North Korean Economy Watch

Mount Kumgang tour goal to fall well short of 400,000
Joong Ang Daily
12/18/2006

The number of South Korean tourists to a scenic North Korean mountain resort is expected to fall far short of the initial target of 400,000 for this year due to inter-Korean tensions, South Korean tour organizers said yesterday.

About 1.3 million South Koreans have visited Mount Kumgang since the communist North opened the area to outsiders in 1998 to earn badly needed hard currency.

The South Korean tour operator, Hyundai Asan Corp., had planned to attract 400,000 tourists to the area this year, but the number is expected to reach slightly more than half of the the target, company officials said.

The sharp drop in the number of tourists to the resort can be attributed to recurring tensions caused by the North’s multiple missile tests on July 5 and its first-ever nuclear weapons test on Oct. 9, they said.

“We had aimed for 400,000 visitors for the year, but the North Korean nuclear crisis caused a significant problem,” a Hyundai Asan official said, citing the North’s missile and nuclear tests.

According to Hyundai Asan, a total of 230,224 people, mostly South Koreans, visited the resort in the first 11 months of the year, and the number of visitors in December is not expected to be more than 10,000.

The North’s mountain resort is reachable from South Korea by bus within an hour.

Yonhap
12/6/2006
Byun Duk-kun

Unification Minister Lee Jong-seok returned to South Korea Wednesday after a two-day visit to North Korea aimed at rallying support for a cross-border tourism program criticized by the United States.

The South Korean government’s point man on North Korea arrived in the country’s eastern city of Goseong shortly after crossing the heavily-fortified border with North Korea around 5 p.m.

Lee was the highest-ranking South Korean official to visit the South Korean-developed tourist destination in Mount Geumgang since the communist North tested a nuclear device about two months ago.

The visit was geared towards meeting South Korean officials and businesspeople at the North Korean resort, but it followed Washington’s intensified criticism against the tourism program.

The United States had long opposed the inter-Korean tourism program, but never too explicitly. It asked the Seoul government to halt the country’s cross-border project with the North after Pyongyang conducted its first nuclear weapons test on Oct. 9.

The Mount Geumgang tourism program appears to be “designed to give money to North Korean authorities,” Assistant Secretary of State Christopher Hill said while traveling here in October.

Hill represents Washington in international negotiations aimed at persuading the North to abandon its nuclear ambitions. The talks are also attended by the two Koreas, Japan, China and Russia.

Seoul remained taciturn on the U.S. demand, only taking what U.S. critics called “eye-washing measures.”

The unification minister, however, said the tourism program must “continue” and “be developed further.”

“We must never take a break from trying to ease tension between the North and South Korea, no matter how difficult the times and conditions are,” the minister said while meeting with reporters at the North Korean resort,

“In that sense, these projects (with North Korea) must continue to be developed and widened,” he added.

Seoul was never expected to halt, let alone suspend, the tourism program, but the minister’s remarks come amid international efforts to punish the North for its nuclear test.

Shortly after the Oct. 9 test, the United Nations Security Council approved a resolution that prohibited the transfer to North Korea of any financial resources or assets that can benefit the communist nation’s nuclear and weapons of mass destruction programs.

Millions of dollars have been paid to Pyongyang since the Mount Geumgang resort opened in 1998, while Hyundai Asan, the South Korean developer of the resort, regularly pays large amounts of money to the North in the form of admission fees levied on South Korean tourists traveling there.

The South Korean government claims the money is unlikely to be used for the North’s nuclear or WMD programs, though it admits there is no way of knowing for certain.

The U.N. Security Council has yet to decide whether Seoul’s continued, and apparently renewed, support for the Mount Geumgang tourism program runs counter to its North Korea sanctions resolution.

“I believe no one can dispute the positive effects that the Mount Geumgang tourism program and the Kaesong industrial complex project have had on North-South relations,” said Lee.

The unification minister has offered to step down from his Cabinet post and is expected to be replaced next week by Lee Jae-joung, senior vice chairman of the presidential National Unification Advisory Council.

He was scheduled to arrive in Seoul later in the day.

From Businessweek:
Joe McDonald
11/5/2006

In the midst of tensions over North Korea’s nuclear program, a Western company is there searching for oil. Another just bought a bank.

