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      Why a Secretive Group of Western Investors Are Bullish on Business in North Korea

      Why a Secretive Group of Western Investors Are Bullish on Business in North Korea Why a Secretive Group of Western Investors Are Bullish on Business in North Korea Why a Secretive Group of Western Investors Are Bullish on Business in North Korea
      Kim Jong-un (right) with Chinese official Liu Yunshan in Pyongyang. (Photo via KCNA/EPA)

      Business

      Why a Secretive Group of Western Investors Are Bullish on Business in North Korea

      By Justin Rohrlich

      Read and watch more about North Korea in "March Madness," a VICE News special section on the Hermit Kingdom.

      The labels said Made in China. But after photographs taken at a North Korean garment factory turned up online last month, Australian athletic gear manufacturer Rip Curl was forced to admit that 4,000 of its jackets had actually been manufactured in the Hermit Kingdom.

      Rip Curl, which said its order had been secretly farmed out to the North Korean factory by a Chinese supplier, offered refunds to its customers and promised to donate all profits it had made from the jackets. The company also said it cut ties with the Chinese supplier.

      "We are very sorry that Rip Curl has breached the trust of our customers," the company said in a statement, "and we apologize wholeheartedly for letting this happen in the first place."

      Felix Abt, however, doesn't think the company had anything to apologize for.

      The Swiss-born Abt, who lived and worked in Pyongyang from 2002 to 2009, is one of a small number of Western businesspeople who encourage economic engagement with North Korea. This year, the Economist called North Korea the worst place in the world in which to invest, yet Abt and the others claim it's good business — and morally defensible.

      It's difficult to paint a comprehensive picture of Western investors in North Korea; with few exceptions, they're extremely reluctant to discuss their interests in the North, whether out of fear of bad PR or reprisals by the regime. But investing in a place like North Korea attracts "risk takers, in large part because they can't play in a bigger market," says one Washington, DC attorney who works with investors in so-called frontier markets and did not wish to be identified for fear of jeopardizing relationships. "They are generally quite ethically flexible, as well."

      China's rising wages "make North Korea a prime destination for outsourcing," says Abt, who wrote a book titled A Capitalist in North Korea and has represented a number of foreign companies in the country. He says laborers "generally work harder than workers elsewhere," and that the country's laws related to foreign investment and business have become more friendly over the years. Newly built industrial parks have also alleviated some of the problems — power cuts, fuel shortages — caused by the North's infrastructure woes.

      Related: In Photos — North Korea Through the Lens of David Guttenfelder

      And as long as less than 50 percent of an outsourced product is made in North Korea, Abt says a company "can still claim that the products were 'Made in China.'" The strategy, called China Plus One in the manufacturing industry, often means sending the most labor-intensive tasks to North Korea, where the highest-paid factory workers in the country earn an official wage of less than $75 per month. The minimum monthly wage in China is roughly $270.

      Abt, who now resides in Vietnam but still sits on the boards of several joint ventures in North Korea, is a controversial figure. Because of his stance on North Korea, he has been called everything from a "bottom fisherman" to "Switzerland's greatest embarrassment to humanity since [Third Reich financier] François Genoud."

      But he maintains that "economic engagement" with the regime also benefits average North Koreans. Abt says he and his colleagues exposed their North Korean counterparts to Western management styles, and introduced them to the concept of corporate social responsibility.

      "When I re-visited factories I noticed positive changes — new canteens, or showers for the workers — as a result of these efforts," he said.

      Showers or not, conditions in North Korean factories "may not be actual slavery of the same sort once experienced by blacks in America, but it's certainly highly exploited labor," says Curtis Melvin, an analyst at Johns Hopkins University's US-Korea Institute.

      Melvin, an economist by training, concedes that investment in North Korea has at least some potential to create change. But for both business and moral reasons, he doesn't advise parking funds there anytime soon.

      "It's an information vacuum marked by corruption, where contracts are routinely violated," he said. "North Korea is a security threat, a massive violator of human rights, and until they're not, investing there is all downside."

      That downside has been borne out repeatedly. In 2012, the Xiyang Group, a Chinese mining firm, called the five years it spent in North Korea "a nightmare." After investing more than $37 million to set up a joint venture with the Workers' Party of Korea — the ruling party headed up by Kim Jong-un — North Korean officials began demanding changes to a contract that had already been signed. When the company refused, North Korea shut off Xiyang's power, water, and telephone service, then put its staff of 100 on buses, drove them to the Chinese border, and kicked them out of the country.

      Last year, a joint electronics venture between European investors and the trading department of the North Korean Ministry of Culture went south. "As a result of irreconcilable differences between the board of Phoenix and the local management, Phoenix Commercial Ventures Ltd. terminated its association with Hana Electronics JVC," read a news release. Phoenix director Nigel Cowie, a British national, declined to speak to VICE News on the record.

