Orascom Report

North Korea: The risk of
Operations
Global Telecom Holding (Orascom)
Names:
Student Numbers:
Idil Aare, Marieke Ter Meer

1600098, 1600115
Class:
IEXSB16S
E-mail Addresses:
Idil.aare@metropolia.f
Maria.termeer@metropolia.f
Teacher:
Mr. Chapman
|Idil Aare & Marieke Ter Meer| Global Risk Trends | LX00BE69 |Orascom in North
Korea|
Global Risk Trends Markets and Mother Nature |
Introduction
This report is written during the course Global Risk Trends in which we are debating the
concept of risk in all of its unique forms. Risk, in which we have defned it as uncertainty
concerning the occurrence of a loss, is a broad concept. This report is dedicated to
political risk, which in terms is defned as probability of loss due to political instability in
the buyer's country that may result in cancellation of a license or otherwise affect the
buyer's ability to make payments. Political risks are insurable risks, and overlap with the
political component of force majeure risks. (George E. Rejda, 2014)
We are here to analyse the case of Global Telecom Holding S.A.E. (formerly Orascom
Telecom Holding S.A.E.), an international telecommunications company operating GSM
networks in the Middle East, Africa, Canada, and Asia. It started its operations in Egypt by
launching the frst Egyptian mobile operator Mobinil in 1998. Global Telecom Holding
S.A.E. is the only company active and proftable in North Korea and that has therefore,
2
dragged
our attention.
It is no mystery why established frms chose not to enter North Korea, simply because
political risk was way too high. However Orascoms entry in North Korea is illustrative: the
companys Egyptian roots gave it a large edge over established frms like Vodafone and
its willingness to develop a telecommunications infrastructure where virtually none
existed won expressions of gratitude from the Dear Leader. No country is more closed to
foreign (in)direct investment and capitalism than North Korea, yet Orascom managed to
develop a positive relationship with the government. How?
This report has a very strict and clear structure in which it will start with a company
outline of Global Telecom holding. This chapter will provide a clear outline of the company
in terms of its sales per division, market share, mission and vision statement and a short
introduction of the company.
After the basic outline of the company, we will elaborate on the growth period of Global
Telecom holding in which we explain what its growth strategy is and how it was able to
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deal with political risk. It provides a clear history of the company

its growth perspective.
Chapter three is concerned with the history of North Korea. In order to understand the
facet of North Korea, one must frst understand the underlying history of the country.
Besides, we will give a short brief history of North Korean telecommunications policies in
a variety of settings, paying particular attention to the recent decision to authorize yet
another foreign cellular provider, in this instance the Egyptian frm Orascom Telecom, to
provide nationwide cellular service, potentially leapfrogging from North Koreas
dilapidated existing systems to a modern system. The theme that emerges from this
review is of a government that tends to place a higher value on political control than on
economic development. Attempts at modernization are subject to reversal at times of
heightened insecurity over loss of control, yet the Orascom deal holds forth the prospect
of things working out differently this time.
Chapter four is concerned with Global Telecom Holdings strategy of entering North Korea.
We3elaborate on how the Holding was able to gain trust in the dictating country there.
Please remember here that reviews the state of North Koreas telecommunications
infrastructure, though the data invoked should be considered highly provisional. Most of
the information is regarded as a state secret, and some data maintained from putatively
authoritative sources (e.g., statistics reported through the United Nations system) are
probably estimates or have been fabricated by reporting sources.
Although Global Telecom Holding has been very successful in North Korea so far, it has
encompassed many problems. For example, a like state-run competitor emerged in North
Korea, and Cairo-based Orascom hit problems trying to repatriate profts. Orascom said in
a November fling in Egypt it had lost control of its 75%-owned North Korean venture,
Koryolink, and struck the venture from its balance sheet, removing hundreds of millions of
dollars in assets. Chapter 5 is dedicated to these problems.
While chapter fve is concerned with the problems that the Holding is facing, chapter 6 is
dedicated to the creativity of the company in fnding solutions to these issues. Yet again
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the question remains how to deal with the most dictated and
corrupt politic regime of all times?
The report starts with an executive summary which provides the busy reader with a short
and comprehensive summary of the report. In contrast, we end with a conclusion in which
we give our recommendation to the Global Telecom Holding and its partners.
Furthermore, all references and appendices can be found in the end of this report and
also provides links for future reading for those who would like to learn more about this
subject.
Lastly, we would like to take the time to thank Mr. Chapman for his guidance and
enthusiasm throughout the process of writing this report. He has always made time to
help us whenever needed and his knowledge and experience has thought us much about
the written topic.
Table of Content
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Introduction
2
Executive
Summary..
5
Chapter 1. Company
outline9
Vision
9
Mission
9
Shareholder
Structure...9
Global Telecom Holding Corporate
5
Strategy.10
3rd Quarter 2015 Financial Statements and Key performance
indicators.10
Group operations in North Korea and Risk
statements..10
Chapter 2. Growth Strategy.

.12
Chapter 3. History and country outline of North
Korea15
Country
Outline...
15
History
..15
Recent
Events...
16
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Telecommunications
16
Chapter 4. Market Entry Strategy North-Korea

