Industrial area promises peace and profit

Foreign companies have asked many questions about the Gaeseong Industrial Complex but are waiting to see how South Korean companies fair before investing, business and government officials said. While businesses in North Korea will likely enjoy low labor costs, a multitude of concerns remain for operating in a communist country that has only cautiously opened its doors for investment. “Foreign companies have continuously made inquiries about the complex, but I think they are waiting to see what happens,” said Cho Myoung-gyun, head of the Gaeseong project in the Ministry of Unification. Mr. Cho would not reveal what business asked questions but said labor-intensive ones and those that do not require sophisticated technology are showing interest. “After the first phase is over, we will try to attract foreign companies to invest in Gaeseong around later part of 2006,” Mr. Cho said. “The North Koreans want this too, I believe.” Because wages in North Korea are relatively low, many European companies in labor-intensive industries might go to Gaeseong if the first phase succeeds, said Jean-Jacques Grauhar, chairman of the North Korea Committee at the European Union Chamber of Commerce in Seoul. North Korea could become a place for companies to manufacture goods cheaply and then sell them to markets in South Korea, China or Japan, he said. But investments have political implications as well. There are ongoing concerns over North Korea’s nuclear weapons program, he said. “The foreign multinationals are all waiting to see how the nuclear issue in North Korea will be solved,” Mr. Grauhar said. “Unless the security issue is solved, there won’t be any active interest.” Very few European banks are enthusiastic about providing loans to companies willing to invest in North Korea, Mr. Grauhar added. Pyeongyang must instill confidence for foreign banks and reduce risk factors, he said. There are also other obstacles, Mr. Grauhar said. “The infrastructure [in North Korea] is good, labor is more flexible, but the equipment is quite obsolete,” he said. “The real bottleneck, I believe, is energy.” Hyundai Asan officials said no large multinational companies want to immediately invest in North Korea. However, foreign companies operated and owned by overseas Koreans are showing interest. Hyundai Asan said even a U.S.-based company has shown interest, despite the political rift between Washington and Pyeongyang. “After test period [of the Gaeseong complex] is over and the infrastructure is set up, then foreign companies will decide to invest there,” Mr. Grauhar said. Construction on the first phase of the Gaeseong Industrial Complex is expected to be completed in 2006, and the area is expected to host 200 to 300 South Korean companies and factories. Companies setting up shop in the complex now tend to be small to middle-sized businesses opting for wages lower than in countries such as China. Since enacting some economic reforms in 2002, Pyeongyang has been trying to attract foreign capital from European countries and overseas Korean businesses. DHL, an international air express services, is one of the very few European companies that have an established base in Pyeongyang. DHL, which opened office in Pyeongyang in 1997, operates under an agreement with the Korea Foreign Transportation Corporation, the leading state-owned company dealing in freight forwarding, transportation and logistics under the Ministry of Trade. DHL’s small fleet of three vans and one jeep are painted with their familiar yellow and red corporate logo. The company did not provide revenue figures for its operation in North Korea. The fleet runs mainly in Pyeongyang, allowing couriers to deliver material between its main office, the airport and other cities. DHL has recently expanded to four other major cities such as Nampo, Rajin Sunbong, Hamheung and Wonsan. “Ever since the launch of economic reforms, we see some very encouraging trends,” said DHL’s Pyeongyang general manager Poh Eng Seng, adding that the government has been helpful “in resolving operational and regulatory challenges, such as customs clearance and shipment recovery.” DHL is the market leader in the international delivery business in North Korea, enjoying growth of 10 to 15 percent annually. In the country, it competes with about a dozen small local niche players operating between North Korea and China, especially in the Dandong-Sinuiju corridor. “Driven by the government economic reforms, there has been growing interest shown by the international business community to explore the economic potential of this still under-developed market of 23 million people,” said Mr. Poh. Top customers are non-governmental organizations, diplomatic missions, printing, textiles, trading, banking, energy and manufacturing sectors. DHL’s Pyeongyang office has a staff of 21, with 18 locals and three international staffers who coordinate communication. All wages are paid in the local currency. “At this point, we have no plans to open an office in the Gaeseong Industrial Complex,” said Lars Voedisch, spokesman for DHL’s Asia-Pacific Office. “We are, however, following the developments at the complex closely and will explore any opportunities that arise such as when customer demand increases,” he said. by Choi Jie-ho