Have Management Consultants Infiltrated North Korea?

McKinsey, BCG and Bain-type consultants have been involved with business training for North Koreans informally and in their private capacities through our programs. As more North Koreans dive into business and entrepreneurship, the transfer of data-driven analytics and modern management theories is increasingly important. On the other hand, corporate America and management consultants in particular are often (and perhaps unfairly) accused of speaking in jargon and buzzwords that confuse more than they illuminate, and it would be a shame to inflict such horror on North Koreans. To my surprise, a corporate buzzword has penetrated North Korean society. On November 4th this year, KCNA, North Korea's state-run news agency, reported on a Provincial "Innovators" meeting.

Pyongyangites Meet to Welcome Jagang Provincial Innovators Pyongyang, November 4 (KCNA) -- A Pyongyang mass meeting took place at the Pyongyang Indoor Stadium Friday to welcome officials, labor innovators, scientists and technicians from the Huichon Ryonha General Machinery Plant. … Those innovators set an example in every aspect including development and production of new products, economic management and improvement of production environment by fully displaying the Kanggye spirit, thus further glorifying the undying leadership feats of Kim Jong Il and strikingly proving again that science and technology guarantee a thriving nation, he said.

October Rason Trip Findings

In October 2011, John Kim, a board director of the Choson Exchange, visited the Rajin-Sonbong Special Economic Zone. The following is a summary of some of his findings based on site visits and talks with senior officials in the SEZ. An longer account of his travels and impressions will be available soon. This information helps elaborate on our report from August. Rajin Port

The Rajin Port employs 1400 workers. The Chinese have conducted feasibility tests regarding two new piers, but currently the port houses three piers with 9-9.5 meters draft. A 30,000 metric ton coal storage warehouse was built at Pier 1 by the Chinese, who moved 80,000 metric tons through the facility in five shipments from January to September. Pier two, largely dedicated to container shipment, is currently dormant and a Swiss company is currently using Pier 3 to ship manganese and talc out of the region. The Russians also have a 49 year lease agreement signed in 2008.

Oongsang Port

Oongsang Port exported Russian lumber until 1985, but remains largely quiet now except for the occasional fishing boat. The present draft of 7 meters constricts any major future activity, so the North Koreans hope to bring in over $100M to widen the draft to 9 meters. After Rajin Port activity surpasses capacity there, Oongsang Port will become the next regional hub for drybulk activity.

Sonbong Port

Originally opened in the early 70’s, the draft within the port is 7 meters, but a fully laden Very Large Crude Carrier containing 270,000 metric tons of oil can offload at an offshore facility further out at sea. Two pipes, 63 cm in diameter, run for 9km underground before reaching the storage facility at “Victory Petrochemical”, a simple refinery that was designed to refine crude and send oil products (gasoline, naphtha, jet fuel, diesel and fuel oil) back to the port for export. In addition to this two way flow, fuel oil also arrived sporadically at the port as part of aid packages from 1994 to 2008.

Sonbong Power

This power plant was originally designed to take fuel oil from Victory Petrochemical as feedstock and generate power to feed back to Victory. Since the refinery has been offline, Sonbong Power has at times provided electricity to the region, but with fuel oil prices close to $700/metric ton and current electricity prices at 6.5 eurocents/kwh, the economics of running the plant do not work leaving the 800 workers employed here largely idle.

Victory Oil Refinery

Literally translated as “Victory Chemical Plant”, this refinery was completed in 1973 with a 40,000bbl/day crude distillation unit that typically yields 40~50% residual fuel oil for an average crude feed. Investment into upgrading capacity in the international market has led to an eroding of margins for simple refineries like Victory. Currently the refinery is idle and would need over $500M in investment to become competitive.

Hye Song Trading Company

Mr Kim visited a Sewing Factory owned by Hye Song, which runs 8 such factories employing 2000 workers. Output is recorded for the entire year on a bulletin board at the front entrance of the company. All employees except the handyman were women.

Cell Phone use more prevalent

The number of cell phone users in the DPRK crossed 1 million earlier this year and one official commented that the overwhelming majority of urban households have at least one cell phone. This particular official had 4 phones for a household of 3. Foreigners are allowed to use cell phones on a different network, and users of the domestic and foreign network can not call each other.  All usage is prepaid.

