The World: The deal that could open up Korea's ad market

O&M's merger of its Korean operations with Diamond Ad may unlock the door for foreign agencies, Mark Johnson reports.

When it comes to foreign investment, Korea's ad market has historically been very isolated. The tide may, however, be about to turn, with the announcement two weeks ago that Ogilvy & Mather is to merge its Korean operations with Diamond Ad, Hyundai's former in-house advertising agency.

O&M, OgilvyOne, Ogilvy PR and a new start-up, Ogilvy Healthworld, are merging all back-office functions with Diamond Ad to form Diamond Ogilvy Group.

The deal has been described by Miles Young, the chairman of O&M Asia-Pacific, as "not a colonisation, but a fusion"; a description that highlights the delicate touch required in South Korea. Young enthuses about a market in recovery with promising opportunities in emerging media.

"The convergence of digital and mobile media in Korea represents the most attractive and exciting market opportunity, far more advanced than either the US or Japan," he says.

But observers will be watching closely to see if such close co-operation produces a powerful partnership capable of tapping into this growing discipline.

They will also be watching closely for a number of other reasons. Since the 90s, there have been few international advertising groups willing to brave the waters of an economy in recession and a market dominated by powerhouse corporations - chaebols - such as Samsung and LG, that own their own in-house agencies.

Few wholly owned foreign ventures have been created in Korea. Grey Worldwide's Korean office, MediaCom and Leo Burnett are the exceptions rather than the rule.

The Diamond/Ogilvy deal marks the first time such a major Korean agency has partnered with a foreign company, turning the venture into a test-bed.

The deal wasn't just about synergies and fusions. Specific circumstances led to the merger. Founded 20 years ago by the car giant Hyundai, Diamond Ad was bought by Cordiant Communications in 1999. Since the WPP takeover of Cordiant in 2003, Diamond Ad and O&M have been siblings in the same holding company.

Having discussed the idea of a merger internally, neither side was keen to rush in until May last year, Young says. So what made the companies change their minds? Korean industry sources point to Hyundai's and Kia Motors' decision around that time to cease working with Diamond Ad.

A senior international agency chief in Seoul says: "Hyundai and Kia Motors decided to establish their own in-house agency, Innotion, in 2005 and moved their business from Diamond Ad."

Industry insiders estimate that such was the impact of the loss, Diamond Ad has fallen from third place in the country's agency rankings to around tenth. The merger with another WPP shop, when it came, wasn't much of a surprise.

Young concedes that the merger follows a period of intense restructuring.

"We changed the management and promoted younger staff to the top posts, then gave them nine months to prove themselves," he says, adding: "Lots of joint ventures have been characterised by a lot of squabbling - usually over finance. This is a merger in a much more equal sense, even though O&M Korea is much smaller than Diamond Ad. This allows us to continue with the best Korean insight, but with the best of the West."

Both sides will service clients separately, leading outsiders to speculate that the merger is less than complete, although the operation is managed by a team from both companies. Young is joined by Jay Paik, the president of O&M Korea, and Yubok Lee, the president of Diamond Ogilvy Group. They report to Shelly Lazarus, the chairman and chief executive of O&M Worldwide. The Diamond side will continue to handle LG Telecom, Korean Life Insurance, Sky Life, APLO Finance and iRiver (a Korean MP3 player brand), while the Ogilvy side will service IBM, Yuhan Kimberly, Unilever, Gillette and GE Capital.

But how will the company fare in the protectionist Korean advertising landscape, which is still dominated by in-house agencies? Young admits the landscape is tough: "The market has effectively been protectionist because of the chaebol structure. It is vertically integrated, with many major companies still running ad agencies as in-house departments. The trend at the moment is to set up new in-house agencies. Nowhere in the world is the outsourcing of advertising so unpopular."

The country's leading advertising agency by far - at more than double the size of its nearest rival - is Cheil Communications. Ranked number 17 in the world in 2004, the agency is owned by the powerful Samsung Corporation.

The second-largest, LG Ad, is owned by the LG Corporation.

In a market still dominated by mass-market advertising, O&M's hopes, like those of other foreign agencies, are pinned on rising imports of foreign goods. Young explains: "Korea is by no means invulnerable to foreign goods and as imports rise, this is forcing an interest in product branding rather than corporate branding."

Emerging media also hold much promise. Driven by a combination of swift advances in communications technology and an economy depressed for the past three years, adspend growth in emerging media is more pronounced than in most markets.

The Welcomm ZenithOpti-media executive media director, Hyon-Ju Cho, predicts these factors will produce growth of 15 per cent in cable and online, while terrestrial TV is expected to fall by 8 per cent and newspapers by 6 per cent. All eyes, then, are on Korea's newest advertising partnership.

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