Why did Orascom chose North Korea as a market?
19
Market Entry
Strategy
19
How did Orascom gain trust of the North Korean government? ..
20
Chapter 5. Problems
encountered..22
Currency
Rate
.22
Losing
Control
23
Reputation
Loss..
..23
Chapter 6. Solution.
...26
Current
Situation
26
Option 1. Eliminate
Operations.26
Option 2. Enter merger
talks..29
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Conclusion
.34
Appendices
35
Bibliography
.40
Executive Summary
Global Telecom Holding S.A.E. (formerly Orascom Telecom Holding S.A.E.) is an
7
international telecommunications company, their vision is to harness their networks to
provide millions of connected customers with solutions that empower their personal and
professional lives. The groups operations in North Korea relate primarily to the 75%
holding in the local telecom operator Koryolink.
In regulated industries such as telecommunications, emerging market companies like
Global Telecom Holding abound. The company has excelled at expanding into other
emerging economies, while giants such as Vodafone have shied away from many of these
risky markets, because even though established multinationals may have deeper
experience when it comes to operating telecommunications networks, they fnd it difficult
to expand into countries with weak institutional environments in which politicians and
regulators have high levels of discretion and important gaps exist in the development of
the infrastructure. First, the lack of preexisting telecommunications infrastrucure and the
flexibility of mobile networks meant faster growth than in the developed world. The
second factor was that established frms were reluctant to enter these countries because
of the risks and also because, if they dared enter they would not be patiend enough to
Korea|
harvest the fruits. Obviously, the risks were higher too, along
with the returns, but the takeway point is that Orascom was willing to go
down this path only because of its experience in Egypt.
Over time North Korea has gradually distanced itself from the world communist
movement. The Juche ideology is the cornerstone of party works and government
operations. Moreover, North Korea follows a "military-frst" policy. North Koreas
telecommunications are a difficult challenge: While improvements in telecommunications
can contribute to material prosperity, and by extension, political legitimacy, they may
also contribute to a loss of control over information flows and enhance the ability of
challengers to organize against the incumbent regime. The countrys dilapidated
telecommunications capability lags well behind world standards. Most of the modern
infrastructure are from the 1950s and 1960s.
So as you were able to discover, Orascom has always had something with risky markets
since it originally came from a risky emerging country anyways, it did no see the
boundaries
and limitations like other MNEs would. For Naguib Sawiris, the choice of
8
entering North Korea was simple. He has explained that many of the established
multinationals did not understand the value of being in highly populated countries.
The good vibes began when Orascom Construction Industries was developing projects in
China, close to the North Korean border. As part of the deal, Orascom Construction was
allowed to use North Korean labour in its China projects. The arrangement allowed
Orascom to get to learn about the governments plans to promote infrastructure projects
as well as to establish trust with politicians and regulators. Orascom was eventually
granted a 25-year license with an exclusivity period of four years, without licensing fee,
although with the commitment to develop the telecommunications network.
So here is what is smart about Orascoms approach to doing business in North-Korea.
First, the company negotiated a win-win situation with the government, sometimes going
beyond the conventional arrangements in the telecom industry. And second, it followed a
strategy of escalating commitments in the country, taking a series of small steps over
time as opposed to making a big investment at the beginning.
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So until now it seems like Global Telecom Holding has only had
to report success stories while operating in North Korea. However, this is far
from the truth either. As written before, growing proft has not been positive at all for
Orascom, simply because Orascom's efforts to get its profts out of North Korea have
been unsuccessful, partially because of international sanctions imposed on the country
but mainly by the government's refusal to let the money go. To transfer money out of
North Korea, Orascom needs permission from the government and it hasn't been granted,
despite it being a partner in the joint venture. Moreover, the government hasn't acted
because it can't afford to. The profts are held in North Korean won, but the currency isn't
traded internationally and the government's official rate is set artifcially high, at 100 won
to the U.S. dollar. But at the black market exchange rate, which is effectively the real
value of the currency in North Korea, the cash is worth only a small percentage of its
original value. And therein lays the problem. The government can't afford to pay the
money at the official rate, and it can't be seen to officially recognize the black market
rate. Another issue came to light in an auditor's report when Orascom dropped another
bombshell
to its investors: It said the North Korean government, which supposed to be its
9
closest partner, had set up a second carrier to compete with Koryolink. With its options
limited, Orascom entered merger talks to combine Koryolink with the new carrier. What's
more, the North Korean government has apparently proposed that it be the majority
partner in any new venture that's formed.
So how can Orascom deal with these issues? We practically see two possible solutions:
eliminate all of their operations and investments or enter merger acquisitions.
Option 1. Eliminate operations / Investments

Because the situation is escalating quickly, e.g. new competitor, currency problems and
the international relations are under more and more pressuring, incurring sanctions from
all sides of the world, we would highly recommend Orascom here to retrieve its
operations fully, in order to prevent further damage to their fnancial status. Based on
Scott McKays framework for presenting and assessing the results of a risk assessment
process the likelihood of the risk, which is in Orascoms case the government, happening
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is very probable, based on the events happening in the past

when the government has for example borrowed heavily from the European
Union, Russia and China and has never paid a penny back, showing that the government
does not take the international standards so seriously. Besides, the potential impact of
the risks actually happening is extreme in this case. The government was unable to
retrieve any of its profts and now has to compete against a new competitor or entering
even more dangerous negotiations for merging the two companies, which only makes the
governments stake in the business bigger, thus enhancing the risk further.
Option 2. Enter Merger negotiations

If Orascom is willing to take another risk in entering negotiations for a possible merger,
we will here state the best advice for Orascom when entering. A merger in this case, it
would be the operations of Koryolink and the government join together and will probably
result in the formation of a new company, although it might be able to keep the same
name. (Peter. J. Dowling, 2013) A merger contains a couple of phases. Each phase has a
unique set of activities and risks that carefully need to be managed in order to mitigate
10
risk and to move forward. In the pre-M&A phase, which includes a screening of alternative
partners based on an analysis of their strengths and weaknesses, the company should
further focus on their risk assessments and future integration of HR activities. Risk
assessments identify key areas of interests to both internal and external stakeholders.
The due-diligence phase deals with a more in depth focus on analysing the potential
benefts of the merger. Here, product-market combinations, tax regulations, and also
compatibility with respect to HR and cultural issues are of interest. In the integration,
Orascom should have fgured their incentive based strategy out and is thus moving
further towards implementation. In the implementation phase, the previous plans
discussed are put into action and place. This process will be driven by the availability of
time and resources to make changes of the company and country, the market impact of
changes and their sequence and their system impact.
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11
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Chapter 1. Company
Outline
Global Telecom Holding S.A.E. (formerly Orascom Telecom Holding S.A.E.) is an
international telecommunications company operating GSM networks in the Middle East,
Africa, Canada, and Asia. It started its operations in Egypt by launching the frst Egyptian
mobile operator Mobinil in 1998.
Global Telecom is operating mobile networks in high growth markets in Africa and Asia,
having a total population under license of approximately 415 million. Global Telecom
operates its networks in Algeria, Pakistan, and Bangladesh. In addition it has an indirect
equity ownership in Telecel Zimbabwe. Global Telecom Holding is a member of the
VimpelCom Group, one of the world's largest mobile telecommunications provider by
number of customers. Global Telecom Holding is a member of the VimpelCom Group, one
of the world's largest mobile telecommunications provider by number of customers.
12
Please review appendix 1 for their Swot Analysis. (Global Telecom Holding S.A.E.,
2016)
Vision
To harness our networks to provide millions of connected customers with solutions that
empower their personal and professional lives.
Mission
Global Telecom Holding exists to...
Enrich customers' lives through accessible communication services

