by Felix Abt
I have met some of these new bureaucrats, whom I consider to be clearly pro-business and pro-growth. A few light changes have already been made in market policy: more flexible opening hours are allowed for markets, and more companies are permitted to interact with businesses abroad.
These have led to changes in light industry and economic development in the broader sense.
In an interview in Pyongyang with the Associated Press’s new Pyongyang bureau, Yang Hyong Sop, vice president of the Presidium of the Supreme People’s Assembly, said that “Kim Jong Un is focusing on building a knowledge-based economy and looking into cases of other countries’ economic reform, including China’s.”
It’s telling that the taboo word “reform” has been used by a top official just a few weeks after Kim Jong Un took power. Later, Kim Jong Un also stressed the importance of using the internet to “find more data on international trends and advanced science and technology from other countries.” He went on to proclaim, “We need to send delegations to other countries to learn more about what we need and have them gather a lot of references.”
Over the years, I always found army-run enterprises to be easier and more efficient at getting things done than the others. Especially in the area of mining, they were resourceful: one major cost in that operation is the transportation of the extracted products from the mine to ports. But at times, the transportation infrastructure was crumbling. Only the military had the resources and manpower to swiftly construct tunnels, bridges and ports—a monetarily extravagant affair. With non-army enterprises as partners, getting anything done took longer, and hiring construction companies was too expensive.
Other times, though, this compartmentalization of the economy was a drawback. On behalf of PyongSu, I once opened a foreign currency bank account with the Daedong Credit Bank, but one day the cabinet, consisting of ministers reporting to the prime minister, decided to consolidate the scarce, foreign currency from various banks into its Foreign Trade Bank. While I understood this measure intended to give the government a more efficient command over scarce hard currencies, I still opposed it because it had too much potential to hurt PyongSu.
Here was the problem. The bank exchanged all foreign hard currency into the official rate for won, pledging that it transfer the cash back into foreign currency again at the same exchange rate when needed. The dictum sounded good on paper, but the official exchange rate was significantly worse for PyongSu than the more lucrative black market rate—and the dollar-to-won gap widened almost every day. It was only a matter of time before a massive depreciation would be ordered, with the risk of my businesses losing most of the value originally deposited in the foreign currency.
The government’s order applied to its own companies, but not to companies and banks under the party and the army. This was because there were three self-contained economies: the civilian economy under the civilian government, the army’s economy under the National Defence Commission, and the party economy under the Central Committee. This has led to unproductive frictions, and Kim Jong Un has started shifting economic decision making away from party and army to the cabinet headed by the prime minister. And that’s not all: even a number of military companies were recently moved away from the army and are now under civilian government control—an amazing move for a country with an “army first” policy.
All foreign groups operating under the cabinet, which reported directly to the prime minister, obeyed and closed their bank accounts with the Daedong Credit Bank. But all other entities not operating under the cabinet could keep their bank accounts with the Daedong Credit Bank, which was operating under the purview of the Party.
PyongSu, which reported partially to the Ministry of Public Health under the Cabinet, was the last one to move its account to the Foreign Trade Bank. That was more than a year after I sent a letter to the Minister of Finance explaining my reasons for objecting, including my argument that the measure dealt a blow to this foreign-invested bank and would discourage potential investors in North Korea.
Why North Korea is not yet an “emerging market”
For a foreign business, North Korea is home to a limited domestic market, with a similarly small growth potential. So the domestic market is not attractive for foreign companies in the way Vietnam and China are—at least not in the foreseeable future.
Although the domestic market is limited, foreign products can fill a few niches. Swiss watches and knives, for example, are selling well thanks to locals’ taste of luxury. The government-run Pyongyang Times reflected this fact in an article on October 7, 2006, when it called Swiss watches and knives ‘highlights’ at a trade fair in Pyongyang.
On the other hand, North Korea is competitive for its processing activities in garments, shoes and bags. Investors supply the cloth, leather and any accessories, and the North Korean contractor returns finished products. The effects of power shortages are, strangely, not the foremost problem in this industry: to ground around the dearth, smart Chinese investors have brought in, for example, non-electric sewing machines.
The same goes for the extraction of minerals and metals, which are abundant in North Korea. The financier supplies the equipment, and mining products are sent back in return. Low to medium technology items, encompassing artificial flowers, dentures, furniture and toys, can be a good investment as well. Indeed, such items are already being produced on behalf of foreign investors.
This factory with investments from Hong Kong generates handsome profits. Its North Korean managing director, whom I met when he attended the Pyongyang Business School, is a very competent business man.
North Korea also harbors an extraordinary number of untapped mathematicians and engineers, making IT a particularly promising industry. The country’s first and only software joint venture, Nosotek, churned out windfall products shortly after it was founded in July 2007. Less than one year later, one of its iPhone games even made it to the peak of Apple’s top 10 best selling iPhone games list in Germany. Of course, stating the name of that application could bring disrepute to the company, so it will remain anonymous.
