Cross Border Journal

North Korea Clamps Down on Cross-Border Commerce with South

The Wall Street Journal reported yesterday in "North Korea Details Border Closings" on the background behind North Korea's recent chilliness towards cross-border commerce with the South:

"Before announcing the border closing, North Korea protested the South's new policy with vitriolic statements in its state-run media. While maintaining harsh rhetoric in its announcement Monday, North Korea said it wouldn't close the industrial park near the border city of Kaesong that represents the biggest joint economic project of the two countries. Instead, North Korea said it will "specially guarantee the business activities" in the industrial park, where about 70 small and midsize South Korean companies provide jobs to 33,688 North Koreans. It added, however, that it will impose tighter limits on the number of South Korean managers who can visit the factories.

""Companies in Kaesong will not be able to carry out their operations smoothly if North Korea continues to make us nervous," said Lee Bu-hyung, a manager of Ksunghwa Inc., which employs 720 North Koreans at a sock-making factory in the complex. "Suspending traffic would greatly hamper our business operations.""

As the WSJ goes on to note, the Kaesong project has been a cash cow for the North and it is not about to bite the hand that feeds it--yet:

"To carry out its plan, North Korea only has to stop traffic at two crossings through the two-mile-wide demilitarized zone that forms the inter-Korean border. The crossing on the east side of the countries provides little more than South Korean access to a mountain resort that has been closed since July, when a North Korean soldier there shot and killed a South Korean tourist.

"The other crossing is on the west side to Kaesong, where Hyundai Asan runs a tourist service in addition to the industrial park. North Korea said it will halt the tourist service, which attracts 200 South Koreans a day, and a little-used cargo-train link to the industrial park."

In a state-run economy, there is little focus on business efficiency, let alone best practices in supply chain management, and this is the risk businesses run by investing in Kaesong. The immediate factory facilities and personnel may be fairly productive, but if the surrounding supply chain architecture that allows that investment to deliver products to market collapses--for example, North Korea closing the only existing transportation links--that productivity becomes meaningless.

As a South Korean manager, frequent cross-border links for both goods and services (tourism) would provide some additional assurances. But with tourism shut down, companies invested in Kaesong will need to adjust their supply chain risk assessments. In fact, with the economy slowing, these companies may be able to find sourcing in China or elsewhere at discount while gaining reductions in overall risk. More thoughts here from North Korea Economy Watch.

Case Study: South Korean FDI in the State of Georgia, Part IV

PART IV: City of West Point, Saddling LaGrange and Troup Counties

This "case study" series will be covered in five parts, listed below:

• Part I: State of Georgia Profile 
• Part II: Georgia Department of Economic Development (GDEcD)
• Part III: Interview with Peter Underwood, Senior Partner, IRC Limited and Managing Director, State of Georgia Korea Office
• Part IV: City of West Point, Saddling LaGrange and Troup Counties
• Part V: Conclusion

You can read my introduction here.

                                  Due to the great, case-study nature of the Kia investment in Georgia, I drilled down further in my research in order to highlight the local activities behind this investment and its current and expected impact. It truly is a situation where future-oriented community and business leaders have been working together to improve the quality of life for local citizens. First, Georgia Trend has an excellent article that chronicles the Kia investment story and impact, labeled 'The Kia Effect.' It should be read in full, but I want to highlight some key pieces, starting off with a recap of the Kia investment story:

"Just a few years ago Troup County, the westernmost county in Georgia along Interstate 85, could claim the title of former textile capital of Georgia, and not much else when it came to major-league economic development.

"Now, although there are a couple of textile manufacturers still operating in the county, the story out of Troup is international automotive manufacturing in the form of South Korea-based Kia...the advent of the Kia plant is one of those defining moments for the entire region. Things are discussed in “before Kia” and “after Kia” terms.

"A Kia plant is currently under construction (see picture below) in West Point, along Interstate 85 at the new Exit 6 interchange. When complete, Kia will directly employ 2,500 people. Its suppliers, also getting up and running, will employ an additional 3,000 plus. Kia is an enormous project, not just for West Point, which has a population of only 3,300, but, as everyone in Troup County says, for the entire region."

Quick Start says that 75% of the employees initially hired were from Georgia and the remainder from other states. Next, Kia generally explains the rationale behind selecting West Point, which intersects with what I was told by Mr. Underwood above:

"Why tiny West Point, then? Many reasons, as it turns out, says Randy Jackson, director of human resources and administration for Kia, and the senior American at the Troup County site. State, county and city support were vital and were there from the start; good interstate access (the plant is visible from I-85.); flat land (hilly land is more expensive to grade and develop); the sister facility, Hyundai, with whom Kia will share suppliers, is in nearby Montgomery, Ala.; Hartsfield-Jackson International Airport is just up the road; a strong workforce; and warm, welcoming people are all cited by Jackson as reasons Kia chose the West Point site."

Much of the above is critical to supply chain flexibility and you can see Kia building all the required architectures to ensure its supply chain is successful. State, county, and city support is foundational to the investment and benefits any supply chain architecture in the region. A strong workforce and warm, welcoming people benefits Kia's personnel base (human architecture) and community interaction, ensuring a high-quality working environment. Good interstate access, the nearby airport and flat land, along with the Savannah port access--all physical architectures--provides multi-modal flexibility in deploying transportation for the inbound and outbound movement of goods. Finally, the proximity to Hyundai suppliers allows Kia to leverage existing relational architecture towards launching the new plant.

As Mr. Underwood mentioned in his interview, various investment incentives are key in luring FDI to any state in the US. From Kia's perspective, such incentives would be the primary component of its financial architecture in making a plant investment in the US. An article titled "Kia's Plans Roll Along: Plant revs up West Point" via the Atlanta Journal-Constitution lays out the incentives used by Georgia to bring in Kia:

"State and local governments and utility providers all pitched in for incentives estimated at $414.6 million, about $160,000 per job. Kia is contractually obligated to provide at least 2,500 jobs at its West Point plant:

• $65.6 million in job tax credits over five years
• $13.9 million in sales tax exemptions
• $130 million in property tax abatements over 16 years
• $20 million in training facilities and programs
• $21 million for local infrastructure improvements
• $34.6 million for 2,245 acres of land
• $48.5 million for clearing 650 acres for construction
• $81 million in road improvements"

The one architecture that I haven't yet mentioned in the Kia supply chain is innovation architecture. As the interview with Mr. Underwood mentions, Kia became the first automotive company to use a completely online system for recruiting new employees. The Georgia Trend article mentions some additional details:

 "Kia, with the support of Georgia’s Quick Start program, took applications for hourly positions in the spring. They received 43,000 applications for 2,500 jobs in 30 days through the online process. Those hired will be provided with training, around the country and in Korea, and the first cars will roll off the line for sale in November 2009. Once two full shifts are up and running, by late 2010, some 300,000 units will be manufactured each year."

