business

North Korea's Super-Efficient Workforce

South Korean companies are flocking to North Korea's Kaesong Industrial Park, which could help pave the way for reunification

The U.S. and the international community have wrestled mightily with Pyongyang to abandon its nuclear weapons ambitions. That match is far from over. But on the economic front, interesting changes are in motion. Just ask South Korean businessman Park Sung Chul, who has steadily raised his investments at an industrial park in the North.

For his apparel maker at least, North Korea isn't a threat but the opportunity of a lifetime. His company, Shinwon, is enjoying tremendous efficiency gains with its North Korean workforce. "It is more efficient and competitive than any factory in China, Vietnam, or anywhere in the world," declares Chief Executive Park.

Just a year ago, some 320 North Koreans produced 25,000 pieces—shirts, pants, and other clothes—a month at the Shinwon factory in the Kaesong Industrial Complex. Now the factory, only hundreds of meters north of the demilitarized zone (DMZ) bisecting the Korean peninsula, employs 900 and churns out 60,000 pieces every month to be sold in the South. "If we could start shipments abroad, the operation here would increase tenfold," Park said in a brief interview at Kaesong.

Experiment in Integration

Park is not alone in switching production from China, Vietnam, and Indonesia to Kaesong. Around 50 other South Korean textile companies have committed themselves to setting up factories there. "In this time of worsening environment, the Kaesong Industrial Complex is rapidly becoming a new attraction for Korea's textile industry," says Ha Myeung Keun, vice-chairman of the Korea Federation of Textile Industries.

If other labor-intensive industries follow suit, an interesting experiment in integrating North Korea with its far more industrialized and prosperous neighbor could get a boost. North Korea-watchers in Seoul say the project has an eventual aim of achieving Asia's biggest economic salvage job—reviving North Korea. Set up after a historic summit seven years ago between the two Koreas, the complex is billed as "a way out for South Korean small and medium enterprises" and "a better life for North Korean workers."

The industrial park is operated and developed by a South Korea-run committee under a 50-year lease that started in 2004. Today in the 330-hectare (815-acre) park, 770 South Korean officials, managers, and engineers are working with nearly 15,000 North Korean workers selected by the Communist Workers' Party at 23 factories.

Deepen Trust and Understanding

An additional 47 South Korean companies are preparing to set up plants there, while the Seoul government is due to select up to 300 more by early June for the 156 empty factory lots, some of which will be shared by several concerns. The application process for factory space will begin on May 28.

"We expect some 300 [South Korean] companies will employ nearly 100,000 North Korean workers in Kaesong in a couple of years," says Jang Whan Bin, senior vice-president at Hyundai Asan, an affiliate of Hyundai Group, whose late founder Chung Ju Yung won the right to co-develop Kaesong. "The growing contacts will not only deepen trust and mutual understanding between the North and the South but will also make North Koreans familiar with global market standards and such terms as corporate accounting, insurance, and real estate."

Of course, it will only be a drop in the bucket of cash needed to rebuild the shattered economy in North Korea even if the project picks up steam. But the hope is that a successful Kaesong will prompt North Korean dictator Kim Jong Il to set up several special economic zones modeled after China's Shenzhen to start cultivating free-market economic activity and prepare the isolated country for integration into international society.

Backdrop of Tension

Seoul certainly sees Kaesong as the first step toward economic integration in the Korean peninsula. "If it succeeds, a Kaesong-like project is a sure model to cut unification costs," said South Korean President Roh Moo Hyun in a May interview with a local newspaper.

The rise in the number of northern workers employed at the park is dramatic, particularly given the mounting tension with North Korea in recent years. The number more than doubled in the past year, even as North Korea has continued to act provocatively on the national security front. Last July the regime test-fired missiles, and in October carried out the country's first nuclear test.

A recent pattern of on-and-off nuclear threats from North Korea has resulted in delays in expanding Kaesong by the Seoul government. With international pressure rising on Pyongyang to give up its nuclear ambitions, the Kaesong project is behind schedule by about two years.

Rising Wages in China

But with Washington repeatedly pledging its commitment to resolving a banking dispute that has blocked progress on a hard-won Feb. 13 international deal aimed at shutting down North Korea's Yongbyon nuclear site, government officials and businesspeople in Seoul say the Kaesong project is poised to take off (see BusinessWeek.com, 2/13/07, "North Korea Deal: Caution Follows").

That's because wages have begun rising in China, whose authorities have recently cut tax incentives to low-tech foreign investors. Other emerging economies—such as Vietnam—offer cheaper alternatives, but not as attractive as Kaesong's. Since a pilot project began in 2004, impoverished North Korea has kept monthly wages at a uniform $57.50, promising to provide hundreds of thousands more workers if Southern companies want (see BusinessWeek.com, 6/16/06, "China Rolls Up the Welcome Mat").

The wages at Kaesong are a third of those in China and a tiny slice of those in the South. Other advantages include lower logistics costs (Kaesong is only 60 kilometers from Seoul) and a highly educated and disciplined workforce. Companies that invest there can also enjoy a five-year tax holiday and corporate tax breaks. The infrastructure at the industrial level is also improving, thanks to a commitment by Seoul to spend $280 million for the project.

Many Hurdles Remain

The combination of the South's need for a cheap-wage manufacturing base and the North's millions of underutilized workers pushed monthly production at Kaesong from $200,000 in January, 2005, to $6.8 million last August, and to $13 million in March. If things pan out as Seoul envisions, the Kaesong project will develop into an economic showcase with more than 500,000 North Koreans working in a bustling business city boasting hotels, golf clubs, and amusement parks. That's a big chunk of the North's population of 22 million.

It's a tall order. And it'll require a heavy dose of luck and cooperation from various parties, including Kim, the North's military elite, and the U.S.

To increase output for textile companies, such as Shinwon, in earnest, Washington will have to let products made in Kaesong benefit from a free-trade agreement with South Korea. Shinwon and many other textile companies ship the bulk of their exports to the U.S., which levies an exorbitantly high tariff on anything made in North Korea—still listed as an enemy.

A Porous Border

"There will be lots of hurdles, but given the economic benefits, the Kaesong project has lots of potential for coaxing Pyongyang into breaking out of its shell and accepting changes," says Lee Young Hoon, economist at Bank of Korea, the South's central bank. Already, two-way trade between North and South Korea jumped 43%, to $350 million, in the first four months of this year, thanks largely to traffic to and from Kaesong.

With hundreds of trucks and cars running through the DMZ—the world's most heavily fortified border—every day, and some 50 buses ferrying nearly 15,000 northern workers every morning to the Kaesong park, a thaw may have begun on the world's last Cold War frontier.

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