|North Korea: Investing With the Enemy|
By Justin Rohrlich JAN 25, 2011 9:20 AM
Believe it or not, there are those who believe the world's most isolated market will yet emerge.
North Korea, arguably the most isolated nation on earth, is making a surprising attempt at attracting foreign investment.
The Korean Central News Agency, the DPRK’s official state news organization, announced yesterday:
“Kim Jong Il, general secretary of the Workers′ Party of Korea and chairman of the National Defence Commission of the DPRK, Sunday received Naguib Sawiris, chairman and CEO of the Orascom Telecom Holding of Egypt, on a visit to the DPRK.
“Kim Jong Il received a gift from him. He thanked him for the gift and warmly welcomed his DPRK visit taking place at a time when Orascom′s investment is making successful progress in different fields of the DPRK, including telecommunications. He had a cordial talk with him. After receiving him, Kim Jong Il hosted a dinner for him.”
Jang Song-thaek, Kim's brother-in-law and vice chairman of the National Defense Commission Lim, was also present at the meeting. This is very unusual, according to Eul-chool, a professor at Kyungnam University's Institute for Far East Studies in Seoul, and suggests North Korea is "putting a great deal of energy into foreign capital attraction."
With US-North Korea relations at a modern low (not that they were ever at much of a high), what does it take to actually invest in the DPRK and who is permitted to do it?
As it happens, doing business with North Korean companies is legal under United Nations sanctions, unless they are involved with the arms trade.
“We do get occasional calls about investing in North Korea, but not very often,” a spokesperson at the US Treasury’s Office of Foreign Assets Control tells Minyanville. “North Korea’s not quite the same as Cuba -- there are a number of individual entities in North Korea that US citizens are forbidden from doing business with.”
A call to the DPRK mission to the UN was answered with a quiet, suspicious-sounding “Hello?” after which the phone was handed to an apparently more senior level bureaucrat who had trouble making heads or tails of the question, “Can you tell me about outside investment policy in the DPRK?” The man on the other end of the line requested a faxed set of questions, addressed to “Ambassador,” after which some sort of response would eventually be offered. Or not.
Finally, a call was placed to the European Business Association, which is “an independent organization whose goal is to promote and develop business and trade relations between Europe and North Korea.”
After some difficulty establishing a connection, the EBA’s liaison in Pyongyang, a German woman named Barbara Unterbeck who works out of the Bulgarian diplomatic compound, picked up the phone.
“Hello, my name is Justin Ro—“
“Who are you? Why are you calling?” she said.
“Um, I was hoping to—“
“You know, it’s late here. Check your timetables and try again, yes? Thank you.” Then she hung up -- as did the government minders who were most assuredly eavesdropping on the call.
Multiple follow-up attempts to reach Ms Unterbeck were unsuccessful.
Rewind to January 2008. Orascom Telecom Holding of Egypt and Korea Posts and Telecomm Corp. established a 75%/25% joint venture to build North Korea’s first 3G mobile network, called Koryolink.
So, how -- and why -- did Orascom, which trades on the Cairo & Alexandria Stock Exchange under the symbol ORTE, and on the London Stock Exchange under the symbol OTL, go into business somewhere companies like Verizon (VZ), Sprint (S) and AT&T (T) would never dare tread?
Sawiris explained, in so many words, that Orascom was intrigued by what could be considered the most emerging of emerging markets.
"We are always examining the countries that don't have service and always pushing to get in," Sawiris said. "This was one that didn't have coverage and we met the embassy here, got in touch with authorities and here we are."
That’s the “how.” The “why?”
"This is not just about providing 3G mobile services; we are making history in a country that is developing and opening up in a remarkable way," he said.
However, “opening up” can be interpreted in many different ways. Though the network was constructed by Orascom, Sawiris accepted that all communications would nevertheless be strictly controlled and monitored by authorities.
"That's the right of the government," Sawiris said.
The decidedly non-capitalist regime even produced a television commercial to promote the service:
But, whether it was an actual attempt to spur sales of handsets that cost up to 25% of the average per-capita income (airtime is, of course, extra), or rather, an easily seen-through propaganda piece to convince the citizenry that the DPRK was in step with the rest of the world, is up for debate.
"In an attempt to make a great leap forward, the government… seized upon the promotion of information technology as a strategic priority," wrote Marcus Noland of the Peterson Institute for International Economics.
Noland identified four markets for Koryolink [pdf], none of which include the populace at large:
“Presumably, there is considerable repressed demand for telecommunications services in North Korea; one can identify at least four distinct potential markets.
“First, there is the state itself. North Korea is extraordinarily militarized, and given the Korean Peoples Army’s privileged position in the economy, the KPA is probably the single most important user of telecom equipment and services. Following the military, the next largest current users are most likely government and Korean Workers Party organs.
