South Korea’s bold policy of engagement accelerates

From 8:30 a.m. until 5:30 p.m. on weekdays since early last month, Kim Yong-ae, a 23-year-old North Korean, has been making stainless pots at a South Korean factory in North Korea. Along with 270 workers, Ms. Kim takes a 10-minute bus ride from her home in Gaeseong to her work at the Livingart kitchenware production plant at the Gaeseong Industrial Complex, just five kilometers (3 miles) north of the inter-Korea border. Ms. Kim polishes steel plates produced by metal presses under the supervision of South Korean factory managers. She earns $57.50 a month, about 17 times less than what Livingart would have to pay a South Korean worker. But at North Korea’s official exchange rate, her income is three times more than the average North Korean worker makes, and 19 times more if calculated with the market rate. Accordingly, Ms. Kim is happy. “It’s very good for me to work here with South Koreans,” she said. The Gaeseong Complex, an ambitious experiment that marries South Korean capital and technology with North Korea’s cheap labor and land, started operations last month after four years of sometimes turbulent preparation. The complex, which is managed by Hyundai Asan Corp., a South Korean company leading the project, and the Korea Land Corp., South Korea’s state-run land developer, is located 70 kilometers (43 miles) north of Seoul. The industrial park sits just across the Demilitarized Zone and 170 kilometers from Pyeongyang, North Korea’s capital. A dozen more companies will join Livingart soon and another 300 firms are expected to sign up. Hyundai foresees leasing land to the new companies in the first half of this year, and those firms should begin to build factories by the end of next year. Longer term, the South Korean government anticipates that the Gaeseong project will provide North Korea with a chance to learn about free market economics, which would help gradually integrate the two Korean systems. President Roh Moo-hyun looks at Gaeseong as a demonstration to North Korea of the path to peaceful reconciliation on the Korean Peninsula because North Korea removed military forces from the main corridor near the city of Gaeseong. Though the project has a political purpose, many small and mid-sized companies of South Korea view Gaeseong as one of their last chances to revive dwindling businesses hit hard by high labor costs in the South. More than 1,800 companies reportedly want to move in the complex. Livingart became the first company to start production among 15 South Korean firms chosen out of 230 applicants for the pilot program. During the weekdays, Kim Suck-chul, 58, the chairman of Livingart, lives at the Gaeseong complex along with 12 South Korean employees who oversee factory operations. Mr. Kim returns to Seoul for the weekends by his car on the new four-lane highway crossing the Demilitarized Zone. The 4.5 billion won ($3.8 million) two-story factory began to turn out the first batch of kitchenware on Dec. 15. The first 1,000 pots shipped through the Demilitarized Zone sold out at Lotte Department Store in downtown Seoul. The second batch of 2,800 pot sets was put on the sale at Lotte and other stores in Seoul on Dec. 29. “I plan to export them to European countries two or three months later when the quality of the products reaches a certain level after North Korean workers are well trained,” Mr. Kim said. He anticipates high productivity and low labor costs as North Korean workers are strongly motivated to learn and seem enthusiastic about their new jobs. Livingart exports to European countries, such as Belgium and Germany, has reached $10 million a year. Chang Jung-gil, a director of Livingart, said, “We plan to export 70 percent of the products from Gaeseong to European countries, as those countries do not place higher tariffs on kitchenware made in North Korea. We expect $3 million in exports monthly if the factory in Gaeseong manufactures products as good as South Koreans make.” A second company at the complex, SJ Tech, makes rubber components for automobiles and plastic components for computers. On Dec. 28, it completed a two-story factory and a four-story office building with a $5 million investment. The company hired 70 North Korean workers and will employ around 200 more this year. Lim Hwang-ryong, a director of SJ Tech, said, “We will train North Korean workers and test machines for a month and then plan to sell goods to multinational companies in South Korea first.” “About 25 percent of the products from Gaeseong will be exported to China, Hong Kong, Mexico, Sweden, Germany and Middle East countries later,” Mr. Lim said. Shinwon, a clothing manufacturer, and Samduk Tongsang, a shoemaker, are building factories, hoping to complete construction by the middle of this month. Computer and automobile component plants and electronic home appliance companies are seeking to begin production during first half of this year. The 15 companies chose the Gaeseong complex simply for the possibility of vastly lower production costs, but also because of the cultural affinity of the two Koreas. The companies pay $57.50 a month to North Korean workers, well below the $100 to $300 that Chinese expect and the $1,000 that South Koreans demand. The cost of leasing the land is three times more expensive than industrial complexes in China, but still three times cheaper than similar facilities in South Korea. A company can buy land-use rights for 50 years at 149,000 won ($129) per four square yards. Mr. Lim of SJ Tech said, “After we surveyed several industrial complexes in South Korea and other countries, we decided to build our third factory in Gaeseong because of geographical proximity and common language, let alone low wages and cheap land.” The railway and highway between Seoul and Gaeseong have made transportation less of an issue. But the companies do face difficulties. The infrastructure remains rudimentary, and North Korean officials lack an entrepreneurial mindset, according to investors from the South. Yoo Yeong-yul, a factory manager of Livingart, said, “We cannot operate the factory at full capacity because we are not getting enough