Ensure shareholders' returns with the highest yields
Expand employees horizons with exceptional growth opportunities
Enable communities' development and prosperity by always giving back
Shareholder Structure
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Global Telecom Holding Corporate

Strategy
Global Telecom
Holding has a strategy in which
it
tries
to
focus on six
strategic priorities which will reinvent the total group. By focusing on the six priority
areas, the company will ensure that the business is positioned so that it will continue to
be successful in the face of the new trends facing the telecoms industry, including cost
and pricing pressures, the rapid migration to data, the need to capture and monetize new
revenue streams and the requirement to be flexible and agile in an increasingly digital
world. Traditionally Orascom had been known for its construction projects such as water
treatment plants, railways, hotels and skyscrapers. Later it diversifed into different
businesses like, production of building materials, telecommunications and tourism
development. These businesses went on to form Orascom Construction Industries,
Orascom
Telecom Holdings and Orascom Hotels Holdings. We would therefore like to
13
highlight the success of Orascoms diversifcation strategy.
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3rd Quarter 2015 Financial Statements and Key
performance indicators
Group operations in North Korea and Risk statements
The groups operations in North Korea relate primarily to the 75% holding in the local
telecom operator Koryolink. North Korea is subject to international sanctions imposed by
the International community, European Union and the United States, as well as by the
United Nations. These sanctions have the effect of restricting fnancial transactions and
the14
import and export of goods and services, including goods and services required to
operate, maintain and develop mobile networks. Whilst these sanctions do not currently
have a material impact on the operations of Koryolink, as it is a domestic mobile operator
with minimal foreign interaction, there can be no assurance that if international sanctions
are subject to enhanced enforcement, the Parent Companys operating subsidiary in
North Korea will be able to fnance its operations, transfer funds to and from the Parent
Company or operate its mobile network. This could adversely affect the Groups
investments, if the group becomes unable to continue to operate its business in North
Korea. We come back to this in chapter 5.
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15
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Chapter 2. Growth
Strategy
In regulated industries such as telecommunications, emerging market companies like
Global Telecom Holding abound. The company has excelled at expanding into other
emerging economies, while giants such as Vodafone and AT&T have shied away from
many of these risky markets, because even though established multinationals may have
deeper experience when it comes to operating telecommunications networks they fnd it
difficult to expand into countries with weak institutional environments in which politicians
and regulators have high levels of discretion and important gaps exist in the development
of the infrastructure. Their comfort level is found in completely different environments;
countries with basic infrastructures already developed and stable regulatory conditions;
so that initial investment is low and changes in the rules of the game are less likely to
change. (Demirbag, 2013)
16
In
In the process of expanding the business, Sawiris became a legend in Egyptian

business circles: Hes a fghter he started three times in his life, his oldest son,
Naguib told interviewer Charlie Rose
the
case
of
Global Telecom Holding, it is hard to explain its growth strategy without taking into
consideration its ability to operate in weak institutional environments subject to unusually
high levels of risk such as Iraq and North Korea.
The origins of Orascom lie in a Cairo-based construction frm established in 1950 by Onsi
Sawiris. While developing and building everything from dams and highways to shopping
malls, the company acquired two capabilities that are invaluable to the
telecommunications industry: experience in the execution of infrastructure projects and
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experience in dealing with politicians and regulators. Sawiris got

a taste of political risk in 1971 when his business was nationalized. Five
years later, under a new political regime more favorable to private business, he formed a
second construction company that became the starting point of Orascom Group, a
diversifed conglomerate with three arms; Orascom Telecom Holding Orascom
construction Industries, and Orascom Hotels and Development each run by one of his
sons. (Sawiris, 2008)
Even though the Orascom Group had a presence in the IT feld trading and distributing IT
and telecommunications equipment, the company became a telecomminucations service
provider though acquisitions, not by growing grow within. Its frst foray was the purchase
of InTouch, a domestic internet service provider. In 1998 teamed up with Motorola and
France Tlcom, Orascom won the bid for the privatization of 51% of ECMS (Egyptian
17
Company for Mobile Services), also known as Mobinil. So far the story of Orascom might
sound like the standard business saga of a well-connected family in a developing
economy, however, theres much more to it than garden variey cronyism.
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In 1998, Onsi Sawaris stepped down after installing Naguib as

