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The Gaeseong Project: The Dream of ‘Dirt-Cheap’ Labor

By Kim Hyo-jin, Joon Ang Daily, 2 November 2003

South Korean businessmen hang hopes on workers in the North

So why not North Korea? If I can get good workers, I would build factories anywhere even if the country were ruled by a regime worse than that of Kim Jong-il, says Lee Woo-chun, president of Dosco Co., a car engine component maker in Pyeongtaek, Gyeonggi province.

He is one of a growing number of Korean businessmen who have been drawn to the Gaeseong Industrial Complex, a nearly barren piece of land that is touted as the centerpiece of North-South Korean economic ties. The interest is understandable: At a time when labor unrest is rife in the South and wages are rising faster than productivity, North Korea is attractive because of its shared language with the South and its dirt-cheap labor.

After Hyundai Asan Corp. and the Korea Federation of Small and Medium Business started taking applications from small and medium companies in 2000, 1,300 applications have poured in—400 of which were filed after the groundbreaking ceremony for the complex in June. And the number is increasing rapidly, a Hyundai Asan spokeswoman said.

I get about 20 calls on average a day, said Jung Hwan-shik, manager of the Business Cooperation Department at the small-business federation, which is also accepting requests from enterprises interested in opening a plant in Gaeseong. He said the Gaeseong fever among small and medium businesses is much greater than the rush to China that started in the early 1990s after Seoul and Beijing ended half a century of diplomatic iciness. About 22,000 Korean companies have set up shop in China in the last 13 years.

In August 2000, Hyundai Asan, a unit of the Hyundai Group in charge of its projects in the North, reached an agreement with Pyeongyang to build the industrial park in Gaeseong. Hyundai offered to invest 200 billion won ($170 million) at the location of a former commercial hub only 30 kilometers (18 miles) north of Seoul. On a clear day, in fact, you can see Gaeseong's Mount Songak from the top of Namsan in Seoul.

But the proximity to South Korea and easy access by land aren’t the main reasons for companies’ desire to move north. The wages offered, for example, would interest any Korean business. Last year, Hyundai and North Korean authorities agreed to a minimum wage of $57.50 per month for the complex; $50 of that would go to the workers and the rest to the North Korean government. In comparison, foreign workers in South Korea receive 1 million won ($845) monthly; Korean workers’ salaries are even higher.

It will cost Hyundai Asan and the Korea Land Corp., a South Korean government corporation, about 90,000 to 120,000 won per square meter (10 square feet) of land to build roads, utilities, and sewage systems, and initially the companies were to absorb all the costs. But after hearing pleas from small- to medium-sized companies, Jeong Se-hyun, minister of unification, said Oct. 8 that the government would take on some of the costs.

Actually, the issue in reality is not wages or land cost, but productivity, said Lee Jeong-taeg, deputy general manager at the Gaeseong project division of Hyundai Asan.

For example, in remote rural Chinese regions such as Dandong or Shenyang, companies can find cheap workers and land. But investors are reluctant to go there because workers are poorly educated and production is low quality, he explained. By contrast, foreign investors flock to urban areas like Shanghai or Shenzhen even though they have to pay more than $100 a month in wages and land is priced at around 240,000 won per square meter because they can easily hire workers who have completed at least a secondary education.

Perhaps less well founded is the belief, nearly universal among entrepreneurs here, that North Korea boasts a high-quality work force. Perhaps so, but a former South Korean manager at the KEDO nuclear reactor project estimated a few years ago that the productivity of his North Korean workers was one-fourth or one-fifth of his South Korean work force. However, Mr. Lee said companies at Gaeseong can get high-school graduates who, most importantly, can communicate without translators.

Some Korean businessmen worry about whether North Korean workers can adjust to a capitalistic environment, but Park Yeong-sik, a director at the Korea Land Corp., said he has seen a lot of changes in the North since it began to introduce more competition into its society after the July 2002 economic reforms. Waitresses, he said, attend to customers more eagerly, in hopes of a bonus.

When I talked to store clerks, they said they work harder to get company incentives, said Mr. Park, who has accompanied Seoul legislators on visits to North Korea as recently as Oct. 23-24.

Mr. Lee of Dosco echoes those sentiments. He said that nothing is more important than finding workers in Gaesong who are young, well-educated and speak the same language.

I do not care about other things, he said. I could give twice as much in wages if I had to. The urgent issue is whether we can find able workers.

Mr. Lee's company is typical of Korea’s small and medium manufacturers, intrinsically labor intensive and threatened by a shortage of young, male workers and rapidly rising wage rates.

Dosco employs 50 workers on its assembly lines; more than half of them are in their 50s or older. Yet it is almost impossible for Mr. Lee to find young workers to replace the aging skilled workers.

It got much worse five to six years ago, he said. You place help-wanted advertisements, yet often not a single young male worker shows up, he said. Nobody wants to work for a small company like mine anymore.

The cost of hiring foreign workers here is rising as well, and communications problems hinder companies from hiring them for sensitive core jobs. The situation is getting hopeless, Mr. Lee said, adding, I don’t think I can last more than five more years.

His gloomy forecast echoes throughout Korea’s small manufacturing sector. When the Korea Federation of Small and Medium Business surveyed 400 chief executives of small and medium firms recently, 65 percent said that if the current conditions continue, they would probably not still be in business three years from now. Forty percent said they would not be able to continue operating for even two years. About 40 percent said they were considering moving their production bases to other countries.