Handset Type	Purchase Costs	Usage Costs
Local	1570-2200 RMB	250 minutes and 20 text messages, while each additional minute is charged at 60 NKW (about .1 RMB/min)
Foreigner	1800-2400 RMB	Does not include any free minutes and are charged at 2RMB/min

Banking System has room for growth

There are two banks in Rason, the Central Bank, which is focused on domestic transactions, and the Golden Triangle Bank, which is focused on foreign currency transactions. Transactions for goods and services are conducted almost entirely in cash, usually in RMB or NKW. Mechanisms for savings are credit have room for development. As banks take a fee to deposit and withdraw cash, merchants prefer to hold money in cash (usually RMB). Credit is also available almost exclusively through friends or family.

Bottlenecks

A number of issues require solving if Rason is serious about attracting large scale foreign investment. Among these are reliable access to travel visas, reasonable communications costs with the outside world, a more mature banking system with savings and credit mechanisms and favorable tax treatment with a consistent legal framework. The mere fact that Rason is experimenting with market reform is encouraging, and Mr Kim is optimistic about economic development in the region and the nation as a whole.

Presentation at Philips Exeter Academy

Managing Director Geoffrey will be making presentations in Boston in early November at Exeter and Harvard University in the Boston area. These will be off-the-record sessions. The Strange World of Pyongyang: Helping North Koreans Learn About Economics & Business and Learning How North Koreans Think Phillips Exeter Academy Assembly Talk 10.15am November 1, 2011

This will be a general introduction to what it is like doing fieldwork in North Korea and an attempt to dispel the common media trope of North Koreans as brainwashed unthinking automatons.

-------------------------------------------------- Assembly Speaker Gives Glimpse Inside North Korea

Some excerpts from coverage of the talk in Lion's Eye at Philips Exeter Academy:

"I want to focus on understanding how we look at North Korea. The main issue with North Korea is that it is a very poorly understood country. We still don't really know a lot about the country despite much having been written in the media."

With that opening, Geoffrey See – founder and managing director of Choson Exchange, a nonprofit focused on economics, business and legal training of young North Korean government officials – began his assembly talk. By drawing on his own experiences from multiple visits to Pyongyang over the last year, See was able to give PEA students a glimpse behind North Korea's shrouding curtain...

To close his talk, See left his audience with several questions: "If you believe North Korea is run by a single dictator and the country is not changing, is it possible to reach a negotiated solution to the nuclear crisis? On the other hand, if you believe North Korea is changing, that it is a more complex country, does that give you more options on how to effect positive change in the country?" See added by way of ending, "How we understand North Korea affects what kind of foreign policy solutions we put forth in trying to tackle issues such as human rights, economic development or the nuclear issue."

Pyongyang Trade Fair

tradefair1

In mid-October, a fund-manager and workshop volunteer with Choson Exchange visited Pyongyang during the trade fair. These are some impressions. The 7th Autumn International Trade Fair opened in Pyongyang on Monday, October 17th with great fanfare, attendance and exhibitors.    It is by far the biggest trade show to happen in the DPRK since the 90’s, with most major industries represented.

105 exhibition booths filled the giant hall; with businesses from the automotive, construction equipment, machinery, garment, consumer goods (both staples and discretionary items), and a large number of what technically fall under the “pharmaceuticals” banner, but for practical purposes can be best described as “herbal remedies”.    A number of foreign embassies also had booths; Germany and India were the two most prominent.   There were 25 “trading companies”; 9 based in Rason and 16 from a mix of Hong Kong, Dandong, Taiwan and China.

The fair gave local residents with hard currency a chance to pick up foreign-made electronics, house wares and garments (most vendors seemed to favor USD over Euro or RMB).    The attendees numbered in the hundreds and were mainly DPRK citizens, though there were a number of foreigners (languages I overheard included Russian, German, Chinese, French and Spanish).   I’m fairly certain I was the only American.  As I reflect on the attendee mix, it was surprising to see just how much hard currency was in the room.

tradefair2

Taking center stage in the exhibition hall was Chinese auto-making giant BYD, whose presence in the DPRK has expanded considerably in the past year.    They had their full range of vehicles on display in the exhibition hall as well as representing a disproportionately large share of the noticeable increase in traffic in the capital this year.   The MSRP for their mid-sized L3 model is approximately US$12,000 in most markets, however, the car commands roughly a 70% premium in the DPRK due to the higher costs to import foreign goods.

While the BYD booth enjoyed a steady stream of people walking through it to get a free keychain, Chinese construction equipment makers Sany and LiuGang and engine manufacturer DCD seemed to have real customers in them.    All three had small curtained breakout areas in their booths, which were occupied pretty much the entire time I was there.    In unrelated meetings and conversations with members of the Foreign Investment & Economic Cooperation Committee throughout the week, mining projects (originating mainly from China) are on the uptick and the number of heavy trucks on the road has markedly increased over the past two years.

