A Capitalist in North Korea: My Seven Years in the Hermit Kingdom

by Felix Abt

  Other suppliers and traders were ready to give us credit, so we carefully selected pharmacies and shops throughout Pyongyang, hoping they’d become fast-turning sales points. We also hired our own sales staff who we thought could get us cash quickly to build up our business. Our opening stages involved a great publicity effort, too. We reached out aggressively to the industry, trying to familiarize them with our pharmaceuticals.

  We took advantage of the state system of “household doctors.” These physicians had a mandate to care for a cohort of some 130 families. In fact, the country has no shortage of doctors and nurses—which is somewhat surprising, given that medical professionals in places like China and India often migrate to other countries for better wages and create “brain drain.” Part of the reason is coercive: North Korean doctors and nurses, like other citizens, are not allowed to migrate, lest they be labeled “defectors” by the foreign press.

  Still, regardless of how authoritarian the anti-migration legislation is, this reluctance to leave the country made the visiting Director General of the World Health Organization (WHO), Dr. Margaret Chan, say in 2010 that the country’s healthcare system was “something which most other developing countries would envy.”

  Though correct when comparing the numbers between North Korea and other poor countries, the statement was politically incorrect: it triggered an outrage by all those citizens who expected that all news coming out of North Korea would be bad news. Adding to their rage, Amnesty International carried a damning report on the state of North Korea’s healthcare system later that year, “based entirely on the accounts of defectors. Some of them, unfortunately, had left almost a decade before the report was compiled,” the Foreigners’ Correspondence Publishing reported.

  The pharmaceutical multinational Solvay gave us samples of products which we passed on to influential doctors. They designed their own trials and published their findings in North Korean medical publications. But our own factory could not produce many products at low quantities, which would have earned us no profit. We needed to focus on fewer products that could be produced at large quantities.

  This wasn’t too difficult; with about three or four different antibiotics, for example, one could cover most infectious diseases. Most products we imported from producers at highly competitive prices, while others, such as traditional Korean medicine, were bought locally. In short, we needed to supply wholesalers and pharmacies with a complete range of quality medicine produced not only by ourselves, but by the few quality suppliers abroad who were not afraid of working with a North Korean company.

  Additionally, our sales team started visiting doctors and pharmacists to promote our products. Reaching out to this clique led to a steady increase in sales, meaning they were taking well to our products. And, of course, there was the market research side: our staff hung out at pharmacies, observing and interviewing the people there. I myself once observed a doctor and his patient crossing the street from Kim Man Yu Hospital to the opposite Flower Shop, which had a pharmacy that was also selling our pharmaceuticals. Inside the shop the patient opened her wallet to show him how much money she had to pay for medicine.

  The doctor compared pharmaceuticals on sale and their prices and then advised her to buy a treatment in line with her purchasing power. The pharmaceuticals that hospital pharmacies gave free of charge to patients were mostly donated by foreign groups. When the hospitals lacked medicine, patients or their families bought it in shops and markets, where pharmaceuticals were cheaper but not as safe. PyongSu’s strategy was to fill those cracks.

  Given the realities of the closed socialist system, most foreign managers were kept in a bubble, making it difficult to meet directly with North Korean customers, suppliers and authorities. I got lucky, because the state allowed me regular access to local businesspeople and customers. For example, I met with the directors of all the most prominent hospitals in Pyongyang, as well as the main wholesalers—the best of whom I negotiated a distribution joint venture with. I also dealt with scores of pharmacy managers.

  I even invited the boss of our fiercest rival, which belonged to a powerful military organization, to the founding of the European Business Association. That group trusted me because I had been doing business in the country for some years, giving them the opportunity to observe me. Her deputy became a student at the Pyongyang Business School, and I tried to help her find a foreign investor who could jointly set up an herbal medicine venture.

  As their company was losing customers to PyongSu, my gestures eased their potentially dangerous frustrations.

  A trade-off with a powerful rival: In a bid to ease high-risk tensions that could have led to the shutdown of PyongSu, I convinced this visiting foreign businessman, who represented investors in the herbal medicinal industry in North America and in Asia, to meet our competitor and start negotiations on setting up a joint business with them. The managing director, despite being a market contender, was an energetic and competent woman who earned my highest respect.

  Part of my success owed to my willingness to work with local people, rather than pass judgment and get involved in politics. I built up a large network of contacts who helped shape our business for the socialist economy. Compare this approach to that of my predecessor, a close friend of the British ambassador, who was a staunch advocate of regime change. He didn’t get access, of course. While I could name off-hand the family background of my staff, he did not even know who the party secretary at PyongSu was—and a good relationship with that gate-keeping official is key to success.

  In-house training for managers, sales staff and pharmacy staff was crucial for a company that could not compete by offering low costs, but rather by priding itself on good quality and services. The Pyongyang map in our sales “situation room” shows priority hospitals and points of sales, which our team was working on during a pre-defined sales cycle. Our promotion campaign favored peddling some products for three months, after which I changed the goals for the next three-month-period.

