Seoul Ignores Caution Signs on the Road North

Mineral water from North Korea’s famed Mt. Kumgang hit South Korean store shelves this month. But it was a long trip.

Since the idea was conceived in 1994, a Seoul firm has been arm-twisted by the North Koreans into building a $6-million local railroad line and has seen the project delayed a year by an electricity shortage.

“If it had been up to me, I never would have made the decision to enter North Korea,” said Oh Byung Kwon, executive director of Taechang Co., the Seoul firm.

Indeed, doing business in the North can be a monumental, unprofitable headache. But that hasn’t discouraged South Korean managers and officials from dusting off old business plans and mapping out new economic strategies in anticipation of the two nations’ historic summit next week, which will spotlight the experience of companies in the South, such as Taechang and IMRI Co., a maker of computer monitors.

Increased trade and investment links would be the earliest and most dramatic evidence of detente, if it does ensue on the troubled peninsula, as some optimists believe will be the case.

Despite the enormous hurdles in the short term, better business ties between the two Koreas make real sense in the long term, experts say.

Reducing the military threat along the demilitarized zone would benefit almost everyone--and marrying Southern capital, technology and know-how with Northern resources and cheap, Korean-speaking labor promises to spur competitiveness on both sides of the border.

South Korea’s Samsung conglomerate, for one, said it will invest more than $500 million over the next decade if conditions are satisfactory. Shifting production to a lower-cost base close to home, with well-trained workers who share the same heritage and language, offers enormous potential, said Young Hwa Park, executive vice president of Samsung in charge of its North Korean electronics assembly operations.

“I hope the summit succeeds,” he said. “It’s only the start of a long, long road.”

Only a few hundred South Korean companies have made the effort over the last decade. And few others harbor many illusions. The divided peninsula has seen its share of false starts.

And even if political barriers come down, the economic hurdles are daunting: starving workers; an almost complete lack of infrastructure; a dysfunctional banking system; and shortages of almost everything.

Yet even those challenges could be managed with time and money. After all, the last decade has provided plenty of experience, from China to the Czech Republic, in dismantling the messy legacies of Marx and Lenin.

The real wild card is the regime in Pyongyang, the North’s capital, with its history of erratic foreign policy and anti-capitalist paranoia. Although North Korean leader Kim Jong Il on his trip to Beijing earlier this month reportedly praised China’s market-driven reforms, he said Pyongyang will build “Korean-style socialism according to its own situation.”

About 135 South Korean companies currently do business with the North. According to a survey by Seoul’s Federation of Korean Industries, the vast majority approved by Seoul to invest in the North dropped the idea or never started. Although two-way trade doubled last year, it’s still a modest $330 million.

One of the first challenges is finding something--anything--in poverty-stricken North Korea that has any value to the outside world.

Taechang first learned about Mt. Kumgang’s water when the firm stumbled onto a 5-decade-old mineral analysis done during the Japanese occupation, which lasted from 1910 to 1945. Through contacts in Beijing, it approached Pyongyang for permission to conduct its own analysis. The results showed that the water was still pure and rich in healthful minerals--one advantage of North Korea’s almost complete lack of industry.

For pharmaceutical maker Green Cross Corp., the attraction of the North was quite different.

Starting next month, its trucks will fan out across Pyongyang each day collecting vats of human urine from public toilets, middle schools and military academies.

The company needs tons of the stuff to synthesize a single dose of urokinase, a human protein that helps prevent blood clots in the brain. North Korea’s primitive plumbing allows the company to collect large quantities in one place, while the nation’s isolation makes the product relatively free of social diseases.

“At the moment, we believe we can get all the high-quality urine we need from Pyongyang city,” said Lee Joon Haing, Green Cross’ international manager. “But if the project succeeds, we may expand our collections to the outlying areas.”

One thing few South Korean companies are finding anywhere in North Korea is profit.