The result of using this innovative approach was a reduction in recruiting costs and time while simultaneously improving the size and quality of the recruiting pool. At the same time, this expanded reach will also bring new people into West Point, including their families, increasing the demand for local services. The article discusses the importance of quality public education services below:

"The biggest need Mayor Ferguson sees in West Point right now is public education. “We have a wonderful elementary school.” But there is no middle or high school in the city limits. “The current formula for education funding is not working,” he says of the state’s approach, which bases money on students who are already in the system, not on students who will be coming through the system in the near future. “If you don’t have great education opportunities people will live far away and drive [to work]. Schools should be looked at as an economic driver.” They are a way to help recruit good strong families to an area, he adds."

Another focus is on roads:

"The state is investing $130 million in a new Interstate 85 interchange that will serve Kia, but the county is responsible for the roads off the exit, (Ricky) Wolfe says. A six-year special purpose local option sales tax (SPLOST) will raise $75 million, with most of that going for transportation, he says."

With Hyundai having already opened a plant in Alabama (see picture below), local leaders in Georgia made the right move in doing some cross-state benchmarking after the Kia announcement was made:

"In order to prepare for Kia and its suppliers, a group of people, including Ferguson III, Lindner and Jane Fryer, president of the LaGrange-Troup County Chamber of Com-merce, met with counterparts at the Montgomery, Ala., chamber to find out what to expect after the Kia announcement. The Montgomery area had been through a similar situation when a Hyundai plant opened there. The Alabamians had nine five-inch-thick notebooks documenting the Hyundai project, Ferguson recalls."

This benchmarking resulted in replicating some innovations to enhance the services provided to Koreans involved with the Kia investment: 

"Fryer called the meetings with her Montgomery counterparts invaluable. Because of what they learned, the Georgia group hired a family support coordinator, who is housed in chamber offices and paid by the county, the West Point Devel-opment Authority and the city of LaGrange. Susan Ferguson (no relation to either Drew) works with Kia and supplier families from the moment they arrive in Troup County. She helps them find housing, sets up tutors for those who don’t speak English, helps with doctor’s appointments, enrolling kids in schools and getting Social Security numbers for everyone. She’s even been at the hospital when one Korean woman delivered her baby and helped choose an American middle name for the boy.

"The chamber also helped hire a project coordinator, who works on the Kia site with Korean contractors to help guide them through permits, wetlands issues and other distinctly American building processes. “That was the smartest thing we did,” Fryer says. He allows us “to know that our investment is being taken care of.”"

These are the kinds of services that, when viewed in aggregate, have a huge positive impact in integrating Koreans into the community and thus creating a more welcoming work and living environment. When I was at Denso, I remember helping Japanese staff get drivers licenses, talk to hospitals, etc. So I personally understand the need and it is highly appreciated when most of the visitors speak little to no English. But it seems this part of Georgia has a history of being innovative:

"Folks in LaGrange have a history of doing smart things. It’s almost as if they’ve been preparing for something as big as Kia, without quite knowing what it would be, for years. In 2000, for example, LaGrange received the Intelligent City of the Year award of the World Teleport Association for being the first city in the world to provide free Internet access to its citizens, says Jeff Lukken, mayor.

"The city continues to stay ahead of the technology curve, this time in the landfill arena, with a new biomass reactor. A $5 million investment by the city will create a $26 million return from the sale of methane gas captured at the landfill. Milliken and InterfaceFLOR helped develop the idea with the city and both agreed to purchase the gas, which provides a green energy source. The reactor also extends the landfill’s life by 16 years."

Below are some basic statistics for the LaGrange/Troup County area:

Population
(2008 Estimate)
Troup County, 63,245; LaGrange, 27,652; West Point, 3,354; Hogansville, 2,909

Unemployment
(May 2008)
Troup County, 7.9 percent; Georgia, 5.6 percent

Largest Employers
Troup County Schools, 1,807; Milliken Floor Covering, 1,660;Wal-Mart (distribution center), 1,600; West Georgia Health System, 1,336; InterfaceFLOR, 1,080

For everyone's reference, below is a list of additional articles on Korean FDI in Georgia, primarily focused on the "Kia Effect":

• March 27, 2008: Kia Training Center Opens
• May 13, 2008: Kumho Tire Breaks Ground
• May 22, 2008: Kia attracts first US Top-Tier Supplier
• June 16, 2008: Kia Plant's Logistics Provider to Create Jobs
• July 30, 2008: Growth Fuels West Point Plan
• August 27, 2008: Latest Kia Supplier Enters Georgia
• September 28, 2008: Development Chief, West Point Mayor Korea-Bound
• October 10, 2008: First Kia Shipment Reaches Savannah
• November 7, 2008: Korea-Southeast Chamber Makes a Comeback

The list above, in order by date, illustrates Mr. Underwood's mention of follow-on investments and positive impacts after gaining that large initial investment by Kia.

The New Silk Road

While writing my previous post on the ADB's CAREC project, I noticed other bloggers commenting on this recent Businessweek article titled, "The New Silk Road." Where ADB is focused on building up the physical infrastructure that links the regions involved in the "Old Silk Road," Businessweek discusses what it sees as the new channels of trade and investment between these same regions.

At HG's World, Tom appropriately delves into the Old Silk Road's history (Tom's links maintained):

"Putting my historian hat back on, I decided to offer some background to how the "Silk Road," a name first coined by German geographer Ferdinand von Richthofen in the 1870's, came to be.

"We know the origin of the founding of the silk road from the writings of Chinese historian,Sima Qian who wrote the Records of the Grand Historian while serving as a scribe for Emperor Wu of Han Dynasty. I had written a post about Qian, The World's Most Dedicated Historian who gave up his testicles in order to continue his life's work.