"A second high-margin constituency is foreigners, though the resident foreign community is quite small, probably numbering in the hundreds. Under an aid agreement reached in the spring of 2008, the United Nations World Food Program and officially sanctioned NGOs will be allowed to station nearly 70 expatriates in country, and the rest of the UN system may have a similar number in total. There are also foreign embassies and NGOs, mostly European, with a semi-permanent presence, and a few foreign businessmen or investors in residence. North Korea has seen a steady increase in international trade in the last several years, resulting in the increase of the number of visiting foreign traders and businessmen (mostly Chinese). Their counterparts are in emerging trading companies and new businesses.
"North-South economic cooperation projects, most prominently KIC, would be another source of demand. Beyond Kaesong, under the right conditions one could imagine light manufacturing and mining operations expanding. Perhaps most interestingly, there are the beginnings of labor-intensive/information-intensive businesses in North Korea, notably software development, information processing, and commercial graphics.”
In fact, information technology has become a pillar of North Korea’s attempt at joining the 21st century -- and the hermit kingdom’s deep bench of programming talent has attracted outside investment.
“I understood that the North Korean IT industry had good potential because of their skilled software engineers, but due to the lack of communication it was almost impossible to work with them productively from outside,” said Volker Eloesser, founder of Nosotek, a German firm which established a joint venture with Pyongyang’s General Federation of Science and Technology. “So I took the next logical step and started a company here.”
Managing a staff is quite different in the DPRK -- one guide says:
“The working week in DPRK is slightly different than in other countries, mainly because office staff have to participate in several activities not related to their work. All workers and office staff have internal meetings on Mondays, collective work assignments on Fridays (in the fields or at construction sites), political study sessions on Saturdays and a day off on Sunday. Business meetings should be planned on Tuesdays, Wednesdays and Thursdays to get the best chances of effectively meeting the desired people.”
Lo and behold, things have gone relatively smoothly for Eloesser.
“We are quite successful,” he told the German edition of the Financial Times. “One time, we were even in the top ten in the App Store. Our customers do not want us to mention the name of our company or our employees’ names on the product.”
Nosotek has actually produced at least two iPhone (AAPL) games -- “The Big Lebowski Bowling” and “Men in Black: Alien Assault,” the last two based on the popular American films.
The client was an outfit called Ojom GmbH -- part of another firm by the name of Jamba. Jamba was then purchased by News Corp (NWS) and renamed Fox Games, after which “Lebowski” and “MIB” were released, creating something of a stir in the media after the (admittedly tenuous, but existent nonetheless) Kim Jong Il/Rupert Murdoch connection was discovered.
Not altogether surprisingly, those who worked on the games will likely never be able to access them outside the lab.
The CIA reports that there is no uncensored Internet service available inside the country for anyone except the highest-level government officials. The agency says:
... an ‘Intranet’ serves as a means to disseminate technical information to research institutes, factories, and schools throughout the country. Accessing the latest foreign data on line from their place of work, North Korean researchers remain under the control of the authorities. The Internet thus limits the risks of foreign defection or ideological infection inherent in sending scientists abroad to study or attend international conferences.
A look at Nosotek’s website makes clear just how tight those government controls are:
“Communication between the engineers and the customer will only take place by email or Nosotek's bug tracking server. Phone calls are not possible.
“Chatting is only possible with members of Online Programming teams.
“Emails exchange will only take place once pay day, answers to questions will be giving on the following day, sometimes two days later.
“The customer accepts that it might happen that email communication is interrupted for one or two days for technical or administrative reasons.
“In case the customer sends political propaganda or agitation, Nosotek has the right to cancel the project without returning the prepaid fees.”
Beyond technology, North Korea is interested in pursuing “imports, exports and Joint Ventures in any economical field.”
Joint ventures include “monopolized production of fire extinguishers,” since “there is no factory in the DPRK that produce fire extinguishers, so all of them are imported from China. Cost of one fire extinguisher in China is only 7 USD, but after transport and taxes, it is sold inside DPRK at 30 USD, and it’s the policy of the DPRK Government not to depend on Chinese imports.”
Exports include sea cucumbers [pdf], and clothing [pdf], boasting “more than 80 garment factories equipped with the modem industrial sewing equipments which can produce annually 1,000,000 sets of high quality ready-made suits for Men and Ladies, 1,000,000 pieces of ladies national dresses, more than 10,000,000 pieces of padded jackets and jumpers, 500,000 pieces of shirts, 1,000,000 pieces of trousers, 3,000,000 pieces of training suits, 7,000,000 meters of polyester padding, 1,000,000 hand knitted goods, 2,000,000 pieces of knitwears and 2,500,000 pieces of the other various garments."
If North Korea ever legitimately opens up, one thing is for certain: the country might not welcome Philip Morris (MO) with open arms, even though the World Health Organization estimates the smoking rates in parts of Asia to be almost 70%. That’s because Kim Jong Il declared the “three fools of the 21st century” to be those who could not use computers, those ignorant of music, and smokers.
Unless, of course, you happen to be Kim Jong Il.