North Korean Economy Watch

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Here is a PDF of the  press release.

UPDATE: Some interesting follow up from a member of Phoenix Commercial Ventures at the Gerson Lehrman Group web page:

Analysis
My colleagues and I are directors of a number of businesses (Phoenix Commercial Ventures) that have been based in the DPRK (aka North Korea) for a number of years. Goldman Sachs is correct to highlight the upside of business opportunities with the DPRK.

The DPRK (North Korea) represents one of the last “green field” economies in the world with exceptional investment opportunities. As such it provides an unparalleled opportunity for business professionals who know and understand the risks, the people and the country. As estate agents are fond of saying, it is a case of “location, location, location”.

1 Physical Location
The DPRK (North Korea) physically borders Russia, China and ROK; as such it is in a prime location in this most important of trade routes. Additionally, its location in Asia Pacific gives it access to one of the world’s wealthiest and most vibrant regions.

2 Resource Location
The DPRK has abundant mineral resources including; coal, gold, magnesium, nickel, copper, graphite, nephelite, zinc etc. The total value of which is estimated at being around $2.5 Trillion (IHT 21 Dec 2007).

The DPRK has a well educated (99-100% literacy), intelligent, hard working population whose wage rates are highly competitive.

The DPRK has a forward looking environmental policy that offers green investors opportunities to generate environmentally friendly power for supply locally and export elsewhere.

3 Historical Location
The recent improvements in geopolitical issues demonstrates that the time is right, in terms of historical context, for progress to be made with regard to the DPRK entering the world financial community and to benefit from world trade.

Practicalities
It is not difficult to set up shop, if you approach the DPRK with a well thought through serious business proposal/well researched business plan and are a professional with reputable/professional local contacts.

It should be emphasised that businesses in the DPRK are no more fond of having their time wasted than businesses anywhere else in the world, local businesses having had their time wasted tend to prefer to deal with professionals that they trust.

When setting up a business within the DPRK remember that you cannot manage solely by email and need people on the ground, as is the case with Phoenix Commercial Ventures. Organisations that do not have people on the ground in DPRK will fail.

One of the major challenges facing a newcomer to the local market is a very practical one – how to find a way to balance the need for pre-start-up feasibility studies requiring possibly large amounts of information from the local Korean partner, against the need to demonstrate to the local authorities that the investor is serious.

There have been many cases over the years of potential foreign investors making promises they cannot fulfil, and the Koreans have consequently become somewhat sceptical. It is therefore essential to promise only what you know you can deliver, and to deliver within the timeframe agreed.

The DPRK Government is actively encouraging foreign investment in areas such as mining, energy, agriculture and IT.

Investors in the DPRK are accorded generous tax concessions:

1. A reduced rate of tax of 10% (standard rate - 25%)
2. An additional tax exemption - whereby the investor is fully exempt from paying tax from the year of investment for 3 years, and 50% exempt for the subsequent 2 years
3. Any tax paid will be returned, if a subsequent investment is made

The DPRK is also undertaking small experiments with free market economy principles that would have been unthinkable a couple of years ago. There are now 24-hour stores operating in Pyongyang, several places providing computer access and a series of adverts on the TV.

Kim Yong-sul, DPRK Vice Minister for Trade, is quoted as saying at a Pyongyang meeting of overseas ethnic Korean businessmen October 25 2004:

“In the past, we only allowed foreign companies entry into specialized economic zones, but now, we will allow them to set up in other places around the DPRK.”

Misconceptions
There are a number of misconceptions harboured by some in the West about doing business in the DPRK. The one that we most frequently encounter is that people do not believe that it is possible, as a Westerner, to set up and run a company in the DPRK. This is patently untrue, the DPRK allows Western companies to set up and run joint ventures (JV’s) with a majority shareholding, with local partners and to remit profits;  the government encourages foreign investment.

One of our (Phoenix Commercial Ventures Ltd) aims is to demystify the business environment, demonstrate that people can make successful and ethical joint ventures in the DPRK that provide a decent return, employ local people, engage with local professionals; thereby encouraging others of good repute to come and do the same.

Another misconception is that communications from outside the DPRK with people working in the DPRK are impossible. This is untrue. I can call via phone and email my colleagues directly from London.

Starting and running a JV in the DPRK requires the same approach as it would in any other country – it is the fact that it is a JV that is important, not that it is in the DPRK.

That means you have to have the good judgement to size up and choose a good partner with whom you are going to work well together, but then you have to do just that – work well together, with emphasis on each of those words.

