North Korean Economy Watch

Yonhap
7/2/2007

In a sign of burgeoning economic ties, a group of South and North Korean officials jointly visited South Korean companies in China and Vietnam, the Unification Ministry said Monday.

The delegation consisting of seven South Koreans and as many North Koreans working at a joint management office of the Kaesong industrial complex visited the companies in Shanghai, Shenzen, Guangzhou, Hanoi and Ho Chi Mihn City for 10 days from June 19. They were given tours and received briefings on the companies’ operations, the ministry said.

“It was a good opportunity for North Korean economic officials to learn from rapidly developing socialist countries,” a senior ministry official said, asking to remain anonymous. “They must have shared the need to further promote inter-Korean economic ties.”

It marks the first time that South and North Korean officials made an overseas trip together to assess the development of South Korean companies, the official added.

In the North Korean border city of Kaesong, a capitalist enclave, South Korean businesses use low-cost skilled North Korean labor to produce goods. Monthly production in the complex exceeds US$10 million.

Currently, 23 South Korean companies employ about 15,000 North Korean workers at the site developed on a trial basis. These include construction workers and workers at a management office. The number of North Korean workers is expected to increase to more than 350,000 when the complex becomes fully operational in 2012.

Yonhap
Lee Joon-seung
6/25/2007

A factory-apartment being built in the inter-Korean industrial complex in Kaesong, North Korea will be opened to South Korean clothing and stuffed goods manufacturers in September, a state-run industrial complex operator said Monday.

The 21 billion won (US$22.6 million) manufacturing and residential facility will house 33 companies and 2,500 workers from both South and North Korea, the Korea Industrial Complex Corp. (KICOX) said.

“More than 100 companies want to use the factory apartment,” said KICOX President Kim Chil-doo, indicating the level of interest by local companies. He said one of the chief merits of moving operations to the complex is cheap labor costs of around US$58 a month.

Kim said wages can only go up by less than 5 percent on an annual basis in accordance with pre-set agreements.

Most companies that wanting to use the new facilities are small- and medium-sized enterprises struggling to deal with the flood of cheap imports from China and Southeast Asia.

Construction on the five-story building began in May 2006, and the facility includes manufacturing areas, living quarters and a training center for North Koreans.

Kaesong park is the most prominent outcome of inter-Korean rapprochement that began with the landmark 2000 summit between their leaders.

At present there are 23 companies operating in the special economic cooperation region and 16 in the process of starting operations there. About 260,000 square meters are currently being used, but this is being expanded to 3.3 million square meters by the end of the year. The extra space could hold 300 companies.

KICOX said the factory-apartment has considerable advantages over other plants in Kaesong since it provides comprehensive support for small companies under a single roof, cutting operational costs in electricity, water and training of North Korean workers.

The corporation, which operates 32 state-run industrial parks in South Korea, said companies are expected to move into the factory-apartment in August ahead of the official opening.

Daily NK
Park Hyun Min
6/23/2007

Power transmission lines not used since May 1948 have been reopened to supply electricity to North Korea. The Ministry of Commerce, Industry, and Energy and the Korea Electric Power Corporation (KEPCO) held a commemoration ceremony for the completion of the Pyonghwa (Peace) Substation on June 21st. The substation will supply electricity to a first-phrase zone (3,3mn square meters) in the Kaesung Industrial Complex. Kim Young Joo, the Minister of Commerce, Industry, and Energy, Lee Won Gul, the CEO of KEPCO, and Lee Yoon Sung, a member of National Assembly participated in the ceremony.

Natural sources of electricity were abundant in North Korea before the Korean War because most electronic power facilities built during Japanese colonial period were concentrated in the North. Southern provinces of the Korean peninsula received electricity from the North through the 154kV power-transmission line between Pyongyang and Susaek Substation in Seoul until May 14, 1948.

The new substation was completed at a cost of 35bl dollars. The line runs 16km from Munsan Substation in Paju, Gyeonggi, South Korea, through the DMZ, and terminates at the Kaesung Complex. It consists of 48 pylons, 154kV power-transmission wire, and outdoor substations in Kaesung. The substation is supplying 100 thousand kilowatts of electricity to approximately 300 factories located in the first-phrase zone of the Kaesung Complex. As demand increases, the amount of electricity supplied by KEPCO could double. KEPCO has already been supplying electricity to specific factories in the Kaesung Complex since March, 2005.

