North Korean Economy Watch

Interview Blog
How a hopeless pharmaceutical joint venture was turned into a success story, why and how humanitarian aid and economic development mostly follow conflicting interests, how foreign business people challenge and survive an environment overshadowed by heavy geopolitical influences including arbitrary sanctions imposed by foreign powers, how North Korean managers prepare themselves to get fit for export and international competition, and what the dos and don’ts are for those who want to successfully start a business in this very special country.

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Klaus-Martin Meyer: Felix Abt, you came as country director for the ABB group to North Korea in 2002 where you have been resident since. ABB closed its representation just about 2 years after your arrival but you have successfully been involved in a number of other businesses since then. What happened?

Felix Abt: At the time the Swiss-Swedish ABB, a global leader in power and automation technologies, not only faced huge asbesto claims in the United States but also large debts versus a tiny equity that culminated then into a matter of life or death for the group. To survive it decided to immediately save 800 million USD cash expenses, making the closure of a number of factories and offices around the globe unavoidable.

Though we at ABB Pyongyang fully covered our cost through sufficient sales with a good margin the funds and other resources necessary to set up the planned joint ventures I had been negotiating, however promising they may have become, were definitely not available any longer. In addition the pre-contracts I secured for ABB – including one for a 9-digit USD infrastructure project I signed at the dismay of the competitors in presence of the Swiss foreign minister, the Swedish ambassador and the North Korean minister of power and coal industries – would have required even more substantial funding. Given ABB’s critical financial condition that I, far from the headquarters, grew aware of only later, neither ABB could have provided this in the form of supplier credits nor commercial banks in the absence of sufficient export risk cover nor institutions like the Asian Development Bank or the World Bank from which North Korea remained excluded as a member due to US and Japanese opposition.

It led ABB to shut down its country representation. The speculations put into circulation suggesting political rather than economic reasons or the failure of its local business operation for the shutdown were all wrong. ABB’s case also drew more attention than it deserved because this company and British tobacco giant BAT were then the only multinational groups active with resident expatriate staff in North Korea.

After the closure of ABB’s offices I continued to work in Pyongyang as an agent for ABB and added other firms to a strategic agency portfolio which comprised first-rated companies in promising key sectors like mining (e.g. Sandvik) and light industries (e.g. Dystar). On behalf of the companies represented by me I realized multi million USD sales in the following years. I was also involved in setting up mining operations.

Klaus-Martin Meyer: From heavy involvement in infrastructure and mining business to raising a North Korean pharmaceutical factory to world standard – how come?

Felix Abt: The PyongSu Pharma J.V. Co. Ltd. in Pyongyang is the first pharmaceutical joint venture between North Korean and foreign investors and the largest operational European investment at present. The foreign investors that had been holding the majority equity stake sent first a Philippino production pharmacist to Pyongyang to build up and run the joint venture. After he had been in Pyongyang for some time he decided some day not to return to Pyongyang from a holiday. The project suffered a setback and got stuck until a second one from Germany was found who stayed some years until he decided to retire. Both of them were excellent production experts and successfully set up and run pharmaceutical operations elsewhere before. And yet, PyongSu’s situation still looked desperate when the second one left and when I was asked to become managing director and the third one to, so to speak, try his luck: A WHO-sponsored international inspection had just come up with 75 objections, rejecting Good Manufacturing Practices (GMP) acknowledgement, a universally recognized production quality standard in the pharmaceutical industry as defined by the WHO. In addition from being far from reaching the necessary standards, the company had no sales but only expenses, large quantities of Aspirin and Paracetamol nearing their expiry dates were stockpiled at its warehouse, and last but not least both investors, unwilling to give the company any more support, and staff were discouraged and they had little confidence left in the company’s future.

Having had the unique chance of getting to know North Korea and gaining, unlike other foreign business people, a pretty good insight and understanding of the way business is done here during the previous years of my stay thanks to my multi-faceted business activities and having worked and survived for a large multinational pharmaceutical group as country director and regional director before in no much less challenging places in the Middle East and in Africa, I thought I should dare it. At the beginning I felt really lonely in the belief that PyongSu had a fair chance of succeeding and many told me straightforward I was a day dreamer. But already recognizing the impressive potential of the Korean staff when I was a member of the board of directors before taking over as chief executive and the ability to recruit more of the industry’s best talents I believed that with proper management that included coaching and training in all business aspects good results were achievable.