“North Korea is hungry for business,” said Roger Barrett, the British founder of Beijing-based Korea Business Consultants, who recently took 11 Asian and European clients to Pyongyang to play golf and make contacts.

A small group of Westerners are taking on the challenge of doing business in the isolated North, hoping to get in on the ground floor as its communist rulers experiment with economic reform.

The obstacles are daunting. A Stalinist dictatorship, bureaucracy and language barriers. Foreign sanctions that block most financial transfers, making it hard to get paid and to get supplies. And now worries that United Nations sanctions imposed after North Korea’s Oct. 9 nuclear test could be expanded to a general clampdown on trade.

But the Westerners talk positively about the North as a business environment, with skilled workers and leaders who they say welcome foreign investment.

“They are very skillful and hardworking,” said Felix Abt, a Swiss businessman who oversees two ventures in Pyongyang, one that makes business and game software for sale in Europe and another that makes antibiotics and painkillers for the domestic market. “It’s sometimes faster to get licenses and necessary approvals here than it is in China or Vietnam.”

Barrett said that even as the U.N. Security Council debated the latest sanctions on the North, he got inquiries from investors interested in its rich mineral resources and low-cost manufacturing work force.

“Investors are rushing into China, but labor costs there are escalating, and companies are looking for an alternative,” Barrett said. North Korea “has absolutely the capabilities to take off like South Korea.”

So far the largest foreign business community in North Korea is from China, its main source of trade and aid.

South Korea accounts for most of the North’s foreign investment, with stakes totaling $620 million in an export-manufacturing zone and a resort for foreigners. China’s investments total just $31 million, according to the Chinese Commerce Ministry.

U.S. regulations allow American companies to trade with North Korea under limited conditions, though tensions between the governments and lack of diplomatic relations raises the risk of doing business. Britain, Germany, Sweden and other Western governments, meanwhile, have official relations with Pyongyang.

North Korea’s foreign trade has risen sharply, though the total was less than $4 billion last year, according to South Korean and Chinese government figures. Trade with the South soared by more than 50 percent in 2005 to just over $1 billion.

Most trade is carried out by North Korean state companies, not private entrepreneurs. And some partners are shying away. Trade with Japan, once the North’s No. 1 trading partner, tumbled from $1.3 billion in 2001 to just $200 million last year amid tensions with Tokyo over North Korea’s abduction of Japanese nationals in the 1970s and ’80s.

The Europeans’ chamber of commerce in Pyongyang had 12 members when it was launched last year. They include delivery company DHL Express, an Italian law firm and a German venture founded in 2003 to provide Internet access to foreign businesses in Pyongyang.

This tentative foothold follows the slow pace of economic reform in North Korea. Only in 2002 did North Korean leader Kim Jong Il allow limited free enterprise to revive a decrepit economy, which teetered in the 1990s following the loss of Soviet aid and then collapsed amid widespread food shortages. Still, foreign observers say officials are reluctant to give up control, despite prodding from Beijing, which wants faster reforms to reduce its ally’s dependence on aid.

Abt, the Swiss businessman, moved to Pyongyang in 2002 after seven years working in Vietnam, another Asian communist economy in the throes of reform.

“I heard that some economic reforms were in the pipeline, and I was quite thrilled to experience the beginning,” said Abt.

Now his Vietnamese wife takes their 14-month-old daughter to play at an international school. After work, he goes out to sing karaoke with North Korean co-workers.

But Abt has felt the bite of efforts to pressure the North.

Foreign banks have been leery since Washington last year sanctioned Macau’s Banco Delta Asia, which the U.S. said helped the North launder money. China told its banks this month to curtail financial transfers to or from the North.

“It’s getting difficult to make bank transfers to suppliers or to get money from customers,” Abt said.

He worries that the factory might have to shut down if U.N. sanctions block imports of required chemicals on the grounds that they also could have military uses.

Barrett said his clients have lost access to $11 million in Banco Delta Asia accounts that were frozen by the U.S. sanctions.

Colin McAskill, a British businessman who has done business with the North since the 1970s, is lobbying Washington to fine-tune its sanctions so the bank’s customers can withdraw money that was made legally.

McAskill is chairman of Hong Kong-based Koryo Asia Ltd., which said in September it was buying a 70 percent controlling stake in Daedong Credit Bank, North Korea’s first foreign-owned financial institution. The bank, which is 30 percent owned by a North Korean bank, serves foreign companies and has accounts at Banco Delta Asia.