charmain and CEO of Orascom Telecom Holding. Naguib was the one who
realized the huge potential of telecommunications in emerging markets thanks to the
confluence of two factors. First, the lack of preexisting telecommunications infrastrucure
and the flexibility of mobile networks meant faster growth than in the developed world.
The second factor was that established frms were reluctant to enter these countries
because of the risks and also because, if they dared enter they would not be patiend
enough to harvest the fruits. Obviously, the risks were higher too, along with the returns,
but the takeway point is that Orascom was willing to go down this path only because of
its experience in Egypt.
From its highly educational home platform, Orascom started to expand into other
emerging and risky countries that shared two features: high-growth potential and little
competition. Sometimes these features were accompanied by weak institutional
environments, which meant that once the investment was made, the rules of the game
coyld change at any time. But Orascom and other companies in the telecommunications
18
industry discovered that governments were in fact interested in developing infrastructure
If you come from a risky destination, then the risk is relative. I remember when I
and
went to Algeria and they told me they were killing people there and there are
some bombs, and I said: This is everyday news in my part of the world, so whats
the
big deal?
Naguib
would handsomely reward
companies
that
would Sawiris
help them to do so.
Over the frst decade of the new century, Orascom Telecom entered countries that are a
roster of global hotspots: Jordan, Yemen, Pakistan, Zimbawe, Algeria,, Tunisia, Iraq,
Bangladesh, Burundi, the Central African Republic, Namibia, Lebanon and North Korea.
One would be hard-pressed to fnd another company in any other industry that exposed
itself to such epic risks in so many chaotic countries, becoming the sixth largerst mobile
operator in the world!
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19
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Chapter 3. History and country outline

of North Korea
Country Outline
North Korea is a country in East Asia, in the northern part of the Korean Peninsula. The
name Korea is derived from the Kingdom of Goguryeo, also spelled as Kory. The capital
and largest city is Pyongyang. North Korea shares a land border with China to the north
and northwest, along the Amnok (Yalu) and Tumen rivers, and a small section of the
Tumen River also forms a border with Russia to the northeast. The Korean Demilitarized
Zone marks the boundary between North Korea and South KoreaNorth Korea's 24,852,000
people are ethnically homogeneous. (CIA World Fact Book, 2015) (New York Times, 2012)
Please see appendix 2 and 3.
History
Korea was annexed by the Empire of Japan in 1910 and until the end of World War II;
Korea was a single political entity whose territory roughly coincided with the Korean
20
Peninsula. Since the Armistice Agreement ended the Korean War in 1953, the northern
division of the peninsula has been governed by the Democratic People's Republic of
Korea, while the southern portion has been governed by the Republic of Korea, with the
north occupied by the Soviets and the south by the Americans. (Korea Overseas
Information Service, 2003)
Over time North Korea has gradually distanced itself from the world communist
movement. Juche, an ideology of national self-reliance, was introduced into the
constitution as a "creative application of MarxismLeninism" (French, North Korea: The
Paranoid Peninsula, 2007) in 1972. The means of production are owned by the state
through state-run enterprises and collectivized farms. Most services such as healthcare,
education, housing and food production are subsidized or state-funded. In the late 1990s,
North Korea suffered from a famine that resulted in the deaths of hundreds of thousands
of civilians. North Korea continues to struggle with food production to this day. (Martin,
2004)
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The Juche ideology is the cornerstone of party works and

government operations. It is viewed by the official North Korean line as an
embodiment of Kim Il-sung's wisdom, an expression of his leadership, and an idea which
provides "a complete answer to any question that arises in the struggle for national
liberation". Juche was pronounced in December 1955 in order to emphasize a Koreacentered revolution. Its core tenets are economic self-sufficiency, military self-reliance
and an independent foreign policy. The roots of Juche were made up of a complex mixture
of factors, including the cult of personality centered on Kim Il-sung, the conflict with proSoviet and pro-Chinese dissenters, and Korea's centuries-long struggle for independence.
(Library of Congress, 2009)
North Korea follows Songun, or "military-frst" policy. It is the country with the highest
number of military and paramilitary personnel, with a total of 9,495,000 active, reserve,
and paramilitary personnel. Its active duty army of 1.21 million is the fourth largest in the
world, after China, the U.S., and India. It also possesses nuclear weapons. (Bureau of East
Asian and Pacifc Affairs, 2007)
21
Recent events
Recently, the situation between North Korea and the rest of the world is under extreme
stress again. There are recent events that put an enormous strain on top of the
relationship between the North and South. It all started when North Korea conducted a
nuclear test around the 6th of January and until now (March 2016) the tensions are
running high. Please see appendix 4 where we have created a timeline of all the recent
events.
Telecommunications
Telecommunications are one of the basic building blocks of a modern economy. In a world
of globalized competition, economic development can be hamstrung by inferior
telecommunications. But the formation of telecommunications policy poses a difficult
challenge for authoritarian regimes: While improvements in telecommunications can
contribute to material prosperity, and by extension, political legitimacy, they may also
contribute to a loss of control over information flows and enhance the ability of
challengers to organize against the incumbent regime. These opposing tendencies are
Korea|
manifest in contemporary North Korea. The countrys

dilapidated telecommunications capability lags well behind world standards.
The countrys physical infrastructure is lacking and decrepit, with a considerable share of
the general infrastructure dating back to the Japanese colonial period. Most of the
modern infrastructure installed by Soviets or based on Soviet or Chinese designs are from
the 1950s and 1960s.
For security purposes, much of the power and telecom transmission network is buried,
hampering successful maintenance. If ever there were a country that could beneft from a
telecommunications upgrade, it is the DPRK. The country faces both external and selfimposed internal constraints on telecommunications modernization, however. Externally,
North Korea is one of the few remaining socialist states and the most militarized country
in the world. It is embroiled in a diplomatic conflict over its nuclear ambitions. The upshot
is that it is subject to Coordinating Committee for Multilateral Export Controls (COCOM)
restrictions under the Wassenaar Agreement, impeding its ability to import state-of-theart technology.
22
More fundamentally, government policies reveal an ambivalent attitude, driven by
conflicting goals of modernization and control. In an attempt to make a great leap
forward, the government has seized upon the promotion of information technology as a
strategic priority, with Pyongyang at the top of a vertical technology hierarchy. Yet the
regime repeatedly reverses feld when its insecurity and instinct for control trumps
development, as illustrated by the countrys multiple false starts in establishing its
cellular phone network, the single most frequently identifed problem in doing business in
North Korea in a recent survey of Chinese businesses operating there. What emerges is
the primacy of political over economic concerns. Policy implicitly regards
telecommunications development as a means of earning hard currency rents rather than
as a tool to enhance economic efficiency and competitiveness.
Social communication is still problematic. Most calls are made through operators- an
important job. This is a prime occupation for women, and a way to gain access to rumor
and information, before other, workers.
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23
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24
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Chapter 4. Market Entry

