A Capitalist in North Korea

by Felix Abt

  The second person from the right was the director of the Korean-Polish Shipping Joint Venture company, which has been doing well for several decades. Finally, the Vietnamese woman to my right is my wife.

  The first meeting between the European Parliament and the North Korean Parliament, called Supreme People’s Assembly, took place in North Korea in 2005. Issues between the two sides, like the nuclear dilemma, were discussed. Methods for more engagement between Europe and North Korea were also discussed, including the business environment for foreign businesses. The picture on the left shows the chairperson, Ursula Stenzel of Austria on the left, and Glyn Ford of the United Kingdom on the right. The picture on the right shows the large crowds at the European Business Association’s booth during the International Trade Fair.

  Above, the official state magazine reported in 2008 on the 3rd Pyongyang Autumn International Trade Fair. In a highly unusual move, the editors selected, for the first and only time to date, one state-owned company from more than a hundred North Korean exhibitors.

  It also showcased, out of a pool of more than a hundred foreign exhibitors two, the PyongSu Pharma JV Company and the European Business Association (EBA) in Pyongyang, both led by me. The magazine emphasized: “Products exhibited by the Korea Machinery Trade General Corporation, the PyongSu Pharmaceutical Joint Venture Company and the European Business Association were the highlights of the exhibition.”

  1 http://www.mcclatchydc.com/2008/01/10/24521/us-counterfeiting-charges-against.html

  2 http://www.mcclatchydc.com/2007/05/22/v-print/16472/swiss-authorities-question-us.html

  3 http://www.wsvn.com/news/articles/world/21007894897051/un-report-nkorea-violating-sanctions/

  4 http://www.pyongyangsquare.com/updates.html

  5 http://www.defence.pk/forums/world-affairs/201069-north-korea-kicks-out-chinese-company-after-completion-factory.html

  Chapter 14:

  The Loss of Innocence

  “I came here because I wanted to see you.” — South Korean President Kim Dae-jung, in a statement to the North Korean people upon arriving in Pyongyang in June 2000 for the first inter-Korean summit

  Throughout the history of the peninsula, South Koreans born in the north, along with wealthy business people, have attempted numerous pet projects to bring both sides together. The first North Korea-born engagement leader was Chung Ju Yung, the founder of the Hyundai business conglomerate and the most famous businessman in Korean history, who passed away in 2001.

  The second was Sun Myung Moon, a businessman who founded the Unification Church and passed away in September 2012. Both were able to make use of their North Korean connections, and their heritage, by propping up sizable investments in North Korea worth somewhere between $1 billion and $2 billion (although the exact figures haven’t been made public).

  In 1998, Chung made worldwide headlines when he sent 1001 cows from the south over the DMZ to the north. He hoped to make up for a single cow he had stolen from his father decades ago, but repaid as a measure of Confucian-style deference. The animal indirectly created his fortune: after selling the cow, the young and poor Chung had the money to buy a train ticket south and escape poverty in the north. “I was repaying North Korea 1,000 times over for the ‘loan’ of a cow I had ‘borrowed’ from my father to pay for my ticket south,” he told The New York Times.

  Chung founded Hyundai in 1946 in anticipation of the enormous need to reconstruct and industrialize Korea after World War II. In 1989 he correctly foresaw another important business opportunity: Mount Kumgang or Diamond Mountain, with its 12,000 sparkling peaks, was considered as the most beautiful mountain on the entire Korean peninsula. Due to the division of Korea, the highly popular mountain just north of the DMZ was no longer accessible to South Koreans.

  He sensed a pent-up desire by South Koreans to visit this mountain, and the development plan was in a good location for tourism. Just south of the border in the area, South Korea’s Sokcho city was renowned for its well-preserved Buddhist temples and the serene Yeongrangho Lake nearby. In addition to the travel venture, Hyundai set up in 2000 the joint business area in Kaesong, North Korea, close to the DMZ.

