Insight: After tragedies and big losses, Hyundai looks to reverse N.Korea fortunes

HD Construction Equipment Co

30/10/2018 23:00

* Hyundai's $1.2 bln bet on N.Korea led to losses, job cuts
    * With easing tensions, Hyundai may stand to benefit most
    * Hyundai wants to expand factory complex, tours in N.Korea
    * Key hurdle is Washington opposition over easing of
sanctions 

    By Ju-min Park and Heekyong Yang
    SEOUL, Oct 31 (Reuters) - For Hyundai, the South Korean
conglomerate, North Korea has been a story of lost opportunities
– and tragedy.
    In 2003, months before Hyundai was set to open an industrial
complex in North Korea, the executive behind the project
committed suicide amid accusations his company had made a secret
$500 million payment to the North. 
    Five years later, a Hyundai-run resort in the North was
closed after a North Korean soldier shot a South Korean tourist.
    Both projects have long been shuttered, symbolising the
difficulties South Korean companies have had doing business
across the border.
    But, emboldened by a thawing of relations on the Korean
peninsula and attracted by its promise of cheap labour and
untapped growth, Hyundai is again preparing to return to North
Korea.
    Hyundai executives and investors are encouraged by a pledge
by Seoul and Pyongyang to re-open the Kaesong industrial park 
and the Mt. Kumgang resort as part of a warming in ties between
the neighbours.  urn:newsml:reuters.com:*:nL3N1W45TR
    International sanctions over the North's nuclear weapons
programme make it unclear how quickly investments can resume.
But executives and investors are betting Hyundai stands to
benefit the most from any peace dividend on the Korean
peninsula.
    “We have invested a lot for a long time, and have a solid
and wide network and business rights there," said Baek Cheon-ho,
a senior executive at Hyundai Asan, the subsidiary that managed
the Kaesong and Mt. Kumgang projects. "Combining all that,
Hyundai will eventually be better off in North Korea." 
    For Korea Inc, struggling with high labour costs and slowing
growth, North Korea's cheap labour, vast resources and huge
growth potential represent an unmissable opportunity, Baek and
several business executives told Reuters.
    For Hyundai and its ruling family, North Korea also has
symbolic importance. Founder Chung Ju-yung was born to a peasant
family in Asan, North Korea and named the subsidiary to handle
the group’s enterprises after his birthplace.
    "We're doing this not only for Hyundai, but for the greater
good of all South Korean companies," Baek said. "If we restart
our North Korea businesses, there will be many new jobs for us,
but also for a number of other firms working with us." 
    
    EBB AND FLOW
    Hyundai's ebb and flow in North Korea also illustrate how it
could again become one of the biggest casualties from any
setback in international efforts to get Pyongyang to abandon its
nuclear programme. 
    Other South Korean conglomerates such as Samsung and Lotte
have made smaller bets on North Korea and will need to start
from scratch if economic ties resume. Both have set up
taskforces in recent months to explore opportunities.
    Shares of unlisted Hyundai Asan have nearly quadrupled to a
record high in over-the-counter trading this year. 
    Other companies such as train maker Hyundai Rotem
 064350.KS , builder Hyundai Engineering & Construction
 000720.KS  and Hyundai Elevator  017800.KS , have also surged
as the two Koreas work towards officially ending their 1950-53
conflict.
    "Stocks like Hyundai Elevator are now going up and down
driven by anticipation and headline news, rather than
fundamentals," said Lee Gun-min, a fund manager BNK Asset
Management. "But we think there is a better chance and
visibility about economic cooperation than in the past since the
two Koreas are now talking about ending the war." 
    Lee manages a "Unification Fund" for his investment firm,
targeting stocks with potential exposure to North Korea, mostly
Hyundai companies such as Hyundai Elevator but also banks and
logistics firms. 
    
