DPRK ECONOMY: KAESONG INDUSTRIAL COMPLEX, BOOM OR

C O N F I D E N T I A L SEOUL 000559

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SIPDIS

DEPT FOR EAP, EAP/K, EB/IFD/OIA AND EB/BTA
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USDOC FOR 4431/IEP/OPB/EAP/MBMORGAN
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TREASURY FOR IA/ISA/BUCKLEY

E.O. 12958: DECL: 02/17/2026
TAGS: EINV PREL KS KN
SUBJECT: DPRK ECONOMY: KAESONG INDUSTRIAL COMPLEX, BOOM OR
BUST?

REF: 05 SEOUL 4653

Classified By: DCM Mark Minton, for Reason 1.4 (b,d)

SUMMARY
--------------


1. (SBU) A round of discussions with South Korean companies
operating in the Kaesong Industrial Complex (KIC) in North
Korea revealed that most are generally satisfied with
business conditions at the project site. While most firms
profess to be making money or to be on track with their
business plans, at least one is struggling, although not
necessarily because of factors unique to the KIC. While most
South Korean companies operating in the KIC appear to have
only a small part of their overall business riding on their
North Korean operations, others look like they are betting
their future on KIC success.


2. (C) North Korean workers are reported to be capable,
reliable, and amenable to changing requirements. Some
employers are able to manage their workers directly, while
others work through DPRK intermediaries. While no concrete
figures are available, it appears that the total monthly
labor payment for KIC -- for some 4,200 North Korean
employees -- totals around USD 242,000. At USD 57.50 per
person per month, cheap labor seems to be the single most
attractive feature of the KIC for South Korean investors.


3. (C) Some investors calculate that North Korean workers are
about half as expensive as Chinese laborers, while their
productivity is about 70-80 percent of the Chinese level,
making the DPRK workers a relative bargain. Another
frequently-cited advantage of the KIC location is its
proximity to South Korean markets, allowing for completion of
last-minute orders.


4. (C) If KIC employees can serve as a metric for the DPRK
population in general, the overall DPRK food situation seems
to have improved over the last few years. KIC workers appear
to consider employment at the complex to be prestigious and
valuable work, and the workers express appreciation for the
fringe benefits they receive. No KIC employers, however,
know the answer to the question of how much of their monthly
wage payments actually makes it into the pockets of KIC
workers; the employees themselves are forbidden to discuss
the topic with South Koreans. End Summary.

WE ASKED KIC FIRMS: "HOW'S BUSINESS?"
--------------


5. (SBU) Econoff recently met individually with executives
from four companies active in the KIC: Romanson Corporation,
ShinWon Corporation, SoNoKo and SJ Tech. These companies
represent a cross-section of the South Korean companies
involved in the Pilot Phase of the KIC development. Of the
15 companies selected for the pilot phase, 11 companies have
commenced operations, two are about to start operations, and
two are awaiting the completion of their facilities.


6. (U) The other seven companies currently operating in KIC
are Samduck Trading (footwear),Buchon Industrial (wiring
harnesses),Daehwa Fuel Pump (automotive parts),Hosan Ace
(coils),Munchang Company (garments),Taesung Industrial
(plastic containers) and JY Solutech (moldings). The two
companies poised to commence operations are Magic Micro
(electronics),and TS (moldings). The facilities of Youngin
Electronics (electronics) and JC Com (cable connectors)
facilities are scheduled to be completed soon.


7. (SBU) The Ministry of Unification (MOU) is in the
preliminary phases of selecting an additional 23 companies to
invest in another small sub-section of the grand First Phase
of the overall project -- essentially a second pilot phase.
Construction of those facilities can be anticipated to get
started within 2006, although that ambitious goal could slip.
According to press reports, MOU is also eager to move
forward as soon as possible with the full First Phase of the
KIC, which could incorporate as many as 40 additional
factories, bringing the total to roughly 78 firms operating
in the KIC, of a variety of sizes. Site preparation
construction work is currently ongoing for the full scope of
the First Phase. Some firms might begin to establish
factories as part of that effort within 2007 -- again an
ambitious goal, which could prove elusive.