The most significant overhead cost for any North Korean operation is foreign managers and technicians. But North Koreans are quick learners, meaning this high cost can be minimized quickly. When I left PyongSu, the local managers and staff were able to run the show alone - through the entire process of manufacturing, importing and wholesaling, along with setting up new retail outlets. A 30-year-old single man with a degree in Oriental language studies followed me to act as the “economic conscience” of the foreign investors, a sort of messenger from the inside of North Korea. Neither a pharmaceutical background, nor industry and management experience and not even a basic business education were prerequisites any longer.
A History of the North Korean Economy
In 1984, the first law on foreign investment was passed, allowing foreigners to set up factories with majority ownership. The change was prompted by the decline of the economy and of USSR subsidies. In 1992 the Supreme People’s Assembly adopted three laws allowing and regulating foreign investment - the Foreign Investment Law, the Foreign Enterprise Law, and the Joint Venture Law. More relevant laws and regulations including special provisions for trade zones and tax breaks and reductions, several dozens in total, were added over the years and existing laws have been adjusted and refined, usually in favor of foreign businesses. The laws provide the legal framework within which foreign investors can operate, and defines in particular the allowed areas of investment, along with the rights and the obligations of the foreign investors.
What’s interesting is that, going against the grain of stereotypes, a few companies and NGOs have won court cases against politically connected North Korean groups. Michael Hay, who runs a legal consulting office in Pyongyang, mentions them on his website without specific names at http://www.haykalb.com. The North Korean website Naenara used to publish the most important laws related to foreign business and investment, but was closed.
> Foreign investors can get an updated CD with the relevant laws and regulations from the DPRK Chamber of Commerce, which has its office at the Ministry of Foreign Trade, Kim Il Sung Square, Pyongyang (Postal Address: DPRK Chamber of Commerce, P.O. Box 89, Pyongyang). Businesspeople may write there and ask how to get the CD. They could also ask to be invited by this chamber of commerce to visit them for a briefing. Alternatively they could ask the DPRK-embassy in their resident country to get the CD on their behalf against payment.
A Chinese invested shopping mall with its name in red Korean letters and underneath in grey Chinese letters.
How difficult is it to do business in North Korea? It depends on the expectations, industry and choices of the investor. First, you need a North Korean partner for your business, as you cannot practically do any business without one. Second, you have to be ardent in finding the right one for success.
When you first visit Pyongyang on a fact-finding mission, you will come across people who want to introduce you to a specific business partner and, in some cases, that person could be themselves. Of course, they almost always have some other vested interest and, most likely, they will not introduce you more suitable business partners.
But you need to know that in every industry there are companies of different sizes, competences, ranges of products, distribution networks, and competitiveness. Therefore, you have to insist on having a reasonable choice from where you select a partner, or else there’s a risk that your investment will turn sour. You should also know your joint venture partner and his thinking before pouring money into any venture. The expatriate manager you will send to North Korea should not only be professionally competent, but should also be able to cope with a highly demanding and exotic business environment.
Some marketers have, perhaps unfairly, exploited the “Made in North Korea” label in a skewed way. For example, North Korean factories produce millions of trousers, including jeans, for export every year. But since this North Korean industry is hardly known to the outside world, three young and clever Swedish advertising executives were able to arouse their own gimmicky glory. They placed a small order of one thousand jeans, which filled one-tenth of a 20 foot container and sold them in Europe.
International news media like Reuters and BBC eagerly broadcasted the story around the globe. No regular repeat orders ensued from it. But that was not the intention in the first place. The hip professionals simply had proven Horace’s adage that “when mountains are in labor, only a ridiculous mouse will be born.” Or, in this case, more like a hill.
The first serious step into Business in North Korea: the Set-up of a licensed Representative Office.
Here is what it takes, according to my own experience. I have updated this with inputs from the Ministry of Foreign Trade in 2010, and later confirmed the number with a high ranking party official:
1. Monthly lease
Changgwang Office, central district, opposite Koryo Hotel - 500 Euro for sunny side or 450 Euro for shadowy side
2. Office equipment
Metal office cupboard Euro 130 x 2= 260
Desk Euro 100 x 3= 300
Chair Euro 50 x 1 (large) = 50 & Euro 10 x 5 (small) = 50
Computer Euro 300 x 2= 600
Printer Euro 50 x 1= 50
Paper shredder Euro 150 x 1= 150
Total Euro 1460
3. Telecom expenses including installation of phone lines and chesin e-mail
Installation of e-mail: Euro 300
E-mail cost: Euro 2 per 25 kilobytes
Installation of local phone: Euro 150
* Internet & international phone in the office are available if resident foreign rep. in the office.
