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.

Update: The Kaesong Industrial Complex

   

I haven't written about Kaesong since November 2006, and its been even longer since my case study on the site, so I figured there should be some updates online in regards to its status and progress. Basically, I had the following questions when looking around:

1. Will Kaesong be part of the Korea-US FTA?
2. Have logistics between Kaesong and South Korea improved?
3. Have there been any official policy changes since South Korea's President Lee has taken office?
4. What are the current forecasts/expectations for the next few years?

Here is the official Korean site, and the English site.

Korea-US FTA

First, the Korea-US FTA Blog has a collection of posts on Kaesong's part in the development of the FTA. It points to a document here, titled "The Kaesong North-South Industrial Complex", updated in February of this year describing Kaesong and how it is to be treated by the FTA. Below is the section on its treatment:

"The text of the Korea-U.S. Free Trade Agreement (signed by representatives of each government but not yet approved by Congress) does not provide for duty-free entry into the United States for products made in the Kaesong Industrial Complex.

"Annex 22-B to the proposed FTA, however, provides for a Committee on Outward Processing Zones (OPZ) on the Korean Peninsula to be formed and to “identify geographic areas that may be designated outward processing zones,” determine whether any such zone “has met the criteria established by the Committee,” and recommend them to the respective governments, which “shall be responsible for seeking legislative approval for any amendments to the Agreement with respect to outward processing zones.” The Committee also is to “establish a maximum threshold for the value of the total input of the originating final good that may be added within the geographical area of the outward processing zone.” Decisions of the Committee would require unified consent (this arguably provides the U.S. side with veto power over any recommendation of the committee).

"The criteria to be met include but are not limited to “progress toward denuclearization of the Korean Peninsula; the impact of the outward processing zones on intra-Korean relations; and
the environmental standards, labor standards and practices, wage practices and business and management practices prevailing in the outward processing zone, with due reference to the situation prevailing elsewhere in the local economy and the relevant international norms.” The OPZ committee is to meet at least annually beginning a year after the agreement goes into effect."

The rest of the section goes on to site concerns over labor standards and final goods from South Korea that use smaller components from Kaesong.

Kaesong Logistics

The report reminds us of aspects of logistics that I have mentioned in my previous posts and case study on Kaesong:

"South Korea also aims to become a hub of East Asia. In order to accomplish this, it would like to be connected to China, Russia, and to Europe via railways that pass through North Korea. As part of the KIC project, North and South Korea have reconnected a railroad line connecting the north and south and have conducted a test run on it. (A second line on the opposite side of the peninsula also was connected.) In terms of logistics, a shipment by rail from South Korea via Kaesong to Hamburg, Germany would take about 27 days by ship, 10 days via the Trans-Siberian Railway, and 7 days via the Trans-China Railway."

Below are some diagrams I had created sometime ago--they are still relevant now when considering the logistics and supply chain positioning: 

 

The second diagram:

Moving on, the report also very nicely provides an example of where trade advantages might occur, mentioning a lower total logistics cost:

"The experience of some of the early investors in Kaesong may be indicative of the economic viability of the project. ShinWon (clothing) established operations in the KIC to take advantage of the dexterity and lower cost of North Korean workers, favorable logistics, and to avoid nontariff barriers in China and Southeast Asia. By manufacturing about 16% of five of its clothing lines there, it expects to accrue considerable savings in production costs. It considers its Kaesong factory to be optimal when compared with those it has in China, Indonesia, Vietnam, and Guatemala."

Obviously, for South Korean companies, Kaesong is closer, has equally lower costs of labor and lacks any language barriers as compared with the above typically mentioned low cost countries for manufactured garments. Basically, this has to be measured against the risk factor of sourcing from the DPRK. I think manufacturing a percentage of their total sourcing volume there is reasonable given there are multiple companies invested into Kaesong at this point.

One of the significant steps forward in terms of logistics is the opening of a shared rail link between North and South Korea. The Economist Intelligence Unit discusses this link in detail in an article from December 2007 titled, "The two Koreas once again share a rail link" and considers what Kaesong may gain from this:

"In purely economic terms, the new freight service is likely to provide a modest boost to the Kaesong industrial complex. The zone already has an output worth more than US$200m—ranging from wrist-watches, shoes and die-cast models to liquid-crystal-display monitors—much of which is exported to non-Korean markets. The new, daily service will to some extent obviate the need for firms operating in Kaesong to truck supplies across the border, reducing delivery times and logistics costs. This, in turn, may attract further South Korean investment into the complex, which is only a few miles north of the demilitarised zone.

"By adding to the industrial park's attractions, the rail link is another step towards South Korea's vision of Kaesong as a regional hub for manufacturing goods for export and for attracting foreign investment—similar to the city of Shenzhen in China's Guangdong province—with industrial, commercial and residential infrastructure."

