Insight: Peace plays: How foreign companies have lost a bundle in N.Korea

Lotte

22/06/2018 24:00

* With easing tensions, N.Korea seen as potential business
partner
    * Companies including Samsung C&T interested in investing
    * U.N. sanctions ban all new, existing JVs with North
    * Most of over 350 JVs closed even before U.N. sanctions hit
    * For multimedia coverage of North Korea: https://www.reuters.com/north-korea/

    By Ju-min Park and Jane Chung
    SEOUL, June 22 (Reuters) - Months before the first summit
between leaders of two Koreas in 2000, South Korean tech giant
Samsung Electronics Inc  005930.KS  invested $730,000 in
Pyongyang's top computer lab. North Korean programmers there
would develop online chess games and food recipes for Samsung to
sell outside the North. 
    Samsung quit the business as inter-Korea relations later
deteriorated and the lab - Korea Computer Centre - was
blacklisted last year for its alleged contribution to the
North's weapons programme.
    As companies from South Korea to Russia and China again look
to cash in on easing tensions with Pyongyang, Samsung's now
defunct businesses in Pyongyang and hundreds of similar failed
joint ventures underline North Korea's status as one of the
world's highest-risk investment destinations.
    Yet days before the historic meeting between U.S. President
Donald Trump and North Korean leader Kim Jong Un in Singapore, a
conference in Seoul to explore investment opportunities in North
Korea drew about 600 attendees.
    Samsung C&T Corp  028060.KS , the construction arm of South
Korea's largest conglomerate, set up a task force in May to
review potential projects such as building railroads, a company
official told Reuters on the sidelines of the conference.
    "We are not clear yet on how to move in there, and want to
know now how much risks we can take," the official said, asking
not to be named because he was not authorised to speak to media.
    Russian gas giant Gazprom  GAZP.MM  and state-run Korea Gas
Corp (KOGAS)  036460.KS  have held talks over the past two
months to discuss a possible construction of gas pipelines
passing through North Korea, a KOGAS spokesman said.
    Other South Korean companies including retail giant Lotte
and telecom company KT Corp  030200.KS  have also launched teams
in recent weeks to study the resumption of stalled North Korea
projects, officials said.
    With vast mineral resources, poor transport networks,
infrastructure and power facilities ripe for major upgrades and
a population of nearly 26 million, North Korea is a potentially
compelling investment opportunity once economic sanctions
against it are lifted.
    But risks range from political uncertainty to poor
infrastructure, as well as the complexity of international
sanctions that will continue to limit business even if they are
gradually lifted, say several South Korean officials who have
done business with North Korea.
    In the case of Samsung, it could not expand its business in
North Korea, partly due to U.S. sanctions that limit production
of "dual use" items that can be used for weapons programmes,
said Dong Yong-sueng, who advised the conglomerate on its North
Korean business strategy.
    "Samsung could not make even microwave ovens there. Why? The
technology used in microwaves is the basis of missile guidance
systems," Dong said.
    
    HIGH RISK, LOW RETURN
    By 2010, Samsung had cut all business ties in North Korea,
including computer software, televisions and other consumer
electronics and apparel manufacturing, following the sinking of
a South Korean warship in waters near the border. Seoul blamed
its neighbour for the sinking, a charge the North has denied.
    Other setbacks had nothing to do with politics.
    Between 1999 and 2004, South Korean TV parts makers built
components for Samsung and LG Electronics  066570.KS  in
Pyongyang to take advantage of cheap labour there.
    Park Byung-chan, a businessman who represented the South
Korean electronic components makers, said production was
suspended after his North Korean partners were sacked over a
corruption case.
    Even before then, they were grappling with high
transportation costs because there was only one shipping route
through the peninsula's west coast.  
    "There was a multi-faceted dimension of risks we couldn't
control by ourselves," Park told Reuters.
    A U.S. CIA open source document reviewed by Reuters lists
more than 350 joint ventures with North Korea between 2004 and
2011, ranging from a piano factory with Austria, to a chicken
and beer joint and a clothing factory in Pyongyang with South
Korean investment.
    Most of those businesses, three-quarters of which had
Chinese partners, had been shut down even before last September,
when the U.N. Security Council banned all joint ventures
following North Korea's sixth nuclear test earlier that month.
    One of the best-known enterprises is Koryolink, the joint
venture between Egypt's Orascom Telecom, now Global Telecom
 GTHE.CA , and North Korea's Post and Telecommunication Company.
    Orascom said it officially "lost control" of its 75 percent
stake in Koryolink in 2015. Despite the mobile network's rapid
rise, the Egyptian firm has struggled for years to repatriate
its cash from Pyongyang, filings reviewed by Reuters show.
    A further 120 South Korean companies used to operate at the
Kaesong joint industrial park north of the border before it was
closed in 2016 after a long-range North Korean rocket launch.
    