  Starting in 1998, South Korean tourists could travel by cruise ship to Kumgang Mountain, five years later Hyundai started using a land route for bus travel to the special zone. In June 2005, the millionth visitor arrived on the mountain, according to the company. With so much success, the conglomerate hoped to expand the site to include a ski resort and golf courses. Unfortunately, the project ceased on July 11, 2008 when a South Korean tourist crossed into a military sector after wandering over a sand dune, and was shot dead by a North Korean patrol.

  The debacle became a national incident that added to the south’s worries over the North Korean nuclear program. Seoul demanded an immediate explanation, to which North Korean officials responded that the sentries had no choice but to shoot the South Korean woman. She did not obey an order to stop, and instead fled, they claimed. South Korea temporarily suspended all tours to the mountain until an on-the-spot survey was carried out. North Korea rejected the demand, arguing that the facts were clear and the victim was fully responsible for the incident.

  In 2010, North Korea seized properties belonging to Hyundai “to compensate for the damage suffered by the Northern side due to the suspension of the tours for a long time,” said a government statement. There is no doubt that North Korea did suffer from the suspension of the tours, although the consequences were probably worse for Hyundai. The incident was also a result of the declining relations in general from 2008 to 2010. The left-leaning South Korean newspaper Hankyoreh wrote on July 26, 2011 that the “resumption of the Mount Kumgang tourism remains suspended due to the Lee administration’s hardline North Korea policy,” rather than a provocation on the part of the North.

  As the dispute escalated, North Korea offered tours to Chinese and foreign tour operators from its side, and cruises that embarked from Rason, a city northeast of the port of Kumgangsan. Sadly, Hyundai’s huge investment—a boon for the North Korean economy—became a victim of another inter-Korean political conflict.

  On the other hand, the Hyundai division, called Hyundai Asan, which oversaw the Kaesong Industrial Park, had been lucky until more recently. The zone is located 10 kilometers north of the DMZ—about an hour’s drive from Seoul—and is connected by rail and road to South Korea. Its first three South Korean companies started production in 2005, and five years later 110 factories had opened shop with some 42,000 North Korean workers and 800 South Korean staff. The total investment then exceeded $1 billion, approximately two-thirds of it coming from the tenant companies. This is a sizable figure when placed against North Korea’s GDP of $40 billion in 2010.

  For small and medium-sized South Korean companies, one goal was to compete with the Chinese export machine: Kaesong offered low-cost skilled laborers, who spoke the Korean language—unlike other contenders in China or Vietnam. For North Korea, the project eased its reliance on its main ally.

  North Korea was interested in Kaesong for the following reasons: The planned 725,000 jobs to be created by 2012 (which they had not reached by the beginning of 2012 with only 50,000), and first an annual $0.5 billion as wage income for North Korea, five years later an additional annual corporate tax income of $1.8 billion from the tenant companies.

  In North Korea, these numbers are highly significant because they could contribute to correct the country’s notorious negative balances of payment and trade deficits. Indeed, North Korea imported in 2010 goods and services totaling 3.5 billion versus exports amounting to 2.5 billion only, according to the CIA World Factbook. The planned tax income of $1.8 billion alone from Kaesong could more than offset this enormous gap. It could even allow the country to buy, for the first time, enough food from abroad, enabling it to shake off its decade-long dependence on foreign donors.

  Tightening the screws

  Almost a year later, in March 2010, the business projects were put into furth
er jeopardy when a South Korean navy corvette, the Cheonan, mysteriously sank. The incident left 46 seamen dead. A South Korean government-led investigation, alongside experts from the USA, United Kingdom, Canada, Australia, and the neutral country Sweden, claimed that a North Korean midget submarine launched a torpedo at the warship.

  Pyongyang immediately rejected the findings, which were also disputed by its quasi-allies China and Russia. Sweden, meanwhile, reportedly did not add any signatures to the report despite partaking in the investigation.