There is some additional speculation on expansion, but I expect this to come quite slowly:

"With this goal in mind, the modest economic impact of the new 25-km service could eventually be multiplied many times over by planned expansions of the rail network. The two Koreas are set to discuss repairs of the Kaesong-Sinuiju railway and Kaesong-Pyongyang expressway for their joint use. Sinuiju in north-west North Korea abuts Dandong, in China, so this raises hopes of recreating a unified transport grid not only on the peninsula, but also in wider north-east Asia. The rail infrastructure that is being built could also, in theory, carry passengers as well as goods—fostering closer ties between the two sides."

As shown in my diagrams above illustrating the Incheon sea port's role in an overall logistical advantage for Kaesong development, I can believe additional port development on the North Korean side in conjunction with Kaesong being within the immediate future, and The Economist mentions this within the agreement rendered at the time:

"The new railway is also only the first step in what is by far the most detailed agreement ever between the two Koreas, which was endorsed at the prime ministers' meeting. The agreement involves upgrading institutions and infrastructure, creating several new committees, and, crucially, setting dates or deadlines for two dozen separate future meetings or activities in a host of fields, mainly practical economic co-operation. This includes upgrading the North’s roads and railways, shipbuilding, a joint fishing area, and a new special economic zone in the North Korean port of Haeju, in effect extending the Kaesong zone. Such a range and depth of activity is unprecedented, implying that at long last North Korea is ready for serious and sustained partnership with the South."

Current Policy Stance

The most recent article I have found so far on Kaesong is a nice update from August 24 of this year provided by Martin Fackler, journalist with the Business Scotsman. The article is titled, "Global Monitor: South's park aims to bring capitalism to Stalinist North" and was written from Kaesong in North Korea:

"The US eased sanctions against North Korea earlier this summer, after the country destroyed the cooling tower at nuclear facilities in Yongbyon, but import restrictions remain, making the Kaesong park less appealing to large South Korean and foreign companies. Indeed, South Korea's own conservative president, Lee Myung-bak, initially suggested he would not honour his predecessor's agreements to expand economic cooperation.

"Despite all that, 72 smaller South Korean companies have built factories here, looking to tap the North's supply of low-cost, Korean-speaking labour. So far, only one foreign company has come."

It is probably good small businesses are the majority in Kaesong as they can provide a solid foundation for the incubator-like economy there.

On October 1, the first North-South military level meetings were supposedly held since President Lee took office. But the North's sensitivity to even the most indirect and subtle announcements or words used by South Korean leaders, combined with the recent event of a South Korean woman being shot at Mt. Kumgang by a North Korean soldier, illustrates how fragile the relationship still is despite Kaesong's dramatic and dynamic growth in such a harsh business environment. There is a great article titled "Will Inter-Korean Project in Gaesong Survie?" in the Korea Times that highlights many of the challenges that remain. See here for more articles on Gaesong from the Korea Times.

Current Forecasts/Expectations

Mr. Hackler goes further by delving into the site's aspirations for the future:

"Despite its prison-like feel, Kaesong Industrial Park is booming. The park's operator, South Korean developer Hyundai Asan, hopes to expand it into a mini-city in the next 12 years, with high-rise flats and hotels, a lake and three golf courses.

"By that time, the company hopes there will be about 2,000 factories employing 350,000 North Koreans and producing $20bn (£11bn) worth of goods a year. That compares with an output of only $366m in the first half of this year, according to South Korea's unification ministry. In the six months to June, the flow of goods in and out of the industrial park accounted for 42% of the $881m in trade between the two Koreas, the ministry said."

It's always easier to understand Kaesong's impact when there are existing case studies to learn from, as Hackler describes below:

"This piecemeal brand of change is seen in the experience of SJ Tech, a South Korean maker of car and cellphone parts, which built a $4m factory here four years ago. The company's first North Korean employees had never even seen a keyboard, much less a computer, said SJ Tech president Yoo Chang-geun. Yoo jokingly calls his factory "North Korea's first business school". But now, SJ Tech's 430 North Korean employees can run the factory without South Korean supervisors. They have even cut their hair to look more South Korean. "The North Koreans are like sponges," Yoo said."

The pro-business, South Korean government has realized how important the site has become if there is any hope in successfully engaging the North and easing it towards a market economy:

"This is exactly the sort of result the South Korean government is hoping for. Even Lee, elected in December, has lately indicated he will back economic cooperation. Supporters of engagement in Seoul say their long-term aim is to prepare the North for unification with the wealthier South. For the North, the economic links mean hard currency for a moribund economy that cannot feed its 23 million people."

But The Economist highlights the difficulties involved:

"...the task ahead remains extremely daunting in purely economic terms. There are few reliable statistics on North Korea's economy, but the best available estimates suggest that it is tiny and exceptionally backward. According to the Bank of Korea, South Korea's central bank, North Korea's nominal gross national income was equivalent to less than 3% of South Korea's in 2006. On other measures, such as trade and infrastructure, a similarly huge disparity exists.