"But I digress, the hero of this story is a little known officer in the palace guard of the Emperor Wu. The emperor sought an envoy to travel west across Central Asia to make an alliance against the Xiongnu nomadic turkic tribes also know as the "Huns." The envoy, Zhang Qian went on a quest that lasted thirteen years, including being captured twice by the Xiongnu, before returning to make a report to the emperor..."

Based on Tom's comments below, we can see from my ADB post that security and economic cooperation are Silk Road foundations then and now (Tom's links maintained, additional highlights mine):

"Zhang's detailed report stimulated Emperor Wu's interest in the goods that existed on the other side of the known world. Within a few years, other expeditions opened the route and lined it with military posts. The Xiongnu were pushed back, and trade flourished under the umbrella of security and the Silk Road linked the great empires of the 1st century Common Era spreading goods, ideas along with the negatives, like disease's Antonine Plague, that today's medical historians see as possibly contributing to the downfall of the Roman and Han Dynasties."

The Road declined in parallel with the decline of civilizations that sustained its links. In addition, the sea trade channel gradually became less and less risky relative to overland routes, providing a preferrable substitute due to increased security and experience in navigating the seas:

"Over the centuries the route fell out of use as dynasties in the west and east fell. The road began to flourish again under the Tang Dynasty 618–907 and continued for the next several centuries to be the main conduit between East and West, only to again fall out of use with the rise of sail and European naval dominance."

Of course, many of these same dynamics are in force today. Commenting on the same article, Steve DeAngelis at the Enterprise Resilience Management Blog made the following comments, first noting one of its regional partners working on both ends of the Old Silk Road:

"One doesn't have to look too far into the distant pass, the article notes, to discover close ties between Gulf states and Asia. Those ties were weakened with when the West's post-Second World War economies started to thrive. "The oil boom led to closer ties with the U.S. and Europe," the article notes, "and most Arabs forgot about India, China, and the rest of Asia, preferring to invest in the West." It goes on to discuss one of the companies in the region with which Enterra Solution's works closely.

"[Tarek Sultan] is CEO of Agility, a Kuwaiti logistics and warehousing outfit with $6.2 billion in annual revenues. Agility has made a bundle supplying the U.S. military in Iraq. Now it's plowing nearly $2 billion into millions of feet of warehouse space and other trade infrastructure in Asia, building up a network of 70 offices and 20,000 employees in China and India. Agility even deployed a dozen trucks and 100 workers to handle dirty laundry for athletes at this summer's Beijing Olympics. 'Everybody knows about China and the U.S.,' says the 44-year-old Sultan. 'We are making investments in the trade that takes place within Asia.'"

"Agility is one of the leaders in helping make connections both within and between emerging market countries. As the article points out, connections are being made everywhere.

"On the ground in the Gulf, connections with Asia are visible everywhere. Asian laborers are the muscle that builds skyscrapers, airports, and petrochemical plants. Asians also provide much of the brains and managerial talent at businesses ranging from investment banks to retailers, and people whose parents or grandparents originally came from the Indian subcontinent form the backbone of the middle class in Dubai and Abu Dhabi. The souks along the Creek, the salt inlet that was Dubai's original harbor, are dotted with hole-in-the-wall Hindu temples, and it's rare to spot anyone in Arab dress among the crowds piling into abras, the rough wooden water taxis that shuttle across the luminous green water."

Steve also notes the challenge faced by establishing links and connectivity, crucial to the ADB strategies for CAREC that I noted previously:

"One of the challenges of doing business in emerging market countries is that the business environment in many of them is radically different than business environments found in most developed countries. As the article states, "For Asian and Middle Eastern investors, negotiating the written and unwritten rules of each others' business environments isn't easy." That is one of the reasons that we stress internationally-accepted standards and best practices as part of Development-in-a-Box. For their part, emerging market entrepreneurs are finding Arab investors and investment groups frustrating because they only want to invest in large projects. As Asian countries become more wealthy, Middle Eastern countries are trying to attract investment money back into the region -- especially the less well-off Middle Eastern countries.

"While oil-exporting nations want to lock up markets for their crude, Egypt and other Arab states are pushing Asian countries for investment that creates jobs. China's exports to Egypt have more than quadrupled since 2003, to $4.7 billion in 2007—roughly 18 times the value of Egyptian exports to China. The Egyptians want China to compensate by manufacturing in Egypt. 'We are trying to make Egypt a hub for China to export from,' says Ahmed El Sewedy, chief executive of Cairo-based El Sewedy Cables and head of the Egyptian-China Chamber of Commerce."

Steve finishes off with the following comments:

"The new silk road is likely to operate as long as the old one did. It's a virtual road that connects that connects wealth, resources, and opportunities. Companies that want to get in front of the money are going to have to travel that road and the sooner they get on it the better."

The New Silk Road and the Old Silk Road will eventually become integrated into a multi-modal, multi-channel "Grand Silk Road" that enhances the trade and economies of nations currently enjoying the benefits of modernized trade and those nations that wish to return to at least some of their past glory in and around Central Asia. Stable security networks and common rule-sets must provide the background for investment, which includes both the physical architecture of roads, rail, and air ports and also the multiple other architectures that form the foundation for modern, high-performance supply chains.

Asian Development Bank Continues Investment in Supply Chain Architecture

The Asian Development Bank (ADB) has been a long-time investor in roads, road transport, rail transport, and ports projects around Asia. These investments often target under-developed areas within specific countries and under-developed links between countries that lack essential funds. As I discussed in a post on China's planned stimulus package aimed at accelerating the development of transportation infrastructure, roads and road transport are often the "first rung on the ladder" for individuals who seek to establish a supply chain for their existing small business, or perhaps a new small business. Without this most basic of supply chain architectures, many goods and services businesses in under-developed regions fail to either get off the ground or expand beyond immediate surroundings.