If you start a joint venture where you are always suspicious of the joint venture partner, then you shouldn’t have started the JV in the first place, it will never succeed – that is exactly the same in any country.

It is absolutely essential to have resident foreign management, a joint venture cannot be run remotely from abroad. The quality of, and relationship with, the local staff is essential; as is that of the foreign management. The aim of the JV should be to bond the personnel into an independent unit, who are striving for the success of the JV, and to remove entirely any idea of ‘our side’ and ‘their side’ within the JV.

The Barclays Report
Goldman Sachs are not alone in viewing the future positively. In 2004 Barclays Capital Research issued an upbeat report about the DPRK:

“The North Korean economy does not seem about to collapse” (contrary to what many might think).

1. As time goes by we are likely to see “the development of an uneasy coexistence with the US”.
2. There are some signs of improvement in the North Korea’s economy, thanks to recent reforms. The growth will remain very slow, but the regime has built in “coping mechanisms” that will prevent collapse.
3. “A slow income growth could be supportive of political stability, because it would make it easier for the regime to control popular expectations.”
4.What the Chinese would call peaceful evolution is possible:

“Political and economic stability would, over the longer term, see the completion of the transition from a planned to a market economy and greater integration of North Korea into the global economy. This in turn, could support a long-term normalisation of North Korea’s diplomatic relations with the external world.”

Plus Ca Change
When we were exhibiting at the Pyongyang Spring International Trade Fair in May 2008, our CEO was at our stand and was approached by a young Korean lad who in perfect English said “Excuse me, am I disturbing you?”

It turned out that he wanted his photo taken.

The above may not seem much of an anecdote to those who have little understanding of the DPRK. However, those who do will realise the significance of that.

We are also attending the current four day international trade fair which opened this Monday in Pyongyang, with 120 companies from the DPRK and 14 other economies taking part.

The DPRK offers an unparalleled opportunity for business professionals who know and understand the risks, the people and the country.

ORIGINAL POST: (Thanks to a reader: Paper link at the bottom) A new paper by Goohoo Kwon at Goldman Sachs argues that the economy of a reunified Korea could be larger than France and Germany by the middle of this century.  The paper is not available on line yet, but according to to an article about the GS paper in the Wall Street Journal:

Since the reunification of West and East Germany 20 years ago, South Korean leaders and economists have convinced many people here that reuniting with North Korea will be costly and disruptive. In the latest gloomy forecast, a government think tank last month said that the tax burden ratio, or proportion of tax revenue to gross domestic product, would need to rise by two percentage points and stay that way for 60 years to pay for reunification.

In the study released Monday, Goldman Sachs economist Kwon Goo-hoon says the risks of reunification need to be re-evaluated, particularly in the wake of the rapid development of countries like Vietnam and Mongolia that also had state-run economies like North Korea’s.

His study contains North Korean data that he acknowledges may not be accurate and assumptions about future behavior that may not pan out. Even so, its tone is more optimistic than previous studies that contributed to South Koreans’ ambivalence about unification.

In an interview, Mr. Kwon said he believed for a long time that unification would be too costly for the South. He based that view largely on what happened with the newly united Germany, where the currencies were quickly equalized, the border opened and huge transfer payments made from the former West to the former East Germany.

“People always look at Germany when they discuss unification of the Koreas, but if you look at China and Hong Kong, or more properly Eastern Europe, Mongolia or Vietnam, you see there are better ways of doing this,” Mr. Kwon said. “I think it’s a matter of education and dialogue.”

In March, the Bank of Korea published a report that said Hong Kong’s gradual integration with China beginning in 1997 and France’s handling of its former colonies after World War II were better models. Both that study and Mr. Kwon’s suggest the two Koreas maintain separate currencies and restrict crossings at the inter-Korean border, perhaps for decades as North Korea’s currency appreciates and its people grow wealthier.

Mr. Kwon’s study goes several steps further by suggesting that the huge growth potential of North Korea could help offset the slowing growth of South Korea, which is burdened by limited natural resources and a fast-aging population. By contrast, North Korea has huge mineral deposits and a population that is younger and growing twice as quickly as South Korea.

Using long-term growth forecasts Goldman Sachs has previously published for industrialized countries, Mr. Kwon concluded that the gross domestic product of a united Korea would be the world’s eighth-largest in 2050 at $6 trillion, surpassing France around 2040 and Germany and Japan later that decade.

Today, South Korea’s GDP is about $800 billion and North Korea’s is believed to be around $20 billion, though no data has been collected inside the North since the 1960s. Some economists believe its economic output is considerably less, while others note that most estimates tend to leave out the North’s well-known illicit activities such as narcotics production and currency counterfeiting.