Strategy North-Korea
Chapter 2 has already given you a basic understanding of how Orascom has used its
weaknesses as strength and how it was able to grow so big in a short amount of time. But
that doesnt directly or necessarily give the same outcome for a country like North Korea.
This chapter is therefore dedicated to showing why Orascom chose North Korea as a
market in the frst place, how it was able to enter and how it gained trust from the
government itself.
Why did Orascom chose North Korea as a market?

As you were able to discover, Orascom has always had something with risky markets
since it originally came from a risky emerging country anyways, it did no see the
boundaries and limitations like other MNEs would. For Naguib Sawiris, the choice of
entering North Korea was simple. He has explained that many of the established
25
multinationals
did not understand the value of being in highly populated countries. He
said that it was a simple calculation: I knew whats going to happen in our part of the
world-we have more population, and revenues are going to be higher and growth is going
to be higher too.
Market Entry Strategy

As said before, no country is more closed to foreign (in)direct investment and capitalism
than North Korea yet Orascom managed to develop a positive relationship with the
government. How? The good vibes began when Orascom Construction Industries was
developing projects in China, close to the North Korean border. The company established
negotiations with the North Korean government and in 2007 agreed to invest $115 million
in a cement plant in exchange for 50% of its equity. (Noland, 2008) The money was
directed to modernize the facilities. As part of the deal, Orascom Construction was
allowed to use North Korean labour in its China projects. The arrangement allowed
Orascom to get to learn about the governments plans to promote infrastructure projects
as well as to establish trust with politicians and regulators. Orascom was eventually
Korea|
granted a 25-year license with an exclusivity period of four

years, without licensing fee, although with the commitment to develop the
telecommunications network. (Second cover photo represents a hotel constructed by
Orascom in the capital Pyongyang.)
Gaining trust of the North Korean government

With no competition and no licensing fees, it was a golden opportunity for Orascom
Telecom Holding, said Hassan Abdou, CEO of Orascoms parent holding company. The
North Korean project, he added, is, in fact relatively low-risk when compared to the
potential reward. In most other countries, the licensing fees are a signifcant portion of
the initial investment, but in this endeavour there was no such cost. (John Ihlenfeldt,
2009) Recently, Orascom has also diversifed into a North Korean bank and is active in
construction projects such as the Hotel Ryugyong, an ambitious but still unfnished 105floor skyscraper in Pyongyang.
26
So here is what is smart about Orascoms approach to doing business in North-Korea.
First, the company negotiated a win-win situation with the government, sometimes going
beyond the conventional arrangements in the telecom industry. And second, it followed a
strategy of escalating commitments in the country, taking a series of small steps over
time as opposed to making a big investment at the beginning. But Orascom was never
stubborn or obsesses about succeeding at all costs. In countries in which the business did
not evolve according to the initial expectations, the company liquidated its investments.
For instance in Iraq, when they realised that the war is never going to be over.
Orascom has carved out a fair competitive position in the global mobile t industry
virtually unnoticed, by trying to simply fly under the radar screen of the established
multinationals. They have positioned themselves for continued growth while learning
along the way how to cope with political risk.
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27
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28
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Chapter 5. Encountered
Problems
Although the price is quite high because the government had put a big tax on handsets
which makes it difficult for everyone to participate but we are having negotiations with
the government to reduce that, the company has been successful! "In its frst two weeks
of operation, in December 2008, Koryolink signed 6,000 subscribers -- not bad for a
country whose citizens need government approval to get a cell phone and where they
needed foreign currency to buy minutes.
Thus subscribers had been grown steadily over the past few years and Orascom
expanded coverage to major cities, highways and railways. Even additional services were
added, like MMS picture messaging, and subscriber numbers passed 2 million users.
Visitors to Pyongyang remarked on how common it had become to see people on cell
phones, and TV news carried reports about new phones. Success brought profts, which
29
was good news for Koryolink but ultimately bad news for its Egyptian owner. We will get
to that point later. (Williams, 2009)
So until now it seems like Global Telecom Holding has only had to report success stories
while operating in North Korea. However, this is far from the truth either. Operating in
North-Korea has never been easy since the rules of the game change whenever the Dear
Leader things they need to change and that of course, always happens when he can gain
some proft from changing the rules. Besides that, one must not forget that North Korea
has always been profting from other countries in the 19 th century, borrowing heavily
without ever paying a penny back. (French, North Korea: The paranoid Peninsula, 2007)
Currency rates bring problems

As written before, growing proft has not been positive at all for Orascom, simply because
Orascom's efforts to get its profts out of North Korea have been unsuccessful, partially
because of international sanctions imposed on the country but mainly by the
government's refusal to let the money go. To transfer money out of North Korea, Orascom
Korea|
needs permission from the government and it hasn't been

