Featured Articles
64 Asian Steel Watch 66 Legacy from Europe’s Restructuring Experiences and Its Implications to the Asian Steel Industry Hou Jie 80 The Korean Steel Industry in Retrospect: Lessons for Developing Countries Chung, Cheol-Ho, Dong-Cheol Sa
92 Learning from the Experiences of the Japanese Steel Industry in the Lost Decades Lee Jin-woo
Vol.04 December 2017 65 Featured Articles
Legacy from Europe’s Restructuring Experiences and Its Implications to the Asian Steel Industry
Hou Jie Senior researcher, HBIS International [email protected]
Europe has been at the forefront of the develop- the then head of Eurofer, concept of restructuring ment of the global steel industry over the past 200 contains two aspects. Firstly, restructuring means years. Its steel industry has enjoyed great success a permanent and continuous process where steel in a variety of areas and, as well, witnessed both producers make efforts to strengthen competitive- booms and depressions during such a long-time ness, ensure long-term profitability, and improve evolution. In particular, the restructuring experi- cost management and process-and-product in- ence following the steel demand peak in the mid- novation in an ever-changing world. Secondly, in 1970s has been widely viewed as a classic case particular, restructuring means specific measures in terms of industry governance. Studying what in order to meet the dangers and challenges of a happened during the restructuring process could temporary crisis. The European steel restructuring hopefully help facilitate the steel industry restruc- experiences in the 1970s discussed in this paper turing in the emerging economies including Asia. are more of the second type.
The word restructuring Evolution of the European steel industry European is sometimes misleading As shown in Figure 1, the evolution of the Europe- steel industry and ambiguous since an steel industry exhibited different trajectories in restructuring people can restructure different periods. in retrospect the production location, • Golden age (1945-1973): Over the period concentration, product from 1945 to 1973, the steel industry was badly mix, or human resources. destroyed in the Second World War, but enjoyed Even M&A could be regarded as some kind of re- a golden age from 1946 to 1973 with crude steel structuring. What do we mean when we talk about production growing from less than 30 Mt to restructuring? According to Mr. Dietrich v. Hülsen, over 180 Mt. This was mainly driven by post-war
66 Asian Steel Watch Legacy from Europe’s Restructuring Experiences and Its Implications to the Asian Steel Industry
Figure 1. Crude Steel Production in EU-15 since 1945
Consolidation (Mt) Overcapacity and ongoing and restructuring 200 restructuring 180 Golden age 160
140 120
100 80
60
40 20
0 1945 1948 1951 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
Source: worldsteel
construction, manufacturing boom, and other 30 years after World WarⅡ. Since the 1973 oil steel-intensive industries. crisis when steel demand peaked, the steel indus- • Overcapacity and restructuring (1974-1988): try experienced a long, hard and costly restruc- The European steel industry faced several periods turing process. This restructuring process could of massive restructuring after rapid expansion. be roughly divided into three phases, according to Sets of measures from national governments the different focuses in different period. The first and the European Union were adopted to cut phase was at the beginning of the restructuring excessive capacity and employment and hence to when national financial supports were provided improve efficiency and profitability. to the suffering industry and then the second on • Privatization/consolidation and ongoing capacity cuts and redundancy reductions. This restructuring (1988 to 2008): Privatization and phase was the most dramatic period in terms of consolidation started as the steel industry was magnitude of capacity cuts, laid-offs, and labor streamlined. Privatization started in the Great productivity improvement. Moreover, this phase Britain as British Steel Corporation was sold, and helped streamline the EU steel industry and then followed by its western European peers. offered favorable conditions for further restruc- Consolidation moved from national level to Eu- turing programs as external economic conditions ropean level and finally to global level. Now three improved and liberalization programs were in big market players are in place in Europe, Arce- place. The last phase focused on changes in own- lorMittal, ThyssenKrupp, and Tata Europe. ership, initiated by the British steel industry, and then about consolidation and rationalization. Restructuring history of the European steel in- This is a general picture of what happened in the dustry European steel industry during the restructuring The steel industry in Europe expanded rapidly for period. As the first oil crisis broke out in 1973,