The results of the new approach are quickly told: PyongSu did become the first North Korean pharmaceutical factory to reach international GMP-level confirmed by the World Health Organisation. It also became the first ever North Korean company to participate in tender competitions and to win contracts against foreign competitors from Germany, China, India, Thailand and elsewhere. With an increasing cash-flow generated by ourselves, we have even become able to add significant value to the company by buying and profitably operate pharmacies and other sales outlets in the country.

Being recognized as a model pharmaceutical company PyongSu has, at the request of the government, also made itself socially useful by sharing know-how with other pharmaceutical companies to help raise their standards.

Klaus-Martin Meyer: You have been the initiator and the first president of the European Business Association (EBA) in Pyongyang, the equivalent of a European chamber of commerce. What was the motivation for its foundation and what has been the result of it so far?

Felix Abt: I always felt that there are plenty of misconceptions about North Korea and the way business is done here. Not only was the country underreported and often misunderstood but when Western media did report about it they tended to repeat old, mostly negative stereotypes. Thus, I saw a need to provide the business world with more accurate information, ideally by competent business people on the ground themselves. I also thought an entity should be created that could serve as a bridge between European and North Korean enterprises to accelerate investment and trade between them and to break the isolation the country was pushed into by the powers who have been trying to overthrow it ever since the DPRK or, in full, the Democratic People’s Republic of Korea (North Korea’s official denomination) was founded 60 years ago. I also thought it could some day become a welcome medium for European businesses and North Korean authorities to hold dialogues in order to learn to understand one another’s problems, concerns and thinking which would strongly benefit both sides. I could, by the way, also imagine a larger meeting and communication platform not just limited to few European businesses but open for enterprises around the globe interested in investing and doing business in North Korea.

Since its foundation the EBA Pyongyang made some headway into the direction described before. However, my presidency was marked and overshadowed by an avalanche of arbitrary economic and financial “sanctions” imposed on the host country which kept me busy to find ways and means to keep (legitimate) business going.

As things have stabilized and as we have learnt how to deal with obstacles to our businesses in the meantime and, last but not least, in order to save time for existing business projects as well as new business opportunities in North Korea and Vietnam including those your readers may approach me with I decided a few months ago that I would no longer be available as president or committee member for a second several-year-term.

But having closely experienced Vietnam’s economic adjustment process and the way it so successfully attracted foreign investment where I have been living and working for many years before I moved to Pyongyang I would still be prepared to spend time and share experience and know-how with the competent North Korean authorities should they be interested in it.

Klaus-Martin Meyer: One of the many hats you are wearing is the one as director of the Pyongyang Business School. Is capacity building for enterprises a better alternative to sending rice bags in order to prevent hunger and starvation in North Korea?

Felix Abt: Let me explain you first that with the exception of Sweden and Switzerland all European countries, invited by the North Korean government to do development projects in North Korea, have refused to do so until now for political reasons (following largely US-policies) and provide only humanitarian assistance, particularly in times of disaster. It is mainly the United States plus European and certain Asian countries that have been donating rice and other food items instead either directly or through the World Food Programme (WFP) each and every year for more than a decade and they are continuing to do so. This not only allowed donors to get a glimpse into North Korea through the eyes of WFP-food distributors but it also created a culture of dependency which I suspect was not entirely without political intentions by the donor countries and which economists and development experts claim to also have prevented necessary economic adjustment measures that would have allowed the DPRK to get on its own feet faster.

Recently, for example, I saw that an NGO bought a large quantity of cookies fortified with vitamines in China with taxpayers’ money from a European country for malnourished kids in North Korea. They thought that European hygiene, safety and quality standards of food items can be met in China but not in North Korea. Instead of helping the North Korean food companies with some capacity building reach these standards they were in fact undermining the efforts that the North Korean food processing industry is undertaking to catch up with the rest of the world. How do these do-gooders imagine that domestic factories can thrive and feed their workers and their families if they place their orders with competing industries just across the border? I can illustrate my point also with PyongSu’s example. Some organizations like the WHO and the IFRC have supported and sincerely honored PyongSu’s efforts to reach international quality and safety standards and competitive prices. They were fully aware of the fact that by purchasing quality pharmaceuticals made in the DPRK they would help raise the quality and safety of pharmaceuticals and save additional lives! And yet there are still many NGO’s and countries that prefer to buy pharmaceuticals to be donated abroad rather than from us, directly undermining efforts of PyongSu and the rest of the North Korean pharmaceutical industry to reach and maintain high international standards. This proves that there is a lot of politics, self-interest and hypocrisy involved in what I would call the foreign aid industry which literally beats the domestic manufacturing industry.

