities in the US market. We decided to start our business there with book-selling because we think books are fairly standardized products with little variation. Our target customers are Koreans living in North America. We are now seeking opportunities to expand our business to other items based on this experience in the United States.
In addition, we’ve been looking for chances to go global using overseas branches of iMarketKorea as footholds since we acquired it from the Samsung Group in 2011. We are looking to diversify B2C and B2B business opportunities in many regions including the USA, the People’s Republic of China, Vietnam and Europe, with the mindset of a start-up company.”