North Korea also has turned to Western investors in hopes of developing oil resources and reducing its near-total reliance on China for fuel. It awarded a 20-year exploration concession last year to Aminex plc, a London firm.

Aminex is helping the North Korean government deal with other foreign companies, and in exchange gets to pick where it will drill for oil, its chief executive, Brian Hall, said by phone from London.

Aminex hasn’t felt any effects from the nuclear tumult, Hall said.

“We have good relations and no problems with the agreements but are closely watching the political situation,” he said.

From Joong ang Daily 
10/25/2006
Rah Hyun-cheol

The tour program to Mount Kumgang and the Kaesong Industrial Complex are certain to be affected by the crisis over North Korea’s recent nuclear test.

But they’re not the only ones ― South Korea has hundreds of smaller companies that have business deals with the North, with some actually operating inside the country.

And they were at a loss when the South Korean government announced it would “proceed with economic cooperation projects, but private companies are to decide on their own about their future investment plans in the North.”

According to the Ministry of Unification and the Korea International Trade Association, companies with records of trade with North Korea totaled 515 as of last year. That figure includes 379 trading firms and 136 companies that process imported materials, trading $420 million worth of products with the North. That amount accounted for 40 percent of South Korean trade with the North for the year, compared with 16.7 percent from the Kaesong Industrial Complex and 8.2 percent from the tour program to Mount Kumgang. Over the first eight months of this year, 395 companies have participated in trade with the North.

“It’s hard to predict what North Korea will come up with, and the South Korean government seems to be lost in its policy decision-making. Besides, the United States and China display different opinions. It’s nearly impossible to foresee the future,” said a head from one of those companies, who declined to be named. “I tried to grasp the real situation in the North by visiting on my own but had to give up the trip as China Southern Airlines shut down the route linking Beijing and Pyongyang.”

What the businesses fear the most is the possibility that trade with North Korea will be abruptly suspended if the North conducts additional nuke tests or economic sanctions against the country intensify.

A senior executive from Hanabiz.com, a firm in charge of dispatching North Korean workers in information and technology to Korean software companies in Dandong, China, said, “The recent nuclear test by North Korea has not dealt a serious blow yet to my company. However, it has become difficult to send cash to North Korean business partners after some Chinese banks restricted money transfers to the North.”

USA Today
Barbara Slavin
10/22/2006

At a kindergarten in Hyangsan, a small city near North Korea’s capital, dozens of colorfully dressed children put on a calisthenics display this month for visitors from the U.N. World Food Program.

The children, full of corn porridge and high-protein biscuits provided daily by the aid agency, jumped, stretched briskly and looked healthy, said Jean-Pierre DeMargerie, the top program official in North Korea. Kids in the front rows looked especially good, he said. “Those 20-30 yards back were not as well groomed or dressed.”

“It’s always difficult to get a clear picture,” DeMargerie said. “The North Koreans don’t like to expose those that might be sick or weak. You build your assumptions on a relatively small sample.”

North Korea, one of the world’s most isolated nations, is a hard society to fathom even for the few foreigners who visit regularly. Whether it is on the verge of economic collapse or resilient in the face of decades of adversity and deprivation remains a matter of conjecture.

Little can be seen clearly

The shroud that keeps North Korea hidden makes it virtually impossible to judge whether the limited sanctions the United Nations imposed in retaliation for an apparent nuclear weapons test Oct. 9 will have any effect on the regime of Kim Jong Il.

The Bush administration hopes the sanctions and international rebuke, particularly from China, North Korea’s main source of trade and investment, will prompt Kim to halt his nuclear program and resume negotiations on a diplomatic solution. “I think (the North Koreans) were surprised by a 15-0” vote on sanctions by the U.N. Security Council, Secretary of State Condoleezza Rice said Saturday. “We’ll see whether or not they are prepared.”

DeMargerie and a half-dozen others who visited North Korea recently say it is better off than a few years ago and may be able to withstand sanctions.

The sanctions could reduce the amount of hard currency North Korea receives, but market reforms in place since 2002 and stockpiling of excess cash, food aid and fuel may give Kim a cushion to defy the U.N.

In 2005, North Korea “received a surplus of a half-million to 600,000 tons of grain” from China and South Korea, said Kenneth Quinones, a former U.S. intelligence expert on North Korea who teaches at Akita International University in Japan. “It looks like most of that went into storage.” North Korea also had a decent harvest this year after two consecutive bumper crops, he said.