When I left the fair around noon, the line waiting to get in had grown from about fifty to several hundred.

Overall, my main takeaway from the 9 days I spent in the DPRK compared to my trips over the past two years was that the “activity” in Pyongyang has picked up substantially.    The number of building projects that simply didn’t exist six months ago and that now dominate the skyline is staggering, though not surprising given the goals the country has for itself.

tradefair3

I counted no fewer than 25 high-rise projects (10+ stories with a handful over 30 stories) that were undergoing “active construction”, though at this point are still concrete shells.  In the case of one hotel project, they are actively looking for an outside investor to help them complete the build-out.  Time will tell how many of these projects move from their current state to completion.

Six-Party Talks, 2012 and Economic Development

Negotiations over the North Korea's nuclear program, whether through the six-party talks or through bilateral meetings, are moving ahead. The signs seem to point to some urgency on North Korea's part, with even the National Defense Commission Chairman Kim Jong Il weighing in on the issue.

In August, Andray and myself argued that economic development appears to be increasingly important to the North Korean state - something that seems unusual when placed in the context of its past propaganda efforts and the government's track record on the economy. China's ambassador to North Korea, Liu Hongcai, agrees with us. As 2012 looms, North Korea's promises of becoming a "strong and prosperous" country by next year have obvious failings. During visits to Pyongyang to discuss economic issues, older officials might claim successes in the areas of ideology, culture and security, but acknowledge openly the lack of economic development. Perhaps now that China is bringing in the Chairman of the China Development Bank, maybe we can look towards less bumpy roads in North Korea.

I wonder whether a renewed priority on economic development is a factor in North Korea's urgency to reconvene talks? Will this priority drive flexibility and commitment, and would it have an impact on the contents of a deal?

Orascom's Internet Service in North Korea

On my last trip to Pyongyang, I had the opportunity to catch up with some Egyptian expatriates from Orascom Telecom Holding over popcorn and whiskey. They were also kind enough to bring our team clubbing into the wee hours of morning.

Orascom Holdings is three companies each headed by a different brother of the Orascom family. Orascom Telecoms is headed by Naguib Sawiris, while the resorts arm Orascom Development is run by Samir Sawiris, and the construction arm Orascom Construction by another brother. All three brothers have stakes in different assets in North Korea, with the infamous Ryuggyong Hotel owned by Samih Sawiris. As of May 2010, when I had met Samih Sawiris in Switzerland, he had yet to visit Pyongyang. Recent pictures from Pyongyang indicate that this has changed.

The most exciting development to us was Orascom's 3G Internet service which was still under the testing phase. The plan is to roll out this service in the near future, although the service will only be available to resident foreigners in the initial phase. Approval for this service to be provided on a larger-scale to North Korean citizens, in any censored form, has yet to be given although the infrastructure to do so is in place. For foreign residents in Pyongyang, the service could offer cost-savings of up to 60-80 percent over current satellite internet offerings. There is no information on what security trade-off such a service might entail.

We also discussed text advertising and the current mobile service business. While text advertising is possible, there has yet to be approval for the company to run such a service. Currently, handsets cost Euro 50 each and there is a monthly subscription fee of 900 Won (we are not sure how this cost scales with usage). For reference, the unofficial exchange rate has fluctuated around 2500 to 3500 Won to 1 Euro this year.

Martyn Williams, over at North Korea Tech, has interesting coverage of Orascom's business in North Korea.

DPRK (N.Korea) Policy Dialogue in Singapore

Studying Hard

In August this year, Choson Exchange, a non-profit focused on economic policy, business and legal  knowledge exchange with North Korea (DPR Korea), implemented a study trip for DPRK policymakers to exchange policy ideas and experience in Singapore with policymakers. Thanks to the sponsorship of the Swiss Cooperation Office DPR of Korea, we were able to implement an insightful and engaging series of discussion with participating Koreans. We focused our program on younger Koreans, with 6 of the 7 North Koreans being under 40 years old, out of which 2 were under 30 years old. 3 institutions were represented in the visit, which involved 10 intensive days of meetings and discussions.

In particular, some of the young participants we selected for the program were able to ask astute questions on development issues and coordination among economic agencies.  During the post-trip debriefing, participants highlighted specific aspects of Singapore's economic development experience which they found particularly interesting and relevant for their country. They also gave feedback on policy ideas which they believe could be adapted to their country. Choson Exchange followed up on  the discussions with consultations in Pyongyang 5 days after the program ended.

