A Capitalist in North Korea

by Felix Abt

  The president of the Pugang Group, Dr. Jon Sung Hun, is one of North Korea’s savviest business leaders—a trait you would certainly not recognize from his appearance.

  Pugang’s “Royal Blood Fresh,” a professionally marketed health food with magical qualities.

  A Pugang sales representative clad in a Choson-Ot dress promotes what Pugang called “cool motorbikes,” assembled with mainly Chinese parts and sold at home and overseas.

  Pictured above is our 2003 meeting over a multimillion dollar pre-contract memorandum of understanding between the ABB group and the North Korean government. The dignitaries present, from right to left, are the Minister of Energy production and coal industries, the Swiss foreign minister (and President of Switzerland as of 2011), and the Swedish ambassador to the DPRK, in the background.

  The international media broadcasted details of the meeting worldwide, framing it as a subtle “coup d’état” against the staunch American policies of the time. The Financial Times, for one, wrote: “The company confirmed that a signing ceremony in Pyongyang was attended by Micheline Calmy-Rey, Switzerland’s new foreign minister, and Hang Pong-Chun, North Korea’s minister of power and coal industries.” It further read, “Washington is planning to put pressure on Pyongyang by isolating its crumbling economy, and ABB’s agreement to improve North Korea’s power network could undermine this policy.”

  The debt dilemma

  At ABB, our biggest challenge was the lack of funds for infrastructure and industry rehabilitation projects. Unfortunately, the DPRK could not fund these projects by itself. The government was already struggling with chronic trade and payment deficits, and foreign debts exceeding $10 billion, according to a 2001 estimate by the CIA World Factbook. I saw the need to minimize any sort of external funding, and make the business sustainable, so I negotiated several joint ventures for low-tech items, like electrical cables, power capacitators, and transformers. My idea was that North Korea could have produced them cheaper than in ABB factories in other “emerging markets.”

  To release ourselves from the need of outside financing, we had to quickly find potential customers with the rare luxury of a hard currency income—an amenity usually reserved for export-oriented industries like mining. North Korea’s maritime fleet became such a customer, buying equipment and spare parts for between $500,000 and $1 million a year.

  The fleet, which earned revenue in hard currency from foreign customers for their transportation services, had bank accounts in foreign currency abroad. When we sold products, like ABB turbochargers for example, the North Korean vessels would pay us against a simple invoice from these foreign bank accounts. In particular the profit margin of spare-parts selling sometimes had a mark-up of 100%, meaning it was so high that it exceeded the entire cost of running the ABB representative office, including my salary. The shipping revenues were extraordinary because the fleet comprising a few dozen vessels sailed around the world picking up all kinds of products at different destinations shipping them to other destinations. Customers could be Chinese, other Asian, Arab, Western companies.

  Our company, however, later turned out to have a desperate financial situation that I didn’t know about at first. It turned out that the group was not able to outsource some of its products to low-cost North Korea nor help pre-finance and supply, in the North Korean tradition, some smaller “reference” infrastructure projects in the form of supplier credits to get an edge over our competitors. In the absence of a cover for our export risk, commercial banks in industrial countries where ABB had factories, such as in Germany, Switzerland and Poland, refused to give export credits to our shipments.

  Of course, ABB wanted to sell products and services in North Korea as it did in dozens of other countries, regardless of whether it had a factory there or not. Even for the planned joint venture factories, we were interested in exporting some products made by ABB-factories elsewhere. Only a few low-technology products could have been made in North Korea, and the rest would have to be procured from ABB-factories in other countries. My idea was that the planned JV-factories could partly have paid for the imports from ABB-factories abroad, using their exports.

  This is the slide of the workshops ABB gave to senior cadres of the Central Bank and the Foreign Trade Bank (known in Korean as the Muyok Bank) where we pointed out the need to address a coordination problem in the banking sector, which was a hindrance to financing projects. In our experience, the same problem was relatively well solved in former East European socialist countries. For example, China adopted measures for financial settlement from the Soviet Union in the 1950s, which were conducive to a highly centralized economy until the 1980s when they started reforms.

  Infrastructure woes

  When Pyongyang’s Russian-built water supply and drainage system had to be overhauled as it suffered from leakage and water losses of around 50 percent according to the government, the state made an international tender call for a project that would turn out ill-fated. The Kuwait fund offered $20 million to fund the undertaking—an ironic donor, considering the country was (as it is today) a close ally of the U.S.

  In fact, it was the only institution prepared to lend money to the North Koreans. Perhaps Kuwait had only a charitable agenda, but its ally may well have had a burning interest in getting to know North Korea’s capital better. What would have been better than a large infrastructure project across the city? Kuwait, of course, still owes its friend and ally a few favors since it was liberated from Saddam’s army.