But according to the Gaeseong timetable, those firms will have to wait, no matter how dire their straits. The draft of the Gaeseong project schedule divides the development of the complex into three phases, with a 22-acre site opening in 2007 to accommodate 300 South Korean companies in the first phase.

Most small and medium companies’ enthusiasm turns into disappointment when they learn that it will not be until 2007 that they can first move to Gaeseong, said Mr. Jung of the small business promotion agency. They say even one day is invaluable. They are up to their necks in desperation.

But Hyundai Asan has yet to turn a shovel of earth despite a showy groundbreaking ceremony on June 6. The government wants to do business by the book.

What is more important is to enter North Korea after the legal basis is firmly established, not to just go there quickly, said Kim Jin-ho, the head of Korea Land Corp. The state-run company is doing engineering work for Hyundai Asan.

It was Hyundai Asan that won the contract from North Korea, Mr. Lee of Hyundai said. The Korea Land Corp. came in later as Hyundai Asan’s partner. But since the land firm is run by the government, it is taking the initiative, and is trying to do things in the government way. There are faster ways to proceed with the project, but the agency will not move until they examine, design and confirm to perfection.

Affirming that view, Park Yeong-sik, a director of Korea Land Corp. said that creating the Gaeseong Industrial Complex is nothing like the Mount Geumgang tourism project. Hyundai Asan alone gets hurt if the Mount Geumgang tour project fails. But hundreds of companies can be wronged if this project goes badly. We know that small and medium firms are desperate, but North Korea is an unpredictable partner. We need a system to be instituted before doing any business there.

Mr. Park agrees with Mr. Lee of Hyundai and Mr. Jung of the small business agency that it is South Korea, not North Korea, that is delaying the project.

North Koreans are really coming forward, Mr. Jung said. They moved out the Gaeseong residents to empty the site. But they ask, What did South Korean companies show in return?

Mr. Park said: Nothing has been prepared at the site. North and South Korea have yet to make agreements about passage to the complex. Telecommunications and custom clearance are other issues that need to be addressed.

According to him, the Gyeongui railway and roads paralleling the railroad would be the main means of transportation to Gaeseong. Those roads may be paved as far as the gates of the complex before the end of the year.

Meanwhile, Baik Ho-sup, president of Daejin Creation Co., an exporter of women’s T-shirts, is losing its clients from Japan. He applied for a spot in Gaeseong two months ago, hoping to build his own factory there.

Mr. Baik’s company does not own its production lines, but provides raw material to suppliers and places orders. The company had about 4 billion won in revenues last year. Sixty percent of its production comes from South Korean suppliers and 40 percent from Chinese companies.

It is not well publicized in the media, but the Chinese government seems to think that it has attracted all the multinationals that it wants, Mr. Baik said. Labor-intensive manufacturing companies, especially smaller ones, are not welcome in China any more. Ninety percent of small and medium Korean firms that entered China are losing money.

In addition to what Mr. Baik feels are excessive regulations from Chinese government and a lack of incentives, Mr. Baik’s Chinese supplier in Shandong province is losing its appeal. Workers there are barely educated, and the productivity is only one-third or one-fourth of that in South Korea, he said.

Mr. Baik says his firm is still competitive technologically, but that Japanese buyers are increasingly turning to simpler products from China. I have no time, he said. I need to find a production base that is competitive in cost in the next year or two.

He said that he has had a series of problems with his suppliers in China, and so has opted for running his own production site in Gaeseong. He repeated the view of his small-business colleagues: It takes only 90 minutes by car from Seoul to Gaeseong. They speak the same language, and they are well-educated. My friends who do business in North Korea say that productivity there is far better than in China, he said.

Another factor in calculating the possible benefits at Gaesong is that setting up a new production base might not be enough. Firms operating at Gaesong might have to find new export markets, which could hurt companies such as Dosco, which generates 60 percent of its 7 billion won ($5.9 million) in annual revenues through exports. Korea’s two leading export destinations are the United States and China. The United States bans the import of most North Korean goods, and China remains competitive enough that labor-intensive imports could not easily be sold there.

It is a problem. I admit that, said Park Yeong-sik of Korea Land Corp. The goods made in Gaeseong could be sold to North Korea, but the purchasing power of North Koreans is near zero, he said.

Japan also levies higher duties on North Korean products than on those from members of the World Trade Organization. That, some say, leaves South Korea alone to absorb the products made in Gaeseong.

We estimate that South Korea has enough purchasing power to buy the Gaeseong output until the first stage of development is completed, Mr. Park said. After that, Seoul will have to hope that relations between Pyeongyang and Washington improve.

We cannot solve everything from the start. We have to bide our time, Mr. Park said.

And political volatility is another concern. What if Pyeongyang abruptly reversed course? Well, if a war broke out, it would not be much different whether your business were located in the North or in the South, Mr. Lee from Dosco said.

Out of those who have called me, nobody has ever asked about issues such as the North Korean nuclear program, Mr. Jung of the small business federation said. They say, What’s the difference between dying here because of economic difficulties and dying there because of political conflicts?

It appears that what worries business owners most are delays in building the complex. If the government wants to pursue this project, it must cut out the political trifles, Mr. Baik of Daejin said in exasperation. Please shorten the time to create the Gaeseong complex, even if it is just one day.