"Closing this massive economic gap is a project that could take decades. Creaky railroads, dilapidated roads and threadbare power lines are not the only woes afflicting North Korea. There are no mass consumer markets operating under market forces in North Korea, other than local farmers' markets and neighbourhood black markets. The basic means of communication in a modern-day economy, such as mobile phones and the Internet, are virtually non-existent and practically prohibited as part of the totalitarian state control. North Korea has pledged to allow Internet and mobile-phone facilities in Kaesong as part of the agreement that has led to the new rail connection. That this small move would be a huge step forwards for the North Korean regime shows the importance of the Kaesong experiment. But it also provides a glimpse into the enormous remaining challenges of the two countries' unification."

Obviously, from a business perspective, the above represents significant opportunities for new projects and investment and would result in a significant increase in employment for North Korean labor, assuming a peaceful reunification or cooperation agreement. Of course, it would be exciting to someday be part of the first major supply chain projects in the North. But any project should be to ultimately benefit the people of North Korea and as long as Kim Jong-Il, his family, or his surrogates are in power, there is a greater certainty that any benefit will remain only for a select few, including the select few that actually are working in Kaesong. In the meantime, the Kaesong project should not be underestimated in terms of importance, and I believe it should be viewed as one of the "fronts" from which to integrate North Korea into the systems and practices of the modern, global economy.

 

 

 

Korea Logistics Report 1

When it comes to supply chain management, there are many days when I feel like Koreans are more innovative, or at least more ambitious in driving supply chain innovation, compared to Japanese in the logistics industry. Mostly, however, I feel Korea suffers from many of the same problems as Japan--primarily in that the logistics industries in both countries have traditionally been isolated from global competition and thus innovation has happened at each their own pace, or in ways very unique to the market--in other words, typically slower than in the West and not applicable outside the country.

Of course this is changing rapidly in both countries with deregulation, gradual consolidation, the introduction of new technologies and via the impact of increasing links with China's rapidly growing economy. When I travel to Korea for 4 days from this Saturday, I plan to inquire on some of the "on-the-ground" trends taking place on the peninsula and look forward to sharing some insights here next week.

In the meantime, I will also be translating a couple articles from the online logistics press in Korea related to logistics investment and also the creation of an investment fund targeting the logistics industry.

Until then, I want to point out an absolutely incredible and excellent collection of links on the Korea-US Free Trade Agreement over at Ben Muse. This FTA, if approved by both countries' congresses, will have a definite impact on the supply chain industry on the Korean peninsula, which I expect to ripple across all industries--even the ones that remain protected.

Revisiting the Kaesong Industrial Park

Over the past few months, I have admittedly neglected wrapping up my case study on the Kaesong Industrial Complex (KIC), and although I intend to return to the topic by the end of the year, I will more than likely have to update my previous case study pieces. Remaining for me to touch on are the political, security and people pieces related to the KIC.

But I was fortunate just now to have browsed The Financial Times Online, as it has a journal written by FT columnist Anna Fifield, who has recently visited the KIC for the seventh time over the past 2 years. Since most of the development at Kaesong has occured over the past 2 years, the author's perspective on the KIC's progress is interesting and, I feel, trustworthy.

It is worth reading the entire column, but I will focus on the reflections on progress. The author early on quotes a North Korean presenter, Ryu Jin-mi, at the complex:

Here in a high-tech presentation suite in the South Korean-built Kaesong industrial complex in North Korea, the 22-year-old graduate of the Pyongyang University of Foreign Studies explains the merits of this capitalist zone to potential investors from the US, Japan and Switzerland.

"Kaesong will be the logistics hub of north-east Asia,” Ms Ryu says, using a phrase spoken every day in the South. "This will help North Korean companies overcome their economic difficulties."

Those who have delved into my case study will understand the hub vision regarding the KIC, so I won't go into that in detail here. After Ms. Fifield sorts through the difficulties so far in getting North Korea to open up, she offers her own assessment of the KIC, supporting it with what she sees as evidence of progress in the right direction:

"...despite the obvious moral dubiousness of paying money to a regime that lets its people starve while all the while developing nuclear weapons, the positives of Kaesong still outweigh the negatives...Indeed, there is plenty of evidence to suggest that engagement is making a difference.

"The trip to Kaesong marked my seventh visit to North Korea in the last two years. Even in that short time it has become apparent to me that economic links are having an impact in this most closed and communist of societies.

"I have haggled with the managers of a state-run art gallery as they jacked up their prices by 20 per cent in six months, and I have sat in on joint venture discussions between a Chinese businessman and the men who run the Pyongyang soap factory, discussions that taught the North Koreans about remittances and guarantees.

"These anecdotes might represent only a baby step towards marketisation, but in a country like North Korea, which has barely changed in the last five decades, they represent significant steps."