Vol.04 December 2017 67 Featured Articles
restructuring in the steel industry means to take prices, concentrations, and movement of labor specific measures to rebalance steel demand and were specified. It was worthy to note that when supply; when the crisis was over, the steel indus- a manifest crisis was declared, such emergency try restructured itself again in a continuous man- measures as production quota, minimum price, ner. and import restrictions might be implemented in the steel industry within the ECSC. Institutional arrange- Post-war ments Crude steel production and capacity expansion background During such a golden The European steel industry expanded massively age, steel was regarded from 1946 to 1973, driven by post-war recon- as a strategic product. struction, manufacturing boom, and urbaniza- The Treaty of Paris and tion. Generally, crude steel production in the EU- Treaty of Rome were 15 in 1974 was seven times that of 1946. Its share signed, and the European Coal and Steel Com- in the world represented a little more than 31%. munity (ECSC) was created on April 18, 1951 Four biggest producers were Germany, UK, France and put into force on July 23, 1952 in order to and Italy, among which the former FR Germany manage coal and steel, for the very purpose of witnessed the most dramatic progress from less a peaceful, united, and prosperous Europe. The than 5 Mt in 1946 to over 50 Mt in 1973. validity period of this treaty lasted 50 years untill As the book 50 Years of the ECSC Treaty Coal 2002. Member states included German Federal and Steel Statistics: data 1952-2002 indicates, Republic, the Kingdom of Belgium, the French investment in the iron and steel industry in the Republic, the Italian Republic, the Grand Duchess ECSC’s original six countries grew from 544.7 of Luxembourg, and the Kingdom of the Nether- million ECU in 1952 to over 2620 million ECU in lands. By 1954, nearly all trade barriers for coal, 1973. Crude steel capacity in these six countries coke, pig iron, and steel had been removed among rose from 63 Mt in 1957 to 145 Mt in 1973. The those member states of the ECSC. magnitude of expansion in investment, capacity, This was the first time for Europe to come up and crude steel production was unprecedented in with a generally binding supranational agreement the Europe. for development of the coal and steel industry. Within the ECSC, High Authority, Common As- Oil crisis as a trigger sembly, Special Council, and Court of Justice were As the industry boomed, an unexpected oil crisis instituted. The High Authority was empowered (see Figure 2) brought such momentum to a halt to assure the fulfillment of the ECSC purposes. in steel demand in 1973. Nowadays, people sided Besides these institutions, guidelines concerning with the argument that the mid-1970s marked a investments and financial assistance, production, turning point for the European steel industry as
68 Asian Steel Watch Legacy from Europe’s Restructuring Experiences and Its Implications to the Asian Steel Industry
Figure 2. Oil Prices and GDP Growth Rate from 1968 to 1988
Oil Price (real; May 2016 LHS) France GDP growth dollar/barrel UK GDP growth Germany GDP growth (%)
120 7 5.75 5.93 5.55 6 100 3.71 5
4 80 2.67 2.58 3.71 3 60 1.40 2 1 40 0 -1 20 -2
0 -3 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988
Source: EIA, World Bank
the oil shock led to an economic recession. The overoptimistic about the future demand. Regard- saturated steel market led to a dramatic decrease less of the contraction in steel demand, new steel- in demand among industrialized economies, and making capacity was still excessively installed the changing competitive landscape in the steel because people expected this demand decline to industry between Europe and newly industri- be a cyclical rather than structural change. alizing countries imposed some influences on imports and exports among those countries. At Three phases in the re- that time, however, many specialists, especially Reaction structuring process those from the industry tended to believe such a to the crisis The European steel crisis was cyclical and market conditions would industry was forced to surely improve in the years to come. Based on react to the crisis and such assumptions, more resources like capital the reaction lasted about