In case of using the communication service in a hotel, it varies according to the country.
For a call to China from the rep office: Euro 4.5/min per telephone call, 1 Euro per receiving the call
4. Staff expenses
For the chief officer and senior officer Euro 700/month each.
Interpreter & driver Euro 80/month each.
5. Car purchase
Registration of car: Euro 50
Euro 11,000-12,000 from Pyeonghwa car company, Nampo.
6. Petrol (1 l = 0.47 Euro)
7. Other items
Registration fee of the office : Euro 4,000
Taxes:
Various kinds of taxes (including insurance): Euro 500/year
No tax if the representative office signs contracts on behalf of a company resident abroad and less
than 20 percent on business dealings done by the representative office in its own name
Maintenance of the office (a discretionary management fee for the chief representative)
Basic input for a business plan
Example: Artificial teeth production (some data have changed since the business plan was first formulated in Pyongyang in 2007)
Manufacturing: Products: acrylic teeth net 4,500,000 (5.3 mill gross) per year
1. Personnel:
Workers: 35 at 35 - 40 € / month
Supervisor: 3 at 35 - 40 € / month
Manager: 2 at 50 - 60 - € / month
Gen. Mgr: 1 at 300 - 500 € / month
The salary quoted in Euro will be changed into won at the official exchange rate and paid in won.
Shift: 8 hours / day
Working days: 300 / year
Incentives (at the expense of foreign investor): 35 - 300 € / month, based on achievement of objectives. The incentives do not have to be changed into won and will be paid in foreign currency.
Gen. Mgr. discretionary expenses: 1.000 € / month
Travel costs foreign business manager/trainer: € 10.000 / year
2. Other
Electricity cost: € / kw / h € 0.045, 0.06 from 01/01/2007
Water cost: € / m³ 0.048 e per m3
Building m² 500 - 800 - 1,200 m
Heating: central (in addition to the air-con heating necessary)
Air con at 30 degrees required
Equipment else see list
Rent € / m² for office 2.50
100 000 € cost of the building without installation
Internet 270 € (flat) per month
Phone € 1.60 (China), 3.60 (Rest of World) per minute
Import: fixed assets duty free
When companies made good projects, like Natural Perfumes pictured on the left, they were sometimes not aware of the importance of design and packaging. Over the years, in a number of companies younger, better trained and more dynamic and competitive managers designed new and more attractive products like these alcoholic beverages to the taste of an international clientele (right).
While I met a number of risk-averse leaders of socialist bureaucracies, I increasingly met young company heads with sharp business acumen. One bright fellow was Dr. Jon Sung Hun, the president of Pugang, one of the country’s largest state-run corporations. His group, founded in 1979, had a capital of $20 million and eight business divisions spreading across all sorts of industries, such as mining, electronics, pharmaceuticals, coins, glassware, machinery and drinking water factories. Together, Pugang realized annual revenue from sales of more than $150 million.
The group had sales offices or agents all over the world, in Germany, Bulgaria, Egypt, Ethiopia and Malaysia, to name some of its prime markets. In parts of China it was able to build a strong brand for its mineral water, “Hwangchiryong,” which it sold at double the price of France’s Evian. They emphasized North Korea’s unmatched clean natural environment from where the natural water stemmed. Pugang also promoted, to use a rather interesting name, its “Royal Blood-Fresh” that, for $39 per 160-tablet bottle, claimed to be a traditional health formula created “from fermented soybeans of the old royal palace” and that “it will make you younger and cleverer. Students’ results are better in exams.” The way the product was marketed impressed even old Chinese marketers, regardless of whether all the claims can be scientifically proven.
Dr. Jon was indeed gifted at salesmanship. At Pugang’s booth at the yearly Pyongyang International Trade Fairs, he attracted the most visitors, and he himself regularly hung around the booth to fire up his sales team. Once I met him and his wife on a Sunday by chance in the “Argentina shop,” a retail outlet that got its nickname from the fact that a former Swiss Nestle executive supplied it with goods out of Argentina.
He pointed out that Pugang’s products were on sale there, and the company’s advertisements were plastered on the shelves. The man was on a mission: he was visiting in person—a rarity for large corporations—to check the sales of his company’s products, and to compare it with those of his competitors.
Perhaps Dr. Jon’s charisma owes to his upbringing and career background. Before turning to business, Dr. Jon was an English professor at the Kim Il Sung University. He not only speaks perfect English but also Chinese. He grew up with his family in Beijing, because his father was the ambassador to China. He comes from a family of thriving sales pitchers: his brother, whom I also met, was nicknamed in North Korean business circles “Rockefeller of Pyongyang,” in reference to his slick skills at running his oil business.