A Capitalist in North Korea

by Felix Abt

  The situation got even worse when a WHO-sponsored international inspection team visited the site and compiled a list of 78 objections. They rejected the factory from getting Good Manufacturing Practices (GMP) acknowledgement, the industry’s worldwide production quality standard defined by the WHO. The problem, then, was that foreign buyers (such as aid organizations) would not purchase pharmaceuticals from the factory without it meeting the baseline. The company was making no sales and only carried expenses.

  Adding to that conundrum, PyongSu had to deal with the fallout of its low rating. PyongSu’s product portfolio consisted only of large quantities of Aspirin and Paracetamol manufactured during the first trial production run. But they were nearing their expiration dates and were stockpiled at the warehouse unused. Investors didn’t want to give the company any more support, and staff had little confidence left in the company’s future. But this was only one considerable hurdle we had to overcome; we ran into all sorts of nutty follies of setting up a business in North Korea.

  Taking the lead

  In October 2005, I stepped up to lead PyongSu, but others probably gossiped that I had taken on a suicidal mission. Indeed, they saw a bad omen: after a few months of working, the recently appointed American CEO of a large family-owned business based in Hong Kong, which was then the main foreign investor of PyongSu, “lost” the employment agreement twice over several months and could not sign it. He was supposed to agree to the terms with me—he as the employer, me as the employee—since his group was the majority investor.

  This was an utter nuisance to him; he was against the group’s engagement in North Korea. By “losing” the contract, he was expecting the headache to be finished quickly if PyongSu collapsed. I later learned that the board of directors had not been informed by his predecessor, a family member, of the group’s North Korea investment. When they did learn of it, they wanted it shut down.

  Although PyongSu had decent hardware with few shortcomings, the company immediately faced a shortage of skilled staff. Few qualified doctors wanted to work for us, because we had fostered a reputation for being an unstable company with an uncertain future. And when I did hire capable, English-speaking physicians and pharmacists, or a young and organized secretary, they usually resigned after a few weeks. I saw them later working at the WHO and UN agencies, where the jobs were safer, better paid and less stressful.

  It would be difficult to get out of this hole, and if I revealed the extent of PyongSu’s needs to the investors, they would have certainly axed the entire operation. And yet, the correction of the 78 major and minor shortcomings alone would require substantial additional financing and more than a year’s worth of time until they were fixed. In addition, the two main shortcomings, namely a large water purification system as well as a microbiological test laboratory, would not only be expensive but difficult and at worst impossible to install given the many parts from Western suppliers that most likely would refuse to sell them to a North Korean factory.

  Additionally, we had, with the exception of the two painkillers previously mentioned, no products to sell, neither self-made ones, nor products made by other producers, although we now urgently needed to generate income and cash. Also, we had no marketing and sales unit which, in a way, made sense when you have nothing or little to sell. Moreover, we lacked a strategy as it was not clear what the company stood for, its medium- to long-term goals and how it should reach them. I knew that the last thing I should do then was to send a report on the state of the business to the investors and on what needed to be done—including footing the bill—as that could have meant the immediate death knell for the joint venture.

  The most difficult question, given the overwhelming fiasco, was where I should begin. In a heavily regulated industry, even the production of older, well known generic drugs takes many months until they hit the market. I started tapping into my industry network, looking for somebody willing to give me some formulations, or drug “recipes,” free of charge. That would allow us to start preparing production right away, saving on enormous costs.

  I wasn’t sure how long, though, it would take for these medicines to reach store shelves, so I diversified by contacting traders in Asia and Europe. I received pharmaceuticals from them on a consignment basis, meaning we paid them after they were sold. At the same time, we did a terse market study and put together a strategy and a marketing plan. One of its core elements was what we called the Quality Pharmacy concept. This idea not only included quality pharmaceuticals for the treatment of more than 90% of all diseases, but also the provision of quality customer service and healthcare advice based on professionalism, expertise and ethical integrity. It sounds simple, but reaching this pinnacle was easier said than done.

  This was our first pharmacy, taken over from the Ministry of Public Health’s Pyongyang Pharmaceutical Factory (PPF) in 2006. It is located close to the Arch of Triumph and the Kaeson Amusement Park, one of the wealthier areas of Pyongyang. The government offered us this space because it was the domestic shareholder of the PyongSu Joint Venture. We renovated the pharmacy to look modern and clean, but it still gave off an awkward aura with its lack of products.

  Early on, I knew it hadn’t yet become the “Quality Pharmacy” that we envisioned, at least until we had gathered a complete range of good pharmaceuticals. Part of the dearth is because suppliers were not willing to do business with us on credit terms. There were a few exceptions, though, such as when some Chinese firms aided us to bring the first products onto these shelves. Some of them agreed to supply products on a consignment basis only if I personally guaranteed to pay in case the company could not. I committed myself to the bill, since I had no choice and I was confident that we could sell their products.

