“You know, this isn’t just business as usual…” Park Jeehee, the CEO of the watchband manufacturer Timepiece, listened carefully as a guide talked her and her small executive team through the details of the Kaesong Industrial Complex (KIC), a South Korean manufacturing zone in North Korea. “As you can see, this is a sophisticated operation,” he boasted. Pointing to the blazer-clad workers exiting several factories, he added, “The KIC is a physical example of the prosperity Koreans can create when peacefully working together.” As a South Korean, Park was more than a little skeptical: She’d grown up fearing the government in the North. But she understood why Hyundai Asan, a division of the South Korean Hyundai Group, had in the early 2000s led efforts to develop the KIC. The complex, supported by both Korean governments, was intended to promote “coexistence and co-prosperity”; indeed, it represented the largest area of economic cooperation between the two nations. It had already attracted more than 100 companies, with tens of thousands of employees. South Koreans served predominantly as managers, and North Koreans provided most of the unskilled and semiskilled labor. Park had not given much thought to doing business in the KIC until a fellow CEO, who had moved his manufacturing plant there in the past year, encouraged her to visit. Government officials looking to draw more companies to the complex had set up the trip. And now she and her team were north of the Demilitarized Zone in one of Korea’s oldest cities, Kaesong—not even 70 kilometers from Seoul, although it felt a world away. The previous day, despite constant chaperoning, the group had glimpsed some of the abject poverty of the North—sights that had heightened Park’s doubts. But as she took in the sprawling complex, set against a traditional agrarian backdrop, she realized that it truly felt different from the North Korea she had always imagined. The workforce appeared to be organized and efficient. The manufacturing facilities, although basic, were well maintained and up-to-date. The gated complex even contained branches of a South Korean bank and a popular South Korean convenience store. “This is impressive,” Park whispered to her CFO, Kim Jaehyun, as they readied for the journey home. Nodding in agreement, he said, “It certainly gives us something to think about.” But they would need to think fast: Park would be meeting with Timepiece’s board the following week to make a recommendation. Real Benefits, Real Risks The next morning, back at the company’s headquarters in downtown Seoul, Park sipped a cappuccino and looked across her desk at Kim. “Now that you’ve had a chance to sleep on it, what do you think?” she asked. “Well,” Kim began, “I phoned a few of the CFOs who have operations in the complex, and the labor savings and productivity estimates in the KIC literature seem real.” Park recalled reading a few years ago that the monthly wages of North Korean workers at the KIC averaged $57.50—far less than those of similarly skilled workers in Qingdao ($100) and Ho Chi Minh City ($134). There would be no language barrier to contend with, and shipping between Seoul and Kaesong was substantially cheaper and easier than shipping to and from China or Vietnam. “Capital risk also seems low,” Kim continued, “because of the South Korean government’s guarantee of up to 90% of our capital investment, along with privileged access to low-interest loans. For now the government appears committed to the KIC as a way of peacefully engaging the North. But there are other risks involved. On several occasions North Korea has threatened to send its workers out on strike. And just last year it unilaterally canceled all contracts and demanded huge wage increases. We could lose a lot of time and money if such incidents continue. And we have to consider how manufacturing in North Korea, given the international sanctions it’s under, would affect customs and trade agreements. Exporting goods made in the KIC could be problematic.” “Of course,” Park replied. “But the companies already doing business in the KIC don’t appear to be suffering from the uncertainty. And global firms have always operated in politically volatile regions, often quite profitably—look at oil and mining in sub-Saharan Africa. Without risk, there’s really no reward.” People First “Honestly, Jeehee, I’m uneasy,” said Mark Lee, Timepiece’s vice president of human resources. He tugged anxiously at his watchband, twisting it around his wrist. “You’re as aware of the potential problems as I am. After the shooting on Mount Kumgang and the detainment of that Hyundai employee, I’m hesitant to send our people in.” “After the shooting on Mount Kumgang and the detainment of the Hyundai employee, I’m hesitant to send our people in.” Two years earlier, North Korean soldiers had shot and killed a middle-aged woman on a South Korean–run tour of a resort in the North. More recently, North Korean authorities had arrested a Hyundai Asan employee in Kaesong for allegedly encouraging a local waitress to run away with him. “Not to mention that our managers will have to stay in the complex for extended periods, with limited communication with their families,” Lee added. “And we haven’t even talked about the North Korean workers. Are we comfortable with how they may be treated?” Lee was broaching a sensitive issue. Two days before her visit, Park had gotten a call from an old college friend who now worked for a human rights group in London. The picture he painted of Kaesong was grim. The wages earned by North Korean KIC workers were paid to the government, which supposedly distributed some of the money to them—but it was impossible to know how much. And