In his congratulatory speech, Kim Young Joo compared “the historic linkage of power transmission lines to repairing blood vessels between the South and North, which were ruptured in May 14th, 1948.” He added that “Completing the construction of Pyonghwa Substation will strengthen the foundation of Korean Peninsula peace. North-South cooperation can flourish by supplying a stable source of electricity to the Kaesung Complex.”

Korea Herald
Matthew Lamers
6/21/2007

“Would you rather pay $1,000 a month for a laborer in South Korea, or would you rather pay $60 a month for a laborer in North Korea? It is up to you.”

When Byun Ha-jung, general manager at Hyundai Asan, put that question to a bus full of potential investors visiting North Korea, a sputter of chuckles filled the air.

But he was serious.

Yesterday, Hyundai Asan invited just over 100 guests to tour North Korea’s Gaeseong industrial park, just a few kilometers away from the Demilitarized Zone.

The potential benefits of investing in Geaseong are enormous. Up for grabs for almost anyone willing to front the cash, are factories for 43,900 won ($47.32) per square meter, even cheaper than in China, and an educated and hard working labor force that demands only about $2 a day.

Development of the complex has been steaming ahead and senior vice president of Hyundai Asan, Jang Whan-bin, said that the reason is that South Korean corporations are essentially being squeezed by rising labor costs in China and elsewhere. “It is difficult to compete with Chinese companies. Some South Korean companies that have moved production facilities to China will have to return to Korea” to maintain competitiveness, “and Gaeseong is the best alternative.”

Gaeseong’s laborers are a fraction of the cost in comparison to workers in developing countries like China and Vietnam. The minimum wage for North Korean workers in the industrial park is $50 a month for a six-day work week. Each worker is entitled to 14 days holiday per year, and maternity leave is up to 150 days, 60 of which are paid.

In 2004, the first 255 North Koreans were hired to work in the complex and as of February 2007 there were over 11,000. That number is expected to swell north of 70,000 before the first phase of the complex’s development is completed.

Han Cheon-seung, co-CEO of Citigroup Global Markets Korea, said that the North is “one of the last frontiers for development. The workers’ quality is quite high here. I think this project is really going to work.” Han added that he thinks the biggest draws for Gaeseong are labor, quality and the Korean connection. “Labor is about 1/30 of the cost here,” and the logistics of having factories located on the peninsula “is much easier than having factories in Vietnam or China.”

“About 7,000 companies have moved abroad – 2,000 of those to China – but Gaeseong is much closer to home and there is no language barrier. One very important question is – can we trust the North Korean government.”

A pertinent question indeed. It is often quipped that the only thing reliable about the North’s government is its unpredictability.

Still, some potential investors were not fazed at all by the geo-political tension between South and North Korea. Others voiced great surprise that a project like Geaseong has been as successful as it has. “What impresses me is the (cooperation) for reunification, roads and railroads being reconnected, for example … In Germany, the Berlin Wall came down and that was it,” said Knut Kille, a native German, now executive vice president of Robert Bosch Korea.

Regarding the North’s nuclear programs, Hyundai Asan’s Jang said, “The overall development of the country is the most important thing. I am not concerned with only the nuclear issue.”

Korea Times
Ryu Jin
6/21/2007

South Korea began large-scale supply of electricity to the inter-Korean industrial park in North Korea’s border town of Gaeseong, Thursday, opening the way for power transmission through high-voltage cables between the two sides for the first time in about six decades.

Power distribution to the industrial complex has so far been carried out through pylons for more than two years, but now it will be distributed by a transformer substation.

South Korea’s state-run Korea Electric Power Corp. (KEPCO) said it has completed the construction of the Pyeonghwa (peace) Substation in Gaeseong to provide factories in the first-phase, 3.3-million-square-meter site of the joint industrial complex with ample electricity.

According to the Ministry of Commerce, Industry and Energy, the newly built substation receives 100,000 kilowatts of electricity — enough to serve up to 30,000 households — from the South via 154-kilovolt transmission cables that cross the Demilitarized Zone (DMZ).