Let's take a look at projects recently highlighted in the ADB press releases below:

• 11/13: "New Silk Road" to Link Europe, Asia
• 11/18: ADB's Railway Loan to Boost Economic Link in Western PRC
• 11/18: ADB Supports Key Central Asia Transport Corridor

The common link here is these are directly or indirectly linked to ADB's CAREC Project, described as follows:

"The Central Asia Regional Economic Cooperation (CAREC) Program was initiated in 1997. CAREC’s goal is to improve living standards and to reduce poverty in CAREC countries through more efficient and effective regional economic cooperation. To date, the Program has focused on financing infrastructure projects and improving the region's policy environment in the priority areas of:

• transport
• energy
• trade policy
• trade facilitation

"These areas are critical to improving the region’s economic performance and livelihoods of the people, especially of the poor.

"Spanning nearly 4,000 kilometres across Central Asia, the CAREC Program includes 8 countries in the Central Asia region, namely:

• Afghanistan
• Azerbaijan
• People's Republic of China (focusing on Xinjiang Uygur Autonomous Region)
• Kazakhstan
• Kyrgyz Republic
• Mongolia
• Tajikistan
• Uzbekistan"

Drilling down into the transport section of the project, the ADB clearly emphasizes how important this physical architecture is in supporting the flows of economics, people, security and legislation and/or regulations. Let's take a look at the strategies set forth that will be supported by the actual infrastructure investments (highlights mine):

"The CAREC Transport Sector Road Map (2005–2010) aims to develop an integrated and efficient transport system in CAREC countries in support of sustainable economic growth and poverty reduction. The Road Map sets six strategic priorities:

1. Harmonization and simplification of cross-border transport procedures and documentation among CAREC countries to facilitate the movement of passengers and freight across borders.
2. Harmonization of transport regulations among CAREC countries to create a level playing field for transport operators and promote efficiency and better services.
3. Development and improvement of regional and international transport corridors to link production centers and markets within CAREC countries and to enhance CAREC countries’ access to neighboring regions and markets.
4. Restructuring and modernization of railways to provide quality and efficient services through private sector participation and improved corporate governance.
5. Improvement of sector funding and management to ensure that the regional transport network is developed, operated, and maintained properly.
6. Incremental approach to liberalization of civil aviation, focusing on the adoption of bilateral agreements using common legislative clauses, with a view to expanding sub-regional agreements among neighboring countries, and potentially more widely in the long term. Enhancement of external inputs from all stakeholders, especially business and tourism, in aviation policy making."

The ADB also provides some maps, which offer a visualization of the project's expanse. The first provides a view of the focus countries:

The second provides a view of how this region fits into the bigger picture of an Europe-Asia link:

The CAREC project is really emphasizing what Tom Barnett calls "The Non-Integrated Gap" which the ADB is obviously trying to get "integrating" again. Below is my overlay highlighting the "Gap" region in the above map--notice how this encompasses essentially all of the non-Russia linkages between Asia and Europe: 

Although China is not necessarily considered a Gap country, much of its Western region bordering Central Asia is quite underdeveloped, and so I include as part of the Gap targeted by the ADB.

Considering that the country risk levels in the Gap are high, the challenges for these ADB projects are quite significant and extend beyond simply the physical challenges of building roads and laying rail. Corruption, terrorism, and a significant black market in trade will also largely take advantage of this new infrastructure until the full range of ADB's strategies are realized. In particular, developing common regulatory and security systems across borders that ensure development is safe and beneficial will be critical in order to positively impact a wider range of communities. The rewards will be great if these projects are successful.

Case Study: South Korean FDI in the State of Georgia, Part III

PART III: Interview with Peter Underwood, Senior Partner, IRC Limited and Managing Director, Georgia Global for South Korea

This "case study" series will be covered in five parts, listed below:

• Part I: State of Georgia Profile 
• Part II: Georgia Department of Economic Development (GDEcD)
• Part III: Interview with Peter Underwood, Senior Partner, IRC Limited and Managing Director, State of Georgia Korea Office
• Part IV: City of West Point, Saddling LaGrange and Troup Counties
• Part V: Conclusion

You can read my introduction here.

I haven't tried to fashion myself as a reporter for this site, but I felt it was important and valuable to readers that I provide some exclusive material for this case study series. Since I was in Korea at the time I conceived of this series, the first country director of Georgia Global I contacted was Mr. Peter Underwood, Managing Director for the South Korea office. Mr. Underwood's picture and profile are below:

"Peter Underwood serves as the director of the state’s Korea office focused on attracting Korean investment into Georgia as well as promoting Georgia exports and Korean tourism to the state. Established in 1985, the Korea office has assisted Korean investors such as Kia Motors, SKC, and LG Chem as well as a host of small and mid-sized companies to establish operations in Georgia.

"Peter is a senior partner in IRC Limited, a business development consultancy specialized in supporting Western companies to be successful in Korea. Prior to joining IRC, Peter implemented executive language development programs at major companies first in Korea and later in Japan. He has traveled extensively, mostly in Asia, and enjoys sports and is fluent in English and Korean."

Mr. Underwood gladly replied to questions I asked via email, with follow-up questions asked by phone and focusing on Kia. I have split the two (all answered during the first two weeks of October), with the email questions first:

Email Questions (10/8):

Q. Why did you decide to join the Georgia Department of Economic Development in Korea? Peter Underwood:I am not an employee of the DEcD. I work for IRC Limited.  Our company contracted with the DEcD in 1985.  I took responsibility for this important client in 1989.

Q. Describe your experience in the office in terms of the greatest reward(s) and greatest struggle(s)?  Peter Underwood:Our greatest rewards are when we attract investors to Georgia.  The high profile investors like Kia are great but we also take great satisfaction on watching small and medium sized companies become established and succeed in Georgia.  Struggles are more numerous:

• There is a huge culture gap between potential investors and our communities.  The expectations of the investors and the behaviors of the communities are often quite different. 
• Facilitating understanding across two cultures keeps us busy.
• The demands on our resources are growing due to the increased investment activity in Georgia.  At the same time, resources available to service this demand are declining (due to the global downturn).  Managing this is challenging.
• We are primarily focused on developments here in Korea.  Sometimes, we forget or are unaware of changes back in Georgia.  Keeping abreast of developments in the state can be quite challenging.

Q. What is the hottest topic on your desk at the moment? Peter Underwood:The "KORUS FTA" is the subject of much debate both in the US and in Korea.  Furthermore, the global downturn and the slide of the value of the Korean won is challenging Korean investors in Georgia.