  Yet The Los Angeles Times wrote on July 23, 2010 that “challenges to the official version of events are coming from an unlikely place: within South Korea.”4 There were questions over the timing: the sinking happened just as one of the world’s largest military exercises at the time, involving dozens of U.S. and South Korean ships, was underway. It also seemed strange that the Cheonan, and all the other American and South Korean vessels nearby, apparently did not notice the approaching torpedo and the North Korean submarine, despite having the latest technologies.

  Because of the findings, the South Korean government ordered the halt of almost all trade between North and South Korea two months later, signifying the bottom point ten years after the “Sunshine Policy” brought hope to both sides. As doing business in the North became politically risky, customers cancelled their orders from the South Korean factories set up in the industrial zone, and several of them teetered on the brink of bankruptcy.

  In addition, eight presidents of tenant small- and medium sized enterprises complained in interviews1 that they lost hundreds of thousands of dollars as a consequence of the boycotts. In September 2012, the right-leaning South Korean newspaper Chosun-Ilbo wrote that “Kaesong Firms still suffer from N. Korea sanctions” imposed in 2010 by the conservative government in Seoul and quoted a survey by the South Korean Chamber of Commerce and Industry saying that “some 61.8 percent of 200 firms said it has been hard to recover from losses.”

  In 2007, a year before Lee Myung-bak became president, I inquired about setting up a small packaging center in Kaesong for the PyongSu pharmaceutical factory. I didn’t see much of a need to open a second factory there, but rather wanted to box and ship our low-cost Pyongyang-made medicines to the lucrative South Korean market.

  There was one upside: North Korean government officials thought it was a great idea, although we’d have to pay higher wages than those in Pyongyang. And unlike the more legally constrained South Korean managers, I was allowed to communicate directly with all North Korean staff. (South Korean factory directors had to communicate with a government-assigned North Korean deputy who would deliver instructions down the pyramid.)

  The problem, it turned out, was in South Korean tastes. A number of pharmacies in the South explained to me that our products would have to undergo a demanding inspection process. Even if they passed, buyers would be uneasy about ingesting North Korean-made pharmaceuticals that they assumed could be dangerous. Besides, European investors like me could already invest in most parts of North Korea and, ironically, the more liberal industrial zone of Kaesong only put up more barriers. We scratched the idea.

  This capitalist enclave in socialist North Korea, pictured, is Kaesong Industrial Park, equipped with modern industrial infrastructure.

  After the successful launch of Hwiparam I, a copy of the Fiat Siena, China’s Brilliance’s Junjie car (image) was assembled in Nampo by Pyeongwha under the name Hwiparam (Whistle) II.

  Soon after Hyundai chairman Chung went to North Korea for business negotiations in 1989, other chaebols such as Samsung, Daewoo and LG started looking into projects and trade with the North. Daewoo invested almost $6 million into a garment factory in Nampo in the second half of the 1990s, LG set up a little later a TV assembly plant in Pyongyang. These ventures were not particularly successful mainly as good quality of the products and good communication between the two sides left much to be desired as I learned from Koreans involved in those projects.

  South Korean companies were eyeing business opportunities in North Korea, hedging on the “Sunshine” policy in the 2000s. The chairman of one of largest South Korean construction companies, who was interested in securing a large chunk of sand from North Korea to make concrete in the South and other countries, invited me to look into opportunities for him. There have been others importing sand already.2 But he thought that I could, thanks to my connections in the North, get most of the sand exclusively for his company. I also met a few representatives from larger business conglomerates in the south, all of whom employed small unofficial committees that discreetly studied the market.

  With one chaebol, I discussed opening a mineral water bottling plant at the foot of Mount Paekdu, the country’s holy mountain because it was the birth place of the Korean race. One highly competent South Korean industrialist, P.H., referring to him by the initials of his given name, and I thought up some more ideas over the years.