    NO BIG MACS SOON?
    Often there is a race between large consumer companies to be
the first to enter a newly opening economy.
    McDonald's was the first American food chain to enter Russia
in 1990 and KFC became the first Western food company in China
in 1987. 
    But Cho Nam-chan, who was the manager of South Korea's first
McDonald's store in 1988, said poor roads and lack of supply
chains would make it difficult for the hamburger giant to open
its first outlet in North Korea. 
    "McDonald's has to make money there and make sure that it is
politically stable, and has stable local supplies, such as
patties, freezing systems for ingredients and enough electricity
to run the whole thing," Cho said.
    McDonald's did not respond to Reuters inquiries regarding
this story, but referred to recent comments from its chief
executive that North Korea was not part of their discussions.
    More attractive might be infrastructure projects such as
building new railroads, funding for which could come from an
international body or a consortium of governments to help
underdeveloped countries, advisory firm Samjong KPMG, which
co-hosted the Seoul conference told the participants.
    Conference attendees were told to consider partnering with
Chinese or Russians, North Korea's allies, to ease political
threats while sharing costs and risks.
    In April, South Korean President Moon Jae-in and North
Korea's Kim agreed to modernize railways and roads in North
Korea, boosting shares in South Korean construction firms, train
and steel manufacturers since.  urn:newsml:reuters.com:*:nL3N1S72GJ  urn:newsml:reuters.com:*:nL3N1SZ02E 
    Expectations of trade with North Korea have also revived
property prices in border towns in China and South Korea.
 urn:newsml:reuters.com:*:nL4N1TE5EL urn:newsml:reuters.com:*:nL3N1SH1JG
    But the speed of economic cooperation won't be "as fast as
we have expected" because of sanctions, Shin Hye-seong, a
director at South Korea's Unification Ministry, told Reuters.
    Past cooperation with North Korea has also exposed "several
problems" and Seoul will offer "systemic guarantees" to cure
those problems, Shin said, without elaborating.

    TRUST ISSUES
    For Rieh Chong-hun, a former chief executive at state-run
utility Korea Electric Power Corp (KEPCO)  015760.KS  the
current discussions sound eerily familiar.
    KEPCO was a prime contractor for the Korean Peninsula Energy
Development Organization, which was created in 1995 to help 
build two nuclear power plants in North Korea in exchange for it
eliminating nuclear programmes. 
    With only a third of construction complete, the $4.6 billion
project was suspended in 2006 after North Korea resumed weapons
development, leaving South Korea unable to recoup its $1.1
billion contribution.
    "The same story as today, a big promise was made then that
North Korea would abandon nuclear weapons and we all agreed to
build reactors in return," Rieh said. "We trusted North Korea
back then too."  
    ($1 = 1,074.7600 won)

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North Korean joint ventures:    https://tmsnrt.rs/2MKfyWq
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 (Reporting by Ju-min Park and Jane Chung; additional reporting
by Hyunjoo Jin in SEOUL; James Pearson in HANOI, Alana Wise in
NEW YORK; 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))