Marcus Noland, a Korea specialist at the Institute for International Economics in Washington, said millions of dollars in Chinese investment went into North Korea during the first half of 2006, more than the country could absorb.

Signs of progress are evident to Steve Linton, 56, who has made more than 50 trips to North Korea in the last 15 years. The son and grandson of Christian missionaries, Linton heads the Eugene Bell Foundation, which has delivered medical equipment to about 70 hospitals throughout the country.

“It used to be that people were visibly thinner in the spring,” when food from the previous year’s harvest had run out and new crops were about to be planted, said Linton, who last visited North Korea in May. Now, he said, “that distinction has pretty much disappeared.”

Linton has noticed that North Koreans are better dressed and that there are more bicycles in a country where a decade ago, nearly everyone traveled on foot. “It’s not lightning speed, but it’s gradual change,” he said.

Emerging markets

Pyongyang, a gloomy capital of bland concrete high-rises and little commerce a decade ago, has a few dozen shops and many sidewalk stalls selling ice cream, cookies, flowers, even videocassettes, said Simon Cockerell, manager for Beijing-based Koryo Tours, which organizes trips to North Korea.

Cockerell said there are four or five billboards for cars, the first commercial advertising in the country. Electricity blackouts, once common, are rare in the capital, he said.

Other indicators of an economic cushion include:

•A resumption of a state-run rationing system that hands out about half a pound of grain daily to city residents, who make up 70% of North Korea’s 22 million people. DeMargerie said North Korean officials told his organization that rationing, which collapsed during a famine in the 1990s, resumed last year. It provides corn or rice to make porridge, a mainstay of the North Korean diet.

•Diversification of oil suppliers. China provides about 80% of North Korean fuel, and Iran and Indonesia supply most of the rest, Quinones said. That gives supply alternatives should China carry out threats to restrict deliveries. Noland said North Korea also may have stockpiled diesel fuel that South Korea provided in 2004.

Noland, who spent several weeks in China last summer along the 880-mile border with North Korea, said economic progress is notable for one group of new entrepreneurs: managers of shuttered state-owned factories who are trading coke, coal and iron ore for cheap Chinese consumer goods and food, which they then sell to fellow North Koreans.

“A lot of small-scale activity in North Korea is done by state-owned enterprises,” Noland said. “They have transformed themselves into retailers. I call it the ‘Wal-Martization’ of the North Korean economy.”

Troubles remain

On the negative side, trade with China, which totaled more than $1.5 billion last year, is down about 30% this year because of the difficulty of transferring funds to North Korean bank accounts, said Nam Sung Wook, head of North Korean Studies at Korea University in Seoul. The problem stems from U.S. action last year to freeze North Korean accounts in a bank in the Chinese enclave of Macau linked to counterfeiting and money laundering.

“There is some confusion among traders in Dandong,” a Chinese city across the Yalu River from North Korea that has become a center of cross-border commerce, Nam said. He forecasts negative growth for the North Korean economy this year after 2.2% growth last year. Even so, new sanctions “will not collapse the North Korean economy,” he said.

Those likely to suffer most are salaried urban professionals, said Nam, who visited Pyongyang in July. He said he heard grumbling from technocrats and professors, whose average monthly pay comes out to about $33 at the official exchange rate but only $5 on the black market.

North Korea also has massive infrastructure needs that make it difficult to sustain economic gains. DeMargerie said only 20%-25% of households have access to clean running water, and the sanitation system is becoming a serious health hazard.

Still, Noland predicted, “They can make it through the winter. They are hunkering down and believe they can survive until the world accepts them as a nuclear power.”

Rice conceded that sanctions are no certain solution. “I think we’ll be at this for a while,” she said. “I can’t tell you how long.”

From the Joong Ang:
Ministry: North got $1 billion since 1998
10/18/2006
Lee Young-jong
Ser Myo-ja

The Unification Ministry yesterday defended itself against accusations that the Roh Moo-hyun administration and its predecessor, that of Kim Dae-jung, were at least partly responsible for giving the North the cash it needed to fund its nuclear weapons programs.

