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(News Focus) Firms still face challenges despite normalization at Kaesong

2013/10/17 11:49

By Kang Yoon-seung

SEOUL, Oct. 17 (Yonhap) -- South Korean firms with factories at a recently resumed joint complex in North Korea continue to face challenges in normalizing their operation, market watchers said Thursday, as a five-month hiatus dealt a harsh blow to their liquidity and credibility with buyers.

The analysis came after the inter-Korean factory park, a rare symbol of detente and economic ties between the two war adversaries, reopened last month after a five-month hiatus. The Kaesong Industrial Complex, in the North Korean border town of the same name, was unilaterally shut down by the North in early April amid heightened military and political tensions on the Korean Peninsula.

The two sides remain in a state of war as the 1950-53 Korean War ended in a cease-fire, not a peace treaty.

Of the initial 123 South Korean companies, 118 South Korean companies returned to the Kaesong complex since the reopening and currently employ some 44,000 North Koreans, roughly 80 percent of the workforce before the shutdown in April.

Prior to the shutdown, the factory zone was home to 123 South Korean companies with some 53,000 North Korean laborers. Five firms have not restarted production for various reasons.

A month has elapsed since the resumption of operations on Sept. 16, but South Korean firms still face challenges as demand for their products plunged amid the prolonged tensions on the peninsula. The fall in demand has led to a cash shortage and created a vicious cycle in their business operation.

Local businesses at the North Korean border city also have to repay compensations they received during the shutdown from the South Korean government at a time when it seemed likely that the complex would be closed indefinitely, which also had an adverse impact on their financial health amid liquidity shortages.

"While the company's profit remains stagnant due to a lack of orders, the low operation rate of the factory and repayment order of the compensation are creating a double-blow," an official from a South Korean firm at Kaesong said.

According to South Korea's Ministry of Unification, which handles inter-Korean issues, 59 firms received some 176.1 billion won (US$165 million) in insurance payments from the state-run Export-Import Bank of Korea amid the gloomy outlook that the industrial park would be closed permanently.

The financial instrument was earlier established to provide South Korean firms with a safety net and induce them to make investment at the North Korean border city, providing them with compensations when they post losses from non-management, or external, matters.

However, as the complex resumed its operation last month, the bank ordered the firms to repay the compensations by Tuesday and said it plans to charge late fees estimated at 3 percent if they pay back in 30 days and 9 percent if later than 90 days.

South Korean firms at Kaesong, however, said they are facing liquidity crisis as their earnings remain weak as buyers are seeking deals at companies located at safer places less affected by volatile political situations.

"We already spent the compensation from the government to pay back bank loans," another official from a Kaesong-based firm said. "Although we want to make a profit, there are no opportunities."

   A group of electronic firms in Kaesong echoed the view, adding that the companies will not be fully normalized until the uncertainties are abated.

"Out of 45 electronics and machinery firms in Kaesong, only 47 percent have operating factories, at least partially," the group said in a statement urging two Koreas to resume talks in fully normalizing the complex.

"While the government says around 70-80 percent of the area's factories are in operation, market watchers here believe the ratio hovers around only 50 percent," another official from an apparel maker said. "Although all workers are showing up to work, nearly half of machinery are turned off."

   The two Koreas, meanwhile, postponed last week an investors seminar planned for the end of the month at the joint park to promote foreign investment there, reflecting the lack of progress made in talks to enhance cross-border communication and travel between Kaesong and the South.

The event that was originally set for Oct. 31 was arranged to attract foreign investors to set up factories at the Kaesong Industrial Complex, which is currently home to only South Korean companies.

"The delay came as talks with the North concerning several policies including usage of the Internet showed no progress, which is a crucial concern for foreign companies," an official from the unification ministry said.

"(The postponement) does not indicate that the two Koreas will stop their progress in developing the industrial complex," the official added.

The delay also came after North Korea in September unilaterally postponed the planned reunions of separated family members, citing what it called Seoul's confrontational policy.

The abrupt North Korean move came only four days before the two Koreas were set to hold the first family reunions in three years. The reunions were set to be held at the North's mountain resort of Kumgang from Sept. 25-30.

Meanwhile, South Korea's Finance Minister Hyun Oh-seok told lawmakers during a parliamentary audit session that he will lend support to them in returning insurance payments.

"It is true that Kaesong-based firms are having difficulties in returning their compensations," Hyun said. "(The finance ministry) will assist the troubled firms in receiving loans from private banks to secure cash for redemption."

   Rep. Hwang Woo-yea, who heads the ruling Saenuri Party, also said the party will make efforts to lower late fees and provide Kaesong-based firms with more financial leeway.

Unification Minister Ryoo Kihl-jae, however, said at the parliament that the redemption plan should be implemented as scheduled, adding the issue can become more complicated when the rule starts to accept exceptions.

"The redemption is imposed by the provisions, and abiding by the rule is better in the long-term," said Ryoo, adding the issue should not be approached in a sympathetic manner.

colin@yna.co.kr

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