  The industrialist, working with a retired president of the largest dairy company in South Korea, Seoul Dairy, thought up a plan to offer every North Korean child a glass of milk per day. The idea struck a chord with many farmers in the south, who were of northern descent.

  We first planned to set up a milk powder plant, and then gradually switch to processing fresh cow milk; the practice of cow farming wasn’t entirely developed yet in the north, and we needed to build it up while we worked on our plant. Charities and wealthy individuals committed to the project, but after Kim Jong Il’s first nuclear test in 2006, the prospect quickly vanished. The North Koreans liked most of our intentions, but the obstacle was that both sides trusted the Swiss interlocutor instead of each other.

  Other interlocutors have arrived from South Korea and overseas in the past decade, undertaking similar efforts to reconcile relations. One fantastic group started the privately funded Pyongyang University of Science and Technology (PUST), which opened its doors in 2010 despite the continued political strains between Seoul and Pyongyang.

  A lot of North Korea watchers lost hope in the project, which was approved by the education ministry in 2001. Construction works and the inauguration had been postponed several times. But on October 25, 2010, hopes were reignited when the university started its operations with 20 foreign professors, 100 North Korean graduate students, and 60 undergraduates. Another 100 students joined courses the following year. Admittedly, the figures were not overwhelming—but they were a good start.

  One personality behind the campus was Professor Park Chan-mo, an information technology expert who took a post as one of the university’s four co-chairmen. He came with a good background to the project. Until October 2010, Park headed the National Research Foundation of Korea—South Korea’s top state body that doles out research funding, the country’s equivalent to the International Institute for Education (IIE) in New York. Before that, he presided over the Pohang University of Science and Technology (POSTECH), which he turned into South Korea’s leading technical university and one of Asia’s best universities. It ranked number one among the world’s top universities under the age of 50.3

  Professor Park was particularly appropriate for this work because he was trusted by North Koreans, having lectured to the country’s IT engineers before and trained engineers at the Pyongyang Information Center (PIC) in 3-D animation—helping making PIC the leader in 3-D animation software in North Korea.

  Professor Park explained his vision in an email to me: “Similar to other nations the future of the Democratic People’s Republic of Korea will be largely depending on the young people, especially scientists and engineers and it is very important to educate those students to have a global mindset,” he wrote. “It is well known that although there are political borders among the nations there are no borders in science and technology. Scientists and engineers should strive together for the betterment of human beings and world peace. That is why I am working for PUST.”

  From prison to university president

  James (Chin-kyung) Kim, a 76-year-ol
d Korean-American educator and former entrepreneur in the United States, was arrested in 1998 on suspicion of espionage. He was incarcerated for more than a month in a North Korean prison, even though the ardent Christian was delivering food from China during the famine. Yet he and the North Korean government, quite pragmatic when things turn to its advantage, have forgiven each other. A few years later, he started promoting the idea of setting up the Pyongyang University of Science and Technology, where he is one of four co-chairmen.

  Professor Park, along with the other initiators of the university, acted out of their own fervor for the Christian gospel. They were smart enough to know that open missionary work would have brought the project to an immediate end. But the reality of the situation—that most of them were ethnic Koreans, Christians and businesspeople—must have been a headache for their counterparts in Pyongyang.

  From my own work at the Pyongyang Business School, I was aware of the North Korean worries. After long discussions on the agenda, we started with a trial seminar in front of party officials before receiving the green light to move forward.

  Even more telling of PUST’s problems was that, although we submitted our school proposal years after the PUST chairs submitted theirs, the government allowed us to start classes six years earlier. Most of their reasoning was that we had no political, religious or other agenda. And unlike the Christians at PUST, I had to make a living and earn my dividends on earth and couldn’t wait until going to heaven. The North Koreans needed to be sure that both our ventures, arriving under foreign influence, conveyed scientific and technical knowledge but no ideology that could infect the apparatus.