Ministry data released yesterday said that South Korea sent nearly $1 billion in cash to the North from March 1998 until August of this year. The ministry said those payments were in connection with “legitimate economic activities.” Nearly half of that cash flow, it said, was from tourism receipts at North Korea’s Mount Kumgang resort, and almost all the remainder was a $500 million payment by Hyundai Group to North Korea for exclusive rights to run the tours.

When Hyundai Group first began the tour program in 1998, Lim Dong-won, then the Blue House senior secretary for security affairs, ordered the Unification Ministry to devise ways of monitoring the payments to ensure that they were not diverted to military uses. But a Unification Ministry official recently admitted the obvious: “There was and is no way to see how the North spent the money,” he said.

The same is true in the other inter-Korean programs, although the amounts are relatively smaller. Nearly $21 million has been paid to the North in the Kaesong Industrial Complex project, including the wages of 800 North Korean workers there. The few million dollars remaining in the total were payments for South Koreans to attend events such as the annual Arirang Festival.

The ministry’s statement yesterday said the Hyundai payment of $500 million was made in August 2000. In fact, it was made in June, just before the first inter-Korean summit that month, and a special counsel who looked into the then-secret payment described it as an inducement for North Korea to agree to the summit. Seven persons were later convicted of violating Korea’s foreign exchange laws in connection with the matter.

Critics on the right believe the ministry’s estimates are woefully incorrect; the Grand National Party, for example, has put the amount at $8.4 billion over the past eight years.

The ministry also challenged the Grand National Party’s argument that South Korea had spent nearly 2.2 trillion won ($2.3 billion) for a failed light-water reactor project in North Korea.

The ministry said the figure was only about 1.4 trillion won.

It also noted that that project was an international one and had begun under the Kim Young-sam administration in 1994. Only a tiny part of that funding involved cash payments to North Korea, the ministry said.

From the Choson Ilbo:
Chinese Banks Restricting Cash Flow to N.Korea
10/17/2006

Major Chinese banks are currently stopping or restricting remittances or payments to North Korea after the North’s announcement of what it claims was a nuclear test, it emerged Monday. Chinese banks in Dandong, where cross-border trade is concentrated, recently started restricting banking transactions with North Korea, an official with the South Korean Embassy in China said. The restrictions, in fact, started in March this year, when the U.S. imposed financial sanctions on Macau’s Banco Delta Asia after designating it Pyongyang’s “primary money laundering concern.”

But not all Chinese banks are doing so, each bank and branch having its own policy. Sources say it does not look as if the Chinese government is ordering them to do so; rather banks have started doing so on their own. Rumor is spreading among traders doing business with North Korea in China that all financial accounts with North Korea including those by North Korean traders in China could be frozen.

North Korean workers in China are leaving the country in droves after North’s claimed nuclear test. A businessman operating a sewing factory in Shenyang, China, said, “Some 100 North Korean workers in my factory returned home three days ago because the Chinese authorities didn’t renew their work permit.” Banks in Dandong and Shenyang, where many businesses trading with North Korea have accounts, are seeing an increasing number of them not receive payments for exports to the North. “Since the U.S. froze North Korea’s accounts in the Macau bank, it takes three or four times longer for us to get paid for imports to the North, and this is hurting us badly,” a businessman trading with the North said. “We can’t do business with the North any longer.”

As official trade between the North and China shrinks, smuggling between the two countries is thriving, local people say. An ethnic Korean in Dandong said if a North Korean vessel ships 1,000 tons of iron ore to a port here, it officially reports only 100 ton of them and smuggles the rest. Smuggling covers almost everything from iron ore to bronze, TVs, computers, petrochemical products, antiques and maritime products. That is why many feel how determined the Chinese authorities are in cracking down on smuggling will determine the success of sanctions against the North. Locals say they have not heard of any Chinese crackdown on smuggling to and from the North, nor do they expect one.

China clearly stated its opposition against military action in the UN resolution against the North over its claimed nuclear test, calling for “an appropriate level” of sanctions. Beijing says the ultimate goal should be getting the North to return to the six-party talks on its nuclear program, not forcing regime collapse. Some expect China to reduce, rather than stop, its supply of oil to the North.

