In the week that talks resumed on the free trade deal between South Korea and US, Peter Chang reports on South Korea's latest production initiative. The Gaesong Industrial Park in North Korea pairs South Korean technology and management expertise with North Korea's cheap and abundant labour force.

Some South Korean textile and shoe-making companies are producing their products in North Korea in order to take advantage of the communist country's cheap labor costs. Wages here are at least 20 times lower than in their main plants in South Korea.

The manufacturing move is made possible by the fact that the two Koreas - South and North - are developing a 66m m² complex in the North's city of Gaesong, just over the Korean border. The complex, which will be completed by 2012, includes a 26m m² special economic zone called the Gaesong Industrial Park.

The two sides are trying to combine the South's capital and technology expertise with the North's cheap land and labour.

In addition to the economic synergies, which will help South Korean textile and clothing companies to offer products at cheaper prices than their Asian rivals, the Gaesong Industrial Park is also a peace project, breaking down the world's last Cold War frontier.

Of the 11 companies currently operating in the complex, three South Korean consumer goods companies have hired around 6,000 North Korean workers to produce products such as clothing, shoes and cosmetics in their plants.

The remaining eight companies are making kitchen appliances, automobile fuel pumps, watches and electrical cords. Some of these products are being exported to China and Mexico.

South Korean officials working in the North's Industrial Park say all products made in the complex will be classified as made in South Korean - which could be a hot issue in the Free Trade Agreement talks between South Korea and the US.

On Monday, South Korean and US officials met in Seoul for preliminary talks on the free trade deal, ahead of the opening of formal negotiations in June.

ShinWon mulls expansion
ShinWon Inc, an exporter of textile products, has five assembly lines covering an area of 7,300m². These produce some 20,000 pieces of clothing (such as women's jackets, skirts and trousers) per month using 326 North Korean workers.

All products made in the North will be bought and sold in South Korea, company officials said. In 2005, North Korean products accounted for 5% of the company's total production on the Korean peninsula. But, it will rise to 13.6% in 2006.

ShinWon officials also said they expect to hire more North Korean workers in the coming months due to the relatively low costs compared with other workers in South East Asia.

"North Korean workers are quickly adapting to the South Korean way of production and business management, showing rapid improvement in terms of both physical and psychological aspects," said a company official. "The labour cost is extremely low, so a worker gets paid just $57.5 per month."

The official said North Korean workers are working an average of 48 hours a week, but they often volunteer for overtime and even work at weekends when the workload is heavy.

The workers, who have great manual skills, are highly motivated and diligent, and their productivity is improving much faster than expected, according to officials. The workers are mostly high school or college graduates.

While all North Korean products will be brought into South Korea, the products that are being consumed in some foreign countries will be produced in ShinWon's overseas plants.

ShinWon currently has four overseas plants. It makes knitwear in Vietnam (ShinWon Ebenezer Vietnam Co), Indonesia (PT ShinWon Ebenezer) and Guatemala (ShinWon Guatemala SA), and handbags in its Chinese factory Qingdao ShinWon Garment Co.

While it continues to produce more products in its North Korean factory, ShinWon is also planning to expand production in its foreign plants.

At its Vietnamese plant, ShinWon has earmarked $2.2m to produce more "low-cost" but "high quality" products utilising the country's cheap labour.

And in Indonesia, ShinWon is to invest $1m expanding its production capacity. The company also plans to expand production at its Guatemalan plant to take advantage of its geographic proximity to the US market.
 
Current buyers of ShinWon's products - currently 30 companies - are Target, Wal-Mart, Kmart, Sears, Gap, Macy's and H&M.

More companies head North
Despite minor problems stemming from the different economic and political systems between the two countries, South Korean officials believe more companies will start making their products in the North as North Korean officials become more cooperative in the management and operation of the Gaesong Industrial Park.

North Korean officials have begun to understand the importance of "corporate profits," "market exploration," and "investment attraction, " they said.

As an example of this changing attitude, North Korea has been allowing foreign buyers and investors to visit the complex since June 2005. In November, North Korea welcomed a 31-member delegation from the EUCCK (European Union Chamber of Commerce in Korea).

Such events signal that North Korea is trying to open its doors to the foreign community, they said.

ShinWon isn't the only South Korean company expanding in the North. Samduk Trading, a shoemaker based in South Korea's second-largest city of Busan, is seeking additional space in the complex to expand production from its current 18 sewing lines and three manufacturing lines.

Samduk makes 1.8m finished shoe products, 3.6m shoe uppers and 2.6m soles annually. It employs 1,055 North Koreans and 11 South Korean workers in the plant, which was constructed in November 2004.

By Peter Chang.