A former country director of the Swiss governmental Development and Cooperation Agency (SDC) and I thought food security could only be established by promoting adequate economic development leading to increasing income in domestic and hard currency, job creation etc. Since, of course, we would not have been able to mobilize finance for the upgrading of the infrastructure, or to buy spare parts and raw materials for enterprises, we thought that a very cost-effective means of helping North Korean companies is capacity building for senior officials and managers to enable them to make the best out of their existing enterprises and to prepare them to get fit for export and international competition.

I made a concept for approval by the sponsor SDC and the DPRK-government and then I started organizing the business school seminars (including some essential elements of an MBA-course) with lecturers from different countries with an outstanding theoretical knowledge and practical international experience. Having gained a good idea of the state of North Korean enterprises, their environment and a fair understanding of the needs of their managers when doing business with them I was not only able to select the most suitable lecturers but also brief them in such a way as to have their lectures tailored to the students’ real needs – something other foreign economic training organizers have failed to do. The students at the seminars are North Korean senior officials and company executives. It was therefore not surprising that they expressed great satisfaction with what they learnt and with the practical benefits they drew from it for their businesses. Since SDC did not pay my work and my expenses during the first two years I was not only a co-initiator but also a co-sponsor. In addition I could convince some large foreign companies to send senior executives and experts to hold seminars in Pyongyang at their own expense.

Western media like The Financial Times were quick at speculating that we were about to challenge the socialist system but that, of course, is non-sense. It’s very simple: If a country, regardless of whether it is capitalist or socialist, wants its enterprises to successfully export they need to get to know and apply the corresponding marketing tools. Or irrespective of whether an enterprise is privately or state-owned it needs to have a strategy and a business plan. So the company managers have learnt such basics at our seminars and, to stay with the example, know that if they fail to plan they plan to fail.

This year most of the lecturers have been coming from Hong Kong. They have an academic teaching background and, in addition, international management experience of 20 years on average. A further asset they have, and that’s another reason why I have chosen them, is that most of them also built up subsidiary companies in mainland China on behalf of Western companies. Thus, they are not just teaching knowledge acquired from books but have a lot of highly useful hands-on experience and are also well aware of the different business worlds and of the very different economic, cultural and political aspects in East and West, which is essential to know when interacting with businesses of other countries. Needless to say that they can understand and empathize with North Korea better than European and other Western lecturers who would have to overcome much more than just a wide geographical distance.

Klaus-Martin Meyer: With your unique and large wealth of experience in North Korea what do you recommend to business people who want to start a business in North Korea.

Felix Abt: This is your toughest question since it would take me at least a full evening to give some really useful reply.

Perhaps I would summarily try to answer that if you want to understand why and how certain companies succeed you have to know first why certain other foreign companies fail. Those who fail are quick at blaming North Korea, its system and so on, and, of course, never recognize their own shortcomings.

But it’s worthwhile having a closer look at them to learn how to avoid costly errors. From my observations these are the five main causes of their failure:

– lack of basic knowledge of the country due to a lack of due diligence (no or little home work done before traveling to Pyongyang)
– advice by ignorant and/or biased advisors and sponsors (all advisors belong to this category to at least a certain extent)
– choice of random, suboptimal business partner based on a recommendation (see above) rather than a systematic selection (i.e. asking for a range of alternative business partners from which to choose the most suitable one)
– no identification of a leverage for a long-term joint venture (e.g. lasting technological advance, ownership of unique loyal customer base etc.)
– appointment of unsuitable project manager (with lack of technical and/or social and/or cultural competence as well as lacking patience, stamina and flexibility and/or a background difficult to accept for the North Koreans)

A larger number of Chinese but also some European business people have successfully started businesses in North Korea in recent years. Readers of yours may join the growing foreign business community and I wish them good luck and success, too!