Perils of Investing in N. Korea Become Clear to a Pioneer

By Anthony Faiola and Joohee Cho
Washington Post Foreign Service
Thursday, November 24, 2005

SEOUL -- Hyundai Group, a major industrial conglomerate, pioneered South Korean economic development in North Korea in recent years, building hotels and restaurants and sending busloads of cash-laden tourists across the world's most militarized border. At the same time, company officials argued that they were giving their communist northern kin a lesson in capitalism.

But instead Hyundai has learned a hard lesson: Doing business on the Cold War's last frontier can make bad business sense. Hyundai is attempting to resolve a dispute with the North Korean government that has jeopardized more than $1 billion worth of investments and cast a shadow on South Korea's "sunshine policy" of engagement with the North.

The dispute began in August after Hyundai Asan Corp., the subsidiary in charge of North Korean tourism operations, fired a top executive for allegedly misappropriating more than $1 million in company and South Korean government funds.

The dismissal was considered a heavy offense in Pyongyang, the North Korean capital, because the executive in question had been granted several rare meetings with North Korean leader Kim Jong Il. Top Communist Party officials last month abruptly announced a review of all concession rights purchased by the company while secretly courting one of Hyundai's rivals, South Korea's Lotte Group, to take over Hyundai's North Korean operations. Lotte officials, concerned about North Korean business practices, decided they did not want to take over Hyundai's business.

Under intense pressure from the South Korean government, the North Koreans and Hyundai reached an understanding last week aimed at smoothing over the rift. They resolved Hyundai's most immediate problem; the North Korean government agreed to rescind its decision in September to cut by half the number of tourists allowed to visit Hyundai's resort at Mount Kumgang in the North. Other issues will be discussed in the near future, Hyundai officials said.

The actions by North Korea raised serious questions about the wisdom of investing there. Despite the dispute, however, the governments of both South and North Korea are lobbying foreign companies to move into a jointly developed industrial park opened earlier this year in the North Korean border city of Kaesong, where more than 20 South Korean firms employ 8,000 North Koreans. The governments describe the industrial park as an experiment with market reforms. The countries also held a joint trade fair at the economic summit of world leaders last week in the southern city of Pusan.

But since South Korea opened up friendly relations with the North in the late 1990s, more than 1,000 South Korean firms have gone bankrupt or lost significant investments in North Korea, according to South Korea's Unification Ministry.

Most were small, low-tech enterprises involved in textile-making and rudimentary housewares. But the problems at Hyundai have shown that the fortunes of even the largest investors are linked to the whims of the North's government.

"In the first place, there aren't that many companies left that really want to go into there given the bad investment environment," said Choi Soo Young, senior research fellow at the Seoul-based Korea Institute for National Unification. "But the Hyundai case shows how dangerous it can be to make the decision to invest in North Korea."

Hyundai's dealings with North Korea began with the efforts of its late founder, Chung Ju Yung, who moved from north to south before the Korean War. He built a diversified manufacturing and heavy-machinery company, including its well-known automobile business. The Hyundai Group, which divested itself of its auto manufacturing and heavy-machinery operations in 2000, had sales of more than $5 billion in 2004.

Chung, nostalgic and dreaming of reunification, eventually campaigned to open up investment in the North, and donated 500 head of cattle and $8.5 million in aid to the famine-stricken nation in 1998. Chung died in 2001.

His son, Chung Mong Hun, became chairman of Hyundai Asan after the company signed a $942 million deal with the North Koreans to develop Mount Kumgang, where the exquisite landscape has been lore among great poets and painters for millennia.

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