and supportive policies were poured into the 15 years from 1974 to steel industry that was then suffering from ex- 1988. The reaction could be sub-divided into cessive capacity, but few recognized this situa- three phases according to the difference in partic- tion or were willing to accept the changed market ipants and focuses. situation as the public, including people working • First phase (1974-1977): This period was pri- in the steel industry, enjoyed or indulged them- marily focusing on national support for the steel selves in the pride such a heavy industry brought industry without European Union intervention; with it. • Second phase (1977-1980): This period was On the supply side of the steel industry, more mainly characterized by national support as well investments were poured into the industry and as European burden-sharing intervention; more capacities were installed as people were • Third phase (1980-1988): This period was the
Vol.04 December 2017 69 Featured Articles
longest one which was well-known for stricter and the Commission for Industrial Affairs and Ener- tougher European intervention into the crisis. gy and commissioner for Industrial Affairs and Energy from 1981 to 1985. These measures were First phase 1974-1977 named as the First Davignon Plan by the follow- As the oil crisis broke out and continued, steel- ing academia. The First Davignon Plan focused makers in Europe suffered greatly from the dete- on three dimensions: internal market, external riorating steel markets such as sharp decline of market and social measures. Within the internal demand and gradual collapse of prices. They were market, measures were adopted to set minimum in urgent need of support from governments; prices and production quota, and prohibited new otherwise, bankruptcy was inevitable. From the production capacities while, as to the external viewpoint of the national and local governments, market, measures were taken to control import the steel industry was a big employer and the prices and volumes, and anti-dumping measures proven pillar of economic development. There- were also used. While the excess capacities were fore, plant closures were politically and economi- removed and new technical processes such as cally unacceptable at the beginning of the crisis. continuous casting were introduced, both the Financial supports were given and steel com- European Union and member states endeavored panies were nationalized to reduce risks of bank- to establish a social safety net by retraining laid- ruptcy and plant closures. Supranational bodies offs, early retirements, and transfers. All these like Eurofer (1976) and the Steel Committee of measures and decisions were designated to con- OECD (1978) were created for the purpose of trol supply and maintain prices and keep steel information sharing and exploring possible coor- companies viable. dinated measures against this steel crisis. However, those measures were believed not From 1974 to 1977, steelmaking capacity to achieve the expected results. Taking minimum continued to rise whereas both production and price system as an example, this system was in- capacity utilization rate fell further in the EU-9 troduced in 1977 first covering six reinforcing countries (see Figure 3). bars and, as markets worsened, was broadened to include most strips. As to a production quota Second phase 1977-1980 system, it was voluntary in nature in 1977 but During this period, member states increased turned mandatory in 1980. These changes in the their investments in the steel industry in order to tone and magnitude of coordinated measures in- keep the industry viable while at the ECSC level, dicated that the Community was being involved a series of coordinated measures were introduced in a much deeper and stronger manner. in 1977 in response to the rapidly deteriorating Controversies also existed about such a steel market. These measures were led by Étienne burden-sharing plan. Objections to production Davignon who was at that time the member of quotas and minimum prices were from efficient
70 Asian Steel Watch Legacy from Europe’s Restructuring Experiences and Its Implications to the Asian Steel Industry
Figure 3. Western Europe's Production, Capacity and Utilization Rate (1970-1977)
Capacity (LHS) Production (LHS) Utilization (RHS) Mt (%) 250 100 86 86 87 90 82 77 199 198 201 200 80 179 174 66 68 63 70 150 156 150 60 135 138 134 127 126 126 113 50 109 103 100 40 30 50 20 10 0 0 1970 1971 1972 1973 1974 1975 1976 1977
Source: Restructuring of the European Steel Industry delivered by Mr. Etienne Davignon during the OECD Symposium on April 18th 2016.