    'LIFELINE' 
    South Korean President Moon Jae-in, who has pushed for
rapprochement with the North since his election last year, calls
the Kaesong industrial park a "lifeline" for South Korea.
    Asia's fourth-biggest economy is being squeezed globally
between high-end, innovative manufacturers and low-cost
producers in China and elsewhere.  urn:newsml:reuters.com:*:nL4N1UX0CA
    Before the 2016 closure of Kaesong, some 120 South Korean
companies employed 55,000 North Korean workers there, making
everything from clothes and kitchen utensils to electronic
components. The North Korean workers were well qualified, hard
working and cost just a fraction of what workers in the South
were paid, factory owners said.
    Almost all small and medium enterprises which used to
operate in Kaesong said they would like to go back, according to
an April survey. 
    Seven out of 10 South Korean companies would prefer to use
North Korean workers instead of foreign migrants due to language
barriers and high costs associated with hiring foreign labour, a
separate survey by the Korea Federation of SMEs found.
    Hyundai Asan has the most riding on the prospect of a
peaceful peninsula. 
    It paid $1.2 billion to buy exclusive rights for Kaesong and
Mt. Kumgang, and has interests in railroads and infrastructure
projects including reconnecting inter-Korean railways.  
    Hyundai Asan's rights to land the size of Manhattan in
Kaesong last for 50 years, and it has a plan to build an even
bigger factory town if the complex reopens, accommodating 2,000
companies and 350,000 North Korean workers. 
    Less than 5 percent of the total property in Kaesong has
been developed currently, Hyundai told Reuters. 
    Officials say Hyundai has also agreed with the North to run
tours in the coastal city of Wonsan, which North Korean leader
Kim Jong Un is trying to build into a hotspot for tourism and
foreign investment, as well as Mt. Paektu, the mythical homeland
of both Koreas.  urn:newsml:reuters.com:*:nL4N1LV3ZG
    Hyundai's Baek said the company is also in talks with Seoul
and state-run corporations about projects to reconnect railroads
between the North and South.
    "The government respects Hyundai's business rights it signed
with the North," said a spokeswoman at South Korea's Unification
Ministry, who did not respond to a question about its
discussions with Hyundai.   
    
    NO LOVE FROM WASHINGTON
    South Korean government officials and business executives
say the biggest hurdle is opposition from Washington, which
wants to maintain sanctions until Pyongyang completely
denuclearises.
    In July, Mark Lambert, director for Korean affairs at the
U.S. State Department, called about 10 South Korean businessmen
for a meeting at the U.S. embassy in Seoul to deliver a stern
message: No resumption of any businesses until denuclearisation.
    “The mood in the room was bleak,” said SJTech Chairman Yoo
Chang-geun, who used to operate a factory at Kaesong and
attended the meeting.    
    Baek, who was also present, unsuccessfully argued Kaesong
and Mt. Kumgang should be waived from sanctions "to show our
goodwill to North Korea".
    A spokeswoman for the U.S. State Department declined to
comment on details of "private diplomatic conversations".
    Hyundai's relationship with North Korea goes back a long
way.      
    Hyundai founder Chung drove 500 head of cattle across the
border to the North in 1998 to aid reconciliation on the divided
peninsula. 
    Kim Jong Il, the late father of Kim Jong Un, was quoted as
saying: "Our first love is Hyundai when it comes to North-South
relations, a way earlier than with (South Korean) authorities,"
according to a North Korean book titled "Patriots Who Left Their
Names On Path To Unification".
    But the suspension of its North Korea projects left Hyundai
Asan with combined losses of $367 million in the past decade.
    Hyundai admitted it paid North Korean authorities $500
million in 2000 to secure business rights there. 
    Two days after being questioned by prosecutors over the
scandal, Chung Ju-yung's son and successor, Chung Mong-hun fell
to his death from Hyundai headquarters. Indictments against him
were dropped after his death. 
    The Supreme Court gave Hyundai Asan's then chief executive a
suspended jail term for violating foreign money transfer rules,
but he was later pardoned.
    The widow of the younger Chung now heads Hyundai Asan's
parent group and visited Pyongyang in September as part of a
South Korean delegation for a summit between Moon and Kim. 
     "There are many hurdles to be overcome, but I feel there is
hope ahead of us," Hyun Jeong-eun said. 
($1 = 1,137.0500 won)

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Korea: A land divided    https://tmsnrt.rs/2KdXMcS 
Hyundai's ventures in North Korea     https://tmsnrt.rs/2O3mXzd
Benefit of inter-Korean economic cooperation interactive    https://tmsnrt.rs/2CMxX24
Hyundai's ventures in North Korea interactive    https://tmsnrt.rs/2O3mWeD
INSIGHT-Empty shipyard and suicides as "Hyundai Town" grapples
with grim future     urn:newsml:reuters.com:*:nL4N1UX0CA
Benefit of inter-Korean economic cooperation png    https://tmsnrt.rs/2CMxXiA
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Ju-min Park and Heekyong Yang, additional
reporting by Hyunjoo Jin; Editing by Soyoung Kim and Lincoln
Feast.)
 ((ju-min.park@thomsonreuters.com; +82 2 3704 5650; Reuters
Messaging: ju-min.park.thomsonreuters.com@reuters.net))