Q. How often and in what manner do you coordinate with the US Embassy commercial programs and American Chamber of Commerce? Peter Underwood:We engage with the embassy except primarily for protocol issues during visits of our state leadership.  The embassy is also very helpful for addressing regulatory issues with the Korean government. We also work with the DOC in support of potential importers.  We have been members of AmCham for a long time.  AmCham is an important networking forum where we meet individuals with whom we can work to address the needs of Georgia companies."

Q. My home state of Michigan does not have this kind of trade office framework for promoting the state. How do you position Georgia against other US states, and do you find there is a consistent Top 3 or 4 priorities businesses in Korea have when evaluating Georgia for investment? Peter Underwood: Location, proximity to markets, and logistics are differentiating factors for Georgia. When evaluating Georgia for investment, Korean firms generally focus on availability of labor, wages, unionization rate as well as the availability of land and suitable facilities.  Of course, everyone is interested in available incentives.

Q. In what way do you feel the Korea FTA would have a positive and/or negative impact on the investment by Korean businesses in the Georgia economy? Peter Underwood:Very positive. It will bring down barriers to US exporters, improve IPR protection, open businesses to foreign companies. It will make it easier for Korean companies to ship inputs to manufacturing in the US. Korea needs to improve its competitiveness in the service sector but many of these sectors are closed to foreign investment.  The FTA should begin to open the service sector to foreign investment bringing skills badly needed to make Korea more competitive. Equally important will be implementation of the visa waiver system which is to be implemented from 2009. The US has lost many opportunities to other Western countries as a result of tight border controls following 9/11.  The visa waiver program will greatly improve Korea’s access to the US.

Q. What industry from Korea is having the largest impact on the State of Georgia and/or what industry is seeing the highest growth in investment in Georgia? Why is it having this impact? Peter Underwood:Automotive due to the Kia Motors investment.  Kia suppliers and 2nd tier vendors are following the Kia investment. Prior to that, textiles and construction materials dominated.

Follow-Up Phone Questions (10/13):

Q. Did Kia consider any other states besides Georgia in the site-selection process, such as Alabama where Hyundai has built a plant? Peter Underwood:Alabama was never really under consideration. Kia wanted to be near Alabama but in a different state.  They first looked at Mississippi but the key concern with Mississippi was the availability of a quality workforce, in addition to the population/size of the workforce. Georgia has a significant advantage in this regard.

Q. To what degree does the Korea office get involved in the details of the process once it is kicked off? Peter Underwood: We consider ourselves the "wide end of the funnel," where we develop contacts, approach potential investors and identify projects for the state.  We do provide ongoing advice to both state and local developers.

Q. How did the meetings between Georgia and Kia get kicked off? Peter Underwood:Well, Governor Sonny Perdue first met the Vice-Chairman of Kia Motors in 2003. Of course, we met regularly with the project team but it was just a matter of time until Kia Motors hit the 500k sales mark in the US, which in the automotive industry is considered the primary trigger for foreign automakers deciding to invest in a U.S.-based manufacturing presence.  The Department of Economic Development put together a special team to go after and win the project in competition with Mississippi and other states in the Southeast.

Q. Have you visited West Point during this process? What were your impressions? Peter Underwood:I have visited a couple times and the reception has been tremendous. The people are very warm and friendly and genuinely excited about the investment Kia is making in their community.

Q. Was there a Korean presence in West Point up until this time? Peter Underwood:No, although a significant number of Koreans live in the Atlanta metropolitan area, there are some in Columbus, where Fort Benning is based and where a number of Korean wives of American nationals who serve in the military live.

Q. Were there any concerns with the potential impact of unions? Peter Underwood: No, not really. There is generally a low rate of unionization across the South, in addition to cultural barriers that make the region less hospitable to union efforts.

Q. I noticed in my research that the Georgia Quick Start program is ranked the #1 workforce training program in the nation. How did this facilitate Kia's successful start in Georgia? Peter Underwood:Via Quick Start, the first completely online recruiting system for the automotive industry was introduced, expanding the reach of recruiting efforts. To help potential employees not entirely comfortable with the internet and online navigation, kiosks were set-up at technical colleges around the state where potential employees could apply online with the help of on-site staff.   Quick Start’s award winning differentiator is that it develops highly customized training programs.  They are based on the actual manufacturing process used by the client.  The programs are developed and implemented by personnel with practical experience in the industry.  Training materials become the property of the client at the end of the process.  Quick Start is credited with rapid ramp up of production frequently leading to record setting start up speeds.

Q. With the U.S. in a presidential election year, the Korean-U.S. FTA has become politicized and put on hold by the U.S. Congress. How do you view the current status of Korean support for the FTA? Peter Underwood:There is an effort right now by the Korean government to officially pass the FTA over the next few weeks. The overall process in developing the FTA was very well done; there is no sense here that it was rammed down their throats (by the U.S.). If passed, there would be a prestige factor involved as Korea would become the first country in East Asia to have an FTA with the U.S.; specifically, the pride in beating Japan cannot be underestimated.

What I took from my conversations with Mr. Underwood were the following lessons:

1. It is critical that resources involved in a state's effort to attract FDI are all 'on the same page.' Any disconnect between local, regional, and international coordination in such an arduous process may serve to discourage FDI.
2. Solid, on-the-ground resources with a commitment to the country from which FDI originates better facilitates the vetting of potential investing companies as well as illustrates a state's seriousness in developing the trade relationship with that country's market.
3. On-the-ground resources in the country from which FDI originates should be well connected with, and understanding of, the people and/or state they represent.
4. State successes in attracting FDI can be attained without federal-level intervention, but federal-level policies and/or legislation (such as with the KORUS FTA) can serve to influence the investment environment in multiple ways, some potentially positive or negative. Therefore, the effort to attract FDI must have resources well-informed of federal-level policy and legislative changes on a continuing basis.

By following the lessons above, a state intent on competing for FDI will increase its likelihood of success in achieving its goals.

A Lesson in Managing Relational Architecture for Supply Chains in China

Relational Architecture

"the appropriate linkage between a supplier, the organization and its customers for maximum benefit; includes internal supply matter relationships throughout the organization."