Since March 2005, KEPCO provided the industrial complex with 15,000 kilowatts of electricity through 22.9-kilovolt power lines. But, in late 2004, the two Koreas agreed on the larger-scale power supply for the industrial park.

Construction of the substation and erecting the 48 pylons that carry the power lines for 16 kilometers across the DMZ began in April last year with a budget of 35 billion won ($37.7 million).

Currently, 23 South Korean companies — mostly small- and medium-sized enterprises — operate in the complex, located some 60 kilometers northwest of Seoul, with an additional 16 preparing to start operations.

Officials managing the joint industrial park hope to lure up to 300 South Korean firms and possibly some foreign companies once the first phase of construction is completed later this year.

“Coming just after the reconnection of the railroads last month, the reconnection of the power transmission line between the two Koreas has a historic meaning linking the blood vessels of the two sides,’’ said Minister of Commerce, Industry and Energy Kim Young-ju in a ceremony.

In May 1948, North Korea unilaterally cut off power to the South, which consumed an average 103,000 kilowatts of electricity a month before the suspension. Two years later, the Korean War (1950-53) broke out and most links between the two Koreas remained severed until the late 1990s.

Exchanges and cooperation between the two sides, including various cross-border economic projects such as the Gaeseong industrial park and Mt. Geumgang tourism projects, have expanded drastically since the first-ever inter-Korean summit in June 2000.

Deputy Energy Minister Ahn Chul-shik said the electricity will be used only in the industrial complex and that any outside use will be contingent upon separate arrangements between Seoul and Pyongyang.

North Korea has the capacity to generate up to 7 million kilowatts of electricity, according to KEPCO, but the poverty-stricken Stalinist state only produces around 2 million kilowatts due to a lack of fuel and dilapidated infrastructure.

South Korea has the capacity for 67.5 million kilowatts and produces up to 61.5 million kilowatts during peak summer months, according to the ministry and the state-run electric power corporation.

Yonhap
Sohn Suk-joo
6/20/2007

Four South Korean companies have canceled their contracts for the use of land at an inter-Korean industrial complex in the North Korean border city of Kaesong for unknown reasons, officials said.

The cancellations come amid growing concerns about stalled negotiations on North Korea’s nuclear weapons program, which critics fear might endanger, in the worst-case scenario, the status of the inter-Korean joint economic project, the brainchild of the unprecedented inter-Korean summit in 2000.

Refusing to identify the companies, they said the contracts were revoked in January, February and April, respectively, but the government has yet to take back the corporate licenses for doing business in the Kaesong industrial complex.

In the capitalist enclave, South Korean businesses use cheap North Korean labor to produce goods. The monthly production in the complex exceeds US$10 million.

Currently, 23 South Korean companies employ about 15,000 North Korean workers at a site developed on a trial basis, including construction workers and others at a management office. The number of North Korean workers is expected to increase to more than 350,000 when the complex becomes fully operational by 2012.

In September 2005, the South Korean government offered plots of land to 24 South Korean companies so that they could start to move into the area created in the first phase of the industrial complex’s development.

Some raised the possibility that the companies canceled the contracts becase there is little chance that the complex will become an “outward processing zone” in a free trade deal between South Korea and the United States.

South Korea pushed for the U.S. to include products from the complex in the trade deal, but they only agreed to create a committee to discuss what they called an outward processing zone.

South Korea sees it as the basis for further discussion of the Kaesong issue, while the U.S. cautions against reading too much into it, saying it is a kind of agreement they can reach with any bilateral trade partner regardless of the existence of a free trade deal. They are expected to formally sign the deal later this month.

Joong Ang Daily
Hwang Young-jin
6/19/2007

Trade volume between North and South Koreas has increased more than threefold since the historical June 15 Declaration in 2000.

With an average increase of 24.3 percent, annually, the total amount will reach $1.7 billion by the end of the year, according to the report on inter-Korean Trade from the Korea International Trade Association, also known as KITA.

Annual trade volume in 2000 was $425 million, which increased to $1.3 billion last year. Trade volume so far this year until May has already reached $563 million, which is a 31.3 percent increase year-on-year.