SHINWON GARMENTS: "PROFIT IS ALWAYS IN STYLE"
--------------


8. (SBU) ShinWon is a large garment manufacturer that has
been listed on the Korea Stock Exchange since 1988. The
company's 2004 sales were USD 367 million, and in the first
half of 2005, its reported sales totaled more than USD 150
million. ShinWon is an international company, with factories
located in South Korea, China, Vietnam, Guatemala and
Indonesia. The company has operated its KIC facility since
February 2005. According to Lee Chang-yoon, President and
CEO of ShinWon's Domestic Division, the value of the
company's investment in KIC is approximately 4.5 million
dollars.


9. (SBU) ShinWon seems to have a successful business plan for
its KIC operations, and Lee asserted that his company is in
the KIC solely for business reasons. In addition to the
lower labor costs, manufacturing in the KIC also lets ShinWon
avoid tariffs on shipments back to South Korea, and provides
the company with a quick solution to meet surges in demand.
ShinWon's KIC plant accounts for seven percent of the
company's total production. All of the KIC-produced apparel
is sold in South Korea. While the company's first fashion
show -- held at KIC -- achieved some notoriety for featuring
clothing that was reportedly too flashy for North Korean
taste, an informal survey of our FSN staff indicates that
ShinWon's KIC-manufactured lines are acceptable for the
fashion-conscious South. Most of ShinWon's designs are
targeted towards young South Koreans.


10. (SBU) ShinWon currently runs its KIC facility with only
seven ROK managers supervising 330 DPRK workers. According
to Lee, because of the workers' productivity and the low
labor costs, Shinwon plans to expand its KIC facility, from
the current five assembly lines to 15 lines by the end of
February 2006. The company also plans to hire an additional
500 North Korean workers to staff the new lines. While Lee
opined that the oft-heard estimates of 100,000 workers at KIC
by 2007 could be met in the fullness of time, he scoffed at
future estimates of 1,000,000 workers that have been
suggested by former Unification Minister Chung and various
officials at Hyundai Asan Corporation, which is doing most of
the infrastructure work at KIC.


11. (SBU) According to Lee, ShinWon is the only South Korean
firm currently making money through operations at KIC. He
would not provide exact figures, but claimed that the KIC
labor costs are less than half those at ShinWon's Chinese
plants. KIC companies must pay a minimum of USD 57.50 per
worker per month. That payment is composed of USD 50.00 for
the wage component, and USD 7.50 as a social welfare
contribution. Additionally, all KIC companies provide a
daily lunch or soup, and some use other material items as
incentives for the employees. Still, according to Lee, KIC
workers are currently only about 70-80 percent as productive
as their Chinese counterparts. He described the North Korean
workers as "naive but well-educated," and asserted that KIC
worker productivity is certain to increase.


12. (SBU) Lee claimed that nearly 40 percent of the
(predominantly female) labor force at his plant has graduated
from university. He also noted that when ShinWon first began
hiring at the KIC plant, the applicants were mostly in their
twenties, but now the applicant pool appears to be growing
older, with some applicants in their forties. As other
employers told us as well, Lee claimed that there is almost
no turnover among ShinWon's KIC workers.


13. (SBU) ShinWon's KIC managers directly supervise their
workers, according to Lee. He explained that there are no
DPRK intermediaries who get involved in work schedules or
requirements, but ShinWon does deal with workers'
representatives on issues such as fringe benefits. Lee said
that ShinWon is widely acknowledged as providing more
benefits than most of the KIC companies, including shower
facilities and generous distribution of food, in addition to
the lunch provided by most KIC companies.


14. (C) When asked about the amount workers actually receive
from the nominal monthly wage, ShinWon's Lee told us that he
did know the take-home wages of his KIC employees. He
explained that DPRK authorities have explicitly forbidden
discussions on that topic, and that even if asked, the North
Korean workers will not answer. Lee complained that ShinWon
wants to set up its own payroll system, and has asked
permission to do so from the DPRK authorities, but they have
been denied permission.