Meanwhile, China is preparing for an emergency in North Korea. It is setting up barbed-wire fences along the border near the Yalu and Tumen rivers where the military units of the provinces there took charge of guarding the area three years ago. The barbed-wire fences are being extended near Changbai County and the Tumen River. A Chinese official said the fences “were put up after consultations with the North because we needed to draw up a clear border between us and North Korea because of the narrowness of the river or newly built roads.” But some say the main goal is to prevent a mass exodus of North Koreans when the regime falls apart. Experts say another reason China is building up its military strength and carrying out more military exercises near the border with the North is to prepare for regime collapse in the north. The new 60-km long road along the Yalu River is also said to serve strategic military purposes.

Paul Tija
GPI Consultancy
October 10, 2006

IN PDF: IT_in_NKorea.pdf

Surprising business opportunities in Pyongyang

Dutch companies are increasingly conducting Information Technology projects in low-cost countries. Also known as offshore sourcing, this way of working means that labor-intensive activities, such as the programming of computer software, are being done abroad. Asia is the most popular software destination, and Indian IT firms are involved in large projects for Dutch enterprises such as ANB Amro Bank, KLM, Philips or Heineken. More recently, we notice a growth in the software collaboration with China.

As a Dutch IT consultant, I am specialized in offshore software development projects, and I regularly travel to India and China. Recently, I was invited for a study tour to an Asian country which I had never visited before: North Korea. I had my doubts whether to accept this invitation. After all, when we read about North Korea, it is mostly not about its software capabilities. The current focus of the press is on its nuclear activities and it is a country where the Cold War has not even ended, so I was not sure if such a visit would be useful. And finally, such a trip to a farshore country would at least take a week.

Nevertheless, I decided to visit this country. This decision was mainly based on what I had seen in China. I had already traveled to China five times this year, and the fast growth of China as a major IT destination was very clear to me. China is now the production factory of the world, but China’s software industry has emerged to become a global player in just 5 years. Several of the largest Indian IT service providers, including TCS, Infosys, Wipro and Satyam, have established their offices in China, taking advantage of the growing popularity of this country. However, I also noticed that some Chinese companies themselves are outsourcing IT work to neighboring North Korea. And since my profession is being an offshore consultant, I have no choice but to investigate these new trends in country selection, so I accepted the invitation to visit Pyongyang, the capital of North Korea. I happened to be the first Dutch consultant to research the North Korean IT-sector ever, and the one-week tour turned out to be extremely interesting. Quite surprisingly, the country offers interesting business opportunities for European companies.

Korea Computer Center
My study tour was organized by KCC (Korea Computer Center), the largest IT-company in the country. Established in 1990, it is state-owned and has more than one thousand employees. It is headquartered in Pyongyang and has regional branches in eleven cities. My accommodation has been arranged at the KCC campus, which comprises of several office buildings. It also has iown hostel, with a swimming pool, for foreign guests. These guests are mainly Asian (during my stay, there were Chinese delegations), so I had to get used to having rice for breakfast. In the evenings, the restaurant doubled as a karaoke bar, and some of the waitresses appeared to be talented singers. The campus is located in a rather attractive green area, and the butterflies flying around were the largest I had ever seen. It also has sporting grounds, and basketball was during my one-week visit the most popular game among KCC staff. An internal competition takes place during lunch hours.

Korea Computer Center is organized in different specialized business units. Before their representatives started with presentations, I received a tour through the premises. As is the case in India and China, the programmers at KCC also work in cubicles. KCC develops various software products, of which some are especially designed for the local market. Examples are a Korean version of Linux and translation software between Korean, Japanese, Chinese and English. They also produce software for Korean character and handwriting recognition and voice recognition. Other products are made for export, and North Korean games to be used on mobile phones are already quite popular in Japan. There are also games for PC’s, Nintendo and Playstation; their computer version of Go, an Asian chess game, has won the world championship for Go games for several years. The games department has a display showing all the trophies which were won during international competitions.

For several years, KCC is active as an offshore services provider and it works for clients in China, South Korea and Japan. For these markets, North Korea is a nearshore destination, and quite a few North Korean IT-staff do speak Chinese or Japanese. KCC also has branch offices in various Chinese cities, including Beijing and Dalian. It works for both foreign software product companies and end user firms, such as banks. For these clients, different types of applications have been developed, for example in the field of finance, security or Human Resources. Europe is a relatively new market for the North Koreans, and some of their products have been showed for the first time at the large international IT-exhibition CeBIT, in 2006 in Hannover, Germany.