steelmakers who claimed such measures deprived Measures adopted either by governments of their competitive advantages. Both production member states or the Community were not satis- quota system and minimum price system were factorily sufficient to solve it. Reasons why these commented to tend to shift production to the less measures failed might be dubious understandings efficient producers in the EC, helping them stay that people had towards the nature of the crisis, in business longer. This caused efficient produc- the particularity of the steel industry and grad- ers to earn lower profits or incur greater losses, ual changes of economic structures. As the crisis thereby discouraging them from making invest- continued and worsened, both the public and the ments necessary for long-run survival. steel industry believed steel demand could not re- Import restriction and minimum price sys- turn to the level of 1974, and tougher and stricter tems were generally believed by industry observ- rebalancing measures were necessary for the then ers to impose some extra costs on their econo- European steel industry. In 1981, the European mies and consumers each year they are in place, Commission declared such a crisis as Manifest even though no one had calculated the exact Crisis. From 1980 onwards, the Commission for- details. mulated a series of measures on state aid, namely As there were many objections, the First Da- the Second Davignon Plan. vignon Plan witnessed weak implementation. Each state-level aid code had its own focus These measures were not effective as expected. As and duration. In general, state-level aid fell into situations became worse, manifest crisis was de- five categories, including investment aid, aid for clared, more and tougher measures were adopted plant closures, aid for continued operation, emer- gency aid, and aid for research and development. Third phase 1980-1988 The first state-level aid code was primarily a legal Until this point, the crisis had lasted for six years. framework under which state aids were permissi-
Vol.04 December 2017 71 Featured Articles
The restructuring experience following the steel demand peak in the mid-1970s has been widely viewed as a classic case in terms of industry governance. Studying what happened during the restructuring process could hopefully help facilitate the steel industry restructuring in the emerging economies including Asia.
ble under clearly defined conditions while ECSC Economic and Social Committee on ‘Industrial regulations did not, in principle, allow subsidies Change and State Aid in the Steel Sector’ (2005/c or state assistance by the state, in any form what- 120/09), soever. The second state-level aid code was about The steel subsidy codes, based on Article 95, stip- investment aid, aid for plant closures, aid for ulated from 1980 onwards that aid to steel compa- continued operation, emergency aid, and aid for nies could only be granted under strictly defined cir- research and development as such a code stated cumstances. However, the types of aid still permitted clearly “it has also become clear that if restructur- initially included almost all the aid which member ing is to be accomplished in a coherent, equitable states were already paying out to their companies and socially acceptable manner, it is desirable to anyway. Thus, for the most part, the first subsidy establish a comprehensive community aid system code only served to legalize existing practices. It was to take account of both changed circumstances only gradually that the kinds of aid most damaging and experience acquired in the application of De- to competition, such as rescue, operating and invest- cision No 257/80/ECSC.” The third state-level aid ment aid were banned completely. code was principally about aid for research and Different sources suggested slightly different development, aid for environmental protection, numbers in capacity reduction, redundancy cuts, and aid for plant closures while the fourth about and state-level aids. According to the Opinion of aid for environmental protection, aid for research the European Economic and Social Committee and development, and aid for closures. The last on ‘Industrial Change and State Aid in the Steel two covered only aid for research and develop- Sector’ (2005/C 120/09) published in the Official ment, aid for environmental protection, and aid Journal of the European Union (May 20, 2005), for closures but have a different validity period. the total budget poured into the ECSC steel in- According to the Opinion of the European dustry was quite big, EUR 70 billion for 1975-
72 Asian Steel Watch Legacy from Europe’s Restructuring Experiences and Its Implications to the Asian Steel Industry
1995 with three different phases: EUR 12 billion Table 1. Privatization of West European Steel Companies for 1975-1980, EUR 41 billion for 1980-1985 and Company Country Privatization EUR 17 billion for 1986-1995. Part of the budget British steel GB 1988 was in return for capacity reduction. “Capacity SSAB Sweden 1987-89 AST Italy 1994 equivalent to about 44 Mt of raw steel and 32 Mt EKO Stahl Germany 1994 of hot rolled steel was dismantled.” Ilva Italy 1995 Based on the speech “Restructuring of the Eu- voestalpine Austria 1995 ropean Steel Industry” delivered by Mr. Etienne Usinor/Sacilor France 1995 Davignon during the OECD Symposium on April Ruukki Finland 1997 18th 2016, European producers got state-level Aceralia Spain 1998 aid of almost 38 billion ECU during the Second Cockerill Belgium 1997 Source: worldsteel Davignon Plan, and with the support of part of this money, Europe reduced 40 Mt of steel ca- pacity (roughly 20%) within five years. As to how this big amount of money was allocated among ership in the Steel Industry ECE Steel Series 1996, continued operations of plants or closures, the privatization is defined as a set of actions aiming former commissioner said that 23 billion was for at transferring ownership of state enterprises continued operations, 12 billion for improvement into private hands and simultaneously securing of ongoing operations, two billion for closures effective private control of the business. In 1986, and one billion for R&D and others. crude steel production from private steel makers in the original six ECSC countries took up 48% Ever since this dramatic of the whole but this ratio grew gradually as the Post-1988 restructuring period Great Britain privatized its British Steel Corpo- restructuring with ups and downs in ration in 1988 and set a good example for its Eu- steelmaking capacity ropean peers. Privatization could be categorized and employment, the into different types, sell-off as a single entity, European steel industry split-into different parts before privatization, sale continued its rational- of a portion of a company to some pre-selected ization process with slightly different priorities parties and other portion to the public or com- but similar objectives being suited to unique na- mercialization into joint stock companies. Table 1 tional economic evolution and to the global steel shows a list of ten major privatization cases with industry. Privatization and consolidation were the year of completion in the EU region. The list two key features during the post 1988 restructur- suggests that the privatization process started ing process. from 1998, 15 years after the peak of steel de- In the book Privatization and Changing Own- mand, and lasted for 10 years.
