hankyoreh

The Kaesong Industrial Complex

Many presidents of former Kaesong Industrial Complex tenant companies say that though their factories are in Vietnam, their hearts are in Kaesong. Such companies were forced to move their production to Vietnam by the South Korean government’s total shutdown of the Kaesong Industrial Complex one year ago.

The complex has been indefinitely mothballed ever since Minister of Unification Hong Yong-pyo announced the closure from out of the blue on Feb. 10, 2016 - the last day of the Lunar New Year holiday. So suddenly did it come that tenant companies were unable to take any of their raw materials with them when they left. After that, they were forced to battle for substitute product sites to meet their existing order commitments.

Vietnam has been the most commonly chosen of the substitute sites. Of the 123 tenant companies at Kaesong, 28 are operating substitute factories there. Two companies are operating overseas substitute factories in Indonesia, two in China and one in the Philippines. 18 of the factories in Vietnam were newly opened after the Kaesong shutdown, while 15 in Vietnam and other countries are expanded versions of existing factories.

Why have the Kaesong companies moved to Vietnam? Is it a viable substitute for Kaesong? A year after the Kaesong shutdown, we heard the thoughts of presidents of Kaesong companies that have gone to Vietnam.　

According to the Kaesong Complex tenant companies, the abrupt announcement of the full closure last year brought chaos, coming so suddenly that they were unable to take most if any of their raw materials with them. It was a sharp contrast with the temporary shutdown in 2013, when North Korean warnings of the imminent measure allowed them to reduce the resulting havoc. The companies reported particular difficulties with managing product orders in the wake of the abrupt closure.

“It closed down so suddenly that we had the hardest time just producing the things that were past their supply deadlines,” said Kim Cheol-yeong, president of Sunghwa Products, which produced socks and other items at Kaesong.

“We had to scramble to contact places like Vietnam, Indonesia, and Bangladesh, then send the raw materials and make the products to fill the orders,” he recalled.

Kim also said the sudden replacement production “cost quite a bit extra.”

with the lights off and no workers around

With normalization of the Kaesong Complex still apparently a long way off, companies needed substitute factories to handle their orders. With their orders cut off for failure to produce, they would have no volumes to work with even if the complex reopened.

In mid-March of last year, Ok Seong-seok, president of Kaesong garment producer Nine Mode, began a month-long survey of sites all around Hanoi and Ho Chi Minh City to find a usable factory. In the end, the company acquired an existing sewing factory an hour from Hanoi. It was a decision that would allow it to begin operating more quickly than if it built a new factory. After a few months of remodeling, Ok brought the factory online in June. His was the first of the Kaesong companies to begin operating a factory in Vietnam.

In Sunghwa’s case, Kim decided to expand a factory that was already being built in Vietnam. The company had begun constructing two blocks of buildings in Vietnam in Dec. 2015; after the Kaesong shutdown, he made the decision to add another.

Jeon Gi-gyeong is president of Dream F, which had been making pants in Kaesong. Jeon took out a loan to complete the 4,300 square meter factory in Kaesong in Dec. 2015 - then found himself forced to find a substitute site in Vietnam after just a month and a half of operation. He built a new factory in the province of Thanh Hoa, about four hours from Hanoi, which went online in October of last year.

Lee Jong-deok, president of undergarment and sleepwear producer Young Inner Foam, also decided to move to Vietnam in April, two months after the shutdown. Although he admitted the move “could cause problems if the Kaesong Complex reopens because of the duplicate investment,” his first order of business was to head off the loss of customer orders.　

Tenant companies that have gone to Vietnam noted that it is not a bad environment as a processing site for sewing - but that it‘s also not as good as Kaesong. To them, going to Vietnam only brought the advantages of Kaesong into sharper relief.

Wage differences weren’t as large as expected. Per worker wage-related costs for Sunghwa amount to US$340 in Vietnam, compared to US$270 in Kaesong. While the base pay at the Kaesong Complex was only in the US$70 range, the company “ended up paying US$260-300 when you take into account worker protection goods, tissue, soap, and things like that.” Guarantees on the managers’ authority to hire, fire, and assign workers are a clear advantage for Vietnam; in Kaesong, the companies did not have hiring rights, but had to go along with the workers supplied to them by the North Korean government. And while products made at Kaesong are intended for supply to the South Korean market to meet domestic demand, those made in Vietnam are items that can be exported throughout the world.

Yet the view among tenant company bosses is that Vietnam still falls short of Kaesong. Perhaps the biggest difference was the higher productivity; Kaesong workers were “diligent and committed, with an outstanding sense of responsibility.” According to Ok, productivity in Vietnam “is about 70-80% what it was in Kaesong.”

Kaesong also offers advantages for distribution.

“With Vietnam, it takes about 15 days to send the raw materials and get a finished product. With Kaesong, you could be there and back within a day,” Kim said.

Lee noted that “distribution costs alone for a container come out to US$1,400.”

The short distribution times allowed small quantities of various raw materials to be sent, which allowed for small-lot production of different items. Timely production and sale of small-lot items resulted in more value-added. In Vietnam, it’s more or less out of the question.

Another big advantage of Kaesong was the fact that products could be listed as “made in Korea” - offering far greater market value than “made in Vietnam.” Another drawback of Vietnam factories is that buyers assign cheaper prices to items produced in Vietnam than they would those made in Kaesong.　

The slightly lower product prices can be offset to some extent with larger volumes, the company presidents said. What truly hurts for the Kaesong companies, they added, is the sudden diminishing of their contribution to advancement for the Korean people.

“In Kaesong, the machinery and fabric were all bought in South Korea,” said Ok, adding that “the distribution costs for Kaesong are low and there aren’t any duties.”

In Vietnam, the companies have to use Chinese machinery and fabric almost exclusively for their production. South Korean materials simply can’t compete once duties and distribution costs are taken into account. Production in Kaesong means that not only the tenant companies but also the partner businesses supplying the complex with raw materials made money. North Korean workers are also able to live in a somewhat better environment. The Vietnamese factories, in contrast, were ultimately only doing good things for Vietnam and China.

From the individual companies‘ standpoint, the future of the Vietnamese factories looks uncertain. Lee signed a five-year rental contract Young Inner Foam’s factory in Vietnam. From current conditions in Vietnam, he concluded it was the “last catch for Vietnam’s textile and sewing industries.” Lee is predicting difficulties ahead for sewing businesses in Vietnam over the next five years, and looks forward to Kaesong Complex reopening before then.

So it is that the Kaesong Complex tenant companies continue operating factories today in distant Vietnam - meeting the orders that will allow Kaesong to go back online once again.

By Kim Bo-geun, senior staff writer

Please direct questions or comments to [english@hani.co.kr]