  At ABB, we were familiar with the Australian consulting firm that managed the project on behalf of the Kuwaiti fund and the Pyongyang People’s Committee. In an attempt to get that contract, my Korean staff tapped into their contacts that would lead us to the government decision makers. We fed the People’s Committee with technical information on the project’s center piece, our SCADA control system for the water purification system, which I was hoping they would agree to using. My staff and I were sure that we would win this tender.

  But once again, trade embargoes got in the way. The SCADA-system runs on PCs with Microsoft software, causing our company’s head of this division (who was an Indian man living in the US), to get nervous about participating in the tender competition with an offer. The consequences could be disastrous for his portfolio in the US if the government chose to enforce sanctions.

  I argued that the American software constituted only a minuscule portion of the whole scope of supply, and that they should ask for a formal permit to get the U.S. approval. This move would have likely been no problem, as Microsoft software didn’t constitute technology that could be used for military purposes. They replied that it would take a long time for the request to move through the cumbersome bureaucracies in Washington. It was a loss for us and for North Korea, and one that made my staff furious after all their long hours that went into marketing our idea.

  An ABB robot works at the Taedonggang General Fruit Processing Factory, helping to improve productivity, product quality and worker safety.

  In 2003, ABB and the British American Tobacco (BAT) were the only multinationals with expatriate staff active in the country. But at the same time, ABB got into deeper financial troubles and had to cut costs so it could save $800 million in expenses. The company immediately closed down dozens of factories and offices around the globe. Our North Korean office covered costs just fine, but apparently this market wasn’t their priority: headquarters shut down our office to squeeze some cash out of it. The corporation also signed a cost-effective agency agreement with me which ABB cancelled after 5 years.

  Like other multinational groups they were afraid from getting into trouble with the U.S. government. The sharply rising bellicose rhetoric and the pressure on the “axis of evil” that included Iran, Saddam’s Iraq and North Korea has become too strong for a company with a very large business in the U.S., although ABB states on its website it is doing this for “humanitarian” reasons.

  This extract from ABB’s letter of referenc
e for me, above, shows that my work was marked to a large extent with the search for funds. My goal was to make the implementation of infrastructure and industry projects feasible.

  The large majority of foreigners doing business with North Korea were Chinese, often of Korean origin. There was hardly any business field where not at least one Chinese company was active. Together with North Koreans they were running shops, restaurants, petrol stations, fish ponds, furniture factories, garment production, green houses, bicycle manufacturing, mining and just about anything else you can think of.

  In a survey carried out by the U.S. scholars Stephan Haggard and Marcus Noland in 2007 of 250 Chinese businesses operating in North Korea, 88% said they were turning out profits. The majority also admitted to paying bribes. Although Chinese businesses routinely face difficulties, most said they would persist and hope for economic liberalization.

  88% of profitable enterprises is indeed a surprisingly high score and certainly higher than that of non-Chinese foreign as well as South Korean companies doing business in North Korea. From time to time I bumped into my friend Joe (a Chinese businessman from the Chinese border city Dandung and then resident in Pyongyang, who had been running a large garment operation in North Korea for more than a decade) at the dancing hall of the Health Club restaurant, which was one of the few places expats went to for eating and meeting.

  Later in the evening, after Joe’s blood-alcohol level had sharply risen, he used to complain about quality and reliability problems he faced. He said that he would like to give up and start another business in another country, particularly when a customer from a foreign country had just returned containers with finished goods.

  Obviously, Joe could somehow cope with these worries as I heard his story again and again for several years until he was gone. I missed him and his departure made me question if I myself would be able to successfully run a business over a longer time if such a smart and experienced Chinese businessman found it necessary to quit. There were some Chinese businesspeople even less fortunate than Joe, who told me that their North Korean counterparts were exploiters and cheaters.

  I met a large number of other Chinese business people – often of Korean descent – who all had their grievances, for example for not being paid in time or not being paid at all by their customers, but were mostly happy with the way they did business. From time to time I saw new faces, and some familiar faces disappeared.

  I rejected most North Korean business proposals. I was not sure if the buyers would ever pay me. Much to my surprise my Chinese competitors often took risks, based on the naïve assumption that state-owned companies would pay them at some point. They realized more sales, but with overall less profit. Sometimes that came with a big loss.

  Still, I met both honest and dishonest North Korean business people and officials just like in other countries I have been working. But, no doubt, honesty and integrity is a much more decisive success factor in North Korea than in industrialized Western countries where it is easier to legally pursue wrongdoings.

  To help sort out the black from the white sheep, I hired a younger North Korean man. He worked as a “scout” and had to identify business opportunities but also the profile of potential business partners. As he was well connected he could avoid the risk of being suspected as a spy. He himself was a sincere person, who once told me that not only competence and resources of a North Korean business partner is important. He stated, “it is even more important in our country to find honest business partners. Korean companies, too, are wary of other Korean companies not respecting contracts.”