Besides the overall growth, what is healthy about the trade quality is that commercial trade accounts for almost 70 percent of the total trade. That figure was below 60 in 2000, according to the report. Non-commercial trade refers to aid including items such as rice, clothing and fuel. In other words, they are products that were sent to North Korea free of charge.

“The success of the Kaesong Industrial Complex is the biggest reason [for the rise],” said Roh Sung-ho, head of the Inter-Korean trade support team at KITA. “We are accepting bids for additional space at the Kaesong complex, and three times more companies bid than there are lots available.”

With more and more companies establishing factories in Kaesong, more material is exported from the South, and more manufactured goods return, said Roh.

The value of goods leaving South Korea was higher than the value of goods returning. However, about 30 percent of those goods were aid and were given free of charge. When that is taken into account, the North made more money from its exports to the South than the South made in exports to the North.

This allows the North to record a profit in trade account books.

“The nuclear incident last year, didn’t affect inter-Korean trade. There might be minor falls, but I expect trade volume between the two Koreas to increase for the time being,” Roh said.

Joong Ang Daily
6/13/2007

A U.S. congressman on Monday demanded changes to a tentative free trade agreement with South Korea, which he said could allow the Asian trading partner to export North Korea-made goods to the United States.

Rep. Sander Levin (D-Michigan) sent a letter to U.S. Trade Representative Susan Schwab raising questions about a draft FTA annex that deals with “outward processing zones” on the Korean Peninsula.

South Korea and the U.S. had maneuvered around the sensitive issue of the inter-Korean joint economic venture, the Kaesong Industrial Complex, by agreeing to discuss in the future whether to include products from such “zones” in their FTA.

Kaesong houses a manufacturing complex where South Korean capital is combined with North Korean cheap labor to produce price-competitive goods. Seoul strongly pushed to have Kaesong covered by the FTA, but the U.S. balked at the idea of importing products made in a country with such a poor human rights record.

Levin, who has already vowed opposition to the FTA, citing unsatisfactory provisions in the auto sector, said Annex 22-C on the zones applies labor standards different from those agreed on between the Congress and the U.S. administration.

The annex directs the committee to examine the standards with “due reference to the situation prevailing elsewhere in the local economy and the relevant international norms.”

“To apply any lesser or different standard for goods from North Korea,” Levin wrote, “would be wholly inconsistent with… basic international labor standards.”

Yohnap
6/12/2007

The chief executive officer of the world’s largest drugmaker, Pfizer Inc., plans to visit a hospital in North Korea this week, the company’s South Korean subsidiary said Tuesday.

Jeff Kindler, along with around 40 Pfizer officials, is scheduled to visit the Kaesong Hospital in the inter-Korean industrial park in Kaesong on Thursday, Pfizer Pharmaceutical Korea said in a statement.

The chief executive officer was to arrive in South Korea later in the day for a three-day visit. He is to meet with local health officials and sign a memorandum of understanding with the Health Ministry during his visit.

During his first trip to South Korea, Kindler also plans to visit local research centers, including the state-run Korea Research Institute of Bioscience and Biotechnology, to discuss possible joint projects for development of new drugs, the statement added.

The New York-based company manufactures the world’s No. 1 selling blood cholesterol drug Lipitor and the well-known erectile dysfunction drug Viagra. Kindler took the helm of the company in February.

Yonhap
6/10/2007

Products made in an inter-Korean industrial park in the first four months of the year were valued at US$48.1 million, about 24 percent of which, or $11.3 million worth of products, were exported, South Korea’s unification ministry said Sunday.

Last year’s comparable figure during the cited period was 18.4 percent, or $2.3 million, according to the ministry.

The industrial complex, located in the North Korean border city of Kaesong, is one of two flagship projects the South operates with the North in the spirit of reconciliation that developed following the historic inter-Korean summit in 2000.

Over 13,000 North Korean workers are currently employed by 22 South Korean companies there. They produce garments, utensils and other labor-intensive goods.

The biggest importer of Kaesong-made goods was the European Union (EU), followed by China, Russia and Australia.

The ministry did not give figures on how many goods made in the industrial park the countries imported.