In regards to workers on the floor, Ms. Fifield indicates that interaction with outsiders at the KIC takes on huge significance given its rarity anywhere else in the world, perhaps except the area on the China-North Korea border: 

"The 9,500 North Koreans now working at the Kaesong complex every day see how much taller, healthier and wealthier South Koreans are. If even 10 per cent of them go home and talk about their Southern colleagues, or about the foreigners who intermittently visit this park, that will have a profound effect. This will only be amplified if Kaesong develops according to plans. It is projected to employ 500,000 North Koreans when it is completed in 2012.

"South Korea knows this. "We never talk about this but the real reason behind engagement is to show the North Koreans that their system is based on lies," one senior government official confides. "This will destroy the ideas that sustain their system. They can’t keep out these ideas of freedom and prosperity. It’s what is invisible that is most important.""

For those managing operations at the KIC on a daily basis, it seems there is gradually evidence of the desired effect:

"Indeed, Hong Heung-joo, the South Korean executive director of the Kaesong Industrial District Management Committee, says he has already noticed significant attitude changes since the complex opened.

""The most important change is that North Koreans have realised the importance of production. Under the North Korean system there is no sense of profit, but here North Korean workers are working to targets and asking for extra hours. That means they are becoming aware of market economics.""

Of course the nature of people flows is still strictly enforced:

"Personal contact does remain limited – the two sides eat lunch separately and conversation rarely strays outside work-related matters. Indeed, the tip sheet given to visitors by Southern authorities advises that North Koreans are "generally simple, naïve and emotional."

"Visitors should refrain from commenting on “the economic situation of either the North or the South, liberal democracy, the superiority of the market economy, unification-related matters, the North Korean leadership, education systems, human rights and/or other potentially sensitive issues," the sheet says.

"And the complex is not free of ideology. Indeed, the South Korean-made model of the completed development that Ms Ryu used features an illuminated statue of Kim Il-sung, the nation’s founder and father of the current leader."

Ah, there is no place in North Korea where the Kim brand is not marketed for the populace to see. But in the end, Ms. Fifield sees hope behind the prominence of controls, ideology and symbols:

"...there can be no doubt that engagement is having a psychological impact. I sat with Ms Ryu while we watched a promotional video shown to potential investors showing a Kaesong industrial park of glittering glass high rises, parks and fountains right here in North Korea.

""Can you imagine this place ever looking like that?" I asked her as the video was running.

""Yes," she replied immediately. "Three years ago this whole area was just fields. I couldn’t imagine then that it would like this even now.""

One of course has to be skeptical of those interviewed in this column--most seem deeply involved in the project and thus could have a predisposed bias towards seeing progress and a successful outcome. None of those interviewed are workers themselves. The key question is whether such a project is appropriate at this stage of North Korean leadership, or would be better initiated later after the current regime either changes or undertakes a significant transformation in trade and foreign policy.

DHL Moves to Strengthen Korea Hub

Nicci Pugh, from Logistics Business Review, covers a new investment by DHL in South Korea:

Global express and logistics group DHL plans to invest $50 million in South Korea for capacity expansion and service capability enhancement. Since 2001, DHL has increased its investments in the country by almost 280%, from $18 million to $68 million, following the company's latest investment.

The bulk of DHL's latest investment will go into expanding its current DHL Express facility at Incheon Airport. The company also plans to upgrade and expand its service centers, introducing more than 100 new vehicles.

As I have touched on in the past, South Korea's government maintains its vision of establishing the country as a key logistics hub, if not the most advanced logistics hub, in the East Asia region. As a result, this investment is in line with encouraging private investment that supports this vision:

DHL's investment plan complements the South Korean government's vision of establishing Incheon as a preferred logistics hub to serve the region. According to the Ministry of Construction and Transportation, the volume of air cargo between South Korea and the neighboring region has shown a significant increase over the last five years, particularly the freight movement between South Korea and China.

"Our commitment to South Korea is largely driven by customer needs arising from a steady flow of trade volumes into and out of South Korea," said Scott Price, CEO, DHL Express - Asia Pacific. "We are confident that our robust network infrastructure, as well as our upgraded facilities, will not only serve the increasingly sophisticated needs of our customers, but will enable us to actively enhance our role as a trade facilitator to improve trade links between South Korea and the rest of the world."

I like the statement by Mr. Price in the last paragraph, because it pretty effortlessly zooms out from the ground-level infrastructural investments to the 30,000 foot level, big-picture view of DHL's influence in the region, and particularly in its established position in South Korea.

Korea Air Partners with Sinotrans

In a September 20 article from the Financial Times, author Andrew Yeh out of Beijing covers news of a new partnership between Korean Air and Sinotrans to form a new air cargo line:

Under the deal finalised in Beijing on Tuesday, Korean Air, the world’s largest commercial air cargo company, and a subsidiary of Sinotrans would invest $65m to launch a new cargo airline. The new venture will give Korean Air an important presence in the rapidly growing market following the collapse of its talks to take a large stake in Chinese start-up Okay Airways.

Despite a number of other deals occuring in the attractive Chinese market, Mr. Yeh notes that there are still risks in the still unsettled market environment:

It is not all plain sailing for overseas operators. A joint venture carrier set up by Singapore Airlines and local partner China Great Wall Industry halted flights in August after two months when Great Wall was hit with US sanctions for allegedly supplying missile parts to Iran.