  It’s perhaps the inexperience, boldness, and lack of due diligence that brought the Xiyang Group Co., from China’s Liaoning province, into deep trouble.5 The privately-owned company produces and distributes magnetite products and steel on its own steel mills, as well as fertilizer. In 2007, the company became North Korea’s largest foreign investor, putting out $37 million for an ore processing plant corresponding to 70 percent of the total investment. Its North Korean joint venture partner supplied the land corresponding to the remaining 30% with the iron ore.

  In 2011, a few months after the plant started processing iron ore, the North Korean partner demanded 16 modifications to the contract. The new scheme included 4 to 10 % of sales revenues for the finished products for the raw materials, $1.24 dollars for every square meter of land leased, and $0.17 for every cubic meter of the sea water used in production. Xiyang refused to compromise and its Chinese workers were deported to the Chinese border. Xiyang publicly accused North Korea of stealing its ore dressing facility.

  From the ensuing public debate between the North Korean Central News Agency and the company it appeared as if the Chinese company may not have fully respected its contractual obligations either, since the North Korean side accuses it of having implemented only half the agreed investment. Whatever the truth is, the precautions I took for my much smaller ventures must have prevented me from getting into similar trouble.

  The Korean-Polish Shipping Co. Ltd. is the oldest joint venture company in North Korea. It was jointly set up in 1967 by the Polish and North Korean governments and has operated profitably most years, according to conversations with their employees. One problem, though, was that its cargo vessel was sailing under a North Korean flag. Some customers, like grain traders looking to lower costs, thus became reluctant to contract with the firm any longer after the Bush-era belligerence.

  Jan Makiel, pictured here with his employees, was a Polish businessman who set up a butchery in Pyongyang using painless animal killing techniques. He has overseen rapidly expanding sales to hotels, restaurants and shops in North Korea and, at one point, even planned to export sausages to China.

  Because of his success, the European Business Association in Pyongyang declared him “Member of the Year” in 2006. Sadly, the business collapsed about a year later due to a serious flaw in the Polish business approach. The Polish investors first sent the equipment and their butcher, Makiel, to Pyongyang, but started negotiations on a joint venture contract when the operation was already in full swing.

  But by then the positions between the Polish and the North Korean business partners had diverged, and could not be reconciled any further. The Polish investors, left without any negotiating leverage, asked me to take the business over or to look for another buyer. While I recognized that the Polish sausages were for the most part delicious and fresh, the lack of preservatives in Polish recipes made them unsuitable given North Korean practices. Consumers usually didn’t respect the expiration dates. Furthermore, the frequent power shortages made proper refrigeration impossible—a second factor that would make the sausages a health landmine more than a profitable opportunity.

  In the photograph above, we welcomed this new member to the European Business Association, given our stagnated membership numbers at the time. And I was pleased to congratulate Jack Spoor, a senior executive of Spirax Sarco and his sponsoring partner, Director Ri of the Foreign Relations Department of the Ministry of Electricity and Coal Production, on the truly memorable day of their representative office opening.

  It was extremely rare that a multinational corporation opened an office, let alone a factory, in North Korea. When that did happen, there was usually a major sensation in the international press. When American businessman Gabriel David Gottlieb Schulze, the Beijing-based CEO of Schulze Global Investments, based in Beijing announced in 2011 he would bring Coca Cola and KFC to North Korea, it caused a media hype. Schulze had already offered hundreds of thousands of dollars worth of loans to mining companies in North Korea for equipment.

  It’s regrettable that the two American multinationals were quick to deny any plan to do business with North Korea. The last Western multinational to set up a licensed representative office was Spirax Sarco, a globally leading manufacturer of boiler and pipeline control valves for steam heating and process plants. On its website the company boasts that it employs “over 4,500 people with offices and manufacturing
facilities worldwide”. Spirax-Sarco opened its representative office in the Changgwang Foreign Dormitory and Offices high-rise building near the Koryo Hotel where we sat opposite to each other on the same floor

  The above extract from the website of the Pyongyang Business School quoted media, which reflected on the purpose of this school.

  Pictured are the resident members of the European Business Association at an informal meal. On the left is the head of a Russian fisheries company in North Korea. He was the only foreigner allowed to use a global positioning system (GPS) for professional reasons, like locating the position of boats at sea. The second man from the left was the chief representative of the Russian airline Aeroflot, which in 2006 shut down its presence due to lack of business.

  The first gentleman on the right studied at Kim Il Sung University and became later a leading and respected diplomat at the embassy of the socialist German Democratic Republic to the DPRK. After Germany’s reunification on West Germany’s terms, he lost his job like other East German government officials. He represented a living example to the North Korean cadres of what would happen after a reunification on South Korea’s terms—a scenario that they fear.

  To survive, he became a businessman, and was resident chief representative of the German company that set up internet services for the small resident foreign community. The company expressed its belief that the “North Koreans would be the Indians of tomorrow,” meaning the country would become the world’s next IT super power. Unfortunately, that promising specter didn’t come to pass, and the company went bankrupt a few years after being founded.