Transportation is a huge part of the problem. Because direct road and rail links are prohibited between the two Koreas, companies often are forced to ship their products through China at enormous added cost. Green Cross, for instance, has to move its semifinished urine mixture to South Korea via Beijing--a daunting and expensive task because the cargo must be kept frozen while in transit through two developing countries.

But despite the hurdles, several ventures say they’ve been pleased with North Korea’s labor market. South Korea’s IMRI says North Korean employees at its 2-year-old assembly operation learned their jobs much faster than their South Korean counterparts at a sister factory in Seoul, the capital. With defective-product ratios at a tiny 1%, the company is considering expanding into software production.

But experts point out that early projects are getting some of North Korea’s very best university-trained workers for basic assembly-line jobs. It remains to be seen how the rest of the work force will stack up.

In addition, North Korea often appears more interested in securing jobs for as many people as possible than in being efficiency-conscious. That’s not exactly the capitalist way.

When Taechang installed a highly automated filtering and bottling line at its mineral water plant, for instance, North Korea insisted that the firm needed 120 people.

“We only need 10,” Oh said.

No matter how the deal is structured, little of what foreign firms fork over to Pyongyang actually goes to the workers, experts say. To offer some incentive, some companies give workers clothes and such basics as toothbrushes and soap.

So what’s the lure, given all the hassle of operating in North Korea? Companies say they persevere to stake out an early claim on the market, because they are too far along to turn back or because they have a sense of responsibility to their northern brethren.

Hyundai and Green Cross, for instance, are headed by chairmen born in North Korea who fled south and believe that they should do something to help their homeland recover.

As the summit nears, high on the wish list for most companies is some sort of guarantee that South Korean investments won’t be nationalized or subjected to double taxation. Expanding infrastructure, funded by Japanese war reparations, and foreign and multilateral aid also are key.

Opening its doors even a sliver to the outside world represents a major risk for the Pyongyang regime, which has ruled through repression even as it has watched many of its Communist allies fall.

But North Korean defector Lee Young Hoon (a name he uses in Seoul to protect his family back home) said Pyongyang is betting that it will be able to keep its grip. A former economics professor and son of senior party officials, he taught a generation of top North Korean planners at the nation’s elite Kim Il Sung University.

The reclusive government’s approach can be seen in its handling of a big Hyundai project opening Mt. Kumgang to South Korean tourists. Pyongyang earned the hard currency it needed, yet managed to insulate its people from contacts with foreign visitors by using special guards and even relocating neighboring villages.

“North Korea has followed a mosquito-net liberalization policy,” said Kim Chung Kyun, a North Korea expert at the Hyundai Research Institute in Seoul. “They’re trying to open the window to catch a cool summer breeze without letting in the insects.”

Also helping is Seoul’s altered stance under President Kim Dae Jung. It no longer seeks Pyongyang’s overthrow, South Korean planners say. Rather than suffer the shock therapy of rapid reunification, Seoul would rather help build up North Korea gradually, narrow the gap and limit the migration so socially jarring for both sides.

“We don’t want immediate unification,” said Lee Young Suk, a director at Seoul’s Ministry of Unification. “Economic stability in North Korea reduces the danger of North Koreans fleeing to South Korea and China.”

High on Pyongyang’s wish list for aid is food, clothing and fertilizer that the regime can hand out and take credit for, analysts say. North Korea will likely welcome outside materials and money for road and rail projects but resist foreign technicians for reasons of pride and military sensitivity.

It will also likely veto early moves to improve telephone or Internet service, fearful that its citizens could gain direct access to the outside world. But it’s likely to encourage priority industries such as high-tech assembly that appeal to its national pride, or tourist projects that earn fast cash while containing foreigners in remote areas.

Said Kim of Hyundai Research Institute, “There are beaches no one’s set foot on in 40 or 50 years.”

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The Two Koreas

Economic success and failure are easy to measure in comparing North and South Korea. Current infrastructure:

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Gross National Product Change in the 1990s

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Sources: South Korea Ministry of Unification; International Monetary Fund; Times research