granted, despite it being a partner in the joint venture.
The government hasn't acted because it can't afford to. The profts are held in North
Korean won, but the currency isn't traded internationally and the government's official
rate is set artifcially high, at 100 won to the U.S. dollar. But at the black market exchange
rate, which is effectively the real value of the currency in North Korea, the cash is worth
only a small percentage of its original value. And therein lays the problem. The
government can't afford to pay the money at the official rate, and it can't be seen to
officially recognize the black market rate. So the two sides have spent months locked in
talks about what to do.
Losing control
Another issue came to light in an auditor's report when Orascom dropped another
bombshell to its investors: It said the North Korean government, which supposed to be its
closest partner, had set up a second carrier to compete with Koryolink. With its options
limited,
Orascom entered merger talks to combine Koryolink with the new carrier. The
30
North Korean government has agreed to the move in principle, but so far nothing has
happened. What's more, the North Korean government has apparently proposed that it be
the majority partner in any new venture that's formed. (PC world, 2012)
That led to a dramatic statement from Orascom when it reported its fnancial results: "in
the group management's view, control over Koryolink's activities was lost." Sawiris
appears to hold out hope, but he might be out of moves. "We are very proud of the
success of our operation 'Koryolink'," he said in a statement. "We have around 3 million
people today carrying our phones in the DPRK. We are still hopeful that we will be able to
resolve all pending issues to continue this successful journey." (Orascom Telecom Group,
2012)
This thus basically confrms what experienced watchers of the North Korean economy
have known for ages. The Pyongyang government perceives international economic
cooperation as a zero sum game, and does not care much about its international
Koryolink, which is 75 percent owned by Orascom, is estimated to have

$630m in cash reserves, but sanctions prevent conversion to foreign
currency. (Albawaba, 2015)
Korea|
standing. This means that foreign partners are cheated as soon

as they outlive their usefulness, which in most cases means as soon as
goods and services are delivered. The company has been overwhelmed by the friendly
behavior of North Korea when entering negotiations in the process of setting up a joint
venture and has thus lost its focus on the possible risks. It is clear now that the North
Korean government still knows its tricks when accruing debt on the shoulders of other
countries or, in this case, companies.
Reputation Loss
Besides the currency standard issues and the fact that Orascom has to fght a new
competitor, many experts and formal employees are still scared for reputational loss
when moving across the borders of North Korea. Since North Korea is well known for their
violations of human rights, it might affect the reputation of the company even though this
is really hard to measure in real-time numbers.
31
Korea|
32
Korea|
33
Korea|
Chapter 6. Solutions
So far we have analysed the case of Orascom and North Korea, we have described its
bumpy journey until now, with all of its success stories and all of the current problems. As
we have seen, the problems are big and put a huge strain on the proft making business.
There is therefore action needed. This chapter deals with the current situation and
provides Orascom with two possible solutions: eliminate all of their operations and
investments or enter merger acquisitions. We know that these options are the complete
opposite outcomes and have nothing to do with each other; this makes our advice a bit
uncommon. However, one must keep in mind that the situation that Orascom is facing at
the moment has nothing to do with bad management, marketing analysis or brand
strategies etc. it exists purely due to the risky environment and government Orascom has
to deal with. Due to the unexpected outcomes they are facing, we offer two completely
different solutions.
34 is the situation right now?
How
The current situation is not very promising. Orascom is entering negotiations with the
North Korean government to retrieve some of its profts out of the country, but at the
moment, the government is more concerned with other things. Its international
relationships, if it even had any, are again under fre as described in the timeline in
appendix 3. The European Union, United States, Japan, Russia, China and the United
Nations have all put sanctions on the country, which only seems to upset the Korean
government even more, leading towards even more focus on their never ending weapon
arsenal.
Option 1. Eliminate operations / Investments

We are highly aware that no company would like to fully eliminate and retrieve its
investments and assets when the operation is running quite well. If it would not be
interfered by the North Korean government deciding to not pay back the profts and
starting a competitor, Orascom would not face any problems so far and would actually
still grow in subscribers and proft every day. Unfortunately, this is not the case anymore.
Korea|
The highly corrupt government is not a government one should

trust easily and this has thus been proved again.
Because the situation is escalating quickly, e.g. new competitor, currency problems and
the international relations are under more and more pressuring, incurring sanctions from
all sides of the world, we would highly recommend Orascom here to retrieve its
operations fully, in order to prevent further damage to their fnancial status.
Scott McKay, AICPA, 2011 has put together a framework for presenting and assessing the
results of a risk assessment process visually and in a meaningful and concise way. This
heat maps is a way of representing the resulting qualitative and quantitative evaluations
of the probability of risk occurrence and the impact on the organisation in the event that
a particular risk is experienced. (AICPA, 2011)
We would argue here that the likelihood of the risk, which is in Orascoms case the
government, happening is very probable, based on the events happening in the past
when the government has for example borrowed heavily from the European Union, Russia
35
and China and has never paid a penny back, showing that the government does not take
the international standards so seriously.
Besides, the potential impact of the risks actually happening is extreme in this case. The
government was unable to retrieve any of its profts and now has to compete against a
new competitor or entering even more dangerous negotiations for merging the two
companies, which only makes the governments stake in the business bigger, thus
enhancing the risk further.
Korea|
36
The outcome of
this matrix plot is thus not very promising, but the question still remains what would be
the next step? What does a score of 25% mean to Orascom? The next matrix is linked to
the previous matrix and basically provides four basic outcomes possible: Reduce, avoid,
transfer and accept.
And as the phrase suggests, a joint venture is a business agreement between two or
more parties that choose to enter into a partnership for proft. But it also means joint
exposure to adverse consequences and potentially signifcant exposure to the owners
objectives, particularly from a strategic, fnancial, and reputational perspective.
Something that the North Korean government does not take seriously at all. So lets take
a look at the impact and consequences of this failed responsibility.
Korea|
Again we are
looking at a high impact and a
high chance of likelihood
which brings us to the section
that mentions avoid.
Although it might seem too
late now to fully avoid the risk
of
an unstable, weak and corrupt

North Korean government,
Orascom can however take
action to limit further impact
of
the already increasing risk

factor. The only advice we are
able to offer here is again to
avoid further damage. If it is
not37
possible for Orascom to fully pull back their entire operations, we can at least advice
Orascom to stop further investments with the North Korean Government, until the risk is
lower or is settling down. Until that point, we see nothing in increasing investments or
even entering a merger with North Korea, since it will only increase their power to
damage the company even further. It might sound harsh but we advise Orascom to write
of the venture, estimated to be worth $832 million in June 2015. (Mobile World Live,
2016)
Korea|
Option 2. Enter Merger negotiations

