The Wall Street Journal reported yesterday in "North Korea Details Border Closings" on the background behind North Korea's recent chilliness towards cross-border commerce with the South:
"Before announcing the border closing, North Korea protested the South's new policy with vitriolic statements in its state-run media. While maintaining harsh rhetoric in its announcement Monday, North Korea said it wouldn't close the industrial park near the border city of Kaesong that represents the biggest joint economic project of the two countries. Instead, North Korea said it will "specially guarantee the business activities" in the industrial park, where about 70 small and midsize South Korean companies provide jobs to 33,688 North Koreans. It added, however, that it will impose tighter limits on the number of South Korean managers who can visit the factories.
""Companies in Kaesong will not be able to carry out their operations smoothly if North Korea continues to make us nervous," said Lee Bu-hyung, a manager of Ksunghwa Inc., which employs 720 North Koreans at a sock-making factory in the complex. "Suspending traffic would greatly hamper our business operations.""
As the WSJ goes on to note, the Kaesong project has been a cash cow for the North and it is not about to bite the hand that feeds it--yet:
"To carry out its plan, North Korea only has to stop traffic at two crossings through the two-mile-wide demilitarized zone that forms the inter-Korean border. The crossing on the east side of the countries provides little more than South Korean access to a mountain resort that has been closed since July, when a North Korean soldier there shot and killed a South Korean tourist.
"The other crossing is on the west side to Kaesong, where Hyundai Asan runs a tourist service in addition to the industrial park. North Korea said it will halt the tourist service, which attracts 200 South Koreans a day, and a little-used cargo-train link to the industrial park."
In a state-run economy, there is little focus on business efficiency, let alone best practices in supply chain management, and this is the risk businesses run by investing in Kaesong. The immediate factory facilities and personnel may be fairly productive, but if the surrounding supply chain architecture that allows that investment to deliver products to market collapses--for example, North Korea closing the only existing transportation links--that productivity becomes meaningless.
As a South Korean manager, frequent cross-border links for both goods and services (tourism) would provide some additional assurances. But with tourism shut down, companies invested in Kaesong will need to adjust their supply chain risk assessments. In fact, with the economy slowing, these companies may be able to find sourcing in China or elsewhere at discount while gaining reductions in overall risk. More thoughts here from North Korea Economy Watch.