A sort of polarization phenomenon is deepening recently in inter-Korean business deals. Since North Korea began to favor processing on commission or direct investment in electronics and information technology this year, processing on commission in light industries has waned. The South's first half of the year intake from the North of textile products processed in the North on commission topped US$15.44 million, down more than 10% from the identical period last year, while that of the same in electronics and IT hit $3.35 million, up a whopping 73%.

"We find that the North's interest in processing on commission in the light industry sector including textiles has plummeted recently," says Kang Jong Yop, a division manager of Middle Land Korea, which has been engaging in textile processing on commission in the North. "Thinking that they have learned all technologies needed in the light industry sector including textiles from South Korean businesses, they are keen on business tie-ups with South Korean counterparts in electronics and the IT sector." To get a letter of invitation to visit North Korea, a South Korean has to pledge an investment of no less than US$2 million or must be a firm engaged in either electronics or IT.

As a consequence, more and more South Korean textile companies that export to Europe and elsewhere are shifting their counterparts to Vietnam or Indonesia. "Accelerating the tendency is a lack of flexibility on the part of North Korean authorities," comments a business source involved. "While Southeast Asian countries lower labor costs during the off-season of summer, North Koreans don't do so." No labor cost reduction is possible in the North because the Price Determination Committee sets the cost in advance.

Another hurdle is the obsolescence of production facilities in the North. As South Korean firms have to provide efficient production facilities, they can hardly make profits even if they benefit from tax exemption when they bring into the country products processed on commission in the North, according to the sources. "When commissions are paid, we deduct the cost of facilities sent to the North," says Lee Dong Su, deputy department director of Hanil Synthetic Fiber. "The longer we do business, however, the more receivables are accumulated."

Due to the reduced North Korean interest in textile processing on commission, North Koreans restrict visits to the North of South Korean technicians and others for the purpose of technical training and quality control, rendering communication difficult with their North Korean counterparts. North Koreans reportedly insist on faxing through a third country.

The situation differs with electronics, however. North Korea is eager to induce South Korean firms producing even basic electronic parts, the technology of which is lacking in the North, in the form of either processing on commission or direct investment. The Korea Terminal Industry has been producing electronic parts including terminals by supplying basic and supplementary raw materials to the North. North Korea now reportedly wants to expand the electronic parts project. The North's interest in the IT sector is even greater. On March 17 last, less than six month into a joint venture with a North Korean counterpart, South Korean firm Entrak Ltd. agreed to construct the "Korea Technology Development Works" in Pyongyang by the end of this year. The projected institute will develop computer software and train North Korean IT technicians. "North Koreans have met whatever requests we've made," says an IT executive who visited the North in June.

But the IT sector too has elements of uncertainty. As seen in the shrunken textile processing on commission, North Korea shifts its attitude once it thinks it has learned all technologies involved. In addition, North Koreans don't permit South Korean business people to reside in the North on a permanent basis for technology training and quality control purposes.

(Lee Kyo Kwan, haedang@chosun.com )