For my previous posts on the air cargo market in China, take a look at this post titled "China Places Priority on Air Cargo."

North Korea's "Bookend" Trade (UPDATED)

With North Korea suddenly in the spotlight again due to its recent missle tests, activity at its borders with China and South Korea naturally receive greater attention. I have updated an earlier post on the China-North Korea rail sector noting that standards of business are nearly non-existent with an obviously desperate North Korea trying to get everything it can, any way it can.

Non-rail business seems to push forward as long as there is a buck to be made. Yonhap News reports on the China-North Korea trade and the impact the current "missle crisis" is having on the local economies:

Cross-border trade in China's northeast region bordering North Korea went on as usual Saturday amid lingering tension abroad over the North's missile launches this week, ethnic Koreans said. A Japanese daily reported the same day that China appeared to begin restricting trade with North Korea as a punitive action against the North's missile firings on Wednesday.

In the quote below, a witness of the ongoing trade requests anonymity--likely because a lot of the trade between China and North Korea is not of the legal variety:

"We don't feel much that there is a particular change here after the missile launches," an ethnic Korean living in the border city of Dandong said, requesting anonymity. "Even yesterday, I saw trucks and cars come and go across the Sino-Korean Friendship Bridge," he said, referring to the bridge over the Amnok River, also called Yalu in Chinese, which defines the territory of the two sides. Dandong serves as the main trade gate between the two ideological allies, and is bustling with logistics trucks that transport industrial goods to the North's Sinuiju from Monday through Friday.

Curiously, Japan's media reports the opposite:

Japan's Yomiuri Shimbun said in a dispatch from Dandong earlier in the day that cargo trucks traveling there via the river bridge have virtually vanished. The report suggested China has frozen trade with the North as a punitive action over its missile launches.

More anonymous (and probably not very reliable) sources counter that seasonality is a factor and nothing has changed in terms of the China-North Korea relationship:

Korean-Chinese businesspeople and North Korean workers, however, denied that China imposed sanctions on the North and said the seemingly reduced trade was a seasonal factor. "Usually in summer there's less trade. If the trading goods and personnel have reduced over the bridge, it's more likely from the seasonal influence. It is a far-fetched idea if they think it was that China began controlling the trade after the missile launches," an ethnic Korean businessman said, also asking not to be named.

Eventually, the article gets to the real reason why trade is likely still occuring despite the above Japanese reports:

"We cannot even think of the Chinese government blocking private-level trade with Pyongyang. And I've not even heard that China was controlling the transportation of goods going into North Korea," another businessman said.

In China these days, there is much more autonomy in terms of business exchanges and trade at the provincial level then those who have never been to China could imagine. There is a sense in the media in the West that China controls events across its provinces with the flip of a switch at Communist headquarters, but I believe this mostly occurs (in obviously more complexity than switch-flipping) at the more macro-levels of trade and business dealings. Many smaller business dealings don't register on Beijing's radar, and the messy border with North Korea around Dandong, I believe, would qualify as an area of smaller business dealings (non-military) mostly ignored by Beijing in the public arena. However, there are likely a number of "spies" lurking around to keep tabs as necessary on the happenings of the area.

The fact of the matter is that there is little enough business there already that no one is going to really hamper any illegal trade that might provide people there with whatever standard of living they can obtain. I have watched a few documentary reports on Japanese TV that interviewed North Koreans who escaped to China only to be put into prostitution and hiding or forced marriage. Many local Chinese or ethnic Koreans understand they can get away with this exploitation because the North Korean escapees will still rather risk exploitation than get deported back to North Korea. Someday I hope to make it to Dandong for a week or so, but right now is perhaps not the best time.

On the other side of North Korea, where trade has occured the past couple years between North and South Korean in an effort to boost the Kaesong Industrial Park development, there is some new reporting from Greg Hitt of the Wall Street Journal on Kaesong and the proposed US-S. Korea FTA in the context of the current missle crisis:

Titled "North Korea Complicates Trade Talks," the article starts off with pointing out that Kaesong remains the sticking point in resolving the FTA talks:

Despite North Korea's missile tests, talks between South Korea and the U.S. on a free-trade agreement are to resume today in Seoul. One sensitive issue: South Korea wants the pact to cover goods originating at its joint-venture Kaesong industrial complex in North Korea.

Hitt next provides a nice summary of Kaesong, which can be studied in much more detail via my in-process case study on the industrial complex:

The joint venture, launched in 2003 and located just north of the demilitarized zone that divides the Korean peninsula, combines South Korean capital with North Korean labor. It employs about 7,000 North Koreans who produce goods such as appliances and plastic containers for cosmetics. While the value of goods made at the venture is small, representing about one-third of the $1 billion in annual trade between North and South Korea, its potential is big. By the time the complex is in full operation in 2012, it could employ more than 750,000 North Koreans.

