Emerging Markets

North Korea, New Land of Opportunity?


As chairman of Wanxiang Group, a Chinese auto parts and mining conglomerate, Lu Guanqiu knows the headaches of doing business in diverse environments. He controls dozens of factories in the U.S. that serve the troubled auto industry and mines in Indonesia, remote western China, and North Korea. “North Korea is like China was 30-plus years ago,” the onetime farmer says in a chilly reception room at Wanxiang’s headquarters in Hangzhou, 100 miles southwest of Shanghai. “Through our contact, we are certain they will become more open and more liberated.”

Despite its guiding doctrine of Juche, or self-reliance, and its reputation as a rogue nuclear state and the last bastion of personality-cult totalitarianism, North Korea is attracting foreign companies with an appetite for risk and a tolerance for government meddling. Chinese, South Korean, and about 30 European companies have invested in copper and gold mines, factories producing medications and blue jeans, and even Internet service. (Americans and Canadians are largely barred from doing business there.)

In Pyongyang, Egypt’s Orascom Telecom (OTLD:TQ) is building a 3G mobile-phone network and DHL (DPW:GR) delivers packages. Two Hong Kong-listed companies operate casinos for tourists (locals aren’t allowed in). France’s Lafarge (LG:FP) owns 30 percent of a cement plant that employs 3,000 workers. German-backed outsourcer Nosotek offers North Korean programming help to Western companies developing cell-phone games. A Swedish group markets Noko Jeans, made in the North.

Total accumulated foreign investment in North Korea reached $1.475 billion in 2010, up from $1.437 billion the previous year, according to the United Nations Conference on Trade and Development. Some $6.5 billion more is in the works as Chinese infrastructure companies plan new ports, highways, and power plants, according to the Samsung Economic Research Institute, a think tank in Seoul.

With mineral reserves valued at more than $6 trillion, according to South Korean state-owned mining company Korea Resources, the North has become a magnet for Chinese enterprises. Of the 138 Chinese companies registered as doing business in North Korea in 2010, 41 percent extract coal, iron, zinc, nickel, gold, and other minerals, according to the U.S. Korea Institute at Johns Hopkins University. China’s investment in the North’s mineral sector since 2004 has reached $500 million, the Samsung Institute estimates. China accounted for 57 percent, or $3.5 billion, of the North’s foreign trade in 2010, up from 53 percent the previous year, according to South Korea’s statistical office. “The Chinese are storming in there and taking all the opportunities,” says Roger Barrett, managing director of Korea Business Consultants, a Beijing company that advises foreign investors in North Korea.

With the death of Dear Leader Kim Jong-Il in December and the elevation of his son, Kim Jong-Un, things could open up further. “One way or another, it is crucial for North Korea to renew its economy,” says Lee Jong-Woon, a researcher at the Korea Institute for International Economic Policy in Seoul. “We expect the new government to carry on attracting foreign capital.”

Those who invest will face countless hassles. North Korea’s roads are narrow and potholed. The country’s railroads and ports are a shambles, and its power grid struggles to keep the lights on. “Leadership decisions can supersede legal agreements,” says Scott Snyder, a Korea fellow at the Council on Foreign Relations in Washington, in an e-mail. A 2009 investment guide from China’s Commerce Ministry warned that “recent Chinese enterprises investing in North Korea have major problems” and have been forced into an “unfavorable situation.”

In 2007, Wanxiang acquired a Chinese company that owned 51 percent of North Korea’s Hyesan Youth Copper Mine, an inactive facility two miles from the border with China. Two years later, after Wanxiang had revived the mine, the North Korean partner suddenly said it planned to take back full ownership with no compensation. Lu, who has close ties to Beijing’s central government and last year accompanied Chinese President Hu Jintao on a visit to the White House, contacted Chinese Premier Wen Jiabao. After Wen raised the issue with Kim Jong-Il, Wanxiang was allowed to stay. “Our cultural backgrounds and mindsets are very different,” Lu says.

For some small South Korean companies, location trumps the political and infrastructure concerns. More than 100 enterprises from the South now run light manufacturing plants in the Gaeseong Industrial Park, a special economic zone just north of the border, where production started during a thaw in North-South relations in 2005. “I save time and logistics costs compared with running a business in Vietnam or Indonesia,” says Ok Sung Seok, president of Nine Mode, which has a men’s shirt factory at Gaeseong.

While production slowed after Kim’s death, Ok says things are back to normal and that the hassles are outweighed by the low cost of labor. He estimates that his workers are about 60 percent as productive as South Koreans, but he pays them just $160 per month. That’s one-fifth the minimum wage in the South and a quarter the salaries in a factory he operated in Qingdao, China. “The poorer productivity comes from politics, not from laziness or a lack of skill,” Ok says. Government officials “put a priority on political events rather than spending more time for production.”

The bottom line: Despite hassles and bureaucratic meddling, cumulative foreign investment in North Korea jumped to nearly $1.5 billion in 2010.

With Seonjin Cha and Rose Kim
Dexter_roberts
Roberts is Bloomberg Businessweek's Asia News Editor and China bureau chief.

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