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80% of Firms Making Little or No Profit
Kaesong Industrial Complex
80% of Firms Making Little or No Profit
  • By matthew
  • July 29, 2013, 05:49
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North Korean workers at Kaesong Industrial Complex produce sneakers.
North Korean workers at Kaesong Industrial Complex produce sneakers.


Working-level negotiations regarding the Kaesong Industrial Complex are about to be resumed between the two Koreas. Since the North shut down the complex, many in South Korea have pointed out that the issue be approached from an economic, not political, perspective. Democratic United Party senior advisor Chung Dong-young, who served as the Minister of Unification during the Roh Moo-hyun administration, claimed on May 24 that all 123 companies in the industrial complex were in the black.

The Ministry of Unification and the Small and Medium Business Corporation recently published a report on how to improve the business and investment conditions of companies in the complex. The report surveyed 119 out of the 123 firms there in May 2012 and analyzed their financial data for 2009, 2010 and 2011.

The results have shown that average sales and operating profits for 2009 stood at 900 million won and negative 157 million won, respectively. The total sales and profits were 106.2 billion won and negative 18.526 billion won, respectively, which means that the profit ratio amounted to 17% below zero.

The average turnover increased to 1.132 billion won the following year, yet the average operating profit was still minus 55 million won, was and equivalent to 6.765 billion won in total operating losses. The profit ratio stood at negative 4.9%, while that of small and mid-size enterprises (SMEs) in South Korea was as high as 5.61% during the same period.

Average sales rose to 1.476 billion won in 2011, with average profits standing at 56 million won to record a business profit rate of 3.8%. According to The Bank of Korea’s data, that of SMEs in South Korea was 5.44% the same year.

In 2011, firms in the complex with sales of 0.5 billion won or less posted a profit rate of negative 24%. The figure was negative 13.9% for those with sales of between 0.6 billion and one billion won, 3.8% for those with sales of between 1.1 billion and two billion won, 9.3% for those whose sales are between 2.1 billion and three billion won and 13.6% for those whose sales were higher than 3.1 billion won.

A total of 52 firms recorded business losses in 2011, approximately 44% of the companies surveyed. Moreover, among the 118 respondents, 24 and 25 were firms with annual sales of less than 0.1 billion won and of between 0.1 billion won and 0.3 billion won, respectively.

What matters more than operating earnings in business is the current net income. The average current income of the firms was negative 272 million won in 2009, negative 134 million won in 2010 and negative 14 million won in 2011. Furthermore, 50% of the 118 firms recorded a negative net income during the period, while 27.9% posted a net profit of less than 0.1 billion won, 13.6% of less than 0.3 billion won, 2.5% of less than 0.5 billion won and just 2% of 0.5 billion won or more. This signifies that four-fifths of the firms housed in the complex were in the red or posted a net profit of just 0.1 billion won at best. According to net profit data in the report, 15 of the firms had at least some gain in the period, while 37, or 35.2%, of them, remained in deficit.

The average assets of those companies were 3.39 billion won, with their debts standing at 2.631 billion won on average as of the end of 2011, and meaning that their average debt ratio was 346.7% that year. Meanwhile, the percentage was close to just one half of that in the same period for South Korean SMEs. Specifically, the debt ratio of the 436,293 small firms in the South that submitted their corporate tax reports to the National Tax Service in 2011 was 152.7% on average.

The debt ratio by industry segment was 501.5% for the textile and clothing manufacturers in Kaesong (169.4% for their South Korean counterparts), 232.6% for bag, shoes and leather goods manufacturers (163.4% for their South Korean counterparts), 115.9% for chemical, rubber and plastic manufacturers (compared to 153.5%), 1,575.4% for machinery and metal makers (compared to 158.2%), and 183.5% for electronics and electrical companies (compared to 139.9%), 316.7% for daily goods suppliers (compared to 172.6%).

At the same time, it has been found that 27 of those firms with sales of less than one billion won underwent capital erosion, while no less than 35 of the firms had a debt ratio of 301% or higher. The average capital adequacy ratio was just 22% for firms in Kaesong but 39.6% for those doing business in South Korea as of the end of 2011.

According to the Ministry of Unification’s data, the Kaesong Industrial Complex is not a good place to do business. Approximately 40% of the surveyed firms answered that they were disgruntled with the intervention from the Communist Party of the North. Furthermore, 99 of those surveyed replied that their influence on personnel management was far from enough, while only eight said the opposite. This clearly shows that most of the firms in the Kaesong Complex had little leeway in regards to making decisions on employment-related matters.