At odds between the U.S. and South Korea is the approach to North Korea, and with the missle crisis the distinction is highlighted further:

Kaesong illustrates a fundamental difference between the U.S. and South Korea. The U.S. sees North Korea as a threat to global stability and is seeking ways to force the country to abandon its nuclear ambitions. But South Korea sees a potentially peaceful neighbor and is looking for ways to promote dialogue and spread capitalism, with reunification the ultimate aim.

"It's a long-term goal that we'd like to achieve during...negotiations," says Ahn Chong Ghee, economic counselor at South Korea's embassy in Washington. Mr. Ahn says North Korea's missile testing hadn't damped the South's eagerness to include Kaesong in any pact.

The benefits of implementing an FTA between the U.S. and South Korea would be significant and very real:

The free-trade pact would be the U.S.'s largest pact since the North American Free Trade Agreement passed Congress more than a decade ago. Annual trade between the U.S. and Korea stands at $70 billion, and a business coalition including U.S. auto makers, financial-services firms and drug manufacturers sees important market-access gains to be had. In South Korea, there is concern about protecting domestic rice farmers from U.S. competition, but Seoul also hopes a trade pact would solidify the country's role as an Asian economic hub, giving Korean producers an edge over Asian rivals in access to the U.S. market.

However, with North Korea not doing itself any favors by launching its missles towards neighboring countries, countries it considers ememies, South Korea's relatively little leverage in the long-term standoff will do little to alleviate any U.S. concerns in including Kaesong in an FTA, let alone change the nature of the overall U.S. policy towards North Korea:

The Kaesong proposal would puncture economic sanctions imposed by the U.S. on North Korea and runs counter to the White House's strategy of isolating North Korea. It would almost certainly force a larger debate on Capitol Hill, shifting attention from improved trade ties with Seoul to North Korea's nuclear ambitions and its record of labor and human-rights abuses.

The U.S. and South Korea hope to agree on the trade deal by year's end, so it could go to Congress before President Bush's authority to negotiate trade pacts expires at midyear 2007. Under that authority, Congress can vote "yes" or "no" on trade pacts but can't alter them. Even before the missile test, U.S. officials were leery of making an overture toward North Korea, insisting that any trade pact simply be "an agreement between our two countries," as a spokesman for the office of U.S. Trade Representative put it.

The following part of the article also hints that Kaesong should at the most be a consideration much further down the road while other possible FTA-damaging issues are worked out:

Even without Kaesong, a fight over the South Korea pact likely looms on Capitol Hill. American textile producers are worried about increased competition, and the AFL-CIO has expressed "grave concerns" about labor rights. Adding Kaesong "has the potential to sink" any deal, inviting the pact to be debated on geopolitical grounds, warns Montana Sen. Max Baucus, the top-ranking Democrat on the Senate Finance Committee.

My feeling is that South Korea is in a rush for the high-risk Kaesong project to be deemed an inter-Korea success via endorsements like an inclusion in the FTA before it is even a true, sustainable economic success based on actual, on-the-ground results. The U.S. would be making a mistake to endorse Kaesong via an FTA when it is so early in its infancy, and in the context of the fragility and irrationality of the North Korean state. However, at the same time, the U.S. should not just ignore Kaesong but leverage it as another avenue for monitoring North Korean activities to gain further insight into the regime and prepare logistically for future trade activities should North Korea collapse. There is nothing that says that, because Kaesong is a politically and diplomatically unendorsable project, it shouldn't be studied closely.

UPDATE: This issue is further mentioned at Ben Muse, which I noticed has mentioned this site previously and at The Asia Pages. For very frequent posting on Korean peninsula relations and politics, The Korea Liberator is a must as well!

Pusan Port Feeling the Heat

This is officially my 100th post, but I won't be doing any lengthy writing to celebrate. Rather, I want to highlight an article that complements some of my earlier posts on ports and logistics hubs.

Considering that South Korea is very intent on strengthening its logistics infrastructure so as to be a high-value supply chain hub in Northeast Asia, the following article from Cargo News Asia shows this effort will face unrelenting competition:

China is dominating the maritime logistics business in East Asia and endangering Korean ports, officials at the Maritime Ministry and Korea Institute of Maritime and Fisheries Technology warned.

The officials noted that in Busan, 1 million TEUs were processed in April, a drop of over 3 percent from the same figure last year. The aggregate amount of containers processed at Busan Port in the first quarter of this year was 3.9 million TEU, a 1 percent increase from the same period last year.

The three new berths at Busan New Port were almost empty. The new port opened almost two months ago, but only 37,000 TEUs have visited the port, far less than was predicted.

In China, however, the Port of Shanghai, processed 1.8 million 20-foot containers in May, a 19.6 percent increase over that of the same month last year. The new Yangshan Port, which has five berths for ships and is only six months old, processed 230,000 TEUs creating an aggregate of 8.2 million TEUs just this year. It was a 17.1 percent increase over the previous winter.