15. (C) Before Woori Bank opened a branch office in the KIC
in December 2004, ShinWon -- like the other South Korean
companies -- held off on making payments to North Korean
authorities. Since then, payments for worker salaries have
been made in U.S. dollars to the Central Development Special
Bureau office in the KIC. ShinWon also paid in full their
"arrears" to the DPRK authorities. According to South
Korea's Ministry of Unification, individual companies
withdraw dollars themselves at the KIC Woori Bank facility,
then transfer the funds to the DPRK-run liaison office. With
an estimated 4,200 North Koreans working in the various KIC
factories at this time, and a minimum monthly wage of USD
57.50, monthly cash payments made through the bank total
approximately USD 242,000.

ROMANSON WATCHES: "CAN'T EVEN GIVE 'EM AWAY"
--------------


16. (U) Romanson Corporation sells watches and jewelry,
largely creating new designs in-house and jobbing out orders
to plants around the world. Most of the products are sold in
Russia, other former Soviet Republics and countries around
south and north Asia. Among the companies we visited,
Romanson seems to be the most unlikely model for a profitable
venture. As explained below, many of their decisions are
puzzling when viewed in a business context. End comment.


17. (SBU) The KIC plant is run through a consortium of
investors led by Romanson. Romanson executive director Jang
Ho-sun explained that the consortium started work on its KIC
plant in January 2005, and began manufacturing operations in
August. The consortium was put together to take advantage of
KIC's low labor costs, according to Jang. He noted that
there were no ideological or political reasons driving the
decision to establish a facility in the KIC.


18. (SBU) Jang, like ShinWon's Lee, told us that the cost of
labor at the KIC plant was roughly half that of his company's
Chinese plant. However, much of what Romanson saves in
reduced labor costs may be lost in the cost of maintaining a
large number of South Korean managers at its KIC facility.
The company has one of the highest South Korean
manager-to-DPRK worker ratios we encountered, with 80
managers supervising 560 workers. In addition to South
Korean-level wages, most companies must pay a "risk" premium
to their South Korean managers -- as well as per diem and
transportation costs -- for working at the KIC. All South
Korean managers commute for varying periods from Seoul to
Kaesong.


19. (SBU) While there are no plans to increase the size of
Romanson's KIC facility, Jang predicted doubling his labor
force to 1,000 workers. Increasing the number of employees
at this stage seems to be yet another counter-intuitive move
by Romanson, as Jang lamented that, as a company, the firm is
not meeting overall revenue targets. However, he professed
confidence that the company's sales will increase, especially
the KIC-made watches.


20. (SBU) According to company officials, Romanson's annual
sales are approximately 900,000 watches, of which 25 percent
are currently produced at its KIC facility. Company
officials hope to increase KIC-produced sales to 50 percent
of the total this year, and to 80 percent within two years.
Jang did not elaborate on whether Romanson would concurrently
reduce other overseas production if KIC production met these
goals.


21. (C) Following the meeting with Jang, Econoff stopped at
the in-house store located in Romanson's building. When the
store clerk was asked about a garish set of commemorative
watches, she explained that the set of watches -- named
"tong-il," or unification -- was made to mark the beginning
of operations at Romanson's KIC plant. Three nine-watch
sets, encased in a traditional Korean lacquered box, were
produced for the occasion. One set was presented to DPRK
leader Kim Jong-il, one to South Korean President Roh
Moo-hyun, and the last set was presented to, but declined by,
an unnamed South Korean cabinet minister, according to the
clerk. We assume this unnamed minister to be former
Unification Minister Chung Dong-young.


22. (SBU) According to Jang, Romanson's KIC managers are not
permitted to directly supervise their DPRK employees.
Instead, they supervise the work force through a layer of
North Korean managers. As all the companies do, Romanson
pays its workers the minimum wage, and company officials
claimed they make no other payments or "contributions" to
DPRK officials in order to run their plant. Jang was
satisfied with the quality of his DPRK employees, explaining
that the workforce was stable, and that only two have left
since the Romanson plant opened.