The level of IT-expertise was high, with attention to quality through the use of ISO9001, CMMI and Six Sigma. KCC develops embedded software for the newest generation of digital television, for multimedia-players and for PDA’s (Personal Digital Assistants). Surprisingly, it also produces the software for the mobile phones of South Korean Samsung. I was shown innovative software which could recognize music by humming a few sounds. In less than a second, the melody was recognized from a database of more than 500 songs. Also applications for home use were developed, such as accessing the Internet by using a mobile phone to adjust the air conditioning. KCC also Photo: KCC campus in Pyongyang made software to recognize faces on photographs and video films. They gave me demonstrations of video-conferencing systems, and applications for distance learning. There was a separate medical department, which made software to be used by hospitals and doctors, such as systems to check the condition of heart and blood vessels.

Supply of IT-labor In countries such as The Netherlands, the enrollment in courses in Information Technology is not popular anymore among the youth, and a shortage of software engineers is expected. This situation is different in many offshore countries, where a career in IT is very ‘cool’. Also in North Korea, large numbers of students have an interest to study IT. I visited in Pyongyang the large Kim Chaek University of Technology, where there are much more applications, than available places. Although my visit took place during the summer holiday, there were still students around at the faculty of Informatics. In order to gain experience, they were conducting projects for foreign companies. I spoke with students who were programming computer games or were developing software for PDA’s. A large pool of technically qualified workforce is now available in North Korea. Some of the staff is taking courses abroad and foreign teachers (e.g. from India) are regularly invited to teach classes in Pyongyang.

Business Process Outsourcing
Some companies in Pyongyang are involved in activities in the field of BPO (Business Process Outsourcing), an areas which includes various kinds of administrative work. Because of the available knowledge of the Japanese language, the North Koreans are offering back-office services to western companies engaged in doing business with Japan.

In order to get an understanding of this type of work, I visited Dakor, which was established 10 years ago in cooperation with a Swiss firm. This joint venture is located at the opposite side of Pyongyang, across the Taedong river. It works for European research companies, and it receives from them scanned survey forms electronically on a daily basis. It processes these papers and returns the results within 48 hours to their clients. The company is also conducting data-entry work for international organizations such as the United Nations and the International Red Cross. Their data, which is stored on paper only, is being made available for use online. Dakor is also offering additional services, such as producing 2D and 3D designs for architectural firms, and it is also programming websites.

Animation
North Korea is already famous as a production location for high quality cartoons and animation. Staff of the American Walt Disney Corporation described the country as one of the most talented centers of animation in the world. The specialized state corporation SEK Studio has more than 1500 employees, and works for several European producers of children films. New companies are being founded as well, and I visited Tin Ming Alan CG Studio. This firm was set up in early 2006, and is located in a new office building in the outskirts of Pyongyang. Its main focus is in Computer Graphics and in 2D and 3D animation it uses the latest hardware and software, including Maja. Some of the staff of Tin Ming Alan speak Chinese and the company has a marketing office in China. They are hired by Chinese advertisement companies to make the animation for TV-commercials. It also works on animation to be included in computer games.  Several employees of this young company come from other animation studios and have more than ten years of experience in this field.

The North Korean IT sector seems to be dynamic, where new firms are being established, and where business units of larger organizations are being spun-off into new ventures. I visited the Gwang Myong IT Center, which is a spin-off from Korea Computer Center. It is specialized in network software and security, and it produces anti-virus, data encryption, data recovery, and fingerprint software. This firmis internationally active as well; it has an office in China and among its clients are financial institutions in Japan.

Issues of country selection
My study tour revealed that North Korea has specific advantages. The local tariffs are lower than in India or China, thus giving western firms the option of considerable cost reductions. The commitment of North Korean IT-firms is also high, and the country is therefore also an offshore option for especially smaller or medium sized western software companies. Outsourcing work to North Korea could also be used to foster innovation (e.g. developing better products or new applications). This country can be used for research as well (from Linux to parallel processing).  Based from my interaction with Korean managers and software engineers, I do not believe that the cultural differences are larger than with China or India. My communication with them, both formal and informal, was pleasant. Communicating with North Koreans is clearly less difficult than with Japanese.