Recently, news articles claim that Orascom did however enter negotiations
to make Koryolink from a joint venture towards a new merger with its biggest
competitor set up by the North Korean government in order to get more saying and
ownership over the company. As already made clear in the previous section, we highly
recommend Orascom to take its losses and move out as soon as possible to prevent
further damage! However, we need to be realistic here as well. If Orascom is willing to
take another risk in entering negotiations for a possible merger, we will here state the
best advice for Orascom when entering.
A merger in this case, it would be the operations of Koryolink and the government join
together and will probably result in the formation of a new company, although it might be
able to keep the same name. (Peter. J. Dowling, 2013) To better understand the M&A
process, let's review the phases and activities associated with a typical transaction:
38
Korea|
Each phase has a unique set of activities and risks that carefully
need to be managed in order to mitigate risk and to move forward. Below,
we will discuss these risks more detailed per phase and try to provide Orascom with a
solution focussed approach in order to successfully merge with its competitor:
Pre-M&A phase
The pre-M&A phase included a screening of alternative partners based on an analysis of
their strengths and weaknesses. Although in the case of Orascom, there are no
alternative partners to merge with. Therefore, the company should further focus on their
risk assessments and future integration of HR activities.
Risk assessments identify key areas of interests to both internal and external
stakeholders. This activity empowers an organization to adopt a proactive approach to
effectively communicate with key stakeholders. When a risk assessment is not
conducted, or fails to identify key issues, the potential for a crisis increases. Key
stakeholder here is of course the North Korean government. How can you assess a
country
that is so closed off to the world, thus you have to trust them on their world and
39
are not able to verify any information?
Due diligence phase
Due diligence phase deals with a more in depth focus on analysing the potential benefts
of the merger. Here, product-market combinations, tax regulations, and also compatibility
with respect to HR and cultural issues are of interest.
Although Orascom is quite familiar with cultural differences of North Korea and is aware of
the so-called tax regulations and foreign exchange risks, there are still many things to
take into considerations, since most mergers are doomed from the beginning. Anyone
who has researched merger success rates knows that roughly 70 percent of mergers fail.
Over time, this statistic has created an entire culture and practice of merger integration
focused on avoiding failure: processes, IT solutions, checklists, and work plans, all crafted
to ensure that integration avoids doom by sticking to its plan. Dont overcomplicate
integration is a common mantra. Just follow the process and you will not fail is another.
The problem is that avoiding risk can conflict with realizing the full value at stake in the
Korea|
merger. The issue begins with the fact that due diligence has
only limited ability to set accurate expectations of the total synergies
available in a deal. A recent McKinsey study found that 42 percent of the time, due
diligence conducted before a merger failed to provide an adequate roadmap for capturing
synergies and creating value. Moreover, the survey showed that the due diligence in
most deals can overlook as much as 50 percent of the potential merger value. Survey
respondents also admitted that due diligence is inadequate in more than 40 percent of
their deals. Companies clearly need to improve and expand their due diligence.
(McKinsey & Company, 2010)
In addition, the risk-avoidance mindset usually translates into an intense focus on pure
process that can actually hamper an organizations ability to adapt and capture emerging
or unforeseen sources of value from a deal. We think that this could not be truer with
regards to Orascoms history of outperforming its direct competitors. Though in the duediligence phase, greater attention should be focused on putting the right incentives in
place to keep the North Korean government interested with regards of its performance.
40
Integration planning phase
Based on the results of the due diligence phase planning for the new company is carried
out. Orascom should have fgured their incentive based strategy out and is thus moving
further towards implementation. What are the things the company should consider here?
The company should come up with a negation strategy in where they try to aim for at
least 50% of ownership in the merger. The North Korea government is trying to outsmart
the company, but Orascom cannot give up its ownership at all since, this would lead to
more exposure of political risk. Political risk will forever remain an issue and the forex
might prevent the company from ever retaining a dollar back to their home country, but
50% ownership will at least guarantee that Orascom is not the underdog in the remaining
challenges to come. It provides the company with a voice. The integration phase also
incorporates to carefully negotiate the incentives that Orascom has thought. This means
that the company has to keep some of its tricks in hand and should not give away its full
tricks or it will again we outperformed by the government. These tricks might be the
Korea|
implementation of the 3G network, video-calling or other

features that again require telecommunication infrastructures in place.
Implementation phase
In the implementation phase, the previous plans discussed are put into action and place.
Implementation has to be done in phases in order to spread the risk and not go all in
immediately. This process will be driven by the availability of time and resources to make
changes of the company and country, the market impact of changes and their sequence,
and the system impact of the implemented changes. Challenges that might arise here are
the change of management from Orascom to a deeper influence of the North Korean
government, which is critical to deal with market factors, new information, unforeseen
problems and the possibility of a lack of resources. Changes must be coordinated widely
to manage expectations and to integrate elements as planned. All elements must be
thoroughly tested since failures will be public failures. Moreover, the delivery of the
merger has to meet the requirements of the North Korean consumer.
41
Korea|
42
Korea|
Conclusion
To comprehensively conclude our report we can say that Global Telecom holding is a very
unique, diverse and dynamic company. Their strategy has provided them to move into an
internationalisation strategy quite smoothly and made their revenue expand quickly.
Global Telecom Holding is a company that has the guts to operate where competitors
would close their eyes.
The company also provided many telecommunication networks all around the world, thus
helping third world companies to become economically more attractive for other
companies, since telecommunications is one of the building blocks for a strong and
healthy economy. The company has been able to deal with political risk and even make it
a competitive advantage, something that many companies could learn something from.
They have even proved to be proftable in a country like North Korea, which has been
closed off from the world for decades already. Although sanctions are imposed on the
43
country and recent events make things even more risky, Global Telecom Holding was still
able to move in and implement an entire telecommunication structure. However,
telecommunications will always be a contradictive topic for communistic countries.
Global Telecom Holding did experience many issues and the question remains whether
they are able to deal with this. Political risk is something to take seriously and as said
before, the company has dealt with this quite well. Although it has become clear now that
North Korea has been able to outsmart the company and took advantage. Now that
Global Telecom Holding is not needed anymore, the government has decided to use some
nasty tricks by setting up a competitor.
We cannot conclude that things will work out for Orascom and with the lack of
information about the North Korean government; it might be even harder to conclude that
in the future. The only hope we have is that Orascom is able to use incentives to trick the
government again into a mutual agreement and understanding.
Korea|
We can conclude though, that all of the prejudiced thoughts