23. (SBU) In Jang's opinion, the food situation in the DPRK
must have improved. He told us that when North Korean
workers began reporting to Romanson's factory last fall, they
appeared to have visual symptoms associated with
malnutrition. Jang commented that the faces of those first
employees were ashen, but that more-recently-hired employees
are in better shape and do not appear to be suffering from
nutritional problems. We were shown photographs of the
various KIC plants at most meetings. The North Korean
workers all appeared robust and seemed to be in good shape.

SJ TECH PUMP SEALS: "MORE THAN JUST MANUAL LABOR"
-------------- --------------


24. (SBU) SJ Tech claims to have been the first South Korean
company to sign up for the KIC -- in September 2004 -- and in
fact, the building address is 1-1 Kaesong Industrial Village.
According to company president Yoo Chang-geun, SJ Tech was
contemplating a joint venture operation with a U.S.
manufacturer in 2004. The two companies were originally
thinking about expanding into China, but decided on KIC
instead. While Yoo was originally uninterested in KIC, he
changed his mind because of the low cost of labor, the common
language, and the South Korean government's investment
guarantee -- with a ceiling of 2.5 million dollars at the
time.


25. (SBU) Since that initial decision, SJ Tech has invested
USD 8 million in its KIC plant to date, nearly double the
amount covered by South Korean government guarantees against
political risk for investment in KIC. In January 2006, the
South Korean government increased the guarantee to five
billion won (approximately USD 5 million. In comparison,
non-KIC South Korean companies are covered up to one billion
won against political risk for investments elsewhere in the
DPRK. Yoo's company produces a range of industrial products,
but its KIC plant produces rubber rings used in hydraulic
seals. Yoo explained that all inputs for KIC operations are
sent from South Korea, and that final assembly of the
hydraulic seals takes place in South Korea.


26. (SBU) SJ Tech's KIC operations require a degree of
technical expertise. Therefore, the company asked DPRK
authorities to recruit employees with technical backgrounds
or training. Despite the fact that nearly half of the new
employees showed up with a technical degree, SJ Tech
reportedly had to train them for nearly one year before they
could begin full-scale production. In comparison, Yoo told
us that SJ Tech's South Korean workers require only a
five-month session to receive equivalent training. While
most anecdotal accounts of KIC operations include the
assertion that the South Korean firms only use low-tech,
outdated, or worn-out equipment in Kaesong, during our visit
Yoo showed a flashy PowerPoint presentation on SJ Tech's KIC
operations. The equipment featured in the presentation
appeared to be modern, functioning and well-maintained.


27. (SBU) According to SJ Tech's projections, the KIC factory
will reach the break-even point sometime in 2007. According
to Yoo, only five percent of SJ Tech's overall sales come
from its KIC operations, and the seals produced there are
sold only in the domestic South Korean market. SJ Tech's
DPRK labor force has 143 workers, with five South Korean
managers -- down from the 20 they started with in May 2005.
While he does not have plans to expand his KIC operations,
Yoo told us that he is happy with his decision to invest
there. Among the executives we met, Yoo was the most
tight-lipped about KIC salaries and benefits. He comes
across as a savvy businessman who is concerned only about the
bottom line.

SONOKO CUISINEWARE: "WORKERS LOVE THE BENEFITS"
-------------- --


28. (SBU) Kim Suck-chul, owner of SoNoKo Cuisineware,
formerly known as LivingArt, is a gritty businessman with
three decades of experience in the kitchenware business.
SoNoKo (derived from "South and North Korea") is the
restructured version of LivingArt, which was dissolved when
Kim's partner failed to make promised investments. According
to Kim, this unnamed partner asked him to participate in the
KIC venture because of his extensive experience. Kim claimed
to have invested USD 3.5 million of his own money and said
that he had taken a USD 2.3 million loan from the
Inter-Korean Cooperation Fund. Kim did not elaborate on the
unnamed partner's contributions.