there were unconfirmed rumors that North Koreans working in the KIC were considered “contaminated” by exposure to outside practices and were not allowed to return home. “But wouldn’t we be giving North Korean employees a better quality of life?” Park asked. “That’s possible,” Lee conceded. “Our factory would provide a better work environment than what they’re used to. But we would have no transparency and very little autonomy. The North Korean regime wouldn’t allow us to make any substantial changes to our plant; we’d be bound by the agreements signed several years ago by the KIC’s founders. Add that to the questions about our employees’ safety and the broader human rights situation in the North, and I’m not sure it’s worth it.” “Everything you’re saying is true,” Park replied. “But does it mean we can’t do business there? Furniture makers in places like Pakistan deal with the risk of human rights violations all the time. It just means they must set a higher standard for themselves. Couldn’t we do the same?” Hold the Politics Later that day, at lunch with a friend who was a member of the South Korean parliament, Park pushed a small pile of noodles around her plate. Across the table, Keel Young-hoon provided a politician’s perspective and a counter to Lee’s apprehensions. “How could you pass up an opportunity for patriotism and profit?” he asked. Keel belonged to the liberal minority party—the second-largest political faction in South Korea and a strong supporter of the KIC. “This isn’t just a business decision, Jeehee,” he contended. “Opening a factory in Kaesong would be an act of public service. The KIC was founded with reunification in mind, and look at all the good it’s already doing. North and South Koreans are working side by side for the first time in decades! North Koreans are getting exposure to market economics. And it’s a fantastic show of goodwill toward the North.” “I can definitely see that,” Park said. “But there’s a lot of uncertainty, not only for businesses but also for the future you envision. It’s far from a slam-dunk proposition.” “You need to view it as a long-term investment,” Keel told her. “Just as the West Germans’ Ostpolitik was pivotal in unifying the two Germanys, the KIC will be a key factor in our reunification.” Park admired his optimism, but she remembered that only two decades earlier, providing resources to the North Koreans had been considered treason. She knew that attitude had not entirely disappeared. In fact, majority-party politicians had tried on numerous occasions to shut down the KIC. Park did see merit in the argument that the KIC might aid reunification—something that she, with distant relatives still in the North, would be thrilled to see. But the political aspects of the project worried her. For every person happy about a decision to open shop in the KIC, there would certainly be another person opposed. “I’m not sure I’m ready to be a politician yet,” Park said, smiling at her friend. “I’ll leave that to you. But it’s hard not to want this to work.” Ticktock, Ticktock Late that afternoon Park sat in her office, prototypes of two watchband designs resting atop the KIC documents on her desk. As she thought about the conversations she’d had throughout the day, she gazed at the Han River below. In a way, she envied the Han: Its waters flowed from two rivers, one originating in South Korea and the other in the North, merging easily with no concern for national boundaries. Although those she’d spoken with had agreed that economic benefits could accrue from the proposed arrangement, her talks had also driven home the other concerns she had to weigh. She could think of lots of relevant case studies—textiles in Bangladesh, divestiture from apartheid South Africa, business engagement with East Germany. But every situation was different. Methodically, Park listed the pros and cons on the legal pad in front of her, using quick, precise strokes of her pen. If Timepiece opened a Kaesong plant, it could improve the quality of life for many North Korean workers. But would the communist regime interfere with the company’s good intentions, threatening the business as well as its employees? Were the potential economic benefits worth the human risks? And how should politics and national pride factor into the decision? Park had to move carefully, but she knew that time was of the essence. The board meeting was coming up soon. She set her pen down on her pad, closed her eyes, and thought hard about whether to expand Timepiece’s operations to North Korea. What Would You Do? Some advice from the HBR.org community The risks outweigh the short-term cost savings that would accrue. If a more cordial, hopeful macropolitical environment emerged, things would be different. Without such an environment, Timepiece would be wise to ignore “long-term” potential and heed the sage observation of John Maynard Keynes: In the long run, we are all dead. Nadav Davidai, crisis and resilience consultant, Control Risks North Korea has one of the most aggressive intelligence services in the world. Even in times of thaw, the intelligence adage applies: There may be friendly countries, but there are no friendly intelligence services. A joint meeting place like the KIC would certainly have operatives disguised as workers. Daniel Slate, analyst, Palantir Technologies If the Dear Leader’s clique decides that the KIC no longer suits its needs, it might portray Timepiece in a very bad light, so the company might be ineligible for the South Korean investment guarantee, and its reputation and brand could suffer. Gary Harlan Roseman, associate professor of economics, Berry College Should Park set up shop in Kaesong? Youssef Nasr recently