Kaesong running at half-capacity as investors trickle away

When Kaesong reopened after a five-month shutdown, I speculated that the shutdown would have lingering adverse effects on some of the operations there — that some of the manufacturers would have lost suppliers and customers, experienced workers would not return, credit would be overextended, and machinery and materials would have degraded.

Sure enough, Kaesong still hasn’t recovered from the shutdown. Contrary to South Korean government claims that it’s running at 80% capacity, the true figure is just 50%. That may be as good as it gets. South Korean companies are starting to trickle out of Kaesong, and new ones can’t go in to replace them:

Two South Korean companies with factories at the inter-Korean factory park in Kaesong have decided to discontinue operations in the face of unfavorable business conditions, sources said Tuesday.

The unification ministry and corporate insiders said a textile manufacturer and an electronic parts producer opted to sell their factories and land at the Kaesong Industrial Complex and signed related contracts.

Another small company that makes stuffed goods at a factory apartment run by the Korea Industrial Complex Corp. is close to abandoning its Kaesong operations in the face of mounting financial difficulties, they said.

Of the 123 companies with factories in Kaesong, three have not restarted their factories, with many others conceding they are operating below full capacity. Entrepreneurs claimed companies are currently operating at just 50 percent capacity even though normal operations resumed on Sept. 16.

“Concerns caused by a cooling off of cross-border relations after the Kaesong complex reopened are making it hard to secure orders, and there are growing fears that things will not improve in the near future,” said a corporate source, who declined to be identified.

He claimed that there are other companies who may decide to leave Kaesong if things don’t improve soon. [Yonhap]

Korea Real Time has more on the specific troubles some of the firms are having, and also notes that “another seven South Korean companies, which had leased land to build factories” at Kaesong, have informed the Korea ExIm Bank “of their decision to give up and scrap their business plan.”

On top of everything else, some companies that received $166 million in insurance payments from the South Korean government before restarting operations will now have to repay their bailout money to the government. The North has also made exorbitant demands that the investors pay the workers it has not yet reemployed “a so-called supplemental security income equal to 40 percent of their monthly pay.”

Sources speculated that up to 1,800 workers may be let go by companies, which means business will have to pay security income totaling $40,000 this month to 1,000 workers they want to retain.  [Yonhap]

Although the September deal that reopened Kaesong was designed to protect investors from political risks, the policies of both governments continue to constrict business operations. The North’s restrictions on “travel, communications, customs, and basic rights of South Koreans working at” Kaesong are inhibiting its competitiveness. So are South Korean trade sanctions imposed after the North’s 2010 attacks against the South. Seoul recently considered, then rejected, demands by the not-pro-North-Korean-at-all Democratic Party to lift trade sanctions against North Korea without the precondition that the North apologize for sinking the Cheonan (and for shelling Yeongpyeong Island?) and “take responsible measures,” whatever those are.

A surprising point that arose from this debate is that, according to ROK Unification Minister Ryoo Kihl-jae, “as long as the ban [on North-South economic exchanges] is in place, South Korean companies will be barred from investing in Kaesong, although this rule does not apply to foreign firms.” Presumably, Ryoo is only speaking of new South Korean investments, but still — really? So a venue whose sole appeal to a potential investor is a nationalist delusion exclusive to South Korea … is only open to investors who aren’t South Korean? If that’s a business model that tempts you, I hope I can interest you in my plans for a chain of bondaegi stands, coming soon to a county fair near you.

Is it any wonder that “[i]n the past foreign companies had shown interest in investing in the special business zone, but this did not bear fruit”?

The extreme political risks of an investment in Kaesong hover over the whole experiment. At the moment, tensions appear to be rising. Some predict that more provocations are likely, and those provocations that would almost certainly impact Kaesong. On the other hand, signals from the South Korean and U.S. administrations suggest that each is interested in cutting some kind of deal with Pyongyang, but also fearful that the other ally will do so to its own disadvantage. Park Geun-Hye has even floated the prospect of a summit, before denying (not quite believably) that the condition are “ripe” for that. (Judging by the recent experience of the Mongolian President, they’ll be ripe when she makes the NBA draft.)

Policy-wise, we’ve reached a fork in the road, and it isn’t clear which fork we’ll take. The problem, as always, is that Pyongyang doesn’t want the same deal we do. It has no use for Park Geun-Hye’s conditional type of engagement, or Washington’s demands for nuclear disarmament. Unless someone caves, one of these two forks is blocked. The other leads to more political risk for Kaesong, and for things that matter much more.