about North Korea can yet again be confrmed. The country is putting politics
before economics and with their recent focuses on the International relations, things are
probably going to get worse. Pressure is rising and North Koreas next move is proven to
be unpredictable.
Appendices
44
Korea|
Appendix 1. Swot Analysis.
45
Korea|
Appendix 1. North Korea
46
Korea|
Appendix 2. Border between North and South

Korea.
47
Korea|
Appendix 3. Timeline recent events North Korea
Date
th
6 of January
2016
10th of January
2016
11th of January
13th of January
22nd of January
48
5th of February
7th of February
8th of February
9th of February
10th of
February
12th of
February
16th of
Event
North Korea conducts a nuclear test.
As a response, South Korea has put the propaganda speakers ' on
again.
America lets a B -52 airplane fly low over North Korea.
South Korea announces to limit the access to the Kaesong
industrial park, which is shared with the Stalinist North Korea.
North Korea has arrested an American on suspicion of spying.
Kim Jong-un states that the development of nuclear weapons
should be expanded further.
The United Nations prepare an international statement: the world
should be committed to the criminal prosecution of the leaders of
North Korea.
Kim Jong-un said to launch a satellite into space.
Obama has had a telephone consultation with Xi Jinping on
suspected North Korean preparations for a test of a ballistic
missile.
North Korea launches the ballistic missile.
Tensions run even higher when the South Korean navy fred
warning shots to expel a patrol boat from North Korea.
The US proposes to quickly send a missile defense system to
South Korea.
Japan announces to impose new sanctions.
South Korea stops all activities with the shared industrial terrain
of North Korea.
The Pentagon announces details about the long-distance missiles
of North Korea.
North Korea announces to stop investigating the abduction of 70
Japanese in the early 70s to take revenge on the sanctions
imposed by Japan on the same day.
South Korea announces more sanctions against North Korea.
Korea|
February
23th of
February
2nd of March
3rd of March
9th of March
17th of March
21st of March
23rd of March
25th of March
29th of March
1st of April
4th of April
9th of April
14th of April
15th of April
49
North Korea threatens to attack the South Korean Palace

Heavy sanctions against North Korea imposed by the United
Nations.
North Korea has launched short-term missiles.
North Korea has launched Ballistic missiles
UN investigates prosecution of North Korea
American Korean confesses intention of stealing army secrets.
US talks about recent threats of North Korea with South Korea
and Japan
US and China are working together to stop Nuclear smuggling
North Korea again has launched short-term missiles.
Suspicious activities of nuclear activity in factories North Korea
North Korea claims to successful test of new rocket engine
North Korea is possibly preparing new missile launch
North Koreas rocket missile launch has failed
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AICPA. (2011). Risk Map. Scott McKay.

Albawaba. (2015, August 18). Egypt's Orascom-Koryolink merger hampered by North
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Demirbag, M. (2013). Emerging Market Multinationals. Edward Elgar Publishing Limited.
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George E. Rejda, M. J. (2014). Principles of Risk Management and Insurance. Pearson
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Global Telecom Holding S.A.E. (2016). About us. Retrieved from

http://www.gtelecom.com/web/guest/missionvision;jsessionid=90908D9A9108CC2E89CD043A398D345D
John Ihlenfeldt, K. K. (2009). Out of Africa: The Egyptian Telecoms Challenger.
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North Korea: The risk of

Idil Aare, Marieke Ter Meer

Global Risk Trends Markets and Mother Nature |

deal with political risk. It provides a clear history of the company

Chapter 2. Growth Strategy.

Chapter 4. Market Entry Strategy North-Korea

Option 1. Eliminate operations / Investments

is very probable, based on the events happening in the past

Option 2. Enter Merger negotiations

Enrich customers' lives through accessible communication services

Global Telecom Holding Corporate

Holding has a strategy in which

3rd Quarter 2015 Financial Statements and Key

In the process of expanding the business, Sawiris became a legend in Egyptian

experience in dealing with politicians and regulators. Sawiris got

In 1998, Onsi Sawaris stepped down after installing Naguib as

Chapter 3. History and country outline

The Juche ideology is the cornerstone of party works and

manifest in contemporary North Korea. The countrys

Chapter 4. Market Entry

Why did Orascom chose North Korea as a market?

Market Entry Strategy

granted a 25-year license with an exclusivity period of four

Gaining trust of the North Korean government

Currency rates bring problems

needs permission from the government and it hasn't been

Koryolink, which is 75 percent owned by Orascom, is estimated to have

standing. This means that foreign partners are cheated as soon

Option 1. Eliminate operations / Investments

The highly corrupt government is not a government one should

an unstable, weak and corrupt

the already increasing risk

Option 2. Enter Merger negotiations

implementation of the 3G network, video-calling or other

We can conclude though, that all of the prejudiced thoughts

Appendix 1. Swot Analysis.

Appendix 1. North Korea

Appendix 2. Border between North and South

Appendix 3. Timeline recent events North Korea

North Korea threatens to attack the South Korean Palace

AICPA. (2011). Risk Map. Scott McKay.

Global Telecom Holding S.A.E. (2016). About us. Retrieved from

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