  PyongSu could not compete with the lower prices set by other North Korean companies. Our competitors had the market stacked in their favor because they were politically connected and state-owned. They paid lower salaries, lower electricity and water bills, and had zero land fees. They were also privileged enough to receive raw materials which were, at times, free of charge from both the North Korean government and the international donors.

  As a result, our aspirin was dozens of times more expensive than that of our local competitors. For example, 20 tablets of our version of Aspirin, or 250 mg in international standard packaging was about $0.40, compared to $0.015 for the equivalent local product wrapped in a simple manner.

  We had to find a way to distinguish our image as a company that churned out the highest quality of the bunch, and that meant we rely on “brand marketing” as much as the quality itself. Before I became managing director, I suggested as a member of the board of directors that we develop a line of branded generic pharmaceuticals. The Aspirin was to become PyongSu Spirin and the Paracetamol to become PyongSu Cetamol. That plan, it seemed, would give us a distinct buzz-name among customers looking for an alternative to the state-produced drugs.

  Dr. TM, a Seoul-based British economic historian who was a member of the board of directors, tried to mob me out. I was a threat to his consulting firm, which he used to try to bring foreign companies to North Korea, some of whom were instead contacting me. He sent alarming mails to the investors telling them, to name one instance, that “problems with Felix Abt seem to increase. The North Koreans tell me that Felix is ‘poking his nose into everything’ and has delayed packaging and signage.” Dr. TM also told them that I wasted the company’s time with “secondary” issues such as the company’s logo. He took issue with my push to replace the first, blue logo with an unmistakable and more recognizable logo that should associate PyongSu with modernity and quality pharmaceuticals. Of course, the debacle was all a power struggle.

  The board of directors became split between one group that wanted to keep the blue logo, and another that wanted a new one. We all compromised on the Red Cross logo. I felt the red one was better than the blue, because the latter color wasn’t associated with the pharmaceutical profession. But it still was suboptim
al as we weren’t a hospital or ambulance service, an impression that many would glean from a red cross.

  Dr. TM soon resigned as a director and shareholder, which allowed me to step in the leadership role. My first task was to change the Red Cross logo with an even newer one, a medicine capsule which became part of a new corporate identity. Later, we regularly won contracts from the International Federation of the Red Crescent and Red Cross Federation (IFRC), but they demanded that we change the logo from a red to green color. The motif was reserved for them under the 1949 Geneva Conventions, and could not be used for commercial purposes. We did so with pleasure, honored to work with such a prestigious body.

  We couldn’t rely too much on our brand image, though. This pharmaceutical business had to be run in a suave, modern way unfamiliar to the North Korean board members. The Chinese industry became our benchmark, because it has been transforming from an outdated socialist public health system to a more market-oriented one. I took my Korean colleagues to study trips in Shijiazhuang, Shenyang and Shanghai.

  In a visit we hoped would foreshadow our future success, we visited the pharmaceutical joint venture formed between foreign and Chinese investors. To my surprise, the foreign majority shareholder of that company today remains Bristol Myers Squibb, an American multinational. I also convinced its Chinese octogenarian architect, Henri Jin, to join our company’s board of directors, because he could bring his relevant background to the table.

  On the left shows, I take a photo break with the Korean chairman and board members while on a fact finding mission in China. The photo on the right shows managers of PyongSu with myself after arriving at the Hongqiao Airport Shanghai for a study tour.

  A North Korean PyongSu board member (in black suit with tie), in the photograph to the left, getting a free consultation in a Chinese pharmacy. A free diagnostic and therapeutic function is typical of a good pharmacy in China. Since North Korean pharmacies did not offer free onsite medical consultation with trained doctors, this would become part of the quality pharmacy concept I developed, provided the Korean directors agreed, in order to distinguish PyongSu from its competitors. At an exhibition in Pyongyang, pictured to the right, we made a test run on an individual’s blood pressure. The crowds it attracted suggested to us that the idea would work.

  PyongSu staff learn the ropes of the industry from pharmaceutical wholesalers and retailers in China.

  Because China had recently developed its bustling industry, we figured taking a cue from these “case studies” would prove useful for our operation. The Chinese allowed us to discover a lot at their premises, including facts which would normally be considered a company secret. They were obviously not taking us very seriously. They thought we were playing in a much lower league than them, and in a sense, they were right.

  PyongSu’s new Chinese member of the board of directors

  Henry Jin, known in China as Jin Bo Cheng, was general director of Shanghai’s largest pharmaceutical company. He has a fascinating life story. During the Cultural Revolution he was demoted to simple worker and was forced to work in the factory’s most hazardous production area. The so-called Great Proletarian Cultural Revolution from 1966 to 1976 led to the persecution of millions of people suspected to be undermining the socialist revolution. He weathered the storm, though, and was reinstated as general director after the storm passed.

  Later, Henry Jin became a pioneer when he introduced the GMP to the Chinese pharmaceutical industry with the endorsement of the Chinese government. In 1982 he set up the first foreign and Chinese joint pharmaceutical venture on behalf of Sinopharm, China’s largest state-run pharmaceutical company.