Vol.04 December 2017 73 Featured Articles
Restructuring is a long, hard, passion, but with commercial passion.” He con- tinued “It’s not about big companies and small costly, but inevitable process. It is companies; it’s a matter of being globally com- a result of economic evolution and mercial.”
industrial particularity. Restructuring of the Evaluation and European steel industry implications was taking place from the mid-1970s under such a context that the steel demand had passed its peak level as After steel companies were privatized, con- industrialization and urbanization had seen their solidation continued at the European level from close completion. National economic priorities national level. Around the year 2000, USINOR, were then transforming gradually from industrial Arcelor, and Corus were formed; consolidation at sector to service sector and industrial sector itself the international level started and ended with the was transforming from traditional manufactur- three big steel players in Europe, ArcelorMittal, ing industries to advanced and hi-tech ones. This ThyssenKrupp, and Tata Europe, as shown in the process was inevitable, costly, and hard; howev- Figure 4. er, timely, effective and efficient restructuring Consolidation was a continuous process driv- was very worthwhile as far as the whole national en by competitiveness within the steel industry economy was concerned because this could save and from other industries. Such logic was demon- and re-allocate necessary resources to newly fos- strated clearly by the questionnaire designed tered industries. Otherwise, national economy by BBC upon the time Tata Steel was acquiring would suffer from a much more costly, harder, Corus. One question went as “what does the and longer transformation process. takeover of a big European firm like Corus by a National re-positioning in the post-peak steel small Indian steel firm as Tata mean to UK manu- industry exerts great impacts upon how people facturing? ” evaluate the restructuring programs. During the Corus chief executive once said, just as Brit- structural crisis period, restructuring will neces- ish Steel and Dutch group Hoogovens merged in sarily result in rebalancing between supply and 1999 because they felt they could not simply be demand, capacity cuts, and redundancy; however, national companies, Corus now felt it was “no capacity cuts and redundancy are not the ulti- longer sufficient to be European.” “This is a global mate goals but intermediate steps to re-shape industry,” he said. “We have got to respond with the competitiveness of the steel industry and to
74 Asian Steel Watch Legacy from Europe’s Restructuring Experiences and Its Implications to the Asian Steel Industry
Figure 4. Consolidation Process in the European Steel Industry
Phase 1. National level Phase 2. EU level Phase 3. International level
France 2004 SIDMAR Belgium + Luxembourg
Cockerill Sambre Cockerill Sambre GROUPE USINOR GROUPE USINOR 2002 2006
1999
Germany
Netherlands 1999
United Kingdom
2007
Spain
Source: Compiled from media reports
help the industry adapt to internal and external supply and demand in the European steel indus- changes as required. Germany took opportunities try in devastating market situations, involving offered by division of labor in the 1980s and ex- different levels of actors like ECSC, member panded their business in manufactured products states, steel companies, and trade unions. These and activities into global markets, which drove two plans had different priorities. The first was their manufacturing industries and, in turn, primarily voluntary and mild in nature like set- upgraded their steel industry. Its steel industry ting up minimum prices, production quota, and moved forward with down-stream industries, import limits while the second was basically while steel industries in other countries lost its harder and stricter by pushing forward capacity share gradually no matter what restructuring reduction and redundancy based on the evalua- measures were adopted. tion of viability of steel makers and supervision What was the result of restructuring like? The of detailed implementation from consultative First and Second Davignon Plans were supragov- groups. But, both plans focused on the supply ernmental coordinated measures to re-balance side by reducing steel supply and endeavored to