  The challenge of keeping up

  We did encounter an obstacle in our production, which would be difficult to keep competitive. Some groups were either not willing to enter a franchising agreement with us, as we have seen in the case of the Rakwon shopping mall, or would not allocate enough resources to set up and maintain the Quality Pharmacy concept. They lacked selling space, sufficient refrigeration, and the cash to buy the pharmaceuticals. We were not able to offer them products on credit-terms, meaning payments after they sold the products supplied by us.

  I realized that if we could not rely on franchises, we would need to run our own pharmacies to make sure the Quality Pharmacy concept would be implemented. Our factory was only a small tabletting unit, not benefitting from economies of scale and therefore lacking the potential of making a reasonable profit. Our domestic competitors had not only larger tabletting units but produced a complete range of galenical forms of drugs from injectables, syrups, powders, to creams and ointments. Even if we were to become the first company to reach the highest GMP standards, it was only a matter of time until other factories caught up and took away our competitive advantage.

  We focused on the service area, rather, as our strength, because the state-owned factories had neither the necessary attitude nor the skills to offer good services. Wholesaling and retailing of pharmaceuticals, then, fitted nicely into our business model. The wholesale margin—that is, when we sold imported pharmaceuticals and those made by ourselves to pharmacies—was 15 percent.

  The retail margin of the pharmacies, however, was a very handsome 43 percent. If we’d run our own pharmacies we would have not only earned the 15 percent but also the 43 percent. In addition, if we had bought pharmacy buildings at attractive locations, we could have eventually sold them and made a profit multiple times the purchase price a decade later or so. Our direction was now clear: developing profitable pharmacies at good locations throughout the country.

  The green building is the second pharmacy we b
ought in central Pyongyang. Depending on the location, the purchasing price for buildings like these in the capital ranges from $10,000 to $20,000, a cheap buy by Western standards.

  Although PyongSu’s future was to be its pharmacy business, the factory still had a role to play for the foreseeable future. In my view, the company should not only have had wholesale and retail profit centers but also a factory profit center. Still, I was aware of the fact that margins had to be small if we were to compete with foreign generic manufacturers who benefitted from larger economies of scale. I aimed at substituting a portion from the imported pharmaceuticals large enough to employ the factory with at least one or two shifts.

  Large donor organizations, such as the International Federation of the Red Cross and Red Crescent (IFRC) issued public tenders for pharmaceuticals they could use in the field, and the lowest bid from a pharmaceutical manufacturer obtained the supply contract. However, for us to participate in such tender competitions we had to solve two crucial problems. First, we had to obtain GMP status, and second, find tender specifications that were adapted to our more restricted manufacturing abilities. The tenders usually sought a large range of pharmaceuticals with a variety of packages, which given our small factory we could not produce. I urged the IFRC, and other groups, to break down a large tender into smaller sub-tenders, which would have opened the competition to us.

  As a former resident regional director of Roche in West Africa, I was familiar with the product Bactrim, a Roche invention, also known as Cotrimoxazole. It was a combination of two antibiotics that faced little resistance and was tolerable for children. It was used mainly against urinary tract infections and respiratory tract infections, especially during the harsh winters.

  At the time it was widely used by pediatricians in the form of syrup in Western Africa. IFRC agreed to create one kit with the antibiotic Cotrimoxazole and the well-tolerated painkiller Paracetamol for adults, and one for children, and issue separate sub-tenders from then on.

  If those ailments were left untreated, I imagined more people would die of this disease alone than of lack of food in North Korea. For this reason I became a strong advocate for Cotrimoxazole (which is the generic name versus Roche’s brand name “Bactrim”) and wanted to produce it. When IFRC agreed and we won tenders, it became the factory’s largest product.

  In 2007 we won the first IFRC-contract for Cotrimoxazole and Paracetamol, a painkiller and antipyretic. IFRC had samples of our products tested in an independent laboratory in France. The factory order profits were not substantial, but alongside our other sales, they eventually led to our first corporate profit in my third and last year at PyongSu. For the first time, we then happily paid corporate profit taxes to the government.

  PyongSu receives its first large order containing Cotrimoxazole and Paracetamol, and I and my Korean deputy hand it over to the IFRC representatives (left). The contract was our first large and regular production job, an accomplishment that made us nervous: in particular, we weren’t certain whether our Chinese materials suppliers would follow through with their orders, or let us down. For them, we were a small customer that had ordered for the first (and perhaps the last) time, and they gave preference to the more prominent ones.

  When the materials finally arrived, our workers were enthusiastic, working long hours for many weeks despite the biting cold air in the factory. Later the IFRC asked an independent laboratory in France to analyze our samples and, to our relief, the results were good. For the WHO we produced Propranolol, a so-called beta-blocker for the treatment of high blood pressure, heart rhythm disorders and other heart or circulatory conditions. We also manufactured Mebendazole, an antimelmintic or anti-worm drug which prevents parasitic worms from growing or multiplying in the body (right).