If you haven't ever read the Silk Road International Blog, today is the day to start. The posts there consistently provide great insight into on-the-ground business in China. Earlier this week the blog's author, David Dayton, wrote extensively on the disconnect between Chinese suppliers and Western buyers. The post delves into their relationship and in my mind provides a lesson on managing relational architecture in supply chains that traverse China. Bob Ferrari of the Supply Chain Matters blog does a nice job of summarizing David's key points:

"You will note that this blog posting points to six deep ethical differences between Chinese suppliers and western buyers:

1. The Chinese supplier wants to know first and foremost who you are to determine first and foremost if they are going to be paid on a timely basis.
2. Westerners forget that the West has, in general, been pretty nasty to the Chinese for hundreds of years. The Chinese do not forget.
3. Business is about getting you, the buyer, to sign agreements and pay deposits. Promising the moon and figuring out how to get it to you comes later.
4. Chinese suppliers have their own interest in mind first and foremost, and no one knows what’s around the corner 3, 6, or 12 months from now.  The resultant attitude is "get it now while the getting is good."
5. The current world economic crisis implies a growing sense of desperation in China.
6. There is a completely different sense of what is right and what is wrong. While Western culture is guilt-based, driven by a spirit of laws and doing the right thing, China is shame-based, meaning that getting caught and the resultant public humiliation is the definition of what can be considered wrong."

Basically, I get the sense from these that the Chinese are currently "deal-focused" while willing to sacrifice quality in supply chain execution to maintain the deal. The pitfall for Western buyers is in thinking a solid deal will result in solid execution by the Chinese counterpart, and so the best approach is to treat them separately and follow several of the tips illustrated by David in his post. In the end, the goal is to make sure partners mutually understand where each other fits in supporting your supply chain architectures.  Based on this, possible performance gaps--say a Chinese emphasis on financial architecture (i.e. how they get paid) vs. a Western emphasis on innovational architecture (i.e. execution quality)--can be identified in advance and shored up early on.

Case Study: South Korean FDI in the State of Georgia, Part II

PART II: Georgia Department of Economic Development (GDEcD)

This "case study" series will be covered in five parts, listed below:

• Part I: State of Georgia Profile 
• Part II: Georgia Department of Economic Development (GDEcD) 
• Part III: Interview with Peter Underwood, Senior Partner, IRC Limited and Managing Director, State of Georgia Korea Office
• Part IV: City of West Point, Saddling LaGrange and Troup Counties
• Part V: Conclusion

You can read my introduction here.

As I mentioned in Part I, the Georgia Global website is a slick interface for businesses in the state wishing to participate in Georgia's trade with foreign countries--both exports and imports. In its own words, the GDEcD describes itself as follows:

"The Georgia Department of Economic Development (GDEcD) and its international offices are the one-stop-shop for businesses looking for the right components for success. The Department’s business development and industry experts, along with its partnerships with public and private sector resources, make it possible for Georgia to meet the specific needs of your company."

For an idea of the services offered in terms of trade, the GDEcD breaks it down into local companies wishing to branch outward and international companies looking to get in to the Georgian market. I have highlighted those services that would provide support to a company's supply chain architectures:

What can our international representatives do for you as a Qualified Georgia Company?

• provide market assessment and entry strategies
• locate and pre-qualify appropriate partners and customers (relational architecture)
• offer advice on current issues, local business practices and solutions (innovational architecture)
• assist companies in preparing for and participating in trade shows
• providing information on key contacts in market such as lawyers, accountants, translators, interpreters, trade associations, etc. (relational architecture)
• set appointments for Georgia companies visiting their markets (relational architecture)
• arrange delegations of international buyers to visit Georgia (relational architecture)

What can our international representatives do for you as an International Company?

• provide site location services for companies interested in expanding or relocating to Georgia (physical architecture)
• identify Georgia suppliers of specific products and services (relational architecture)
• arrange appointments for visiting Georgia companies seeking to do business internationally (relational architecture)
• organize buying missions to Georgia
• provide information on key business events in Georgia
• provide information on key contacts in Georgia such as lawyers, accountants, translators, interpreters, trade associations, etc. (relational architecture)
• support companies’ marketing efforts with PR and press coverage (relational architecture)
• provide group tour operators and travel agents with information on Georgia tourism
• leverage opportunities to promote Georgia as a great place to live, work, play and do business

Notice how support for building and establishing relational architecture is predominant--I believe this is due to the fact that this architecture is one of the hardest to develop, establish and maintain in the supply chain.

I would like to finish off Part II with a 2007 interview with Kenneth Stewart, Commissioner of the Georgia Department of Economic Development. This interview provides a great big-picture view of Georgia trade that includes a mentions of China and Japan, via Area Development Online (highlights are mine):

Q. What was one of the most exciting happenings for economic development this year?
A. Kia Motors Corporation announced a new automotive assembly plant in the city of West Point that will create more than 2,800 jobs at a $1.2 billion economic investment in the state. The business deal includes a commitment from five supplier companies to locate in Georgia, meaning an additional 2,600 jobs. It is scheduled to begin testing operations by May 2008 and reach full production by 2009, and will include two vehicle lines, an engine assembly line, paint shop, training center, welcome center and two adjacent supplier facilities.

Biofuels is another exciting area. In February, Range Fuels, Inc., a Colorado-based cellulosic ethanol company, announced Georgia’s first wood-based cellulosic ethanol plant in Treutlen County. Instead of ethanol produced from corn, wood waste from our indigenous Georgia pine trees will be the main source of this facility’s biomass needs. This plant means 70 jobs and $225 million of capital investment. At the beginning of the year, Governor Perdue introduced legislation that would exempt sales taxes on the purchase of materials and equipment used in the construction of biofuel facilities in Georgia. We also had announcements for a corn-based ethanol plant with two more on the drawing boards and a wood pellet-based plant.

Q. Does the economic development department have a specific industry focus?
A. Our focus is on the industries that provide some economic sustainability to our state; sectors that are strong now and have the capability to use our natural resources and our work force to increase that strength. Logistics is important. We have the fastest-growing ports on the East Coast in Savannah and Brunswick, and very active airports.

