So much for a business brotherhood of the Koreas. In 1998 South Korea elected a new president, Kim Dae Jung, who vowed to end five decades of hostile division between the Koreas. He soon lifted laws making it illegal to travel to North Korea for business or pleasure. The message to business was clear: go North, and begin the work of reuniting the Korean nation. With a sense of patriotic zeal, dozens of companies answered the call. They launched tourism ventures and opened plants manufacturing clothing, shoes, television sets and computers. The Rev. Sun Myung Moon opened an auto-repair shop with hopes of expanding into auto assembly. Only now these plans are collapsing in the bizarre business climate of the world’s last Stalinist regime. “Doing business with North Korea is like doing business in a black hole,” says Lee Dong Bok, a professor of North Korean affairs at Myongji University. “You pour your money in with no hope of getting it back.”
The timing of President Kim’s call to go North is starting to look ruinous. Several of the Big Five South Korean multinationals bet heavily on northern ventures at the same time that they were struggling to recover from the Asian financial crisis of 1997. Those who responded to Kim’s call regret it. The distraction and failure of northern ventures contributed to the collapse of the Daewoo empire and the on-going breakup of Hyundai. Those who ignored Kim are glad they did. Unburdened by northern obligations, Samsung recently displaced Hyundai as the biggest conglomerate in South Korea. “Hyundai lost market confidence partly because of its risky northern ventures,” says Kim Chul Jung, a strategist for Jardine Fleming. “On the other hand, Samsung’s prudence paid off.”
This shakeout came with at least some warning. For decades Koreans living in Japan have invested in small plants in North Korea, emerging with horror stories about working with the erratic regime of dictator Kim Jong Il. Hopes for change stirred when the northern leader met his southern counterpart for the first inter-Korean summit in June last year. Sentiment clouded the southern reaction. Eager to help the northern town where he was born before war divided the Koreas, Hyundai’s late founder, Chung Ju Yung, urged his aides to go lightly with Pyongyang. His five rules for working with the North: don’t smile too much, don’t wear lewd or showy clothes, don’t ask too many questions, sit up straight and be patient.
That wasn’t enough. Since starting a tourist ferry to Mount Kumgang in 1998, Hyundai has spent more than $600 million to build piers, roads and other tour facilities in the North. After a widely hyped launch, the cruise quickly declined in popularity, undone in part by high fees and tight surveillance imposed by the North. So far Hyundai has lost an estimated $400 million, and it recently cut back service from daily to every third day.
Southern businesses were beguiled by the North’s potential as a base for export manufacturing. North Korean workers make an average monthly wage of only $100, less than a 10th of wages in the South. They are disciplined by one of the toughest dictatorships on earth, offering businesses relief from the constant threat of strikes in the South. And they share what southerners mistakenly figured was their language. In fact, after five decades of isolation under Kim family rule, words like “contract” no longer have much meaning in North Korea.
Troubles start even before executives head North. Southern companies have to pay unofficial “entry fees” of $300,000 to $500,000 just to get an official invitation to visit Pyongyang. The roundabout trip through Beijing, the only city in the world with direct flights to Pyongyang, takes several days before the real ordeal begins. Tightly guided visits open with an obligatory bow to a giant statue of the late “Great Leader,” Kim Il Sung, whose one-man rule still dictates the pace of talks. Northern negotiators often walk out of meetings to get new orders from their bosses or to wear down opposition. “Without patience, you can never do business with North Korea,” says a Daewoo executive. “They make you wait, wait and wait until you are burned out.”
The result is that southerners often sign deals in the North they would never agree to anywhere else. Typically they put up money, with no guarantee of ownership or managerial rights. The first North-South joint venture was an apparel factory that opened in 1996 just south of Pyongyang. Daewoo invested $5 million in the plant, but its supervisors were expelled from the North two years ago in a dispute over further business expansion. Now the plant runs at below 30 percent of its capacity, and Daewoo is powerless to fix it. The company’s 50 percent stake comes with no managerial rights. A Daewoo executive admits his company has “almost given up hopes” for the factory.
It gets a lot worse. On paper Taechang owns 60 percent of the $10 million water-bottling plant, but its northern partner refuses to let it post permanent staff in the factory. The northern view, according to some southern business people, seems to be that anything on northern soil is all theirs, regardless of what the contract says. In the midst of other recent disputes, Pyongyang has warned southern partners that their holdings could be confiscated or nationalized at any time. Last year authorities briefly confiscated a shipping container in which they found tabloid newspapers with pictures of nude women. The authorities accused the southern owners of conspiring to pollute North Korea with decadent Western ideas.
The magnitude of hidden business costs in the North also came as something of an unpleasant surprise. The conditions of roads and rail lines are so bad that southern investors often have to build their own. Taechang had to lay out $6 million to renovate old railway tracks near its plant. A southern shipping company recently spent more than $2 million to construct cranes and other cargo facilities at the Nampo port. Daewoo had to build a generator in Nampo because the electric supply was too small and unstable to power a factory. These expenses have undermined the assumption in the South that North Korea’s proximity would lower manufacturing costs. Ship-ping less than 100 miles from Inchon, just west of Seoul, to Nampo costs $900 per 20-foot container, or more than double the cost to the Chinese port at Qingdao, which is much farther. “Many South Korean companies invest in North Korea believing they know the country very well,” says James Yoo, CEO of Seoul’s IMRI, which produces computer monitors in Pyongyang as a partner in one of only a handful of North-South ventures that are not losing money. “They don’t recognize the fact that it is the most mysterious nation in the world.”
The biggest loser may be President Kim and his dream of ending the division of the Koreas sooner rather than later. Before German reunification, East Germans were widely exposed to Western television and underground literature, yet they are still struggling to adjust to capitalism a decade later. After a much longer period in far deeper isolation, North Koreans will have even more trouble adapting. And southerners are now learning the hard way that “normal economic rules don’t apply” in North Korea, says Professor Lee. “Everything is political, even business.” Investor, beware of mixing business and diplomacy.