electricity. It is hard for us to keep contact with offices in South Korea as the complex does not provide enough communication service.” Song Yong-kwon, a manager of Gaeseong project for Hyundai Asan, said, “This month we will complete a power distribution grid, which will be connected from Paju, South Korea, to the complex.” Mr. Song said a 2-million kilowatt thermal plant would be built by 2009 to provide power for the project’s second-stage of development. Hyundai Asan promises to lay 100 telephone lines by next month and then negotiate with North Korean authorities to install mobile and Internet services after assessing the results of telephone service. A dam will be constructed at Wolgot Reservoir northeast of Gaeseong to store 70,000 tons of water for industrial use. A large-scale dam will be constructed in Yeseong River north of Gaeseong to provide water for the factories in the second and third-stage development. Waste water disposal plants also will be built until 2007. In addition to the factories, a Woori Bank branch office and a Family Mart convenience store have already been running profit-making operations since last month. Commercial and residential facilities will operate inside the complex once it is fully developed. On the personnel side, Mr. Kim of Livingart worries about North Korean officials’ attitudes. He said, “It is nonsense to take a week to clear customs. They don’t understand the importance of easy and quick distribution.” Hyundai Asan and Unification Ministry officials acknowledge the problem and said they are negotiating North Korean officials to simplify procedures. Last September, the North Korean government signed an agreement that guaranteed visa waivers, no tariffs, unrestricted telecommunication and unrestricted money transactions from the complex to outside the country. In spite of some early obstacles, Hyundai Asan believes the project will succeed. Once the complex on 16,337 acres is fully developed by 2012, more than 2,000 companies are expected to employee one million workers ― 280,000 South Koreans and 720,000 North Koreans who will produce $20 billion in goods annually. While South Korean companies will benefit from low production costs, North Korea will earn $600 million a year from taxes on wages and corporate profits once the complex is in full operation. Hyun Chung-eun, chairwoman of Hyundai Group, expressed her dream that the complex would become an economic powerhouse when goods can be transported by rail from Gaeseong to China and Russia, and after a new highway is built to connect Gaeseong to Incheon’s International Airport and the city’s harbor. Around 250 bulldozers, excavators and dump trucks are working at the site, which covers 817 acres including the pilot program site. Hundreds of North Koreans have been removed from the area. Bae Kook-ryeol, head of the North Korea subdivision of the Korea Land Corp., said, “We will begin to sell the first-stage complex in March after establishing criteria to select companies in January.” The Korea Land Corp. built a branch office where a dozen officials will stay to manage the complex and the North-South Economic Cooperation Office will be housed. The Korea Land Corp. wants to lease 41 acres of the first-stage development site to foreign companies by the first half of next year with hopes for expansion in later years. Jang Whan-bin, senior vice president of Hyundai Asan, said, “European companies in South Korea have showed strong interest in the complex. If South Korean companies succeed, I think they will invest in the complex as European companies have already advanced in Nampo or Pyeongyang in North Korea.” Mr. Jang, who predicted that European companies would seek the opportunity provided by cheap North Korean labor, plans to host presentations on the Gaeseong project for European Chamber of Commerce Korea and American Chamber of Commerce Korea in the coming months. The future of the project will be affected by political developments, especially by North Korea’s relations with the United States. Yang Moon-soo, professor at the University of North Korean Studies, said, “Unless the nuclear issue is resolved within two years, the Gaeseong project will be in deep fix or should be delayed.” Yoon Deok-ryong, professor at the Korea Institute for International Economic Policy, said, “The speed and volume of the project will be affected by political affairs surrounding the Korean Peninsula. But the project should continue to entice North Korea into reforms and to demonstrate how much North Korea would benefit when it cooperates with international community.” But aside from the threat of political uncertainty stemming from North Korea’s nuclear weapons program, the complex project could fail early if the companies do not make a profit. Many experts point out that export controls for strategic materials will be a major obstacle in building production facilities and import restrictions will be a primary barrier in selling products manufactured from the complex. The South Korean government has not approved the moving of production equipment requested by two companies, JCCom and JY Solutech because of defense-related export restrictions. The U.S. government has regulations that govern exports and re-export of U.S.-made goods and foreign-made goods containing U.S. technology or software to certain countries such as North Korea. In addition, North Korean exports are virtually banned by the United States, and some North Korean products face high import barriers in European countries and Japan. Lee Soo-young, a director of Support Coordination Division at the Office for Gaeseong Industrial Complex Project at the Unification Ministry, said, “The government is working to remove the obstacles that hinder the development of Gaeseong complex.” Mr. Lee cited a free trade agreement with Singapore as an example of what the South Korean government can do. According to the agreement, Singapore will recognize products manufactured from Gaeseong as South Korean products. Mr. Lee said South Korean government is fully cooperating with the U.S. government on the export controls for strategic materials issue. by Lee Moo-young