      Two months after Phoenix's announcement, a regulatory filing by Orascom, an Egyptian telecom provider that set up North Korea's first cellular network, revealed that it had "lost control" of its joint venture, of which it owned 75 percent. The North Korean regime reportedly refused to allow the company access to an estimated $600 million in profits, demanding that the money instead be used for improvements around Pyongyang. The regime then launched its own competing cellular service.

      Orascom has not yet said whether it will remain in North Korea, but if the company pulls out, it will most likely forfeit its entire investment.

      In addition to the economic dangers of doing business with the regime, there is the moral issue of using what Melvin calls "highly exploited labor." In 2014, a UN commission found that the North Korean government was "among the most rights-repressing in the world," and that it "practices collective punishment for supposed anti-state offenses, effectively enslaving hundreds of thousands of citizens, including children, in prison camps and other detention facilities where they face deplorable conditions and forced labor."

      But Abt is not alone in promoting North Korea to foreign businesses. Paul Tjia, a Dutch consultant who facilitates offshoring opportunities for foreign companies in the North, also believes in the benefits of doing business there. As he wrote to prospective investors in a January email, "[W]ith the continuing tensions and the 'Cold War' climate, it is important to find new ways for engagement."

      Tjia is currently keen on North Korea's IT capabilities, which include the manufacture of fingerprint identification software in addition to license plate, face, and voice-recognition products. Abt, meanwhile, says the production of false teeth is particularly lucrative in North Korea, where the teeth can be made for a fraction of what it costs to produce them in the Philippines, which has the most denture wearers per capita in Asia and sustains a large denture-making industry.

      There are also "massive" reserves of metals and minerals in North Korea, but Abt says the equipment and technology needed to extract them are scarce. Providing it could result in "a worthwhile accruement of mined products, provided they are not banned by UN sanctions."

      Jim Rogers, a legendary "contrarian investor" who started the Quantum Fund with George Soros in the early 1970s, has said he'd sink his entire fortune into North Korea if he could.

      Rogers says he first became interested in investing in the North during a 2007 visit to the country, when he "noticed all their propaganda in favor of unification, which is not what our propaganda said." Rogers began investigating investment possibilities in earnest four years later, "a few months after the kid [Kim Jong-un] took over."

      Although brutal purges ordered by Kim are still commonly reported, Rogers notes that he was "reared in Switzerland and he knows there is another world out there." Kim attended a boarding school in Berne between 1998 and 2000; classmates described him as "dangerous, unpredictable, prone to violence, and with delusions of grandeur."

      As an American citizen, Rogers says it has been "almost impossible" to invest in North Korea, and that sanctions have "delighted" Chinese and Russian investors who don't have to compete with Americans. He calls the US curbs on investment an "old, depressing movie," pointing out that the rest of the world has beaten American investors to the punch in countries like Myanmar, Vietnam, Laos, Cambodia, South Africa, Iran, China, Russia, and Cuba.

      They're conspicuously all countries that, like North Korea, currently have or have had serious human rights issues.

      Rogers says he sees North Korea in very much the same place as China in 1981, but believes the country will change even faster than China because "[the North] will merge with South Korea within a few years." Decades of predictions of an imminent reunification, however, have always been proven wrong.

      North Korea must make some level of economic sense for foreign investors if the Chinese are doing it, acknowledges Matthew Reichel, director of the Pyongyang Project, a Canadian NGO that organizes academic exchanges with North Korea. But, he says, anyone who "tries to paint some weird rosy picture of North Korea as the next hot investment destination is not really telling the truth."

      "Their geographical location is amazing, the people are literate and hard-working," he said. "But doing business there takes a very specific threshold for pain, and the ethical issue is not something that should be ignored."

      The North Korean government will not collapse because a few factories are working with Western suppliers. Yet "marketization" naturally weakens government control, and Reichel says anything that puts hard currency into the pockets of North Koreans is a "fundamental positive that keeps them informed beyond the regime."

      As an Australian company, Rip Curl probably didn't violate any laws with its accidental foray into North Korea. But an American company outsourcing production to North Korea, even unintentionally, would most likely have been in violation of US law. Willful violators can face fines up to $1 million and/or 20 years in prison.

      There are certainly loopholes that can be exploited, but, as Washington, DC attorney and North Korea analyst Joshua Stanton points out, there are now even harsher sanctions in place following North Korea's nuclear test and missile launch earlier this year.

      "You'd almost have to be insane," he says, "to consider an investment or joint venture involving North Korea at a time like this."

      Follow Justin Rohrlich on Twitter: @JustinRohrlich

      Topics: north korea, investing in north korea, dprk, business in north korea, felix abt, paul tjia, jim rogers, business, north korea news, asia & pacific, march madness: a vice news spotlight on north korea

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