  The foreign investor was Bristol Myers Squibb, an American multinational pharmaceutical group. This American majority share holder appointed an American as Managing Director, the Chinese investors appointed Henry Jin as Deputy Managing Director of the new pharmaceutical enterprise. The factory in Shanghai covers 58,000 square meters with total floor space of 37,000 square meters and has helped Bristol Myers Squibb to become a major player in the Chinese market.

  Henry Jin, an extraordinary and elderly gentleman, was a great asset to PyongSu when joining its board of directors in 2006.

  Before signing the joint venture contract, the American investors demanded a commitment from the Chinese side to invest a substantial amount in the new venture, too. But this demand appeared impossible to fulfill. Henry told me that he tried to convince Chinese banks at the time to provide the necessary credit, but all banks refused to do so. The problem was that Sinopharm lacked collaterals, such as land and other assets, to secure the loan.

  Concluding a meeting with senior officials chaired by Jiang Zemin, Shanghai’s mayor who later became China’s president, Jiang asked if anybody had a question or a remark. Henry was the only one who raised his hand and explained that he was trying in vain to get a loan from state banks. Jiang empathizing with Henry answered boldly: “I am your collateral!” With this he overcame the first hurdle, followed by many others that the first pharmaceutical joint venture in China was confronted with.

  I was able to convince Henry in early 2006 to join our board of directors. I could draw on Henry Jin’s vast experience, and he was my strongest supporter in the board of directors. He patiently explained to the North Koreans why things had to be done in a certain way to make the company successful. I still feel grateful to this kind and generous person who worked many hours, despite his old age, and who always refused any financial or other reward. He was a truly good-intentioned and fine gentleman who gained satisfaction by helping us, and supporting a number of charitable activities in China.

  In the past, in China multiple government agencies used to give orders and instructions to the management of enterprises for running their daily business. While China had radically streamlined bureaucratic control and delegated power to the managers, North Korean enterprises were still micromanaged by the government.

  Smiling and not surprised at the query, the CEO of a large state-owned pharmaceutical company in Shanghai responded to a question about “government management” from the North Korean members of our board: “The state owns this enterprise. The government does not give us instructions on how to run it. It expects that we are doing it in a competent and profitable way. And if we don’t they’ll replace us.”

  The lesson was that this Chinese enterprise was flourishing despite the freedom its management enjoyed. It was a challenge to the hermit state’s management practices.

  Even though the board of directors agreed that branding was a huge part of our plan, it was hard to get the process going in this socialist country. When I wanted to set up the marketing and sales function, the Ministry of Public Health told me that companies in the DPRK usually don’t have a sales department. They looked at my request with suspicion, and then asked me to send a letter to the cabinet, which reported to the prime minister, to explain my reasoning so I could get a special permit.

  Making headway

  It took the government a few months to authorize my marketing plan, after which we started receiving products from suppliers. To sell products quickly, my first mission was to set up our first pharmacy at the entrance of a large and frequented shopping mall. I first targeted the Rakwon Mall, in the city center, because it sported a clientele that could afford our higher-priced and better quality pharmaceuticals in hard currency rather than in the local weak currency. We also took notice of the sizable Kwangbok Department Store along its eponymous Kwangbok Street. This spot was situated on the capital’s periphery, which was a relatively well-off suburb full of distinguished individuals.

  In downtown Pyongyang, the modern Rakwon Department Store serves expatriates and affluent North Koreans. This outlet became PyongSu’s first regular customer in 2006, and its home to posh foreign goods like vacuum-packed foods, digital cameras, MP3 players, and an Italian-made gas stove that I bought. This mall is truly a gem; the large majority of department stores sold goods made in the DPRK, and w
hich could only be obtained on coupons.

  Since we were cash-strapped and not able to pay a fixed lease in fall 2006, I had to think of a plan quickly to get those pharmaceuticals on the market. I first suggested to these shopping malls that we would pay a rent taken from a 5 percent cut from the monthly sales.

  My second proposal was to pay no rent at all, but rather to hand the pharmacy over after one or two years to the shopping mall. That deal came with the condition that the new owners would supply their booth exclusively with products from PyongSu, including products we manufactured as well as those we imported and distributed.

  This was a kind of slimmed down franchising. Franchisers have a detailed concept that their franchisees must apply, such as which products to sell and which advertisements to display. Our main condition was the exclusivity of using us as suppliers alone. We would have supported the mall’s “quality pharmacy” with training and advertising, though, and it was something completely new to this country. If the first franchised pharmacy worked, we could spread our model and set up more shops elsewhere.

  They liked the concept, but didn’t believe us when we said we’d have the funds to make sure the supply chain would work. The group was probably “once bitten twice shy,” because Chinese and Koreans had previously brought forward business proposals that never materialized. They needed more time to think about it, and to observe our practices, but they agreed to sell our products in their pharmacies in the meantime.