The winners and losers of this battle will be determined by which hubs provide the greatest customer value:

"As Shanghai's port improves in terms of service and business processes, it is 'stealing' freight from Busan," an institute official said.

The last sentence in the article refers back to the announcment I posted on previously:

The official said the situation is serious, and that they would think of ways to make Busan more competitive in terms of infrastructure or high value-added logistics, not scale of freight.

What would be interesting is a survey specifically identifying why port users switch business from Pusan to Shanghai. Is it more location-driven? Is it more of a services-driven decision? Is it based more on port users' customer requirements? If there is a strong correlation to location-based factors, then there isn't too much South Korea can do. But if it is truly operating a sophisticated logistics hub, it will have "feeler surveys" in place periodically to not only identify reasons port users have switched, but also help catch and resolve current customer concerns that could lead to additional defections.

Korea Ramps Incentives to Reach Hub Goal

In previous posts, I have touched on South Korea's aim to model the country into a logistics hub for Northeast Asia. These posts include:

The Kaesong Series

Korea Logistics Brief 2006

Air Cargo Hub Strategy in East Asia

To maintain momentum with its marketing efforts and towards executing its strategy, South Korea is making moves to further open its economy for the changes necessary. A brief article in Asia Times, via Asia Pulse/Yonhap news services, touches on these moves. In essence:

"South Korea plans to modernize its port facilities and streamline their operations in an effort to attract more foreign shipping lines and become a logistics hub of Northeast Asia, officials said.

"The plan is designed to promote a profitable logistics industry, a turnaround from simply competing with Japan and China for bigger amounts of cargo in Northeast Asia," said Woo Ye-jong, a senior official at the Ministry of Maritime Affairs & Fisheries.

What this means is that South Korea hopes to increase its value-added services versus focusing only on throughput levels--how can we handle goods/services better versus how can we handle more goods/services? For anyone in the supply chain management field, value-added services are what drives profitability, and so that is where I make the link. A simple example is of a warehouse that not only stores product but repackages an international product for local market specifications.

The article outlines some of these value-added services the Korean government plans to put in place:

"Under the plan, the government will revamp ports' infrastructure by setting up an automated operation system, enhancing security standards and lifting a ban on nighttime operations."

The government will also spearhead initiatives for attracting additional investment activity:

"To spur Chinese and Japanese investments in the domestic logistics industry, the government will move to ease regulations on hiring foreign stevedores and to complete clearing sites for cargo terminals in the ports of Busan and Gwangyang ahead of schedule.

"The government will also establish a system on financial aid for mergers and acquisitions among local port operators and try to nurture internationally-renowned logistics firms like Hong Kong's Hutchison Whampoa Ltd. and the Middle East's Dubai Ports World."

As already evident in my posting on the publication of the Northeast Asia report on logistics collaboration:

"Efforts will also be made to hold ministerial-level talks on logistics among South Korea, Japan and China regularly to boost cooperation among the countries. The first round is slated for September this year.

"The ministry said the government will also seek the participation of Russia and the Association of Southeast Asian Nations."

I have a couple articles on hand that discuss in more detail the future of the Korean logistics industry and also the educational system being developed for producing more logistics professionals. These I will be translating from Korean over the next few days and hope to post within the month.

Korea Logistics Brief 2006

After browsing the website of Korea Logistics News, I found a short article summarizing a seminar it held on February 10 in Seoul titled "2005/2006 Logistics Market Retrospective and Outlook Seminar." The site is all in Korean, so I have translated the bulk of the article below for my readers. The portion on Japan by Mr. Cho is included even though I have covered Japan logistics extensively elsewhere on this blog. The reason for this is not only to highlight the fact this seminar considers Japan important, but also to show the angle of the Korean perspective.

This seminar hosted a few prominent speakers to discuss specific topics:

• Hyong-ho Kim, President of UPS-SCS
  “2006 International Logistics Market Trends and Key Words”
• Cheol-hwi Cho, President of K&G Global Consulting
  “Japan’s 2005/2006 Logistics Market Retrospective and Outlook”
• Jeong-ho Kang, President of Sagawa Express
  “e-Market Growth Concerns and 2006 Outlook”
• Gyeong-ho Goh, Manager at EXE Consulting
  “Domestic/Foreign 3PL Market Direction and Plan for Capacity Strengthening”
• Jeong-wu Son, Writer for Logistics News
  “Domestic Door-to-Door Market: 2005 Retrospective and 2006 Outlook”
• Wi-shik Yoon, Board Member of Buy-Yes Korea
  “Logistics Companies’ Facility and IT Investment Outlook and Trends”
• Mu-ik Park, Logistics Policy Team Leader at Ministry of Construction and Transportation
  “Main Logistics Policy Issues for 2006”

Dilemma for Foreign 3PLs in Korea's Domestic Market

Mr. Kim from UPS-SCS pointed out that although the domestic 3PL market is quickly expanding, there are many bottlenecks in the way of foreign firms making advancements. As a result, from the perspective foreign firms, many are focusing on advancing the forwarding market centered on the air cargo segment.