The North Korean companies have experiences with a wide range of development platforms. They work with Assembler, Cobol, C, Visual Studio .Net, Visual C/C++, Visual Basic, Java, JBuilder, Powerbuilder, Delphi, Flash, XML, Ajax, PHP, Perl, Oracle, SQL Server, MySQL, etc. They can do development work for administrative applications, but also technical software, such as embedded software or PLC’s. North Korea is very advanced in areas such as animation and games, and I have seen a range of titles, including table tennis, chess, golf, or beach volley. The design of many of their applications was modern and according to the western taste.

Over the recent years, North Korea is opening up for foreign business. This process makes offshore sourcing easier, and even investing in an own software subsidiary or joint venture can be considered. This does not mean that North Korea is potential software destination for every user of offshore services. The country is a subject of international political tensions. In addition, a number of circumstances require specific attention, such as the command of the English Language.  As is the case with China, the North Korean IT staff are able to read english bu thtey do not speak it very well.  Another issue is the relative isolation of the country, and in order to arrange an invitation, a visa is required.  The limited number of direct flights is another disadvantage; one can only travel directly from Beijing or Moscow.  If projects will require a lot of communication or knowledge transfer, it might be recommended to do some parts of the work in China, by the Chinese branches of the North Korean companies. Executing a small pilot project is the best way to investigate the opportunities in more detail.

Conclusion
North Korea has a large number of skilled IT professionals, and it has a high level of IT expertise in various areas.  The country is evolving into a nearshore software destination for a growing number of clients from Japan, China and South Korea. An interesting example of their success is the work they are doing for South Korean giant Samsung, in the field of embedded software for mobile phones.

North Korean IT-companies are now also targeting the European market, and the low tariffs and the available skills are major advantages.  Smaller and medium sized software companies can consider this country as a potential offshore destination, and should research the opportunities for collaboration or investment in more detail. Taking part in a study tour, as I have done, is an excellent way to get more insight in the actual business opportunities of a country – not only in the case of North Korea but for all nearshore and farshore destinations.

Paul Tija is the founder of GPI Consultancy, an independent Dutch Consultancy firm in the in the field of offshore IT sourcing. E-mail: info@gpic.nl
GPI Consultancy, Postbus 26151, 3002 ED Rotterdam
Tel: +31-10-4254172 E-mail: info@gpic.nl http://www.gpic.nl

Korea Times:
9/26/2006 

An inter-Korean joint venture firm was launched for the first time in the North Korean border town of Kaesong yesterday, the South Korean investor in the project said.

The “Arirang-Taerim joint venture stone company” was established with half of the investment provided by South Korea’s granite processing firm Taerim industrial and the other half by the North’s Kaeson General Trading, according to the Yonhap News Agency.

A ceremony to mark the completion of the new company’s factory was held with some 300 government officials and businessmen from the two Koreas in attendance.

The factory is located outside of the Kaesong industrial complex where 13 South Korean manufacturers operate under the protection of a special law ensuring their investment.

Since it agreed on the joint venture with the North in April, Taerim has invested some $2.95 million for the construction project.

Taerim said the factory will process granite and marble stones collected from North Korean mountains using cheap labor.

With a floor space of 3,300 square meters, the factory will have the capacity to produce some 80,000 tons of stone products annually, it added.

Yonhap:
9/24/2006

South Korean companies at an inter-Korean joint industrial complex in North Korea have produced more than US$50 million worth of products and exported about one-fifth of them since they opened shop there in 2004, official data showed Sunday.

The complex in Kaesong, a few kilometers north of the inter-Korean border, currently houses 13 South Korean garment, kitchenware and other labor-intensive plants, hiring about 8,500 North Korean workers. The complex opened its first pilot zone in December, 2004.

As of the end of August, the cumulative production of the Southern firms there reached US$54.6 million and their total exports came to US$11.3 million, according to the Unification Ministry data.

Their monthly output reached its highest level in August with US$6.8 million, up 24 percent from the previous month and 6 times more than the amount in the same period last year, the figures showed.

Under an agreement with North Korea, all goods produced in Kaesong are brought to South Korea for domestic sales or exports.

Those figures indicated a brisk and continuing growth of production in the complex. The project’s first monthly production in January 2005 amounted to just US$201,000. The figures broke the one-million dollar mark in August that year and jumped to US$5 million in March this year.

Besides the 13 firms now in operation in Kaesong, 24 more are constructing their plants in another pilot zone that opened last year in the complex.

The Kaesong complex is a key byproduct of the 2000 summit between the leaders of the Koreas, which boosted reconciliation and cooperation between them.