We would like to thank speakers who volunteered their time and experience at this event in their personal capacities. Speakers included:

- The former Chairman of Singapore Airlines, Singapore Stock Exchange, Temasek Holdings, Development Bank of Singapore, Nepture Orient Lines and Permanent Secretary at various Ministries

- The former Minister for Finance and Minister in the Prime Minister's Office

- The Chief Economist for Bank of America Merrill Lynch in Southeast Asia

- The CEO of Centennial Asia Advisers and former Chief Economist for SocGen Asia-Pacific

- Directors and Economists at various Ministries in Singapore

- Private sector speakers or hosts from McKinsey & Co., Bain & Co., Goldman Sachs and Capital Group

We would also like to thank Member of Parliament Lily Neo for hosting dinners for the visiting delegation.

올해 8월에 조선교류 비정부기관는 조선/북한 정책 입안자들 위해 싱가포르에서 정책사상과 경험의 교류를 위해 정책 입안자와 함께 교육과정을 실행했다. 우리는 스위스개발협력단의 후원 덕분에 조선/북한 참석자들과 함께 통찰력 있고 흥미로운 토론을 할 수 있었다. 7명은 싱가포르에 방문했고 10일 동안 미팅과 토론을 했다. 3개의 기관이 대표로 방문했다. 젊은 사람에 집중했서 7명 중에 6명은 아직 마흔 전이였다. 그 분들이 10일 동안 집중적인 토론과 강의에 3기관을 대표했다.

특히 우리가 선택한 참석자들 중 몇몇 젊은 참석자들이 기민하게 개발문제나 경제담당본부 합동을 대한 질문을 물을 수 있었다.

교육과정 이후에 복명 동안 참석자들이 그들이 찾은 특별히 흥미 있고 그들의 국가와 관련된 싱가포르의 경제개발 경험을 강조하였다. 또한 그들이 그들의 나라에서 적용할 수 있다고 생각하는 정책 개념에 대한 피드백을 주었다.  조선교류가 교육과정을 끝냈고 5일 후에 평양에서 추적 조사를 했다.

조선교류는 개인적으로 이 행사에서 소중한 시간과 경험을 자원해준 강사님께 감사를 표합니다:

-싱가포르항공, 싱가포르주식시장, 테마섹, 싱가포르개발은행, 넵튠오리엔트 여러가지 정부부서의 전임장관

-전 재무부장관과 국무총리장관

- 동남아시아 미국은행 메릴린치의 수석경제학자

- 센텐이알아시아 아드바이절 최고 경영자, 석젠 아시아·태평양 전 수석경제학자,

- 싱가포르 여러 정부 부장 및 경제학자.

-민간 부문의 강사와 호스트 (맥킨지 앤드 컴퍼니, 캐피탈 그룹, 베인 & 컴퍼니, 골드만 삭스)

마지막으로 대표단을 위해 식사대접을 해 주신 릴리니오 국회원님에게 감사의 말씀을 드립니다.

New Addition to Board of Advisors

John Y. Kim will join Choson Exchange's Board of Advisors as a key member of our team, and will advise us on issues such as funding, strategy and programs. He brings with him a deep commitment to North Korean issues, which he has been involved in ever since college.

Bio John Y. Kim lives in Singapore and trades physical fuel products. He was formerly an Executive Director in Goldman Sach's Commodities Trading Division where he managed the fuel oil business for Asia. Prior to Goldman he spent four years at Korean National Investments in Seoul as a trader focused in equity index options markets. John started his career as a technology entrepreneur and professional musician. He attended the University of Pennsylvania, where he received a Bachelor of Science in Economics from the Wharton School and a Bachelor of Applied Science from the School of Engineering.

North Korea Fashion Watch

During our last trip, we met with Korea Daesong Bank, which kindly provided a product catalog from the 80s/90s of their parent company - Korea Daesong Economic Group (KDEG). While fashion definitely has moved on in Pyongyang, we thought that it might be good to share some of the products they display in their catalog - for old times sake. In case you decide that the retro look is for you, do note that KDEG is currently under international sanctions. Check out more photos from the catalog and Pyongyang's fashion scene on our Facebook page. While you are at it, join our Twitter and Facebook pages!

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August 2011 Rason Report

Andray Abrahamian, accompanying Hanns Seidel Foundation, traveled to Rason in August 2011 to attend the 1st Rason Trade Fair and explore training needs for company managers and SEZ administrators. This was Choson Exchange's first visit to the Special Economic Zone and hopefully has laid the groundwork for future training sessions.

While there is a lot of information about Rason out there, there seems to be a lack of current, centralized easily findable and citeable facts. This brief report intends to provide some basics on the infrastructure of the zone.

Download the report in PDF form.