The one thing I always wonder about with the Kims (especially Jong Il) is their adherence to the personality cult well after its sale-by date. Maybe Kim Jong Il fears that stepping down will equal a one-way trip to the Hague (if only ...) Or perhaps he's not convinced that he could still drink gallons of Hennessy after sharing the reins. Maybe he's convinced that he is a god, and that the NK adulation is real. In any event, he'd probably be just as better off in a kleptocracy than the current setup. So he must be addicted to the worship -- that's all I can think of.
Another thing I don't understand is why Beijing hasn't "politely told" Kim Jong Il to move towards a "socialist market economy." I guess even the promise of a SAR can't get him to move towards more open trade. Anyway, the Chinese probably realize that the creation of a SAR would require the formation of a convertible NK currency, the establishment of a solid telecom structure, rustling up western investment (difficult after all the loans the Kims defaulted on over the years), etc. Maybe these difficulties have shied Beijing away from opening up NK, even if the SAR could be made profitable down the line.
From an ATL perspective, I agree that an early Kim Il Sung death might provide an opening for reforms. Perhaps even better would be a NK POD around the time of Deng Xiaoping's market liberalization in the early 80's (maybe the elder Kim could pass away then as well?). Maybe Deng convinced the elder Kim of the ultimate failure of Maoist/Stalinist emperor worship, and promised to provide for the material security of the Kims in return for Chinese-style market liberalization. I think the Chinese would have to assure the Kims that they would save face in the transition, and find some way to ease the NKoreans off of their cult.
Not sure about this, maybe some modern Chinese history scholars can help: were the Chinese of the 80's still steeped in Maoist propaganda, or were they already shifting towards what we now see in China? An early Deng POD might not allow the Chinese enough time to get over Maoism, and therefore hinder the Chinese govt's ability to stop the NK personality cult. Perhaps the Chinese would not have had enough time (or evolutionary ability) to create an opening for themselves in the NK power structure, reform the personality cult, and inject Chinese capitalism. That's a lot to ask from a country slowly creeping towards a socialism-capitalism hybrid from a propaganda system not that far removed from the Kim Cult.