Our advanced manufacturing sectors in aerospace, automotive, and material sciences show a substantial amount of growth. Our strong life sciences sector includes biotechnology, elder care, medical devices, and vaccine production. Now, we are one of the strongest states in the life sciences in terms of critical mass. We are working with Georgia Tech in electrical design and multimedia to encourage interest in advanced communications. We have Centers of Innovation focused on advanced communications, advanced manufacturing, and life sciences that are strategically aligned with industry. Our agriculture and forestry sectors are growing as a result of technology advances as well.

Q. Is any new legislation or initiatives on the horizon?
A. HB 186 has been passed by the legislature and is expected to besigned soon by the governor, to allow for a sales tax exemption for alternative fuel.

Q. What about foreign interests?
A. Our largest trading partner is Canada, followed by Mexico, China, the United Kingdom, and Japan. We are strategically trying to improve our global approach. We have 10 international offices around the world and will open one in China this spring. Currently, 44 countries operate almost 1,600 internationally owned facilities here. In 2006, international companies accounted for 36 percent — more than $2 billion — in new investment in the state. We are very attuned to the need to think and act globally, and we are very proactive in recruiting international companies to invest in our state and to market our products to those countries. With 60 consulates, a commercial trade office and bi-national chambers in Georgia, we are prepared to play on the international stage. It’s critical that we know exactly where to place our money, people, energy, and time.

In a follow-up article from this summer:

"Foreign direct investment has a major economic influence. Since the announcement of a Kia auto assembly facility in West Point with a commitment to hire 2,500 workers and begin operations next year, "a number of Tier-One suppliers have also chosen to locate here," says Stewart. Korea-based Sewon Precision is locating its first U.S. plant in LaGrange, creating 700 jobs to manufacture stamped chassis, body components, and decorative trim pieces for the Kia plant. Another Kia supplier, Sejong Georgia LLC, anticipates 250 jobs at its new LaGrange muffler and exhaust systems manufacturing facility, planned to begin production in October 2009."

The article continues on to note how regional, U.S. partnerships have been valuable in directing FDI towards Georgia:

"Canada is Georgia’s largest trading partner, with $4.7 billion of exports. At the end of 2007, Governor Sonny Perdue signed a declaration to charter the SEUS (South East United States)–Canadian Provinces Alliance, to promote trade and tourism between Canada and the southeastern states. Says Stewart, “It models our success with SEUS–Japan, started in 1975, which has been a factor in attracting many of the more than 300 Japanese companies currently operating in our state."

"Additionally, says Stewart, “We have had much success with China, Georgia’s second-largest trading partner.” In April, the governor opened the Beijing Georgia Business Advisory Center in Beijing to encourage foreign direct investment and find new export markets and tourism opportunities. Also in April, point-of-sale manufacturer Pax Technology Ltd. of China announced an Atlanta venue for its U.S. headquarters, sales, and support center. Stewart points out two Chinese projects in 2007: General Protecht in Barnesville, for an assembly and distribution facility for electrical devices, and Sany Heavy Industry Company, Ltd.’s U.S. headquarters and assembly center in Peachtree City.

Other countries are investing in different areas of technology, including bio-technology:

"Other foreign countries are also boosting employment in Georgia, including transformer company Group EFACEC of Portugal’s 600 jobs, compressed air technology firm BEKO of Germany adding 35 jobs, and software development center for Wipro of India, which is expected to hire 500 people over the next three years.

"The biosciences sector continues to expand, with concentrations in vaccine development, cancer research, immunology and medical devices. Georgia is home to 270 pharmaceutical, biotech, medical device, diagnostic, ag-biotech, and biofuel companies. The state is also headquarters to the U.S. Centers for Disease Control and Prevention. In 2009, Atlanta will host the BIO International Convention, a four-day event which is forecast to attract 25,000 people from 70 countries."

In Part III, I will begin to focus solely on Georgia-South Korea interaction, but the above provides a broad picture of how dynamic Georgia trade has been and how successfully it has built a foundation for stronger trade competitiveness into the future.

Will President-elect Obama's First Foreign Visit be to Northeast Asia?

As the world anticipates the start of an Obama Administration, many will be watching closely to see which country, and by extension which region, President-elect Obama decides to make his destination for first official foreign visit. Although an Obama Administration's greatest challenges may not necessarily originate from this country and/or region, the visit will help to indicate which foreign relationships President-elect Obama views most critical to the future betterment of American and its foreign affairs.

Thinking on the Bush Administration, many may not remember where President Bush made his first official foreign visit--Mexico, on February 16, 2001. Then Secretary of State Powell summarized the rationale of this visit on January 30, 2001:

"President Bush's decision to travel to Mexico as his first official foreign visit is powerful evidence of the special place Mexico holds in our national priorities. Our dealings with Mexico impact on the lives of millions of Americans. Our common border is no longer a line that divides us, but a region that unites our nations, reflecting our common aspirations, value and culture. Over a million people cross that border every day to work, to study, and to visit family members.

"With the advent of NAFTA, Mexico has grown to be our second largest trading partner, second only to Canada, our neighbor and fellow NAFTA member. The expansion of trade with Mexico has brought jobs and prosperity to both our nations, helping Mexico rebound from the peso crisis of the mid-90s.

"When President Fox took office last month, he inherited a sound economy and solid democratic institutions. And with President Bush now in office, these two leaders can take the opportunity of the upcoming meeting to chart a course for mutual cooperation over the next several years to develop plans for action in areas such as migration, law enforcement cooperation, border affairs and trade policy."

Although I won't expand on the positive and negative developments of our relationship with Mexico since that time, it is fair to say that Mexico remains a key trading partner and ally in global affairs. However, it has been replaced by China as the #2 trading partner with the United States (Source: FTDWebMaster, Foreign Trade Division, U.S. Census Bureau, Washington, D.C. 20233):

Tom Barnett argues in his article "What Bush-Cheney got right with China" that the solid foundation in the US-China relationship built by the Bush Administration should be taken advantage of by an Obama Administration:

"In the grand sweep of history, this is arguably George W. Bush's greatest legacy: the encouragement of China to become a legitimate stakeholder in global security.

"This sort of effort at grooming a great power for a greater role in international affairs is a careful balancing act, and the Bush team sounded most of the right notes, from reassuring nervous allies in Asia, to avoiding the temptation of trade retaliation while simultaneously pressuring Beijing for more economic liberalization, to drawing China into the dynamics of great power negotiation over compelling regional issues like the nuclear programs in both North Korea and Iran.

