Peace plays: How foreign companies have lost a bundle in North Korea

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© Reuters. FILE PHOTO: The logo of Samsung Electronics is seen at its office building in Seoul© Reuters. FILE PHOTO: The logo of Samsung Electronics is seen at its office building in Seoul

By Ju-min Park and Jane Chung

SEOUL (Reuters) – Months before the first summit between leaders of two Koreas in 2000, South Korean tech giant Samsung Electronics Inc (KS:005930) 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 program.

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 , 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 authorized to speak to media.

Russian gas giant Gazprom (MM:GAZP) and state-run Korea Gas Corp (KOGAS) (KS:036460) 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 (KS:030200) 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.

(For graphic on North Korean joint ventures, click https://tmsnrt.rs/2MKfyWq)

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 neighbor 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 (KS:066570) in Pyongyang to take advantage of cheap labor 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 (CA:GTHE), 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.

Expectations of trade with North Korea have also revived property prices in border towns in China and South Korea.

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) (KS:015760) 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.”

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