Nearly all previous economic reports on Korean unification focused on the costs that South Koreans will face and ignore or play down investment and business opportunities that may also occur. Mr. Kwon said the tone of the discussion will change as economic and demographic pressures grow in the South and he wanted to produce an analytical framework ahead of that.

Further information:
Goldman Sachs Has a Different View of Korean Unification
Wall Street Journal
Evan Ramstad
9/21/2009

Global Economics Paper No. 188: A United Korea? Reassessing North Korea Risks
Goldman Sachs Slobal ECS Asia research
Goohoon Kwon, CFA
September 2009

Lots of North Korean economic info here.

The most authoritative map of North Korea on Google Earth
Download it here

This map covers North Korea’s agriculture, aviation, cultural locations, markets, manufacturing facilities, railroad, energy infrastructure, politics, sports venues, military establishments, religious facilities, leisure destinations, and national parks. It is continually expanding and undergoing revisions. This is the eleventh version.

Additions include: Mt. Paegun’s Ryonghung Temple and resort homes, Pyongyang’s Chongryu Restaurant, Swiss Development Agency (former UNDP office), Iranian Embassy, White Tiger Art Studio, KITC Store, Kumgangsan Store, Pyongyang Fried Chicken Restaurant, Kilju’s Pulp Factory (Paper), Kim Chaek Steel Mill, Chongjin Munitions Factory, Poogin Coal Mine, Ryongwun-ri cooperative farm, Thonggun Pavilion (Uiju), Chinju Temple (Yongbyon), Kim il Sung Revolutionary Museum (Pyongsong), Hamhung Zoo, Rajin electrified perimeter fence, Pyongsong market (North Korea’s largest), Sakju Recreation Center, Hoeryong Maternity Hospital, Sariwon Suwon reservoir (alleged site of US massacre), Sinpyong Resting Place, 700 Ridges Pavilion, Academy of Science, Hamhung Museum of the Revolutionary Activities of Comrade Kim Il Sung, South Hamgyong House of Culture, Hamhung Royal Villa, Pork Chop Hill, and Pyongyang’s Olympic torch route. Additional thanks go to Martyn Williams for expanding the electricity grid, particularly in Samjiyon, and various others who have contributed time improving this project since its launch.

Disclaimer: I cannot vouch for the authenticity of many locations since I have not seen or been to them, but great efforts have been made to check for authenticity. These efforts include pouring over books, maps, conducting interviews, and keeping up with other peoples’ discoveries. In many cases, I have posted sources, though not for all. This is a thorough compilation of lots of material, but I will leave it up to the reader to make up their own minds as to what they see. I cannot catch everything and I welcome contributions.  Additionally, this file is getting large and may take some time to load.

Interview Blog, Germany
(click here for all their North Korea-related interviews)

“Phoenix Commercial Ventures Ltd is a venture capital company that offers investors business and investment opportunities in the DPRK” - Interview with Ken Frost (CFO of Phoenix)

Klaus-Martin Meyer: Mr. Frost, you are member of the Board of Phoenix Commercial Ventures Ltd, a company that offers investors business and investment opportunities in the Democratic People’s Republic of Korea (DPRK) otherwise known as North Korea. Would you mind introducing yourself and your company as well to our readers?

Ken Frost: Phoenix Commercial Ventures Ltd is a venture capital company that offers investors business and investment opportunities in the DPRK, enabling them to take advantage of the economic reforms that are taking place there.

Phoenix is owned and run by four experienced professionals, who are based in London, Paris and the DPRK. The Board has between them many years of international business experience, and an invaluable network of well placed contacts. Phoenix offers a unique service, by being able to offer direct access to the DPRK.

Phoenix Commercial Ventures Ltd specialises in project finance in the DPRK. As is well known, the business environment is difficult, and the company targets very specific investment projects; these are small enough to manage and have the capacity to generate foreign currency, either through export or import substitution.

Phoenix Commercial Ventures Ltd maintains an office in Pyongyang, almost the only European company to do so, and operates with the following specific aims:

• Identify commercially viable investment projects in the DPRK, on a case by case basis
• Identify reliable local partners for all forms of business in the DPRK, either trade or investment
• Seek overseas investment sources for such projects
• Minimise the risk in such projects, by taking responsibility for supervision of the local set-up procedures and management of the projects

The Board of Phoenix Commercial Ventures Ltd consists of nationals of the UK, France and the DPRK. The European flavour is enhanced by the fact that most of the counterparties and suppliers in the various projects are also European, and the DPRK government views Phoenix Commercial Ventures as a prime conduit for European business and investment in the DPRK.