"We can always complain that Bush-Cheney didn't do more to solidify this most important bilateral relationship of the 21st century, but we cannot fault them for any lasting mistakes, and that alone is quite impressive.

"Indeed, history will likely judge this success as greater than the Bush administration's failures in Iraq.

"There, I said it.

"Democrats, who now control both Congress and the White House, would do well to retain the Bush administration's long-term perspective on China, especially during this moment of profound global economic uncertainty, when we need Beijing's help almost as much as it needs Washington's calm leadership."

David Wolf, at Silicon Hutong, also explains why an Obama Administration's approach to China will be crucial to the success of American foreign policy:

"If Obama is to keep his hard choices from backfiring with China, he must make his case to both the Chinese government and the Chinese people.

"And make no mistake, Obama will need China. One only need look at the issues the new president will face to see how important the help of the PRC will be to his success. At the very least, China will be essential in forging a global energy and environmental regime, bringing security to Central Asia, ensuring that Russia remains integrated in the global system, midwifing North Korea's return to that system (and perhaps its peaceful re-unification with South Korea), and, of course, resolving the current global financial crisis and forming new system to both nurture and regulate international finance.

"Conventional diplomacy will form a part of the effort to enlist that support, but it will not be enough. Instead, Obama and his team will need to undertake an unparalleled effort of public diplomacy, and one that shuns the tools and tactics of the Cold War for strategies, approaches, and messages more appropriate to a world rendered naked by the Internet."

Excluding the current financial crisis, since the last 8 years have provided an overall improvement in the economic and political relationships between primarily China, South Korea, Japan and Taiwan, these four countries are understandably expressing some concern and uncertainty about the approach an Obama Administration will take towards Northeast Asia. South Korea has concerns it will be insufficiently included in a resolution to issues with North Korea. Japan is concerned about a lack of commentary from the Obama team regarding Japan and its future role in American foreign policy, in addition to the team's protectionist and pro-union rhetoric during the presidential campaign. Because positive trade with the U.S. has benefited the Northeast Asia region considerably, concerns with an increase in U.S. protectionism is a common theme across the region, in particular China. The China Law Blog points out some posts to read on our #2 trading partner's perspective.

I feel one approach that will fail is to develop isolated policies for each country, rather than developing a regional, Northeast Asia policy that then drills down into how each country should be dealt with in relation with each other. If President-elect Obama chooses any other region besides Northeast Asia for his first official foreign visit, I will be disappointed. Assuming he does pick this region, I think the first choice should be China for all the pure strategic implications and the alternate would be South Korea as the Korean Peninsula will be a continuous and region-binding topic for the next administration.

Rough Waters for China's Shipbuilding Industry

China Law Blog has posted in parts one and two on the 2008 Maritime Conference in Wuhan, China, where Dan's colleague Steve Dickinson was attending. Since shipbuilding is a key industry in making the world's supply chains go 'round, there is some solid insight to take away from these posts. The first post provides the following highlights:

"The presenters all agreed on the following. The downturn in shipping is having a profoundly negative effect on all segments of China's maritime industry.

• Shipbuilders are finding that their shipbuilding contracts are being extensively breached. Since shipbuilders in China are mostly new companies, they are heavily in debt. These breaches threaten the life of the entire shipbuilding industry in China. 
• Vessel owners are finding that charter parties are refusing to pay charter payments. Some charter parties are demanding revisions to charter agreements. In more extreme cases, the charter parties are simply abandoning vessels in mid-voyage. [Editor's note: charter party agreements are essentially agreements to rent out a ship] 

Shippers are finding that their customers are refusing to honor long term shipping agreements and are demanding extreme reductions in shipping rates.

• Ports are finding their volumes rapidly decreasing. This is an especially serious problem with smaller and newer ports. It is also a problem with ports in the middle of ambitious expansion plans."

Read the rest for some additional evidence of how companies are dealing with the collection of debts as companies lose business or fall out of business completely during this financial crisis. This all strikes at the heart of a supply chain's financial architecture. Because the funds generated from this architecture is essentially what maintains every other architecture--physical, informational, relational, innovational, and human--companies must decide which aspects of their business will have to take the hit and which receive scarce funds. Of course, in extreme situations the whole supply chain can collapse.

In the second post, Dan highlights a Q&A session where Steve acted as moderator:

"In my role as moderator, I then posed the following questions/comments to the speakers and to the audience:

"Steve: The shut down in bank financing will have a severe impact on the Chinese shipbuidling/shiprepair industry, right? Answer: Correct.

"Steve: Historically, in the U.S. and Europe, when worldwide bank financing dried up, local banks usually stepped in to provide financing. Are Chinese banks stepping in to fill the financing gap? Answer: No, they are not. Chinese banks have no appetite for risky loans right now. Further, they do not understand international ship financing and they have no real desire to learn.

"Steve: It appears China's shipbuilding industry is taking a passive approach to both the contract default and financing issues. Answer: Yes.

"Steve: It therefore appears China's ship building/ship repair industry will be heavily impacted over the next 18 months, with few companies surviving. Answer: The audience did not answer. The presenters agreed that this seems to be a reasonable conclusion. These Singapore and Hong Kong lawyers are therefore turning their efforts towards cementing their relations with Korean and other national shipbuilders they think will survive the current situation. Even during private discussions after the formal presentation, the Chinese company representatives remained silent about their plans for dealing with the key issues facing their industry.

"It is not clear to me whether the Chinese industry will wake up to the situation in time to resolve the critical issues facing the industry. In the interim, however, it appears there will be some very good deals on new vessels from Chinese yards as customers begin to abandon existing contracts. I also think there will be very good deals on Chinese shipyards, many of which are state of the art. It is also possible, of course, that China will institute a stimulus package that will save at least some of its shipyards."

It seems the financial crisis will last beyond when many companies will need the economy to pick back up to survive; thus, as Steve mentions above, there is likely to be some consolidation of the existing capacity with perhaps some of the strongest players in the shipbuilding market looking for deals on any failing shipyards.

Back to Japan

I am now on my way back to Japan after a month in South Korea...looking forward to being back "home" and have a few posts to catch up on...

Shawn Beilfuss Manhattan Associates-Tokyo -------------------------- Sent using BlackBerry