  The challenges weren’t over, though. Before international organizations started placing orders with us, we had to make sure we could produce according to the WHO’s international standards, known as the Good Manufacturing Practices (GMP). Our staff worked tirelessly to remove the objections put up by the GMP inspectors. Given the closed-off circumstances in North Korea, this wasn’t an easy task. We had a major headache just trying to order a new water purification system and the microbiological test laboratory (MBTL). It was pretty much impossible to buy a complete system in North Korea and China.

  Rather, we had to buy each component from a large number of producers around the world, including in the United States and other Western countries. I started contacting their subsidiaries and Chinese sales agents in China, but most of them refused to sell their products to a North Korean company thanks to embargoes.

  Then, we went through a sudden change of foreign shareholders, who substantially cut my salary and lagged in giving us the funds to implement the GMP measures. I swallowed the bitter pill of my income reduction, because I didn’t want to let down my North Korean staff at this critical juncture. I haggled with investors for 10 months for that money, which was a waste of time. Indeed, more than half of my contractual time at PyongSu had already elapsed, much of it spent on what would have otherwise been a minor bureaucratic hassle.

  Thankfully, Henry Jin and I found a smaller Chinese pharmaceutical company that was willing to help. We solved the thorny problem by purchasing a water system and MBTL from them; they luckily had a similar system to what we needed. In our deal, we set up a project team that consisted of representatives from both companies, and they helped install the system after taking a modest commission. It was in their interests to help us: They produced an excellent cough syrup based on herbs, which they were interested in selling during those North Korean winters.

  Our small reverse osmosis water purification system had to be replaced by a larger, multiple water purification system (left), which, as part of the WHO standards, would generate enough clean water for the production and to clean our equipment. The microbiological test laboratory (shown partially in the right-hand photo) ensured that the manufacturing environment was free from any contamination.

  PyongSu became the first pharmaceutical company in North Korea to be GMP-acknowledged by the WHO in 2008. In a letter, the WHO confirmed that PyongSu was “eligible for supplies for UN and other international organizations.” In the same year we received also our first GMP certificate issued by the North Korean government’s quality inspection body (left).

  As the company grew with the GMP label, my staff and I went more often to China to meet suppliers. The country was a foreign environment that some would have considered politically hazardous, but as I would find out, the solid worldview of my staff wouldn’t be shaken by the new environment.

  In Shenyang, a provincial capital in northeastern China, we sang both North Korean and Chinese songs. But the local Korean Chinese included images and sounds from South Korea. When images of Seoul popped up on the television screen, they immediately switched to other tunes with northern themes.

  In other spots, the censorship got heavier. In Shenyang, we stayed at the Chilbosan Hotel, which was owned partially by a North Korean state insurance company and, understandably, hadn’t installed foreign TV channels. We strolled in during the days leading up to the US presidential election in 2008, but even the main Chinese channel that was broadcasting the event was switched off. When the election results came out, the TV screen remained dark; the guests, it seemed, must have been the only people in this industrial entrepot of 8 million residents who missed the development that America had elected its first black president.

  On the glorious day we got our certification, we were ready to produce on a regular scale, and we set up our launch plan for all sorts of pharmaceuticals: antibiotics, anti-inflammatories, anti-hypertensives and painkillers, to name a few staples.

  Still, competing on this global scale was new to lots of staff, and I had to get retentive over what we Westerners would consider basic and ineffectual gaffes. Shortly before shipment, I scrounged around the store room and opened a number of the products for a last check. I got furious when I n
oticed the package insert, which was supposed to list precautions for use of the drug, side effects and contraindications, was missing.

  I immediately halted our scheduled operation. The employee charged with printing the package inserts furtively explained to me, “Korean companies don’t add package inserts to pharmaceuticals, and we thought we should save the cost for the package insert.” At less than one-half of a cent, a single package insert cost peanuts.

  But what irked me was that, since our strategy focused on quality and service, we could never compromise on an important matter like package inserts, no matter how irrelevant it seemed to the North Korean staff.

  Competent and friendly staff was the key to success to PyongSu. I am not sure whether the pharmacist is smiling because she remembered the sales meetings in which I asked our pharmacy staff to smile with customers in front of the camera, or because the worst was behind us. A smile makes a big difference in a country where most shop assistants tend to consider customers as a nuisance. As our sales were rising, the sales bags with the PyongSu logo (right photo) were scattered more widely around in Pyongyang.

  We faced yet another hiccup when, in 2006, the United Nations passed sanctions at the behest of Washington. We were suddenly prohibited from importing certain reagents that we needed, even in small and harmless quantities. But we needed them to analyze our product samples, ingredients and the like, ensuring they were free of contamination.