Privatization Era & Attention to Friendship Repairing Process

Mr. Cho, while introducing the recent Japanese logistics market centering on "key words," explained that it is necessary to pay attention to Japan’s “Comprehensive Logistics Policy” which was newly established in 2005. He foresees the principle issue being the nexus where such things as environmental logistics and the repairing of friendship with Japan crosses logistics industry reforms and the privatization "era," where the securing of logistics-expert personnel and the thrusting M&A activity are the biggest influences.

Domestic e-Market Expected to Grow by 20%

Mr. Kang of Sagawa Express expressed his expectation that the domestic e-Market will maintain approximately 20% growth owing to the emphasis on internet shopping and fast-pace growth of the open market. He said that if one looks at the product distribution conditions for each year of the e-Market, while the usage rate of home-delivery from internet shopping mall firms, etc. has risen more than 10% compared with 2002, his own firm’s delivery rate has dropped more than 10% from 29% to 18.2%. For this year as well, he anticipates that the usage of home delivery will quickly expand.

Small to Medium Firms: Possible for “*Nut-Cracker” High

Mr. Goh foresees that, compared to the previous year, the entire domestic logistics industry will grow by 1.6% this year with contract logistics sub-industry growing 14.2%. The total logistics industry base value is approximately $92 billion with the contract logistics sub-industry at approximately $37 billion. While saying that the set-up for selection of a customer’s 3PL contract-logistics firm is expected to be revised again towards centering on a comprehensive logistics certification, he analyzed that depending on both enforcement of certification in the initial period and also any excesses in certification there is a high possibility that larger firms will benefit most due to such things as price drops and confusion in providing services. If there is no segregated capacity planning in the case of small to medium firms, then there also exists the possibility for a “*Nut-Cracker”-type situation.

(Nut-Cracker refers to the conditions where components of the Korean economy are under extreme pressures due to gaps in technology, competition, and pricing versus more advanced or advantaged countries. This term began to be used during the time of the 1997 IMF crisis when the American consulting firm, Booz-Allen, described Korea being in a "nut-cracker" where it was being pressed by Japan's advanced technology and China's low prices. If not remedied, it was said that the only thing left is to "crack" under this pressure. In the above situation, Mr. Goh illustrates that small to medium-sized logistics firms could be squeezed in this way if the systems in place to certify 3PLs advantage larger firms with more scale and better resources).

Competition will be Fierce from Second Half

With this year’s domestic home-delivery market logistics volume estimated to climb to approximately 644 million items, Mr. Son foresees that sales will exceed $2.2 billion. He anticipates that with large based investment picking up at each firm into the second-half of the year, the stage will be set for fierce competition.

System Integration Capabilities in Demand

Mr. Yoon described that, in relation to the IT investment outlook for logistics firms, while the key issue of being able to get new corporate investment has not existed for a long time, it is necessary to pay attention to the appearance of new issues driving recent investment, such as BPM and RFID. In this regard, he expressed the necessity for constructive marketing policies. He also stated that with an expansion of differences in the IT requirements between small/medium firms and large firms, between export businesses and domestic-targeted business, and between manufacturing and service businesses, his firm sought to investigate ways to balance IT for the customer. What stood out was the demand for a system integration capability that could pursue a wide range of customer requirements—a sort of dynamic scalability. (my own words in italics)

Strong Promotion of Northeast Asia Logistics Centralization Issues

Speaking last, Mr. Park explained this year’s main logistics policy issues. Within the objective of creating a “Northeast Asia logistics hub where goods, information and people gather,” he stated that issues are divided into both a hardware strategy for such things as the Northeast Asia hub transformation at Incheon International Airport and also a software side related to the activation of third-party logistics. In this way, he clarified this is the policy in place to kick-start the realization of the Ministry’s vision.

On the hardware issues, Mr. Park described the focus on specifically the Incheon International Airport hub transformation and the rail line that will serve as a regularly running logistics artery. In addition, such things as expansion of the road system and configuration of a national logistics center network are being promoted. On the software side, he stated that such things as establishing a comprehensive logistics firm certification system, activating a logistics information network, and advancing the goods transport market are being promoted.

COMMENTARY: Korea has one of the better websites in Asia for logistics news in its Korea Logistics News site. But because it is entirely in Korean, and my Korean is only at an intermediate level, it takes a bit longer to digest all the great articles. For the articles with topics I am interested in, I use Yahoo Japan to translate the Korean into Japanese, then translate the Japanese to English while proofing the Japanese against the Korean original. But it is all good, because the information can't be found anywhere else publicly accessible (as far as I know). I also improve my Korean and thus the process should only get easier. Fortunately, information on China is readily abundant in English.

There is a section on Korea that I am pursuing for which I have both English and Korean resources. That will probably come along starting later this week in the form of a short series of posts. In the meantime, I hope this brief is helpful.