The North Korean manufacturers are known as toll processors and use specialized equipment to produce export bound apparel for the Chinese companies, which supply the raw material. These contracted manufacturers have been found selling some of their finished products at bargain prices in the tightly-controlled country's black market, according to sources inside and outside North Korea.
Apparel such as coats are sold by the manufacturers without the knowledge of the Chinese companies and made from raw material skimmed off from the companies.
Chinese textile companies use factories in North Korea, where labor is much cheaper, to produce high quality, big-ticket items such as winter coats that can sell for more than U.S. $100 in China.
But these expensive items are sold on the black market in North Korea at highly discounted rates, the sources said.
A Korean-American based in China said that he supplies to his North Korean manufacturer 10 percent more fabric than what is needed to complete an apparel order so as to compensate for production-related losses.
But the toll processor returns only 90 percent of his order, the remainder of the material he supplies is pilfered.
About 20 percent of the order volume remains with the processing company in North Korea. It's hard to do consignment business with North Korea if they are not prepared for these losses.
It is believed that powerful toll-manufacturing factory managers and their loyal employees skim off the material and apparel and sell finished goods, such as parkas, in black markets where ordinary North Koreans can afford them.
In return, low-paid factory employees can supplement their extremely meager incomes and buy food and other daily necessities with money they earn from selling the apparel.
Foreign enterprises that send material to North Korean toll manufacturers usually provide more material than their orders require to compensate for a certain amount that they believe will be lost in the manufacturing process.
But after delivering the volume of orders, many complete products made from surplus materials are left over, this implying that the items are sold in North Korea on the black market.
Another source in China gave further evidence of such apparel being sold on the black market by pointing out that some members of North Korea's upper class have been influenced by fashion trends that emerge from such clothing.
Some North Koreans can follow foreign trends by buying clothing that finds its way to the black market the source said.
Foreign companies in China, the Netherlands, France, Germany, and South Korea have produced various types of clothing in North Korea, making garment processing one of the country's most successful export-related activities, according to a 2012 report by Washington-based Johns Hopkins School of Advanced International Studies' website 38 North.
They do business there to take advantage of North Korea's highly skilled labor force and the lowest wages in Asia.
Clothing now accounts for a large portion of North Korea's light industry sector and is a major export sector. It is also a successful foreign investment activity, with Chinese companies taking the lead in using North Korea as a production base.
As the companies have a wide range of machinery for cutting, sewing, sealing, ironing, pressing, and embroidery, and use computer-aided design and computer-aided manufacturing technology.
North Korean garment processors produce a large variety of clothing, including undergarments, sportswear, winter coats, suits, knitwear and uniforms with the specific quality of products made according to client specification.
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