One of the directors of Phoenix Commercial Ventures is also General Manager and CEO of the Daedong Credit Bank, the only western-invested foreign bank in the DPRK. Based in Pyongyang, this is a 70-30 joint venture between a UK financial management company based in Hong Kong and the Korea Daesong Bank, one of the main DPRK banks.

Phoenix Commercial Ventures is unique in having this connection with a reliable, locally based financial institution. The synergy benefits include a wider exposure to local business contacts in differing fields; as well as an additional degree of control, made possible by the fact that the various joint venture projects have to maintain their accounts with the bank.

We have a number of projects within DPRK, including two 50/50 joint ventures:

- Hana Electronics JVC, a consumer electronics company now ranked as one of the top three best performing joint ventures in DPRK, as assessed by the Ministry of Finance.

- Sinji JVC, whose main areas of operations are retail, software and bonded processing.

Full details about our company can be found on our website www.pcvltd.com

I am the CFO of Phoenix and am a chartered accountant with over twenty years international experience of FMCG industries, consumer electronics, rough diamond distribution and the Internet. I have worked in KPMG, Philips Electronics, De Beers and run my own Internet company. I am also a Scholar on Gerson Lehrman Group Councils.

In November 2007 I reached the finals of Accountant of the Year held by the Association of International Accountants at the President’s Awards Dinner 2007. This award is designed to recognise organisations’ accountancy stars.

In January 2007 I was awarded, based on recommendations from fellow members of the ICAEW, a New Year’s Honour by AccountingWeb. The award was for my services to the accountancy profession in opposing the merger of the ICAEW with other accountancy bodies.

In November 2006 I was awarded an honorary fellowship of the Institute of Professional Financial Managers (IPFM), for my services to the accountancy profession.

In January 2006 Accountancy Age placed me on their Financial Power List for 2006. I was 11th on their list of the top 50 of “The Ones To Watch”. The list identified the “most influential names to look out for” in the world of finance for 2006.

Klaus-Martin Meyer: We read on your website “offers investors business and investment opportunities in the Democratic People’s Republic of Korea (DPRK), enabling them to take advantage of the economic reforms that are taking place there.” Can you tell us what kind of opportunities this could be?

Ken Frost:There are three main areas of investment opportunities open to investors, which we can facilitate within the DPRK:

1 Small scale investments ($500K or less) yielding good levels of return (20% or more).

These investment opportunities are in local production (consumer goods, bonded processing, software etc) for domestic market consumption and export. These utilise the advantages that DPRK has over all the other countries in the region namely:

- 99% literacy
- skilled/disciplined/hard working workforce
- well educated workforce, many speak a good level of English
- lowest wage rates in the region

Phoenix has a number of opportunities that it can offer investors in this area; eg bonded processing, consumer manufacturing, clothing manufacturing and software development.

2 Natural resources

DPRK has proven abundant natural resources worth several trillion dollars; eg coal, gold, copper, titanium, lead, zinc, nephelite, nickel, magnesia, graphite etc.

The investment required would be of a higher order than the small scale investments above, $1M plus. The money would be used to bring existing mines back to production, by pumping out flood water and renewing worn out capital equipment.

Phoenix has, via its working relationship with CPEEC, a number or opportunities in the natural resource sector that it can offer genuine investors.

3 Infrastructure development

Clearly investment in infrastructure is the costliest form of investment. However, given the dilapidated state of the roads, railways, ports, electricity grid etc it is necessary if the economy is to be revived.

DPRK also has a keen interest in infrastructure development focussed on green/renewable energy areas.

Phoenix has on it books a profitable renewable energy project that would suit a serious, well financed and experienced green energy investor.

The DPRK is the final economic frontier and is a “green field” site. Its primary advantages are:

- Location (physical position between Russia, South Korea, China and in AP)
- Location (historical, all the major players now want to move forward)
- Location (resources, it has abundant rich resources both mineral and human capital - high literacy, well educated etc)

Klaus-Martin Meyer: What are the main differences between your company and a conventional venture capital company that is investing for example in internet our biotech companies?

Ken Frost: Companies such as those you mention are industry-specific, whereas ours is location-specific. Our company is relevant to people who might want to invest in the DPRK.  We work in the DPRK and have a physical presence in the DPRK, other “conventional” venture capital companies do not.

Klaus-Martin Meyer: Are there any differences to other investment companies?

