TUMEN, CHINA — Setting up a brewery in North Korea seemed like a good idea to Harry Kim and his Chinese friends two years ago. Everyone likes beer, even in one of the world’s most closed and least understood countries, they believed.

Mr. Kim and his partners managed to start production after workers strapped brewing equipment to a truck in the Chinese border town of Tumen and drove it to the North Korean coastal city of Chongjin. Chinese engineers taught the locals how to brew. City officials loved the taste, he said.

But the small Chinese-North Korean venture ran aground within months after failing to get final approval from the authorities in Pyongyang.

Mr. Kim’s experience is an illustration of both the challenge and the potential of doing business in North Korea, which has grabbed global attention in recent weeks with its threats to wage nuclear war on South Korea and the United States.

“It wasn’t rejected. We just waited. The central government didn’t come and say ‘no’, but the documents were just never issued and so we eventually gave up,” said Mr. Kim, a Chinese national of Korean descent who lives in Tumen, in China’s northeastern Jilin Province.

Building a brewery in Chongjin, one the biggest cities in North Korea, would appear to make good business sense.

Domestic beer has to be trucked up from Pyongyang, 460 kilometers, or 285 miles, to the southwest. Terrible mountain roads and the long journey take their toll on the cargo, said Mr. Kim, speaking at a restaurant he owns a few blocks from the icy Tumen River, which divides the two nations. One tour operator said North Korean beer in Chongjin was twice as expensive as it was in Pyongyang.

Chongjin and provincial officials supported the project. Factory space was available in the struggling city, which is 130 kilometers south of Tumen. The local water was crystal clear, too, promising a clean and tasty product.

And to hedge the obvious risks, the local business partner arranged for the Chinese to buy shipments of North Korean seafood to sell in China at each stage that they invested in the beer venture.

“The problem isn’t that the people are hard to deal with,” Mr. Kim said. “These are all firsts. It’s not that the nation does not want to do it, but rather that it’s the first time.”

Indeed, North Korea lies at the very edge of the global investment frontier. After years of U.N. sanctions over the country’s nuclear and missile programs, few have tried to make money there, apart from Chinese companies and, in an industrial park near the North-South border, some South Korean companies. Pyongyang effectively closed that factory zone in the past week, recalling its workers amid its threats of war.

Between 2003 and 2009, Chinese investment in North Korea was the equivalent of $98.3 million, according to Chinese data cited in a 2011 report by Drew Thompson, a Korea specialist now at the U.S. Department of Defense. Analysts say Chinese investment has risen more recently after a push by Beijing, North Korea’s only major diplomatic ally, to increase economic links.

Examples of collapsed Chinese investments abound. Last year, the Xiyang Group said it had been “cheated” in a failed deal to refine North Korean iron ore. In public comments, the miner and steel maker said doing business in North Korea had been a “nightmare.”

There is little public information on North Korea’s beer market, but one thing seems clear — demand outstrips supply.

Troy Collings, a director at Young Pioneer Tours, a travel operator based in China that takes groups into North Korea and has organized brewery visits, said there were probably fewer than a dozen locally made beers available in the country.

In Pyongyang, two hotels concoct their own microbrews. The Rakwon department store creates its own eponymous beer, too, he said.

“They can’t produce enough for the domestic market,” Mr. Collings said.

The opportunity was clear — and reinforced for Mr. Kim when he saw the elite in Chongjin drinking a lot of Heineken and Corona.

So, in mid-2011, Mr. Kim and two friends joined with a North Korean businessman to put the brewery plan in motion.

Approval from the city of Chongjin came easily, he said. The province, North Hamgyong, gave the green light too.

And the first of three investments in equipment and supplies — the initial one worth about 200,000 renminbi, or $32,000 — was made.

Since North Korea has no system of credit and the risks of investing were high, Mr. Kim and his partners tied the beer project to seafood exports.

Before each investment was made, they were allowed to buy a cargo of North Korean seafood to sell in China. The first was about 50 tons of squid, he said.

Article source: http://www.nytimes.com/2013/04/13/business/global/beer-venture-fails-in-north-korea-despite-eager-market.html?partner=rss&emc=rss