29. (SBU) The LivingArt company was the first to bring
KIC-produced goods to South Korea for sale. In fact, its
first run of KIC-made kitchenware -- simple pots and pans --
was an instant sentimental hit in South Korea, selling out as
part of a flashy promotional event at the prestigious Lotte
Department Store on the first day. The company's 2005 sales
totaled USD 2 million, all in South Korean sales. Since
then, the KIC plant had to suspend operations for an extended
period in 2005, and is currently operating at reduced
capacity. While Kim conceded the going remains rough, he
claimed that he is starting a second production line at his
plant. SoNoKo's products are currently sold in Mexico
because of his "long-standing contacts and experience there,"
but Kim spoke longingly of his target market -- Europe. Kim
claimed that there would be no problems with "rules of
origin" or "made in Kaesong" labels in the European markets.


30. (C) Kim explained to us that, because his was the first
company to actually talk with DPRK officials about operating
in the KIC, he had a difficult time, and he complained that
he had received little support from the South Korean
government. Kim went on to tell us that because of these
problems, he suffered delays in the start of production at
his KIC plant resulting in his failure to produce samples for
trade shows in early 2005, denying him any significant
international sales that year.


31. (SBU) Kim explained that he would soon be traveling
abroad to display his KIC-made kitchenware at this year's
trade shows. He claimed that if he could get "USD 30-45
million worth of orders," at these trade shows, he could
operate at full capacity and produce nearly 200,000 sets of
kitchenware per year. That, he told us, would allow him to
turn the company around and make a profit.


32. (SBU) SoNoKo's operations are limited to its KIC factory,
with 380 DPRK workers and seven South Korean managers. The
ratio was originally 270 to 13, but Kim explained that
increased productivity from the DPRK workers permitted a
reduction in the number of more expensive South Korean
employees. According to Kim, when the DPRK workers first
started, their productivity level was about 20 percent of
South Koreans in the 1970's and 1980's, when a viable South
Korean kitchenware industry last existed. Kim estimated that
his workers at KIC are now up to about 60 percent of the ROK
productivity level.


33. (SBU) SoNoKo's managers also deal directly with their
DPRK employees, and Kim told us that requests to work
overtime are handled painlessly. According to Kim, overtime
is booked at time-and-a-half, with settlements made along
with the regular monthly wage payments. Like the other
companies, SoNoKo's main form of compensation given directly
to the employee -- usually for overtime work -- seems to be
providing extra food or other material reward.


34. (C) Kim, like the other executives we interviewed, told
us that he has no idea how much of the cash monthly wage paid
to the DPRK authorities is actually taken home by his
workers. Unlike the others, Kim speculated that it could be
possible that the workers receive no pay at all out of the
monthly payments. But, he added, even if the workers are
getting no pay at all, they are probably content "just to
receive food, clothing, and a comfortable working
environment, in addition to housing provided by the DPRK."


35. (SBU) Like Romanson's director Jang, Kim believes that
the food situation has improved in the DPRK. He recalled
that when the plant first opened, his North Korean workers
were adding barley to their rice at lunch to make the meal go
further. Now, they bring only rice in their boxed lunches,
indicating that they are somehow getting more food -- either
through the Public Distribution System or through market
purchases.

COMMENT
--------------


36. (U) Although admittedly a second-hand look, our
interviews revealed that KIC profitability neither lives up
to the very rosy view of some South Korean champions of
greater inter-Korean cooperation, nor falls within the
dismissive "wasted investment" view of some Seoul-based
critics of North-South engagement. Although there are signs
that some KIC investment decisions are driven by
sentimentality or a desire to accelerate reunification, we
also gained the impression that the majority of the
businessmen directly involved in KIC work are making credible
business decisions, motivated primarily by hoped-for profits.
If reports of increasing levels of productivity are
accurate, it is possible that the KIC's North Korean labor
force could provide South Korean companies a lucrative option
relative to outsourcing from China, fairly soon. In short,
however, it remains to be seen whether the KIC can be
declared a business success.


37. (C) There are signs that some North Korean citizens are
being exposed to market principles in the KIC to some degree
or another, and that a limited number of workers are learning
advanced work skills. As they receive decent treatment and
tangible fringe beniefits from their South Korean employers,
at least those North Koreans working in the KIC may be
starting to understand the economic value of their work.
VERSHBOW