Ken Frost: We apply the same principles to potential investments as any other professional investment company, we look at:

- the risk
- the returns
- the quality of the local management
- the quality of the business plan
- the size of investment
- the share offered for that investment etc

We also pay very close attention to corporate governance issues such as; financial reporting, management structure and ethics etc. We have a code of conduct which can be seen on our website.

Phoenix Commercial Ventures Ltd is committed to being a responsible corporate citizen and to the pursuit of a sustainable future, both economic and social.

Phoenix Commercial Ventures Ltd adheres to three fundamental ethical principles:

- Integrity
- Competence
- Courtesy

To this end Phoenix Commercial Ventures Ltd has developed a Code of Conduct, which sets out to ensure that these principles are followed in its operations. The Code of Conduct governs Phoenix’s business decisions and actions. The Code applies equally to corporate actions, and to the behaviour of individual employees when conducting business on behalf of Phoenix.

We work very hard with our local management teams and business partners to ensure that international standards re reporting, corporate governance and ethics are understood and followed.

Klaus-Martin Meyer: What are your plans for the company’s future? How do you see Phoenix Commercial Ventures in five years time?

We see the coming period for Phoenix as that of being continued growth.

In our view there will be a major upswing in economic relations between the DPRK and other countries over the coming months/years. Phoenix Commercial Ventures is uniquely placed to take advantage of, and to respond to, that upswing.

We are one of the very few organisations to have made successful joint ventures in the DPRK. We are also one of the very few organisations to have people with many years’ experience, and cultural sensitivity, actually on the ground in Pyongyang. You cannot run a business by email!

Update from Dr. Petrov:

Among the foreign companies attending the 11th Pyongyang Spring International Trade Fair in the DPRK last week was Phoenix Commercial Ventures Ltd.

Representatives from Phoenix Commercial Ventures attended the fair and manned a stand representing member companies of the European Business Association in Pyongyang, together with members of the management team from Sinji JVC and Hana Electronics JVC (joint venture companies formed with Phoenix) and Daedong Credit Bank - Phoenix’s banking partner in the DPRK - (since 2000 Daedong Credit Bank has been 70% owned and managed by a company run by professional fund managers. The remaining 30% is held by Korea Daesong Bank).

Nigel Cowie (CEO of Phoenix, General Manager and CEO of Daedong Credit Bank and Vice President of the European Business Association) said: “The trade fair provides an ideal venue and opportunity for companies to showcase their products and services, as well as providing an excellent networking opportunity. Phoenix Commercial Ventures and Daedong Credit Bank are proud to have participated in this regular event, which provides a springboard for economic development and growth”.

“Although the fair provides the opportunity for participants to establish new contacts for trade relationships, we also wanted to emphasise investment opportunities. Something that is often overlooked is that it is perfectly possible to create and run successful joint ventures in the DPRK. We have shown this with Daedong Credit Bank, which has been operating successfully for 13 years, and with Hana Electronics, which has been doing the same for five years, and are in the process of repeating the process with Sinji JVC, our youngest joint venture,” concluded Nigel Cowie

An extensive gallery of photos from the trade fair can be viewed on the Phoenix website.

ORIGINAL POST:
DPRK holds it’s largets ever Pyongyang International Trade Exhibition
Institute for Far Eastern Studies (IFES)
(NK Brief No. 08-5-19-1)
5/19/2008

From May 12th to the 15th, North Korea held the eleventh annual Pyongyang International Summer Product Exhibition in the Three-Revolution Exhibition Center. The trade show hosted over 180 foreign businesses, making it the largest convention to date.

Companies from North Korea, China, Taiwan, Russia, the Netherlands, Germany, Syria, Switzerland, Australia, England, Italy, Spain, Vietnam, Thailand, France, Finland, and several other countries participated in the show, displaying a wide range of manufacturing machinery, electrical and electronic equipment, conveyor systems, petrochemical materials, medical supplies, daily necessities, foodstuffs, and other goods.

With more than 120 Chinese companies and more than 30 vendors from Taiwan, North Korea’s largest-ever convention was host to over 50 vendors more this year than the previous record of over 130, set last year.

With a large-screen television positioned at the entrance of the hall displaying multimedia advertisements and a range of large-scale billboards and advertising displays for North Korea’s domestic companies set up around the exhibition center, there was also a distinct sense of commercialism in the air.

In particular, there were several booths selling the wares of large Chinese industries, as well as several affiliates of the Haier Group Co. Ltd., representatives from TCL Electronics Co. Ltd. , sales staff from China Hong Kong Manufacturers Co. Ltd. and other main offices directly participating in the event.

The Pyongyang International Product Exhibition has been held in the summer annually since 1998, and since 2005, a convention has also been held each fall.