retired from his role as a senior executive in the HSBC Group. This is a classic, albeit extreme, example of what I would call investing in “ultra-frontier” markets. Park should base her decision on two perspectives: a business one and a humanitarian one. As the CEO of a for-profit enterprise with substantial labor costs, Park is right to seek out cheaper manufacturing locations. But she must take several steps to understand the risks embedded in the KIC option and how they might be managed. To start, Park should use a suitably high discount rate in her financial valuations of the KIC, to reflect the high level of risk. At the same time, she must factor in the South Korean government’s capital-investment guarantee and its provision of low-interest loans—compelling offers that significantly limit capital risks. Then she should consider how to manage production and supply chains so that any problems at the KIC would cause minimal disruption to the parent operation. For example, could Timepiece keep inventory levels at the KIC relatively low, frequently shipping finished products to Seoul? Kaesong’s proximity represents an important logistical advantage in this regard. Park should also investigate ways to track intracompany receivables and payables and to remit earnings on a regular basis, so that large amounts of cash aren’t trapped if adverse events occur. In addition, Timepiece should limit its initial investment to an amount that would not be life-threatening to the company if the arrangement failed. The most common rule of thumb for multinationals is about 10% of their total investments. Assuming she can build a strong business case for the North Korean plant and mitigate the financial risks, Park should then assess the humanitarian case. Corporate social responsibility has become an important part of doing business: Successful companies today are expected to show leadership in this area. Although North Korea has its fair share of critics and is subject to international sanctions because of its human rights abuses and especially its nuclear activities, several aspects of the situation make me think that Park should proceed with the investment. Worries that the regime could acquire dangerous technologies from a new operation do not apply in this case: The manufacturing of watchbands hardly lends itself to nuclear or other military applications. And Timepiece could help alleviate the misery of life in the North, at least for its own employees. For example, although the company would be unable to control the amount of wages that actually reached its workers, it could provide them with a number of non-monetary benefits, such as a pleasant, comfortable work environment; healthy, nourishing cafeteria meals; good job-training programs; and sport and social facilities. If Park can build a strong business case, a factory in the KIC could be a step toward a unified peninsula. Finally, the precedent of German reunification is a highly relevant point. A new factory in the KIC could be a step toward a unified peninsula. Ian Bremmer is the president of Eurasia Group and author of The End of the Free Market: Who Wins the War Between States and Corporations? (Portfolio, 2010). Should Park set up shop in Kaesong? Absolutely not. A serious rise in tensions on the Korean peninsula this year makes any substantial investment in Kaesong far too risky. Consider the signals now coming from the North. South Korea and the United States have publicly accused North Korea of a deliberate act of war. There is compelling evidence that it torpedoed the Cheonan, a South Korean naval ship, killing 46 sailors. Seoul and Washington subsequently held joint naval exercises, and Pyongyang is almost certain to respond in a hostile way. It’s just a matter of where, when, and how. And that’s only the beginning of the uncertainty. Rumors that Kim Jong-il is dying won’t die. We don’t know who will replace him, nor do we know what the new leadership will think about the KIC. There’s a bigger worry still. North Korea has been running small-scale experiments with capitalism for more than a decade. Their purpose has been to avert civil unrest by giving the population access to food and consumer products that the government can’t provide. However, the increasing flow of unregulated goods from China created a shadow merchant class and fueled official corruption. Last year Pyongyang tried to reassert control. In November state officials suddenly announced a plan intended to reverse the move toward private markets, punish corrupt officials, assert greater control over commercial activity, and halt spiking inflation. North Koreans were given a week to exchange their currency for new, greatly devaluated won, with exchanges capped at the black market equivalent of about $40. The use of foreign currency was banned. People frantically dumped currency and hoarded goods. The fledgling middle class, consisting mainly of merchants, bureaucrats, and military officers, was stripped of much of its wealth. Reports of black market hyperinflation, severe food shortages, and rioting soon trickled across the border. Scrambling to limit the damage, the government reversed its reversal, reopening markets and again green-lighting foreign currency transactions. The prime minister apologized and the finance minister was executed. This government has no idea where it’s going. Kaesong is and will remain an island of engagement subject to its whims. The only certainty is that the regime cannot continue indefinitely along (what passes for) its current path. Invest in China. Invest in Saudi Arabia. Invest in other authoritarian states. In these countries, at least it’s possible to see when trouble is coming.