Vol.04 December 2017 75 Featured Articles
Figure 5. Changes in Capacity and Capacity Utilization in EU-9 Countries (%) 250 (Mt) Capacity 100 Capacity utilization 87
200 80 71.7 68.9 69.3 65.9 67.9 65.6 69 63.1 63.1 63.2 58.3 150 56.8 60
100 40
50 20
0 0 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986
Source: worldsteel, EUROSTAT
facilitate the streamlining of the European steel manufacturing to the service sector and owner- industry. ship transfers. During the most dramatic period from 1980 As shown in Figure 7, continuous casting in to 1985, steel capacity was cut by 20% and steel most countries improved dramatically from ap- capacity utilization ratio surpassed 70% (see Fig- proximately 20% in the mid-1970s to over 80% ure 5), employment reduced by 44%, and labor in the mid-1980s. This transformation towards productivity of the west European steel industry brand-new technology had naturally reduced improved by 60% (see Figure 6). As the steel manpower in the steel industry and the indus- productivity enhanced and macroeconomic situ- try’s overall productivity improved significantly. ations improved, performance of the whole steel Europe, together with the USA and Japan, industry turned better. witnessed its steel industry restructuring process Both the European Union and member states from the 1970s, which reshaped the steel indus- formulated measures for a social security net. try and improved the competitiveness and viabil- Measures did not differ substantially from each ity. Over 40 years have passed; our steel industry other and they shared the following points: early is again confronted with global overcapacity and retirement, job transfers, reduction in work time, structural challenges. According to “Capacity incentives for voluntary departures, or benefits Developments in the World Steel Industry” re- to laid-off workers. leased by OECD in August 2017, the total global Here, it should be worthy to note that more crude steelmaking capacity reads 2,380.69 Mt than one factor, like capacity cut, was responsible and capacity addition projects are still underway for employment reduction, for example, technical or planned in some regions, including Asia. The breakthrough. Besides, many other external fac- current Asian steel industry differs substantially tors existed like macro-economic changes from from the West European steel industry in the
76 Asian Steel Watch Legacy from Europe’s Restructuring Experiences and Its Implications to the Asian Steel Industry
Figure 6. Changes in Employment and Productivity in EU-9 Countries (tonne/worker) (1,000 workers) 593.5 600 Employment (RHS) Productivity (LHS) 800 539.7
452.1 600 400
320.8 267.5 400 213.5 201.1 200 174.6
200
0 0 1974 1977 1980 1984 1990 1995 2000 2005
Source: 50 years of the ECSC Treaty Coal and Steel Statistics (Data 1952-2002)
1970s. The steel industry in Asian countries As abovementioned, restructuring is a long, presents an unbalanced evolution phase as far as hard, costly, but inevitable process. It is a result technology, demand magnitude, capacity scale, of economic evolution and industrial particular- and growth rate are concerned. It is a diverse ity. As the restructuring is to begin, exit barriers picture. For example, the Japanese steel industry (social barrier, financial barrier, environmental has already peaked and has gone through capacity barrier, etc.) and institutional accommodation replacement, capacity cuts, M&As, and rational- prevent restructuring from timely start-up and ization programs, and like its peers in Europe and completion. As shown in history, the steel indus- America, is what we see now. The Chinese steel try is especially important both for local economy industry, as many people believe, has passed its and national sentiment. It is a big tax-payer, a big peak and already initiated its restructuring pro- employer, and a big debtor. And steel men enjoy grams. As we learn from various media reports, great pride as they provide basic materials for the Chinese steel industry witnessed capacity social and economic development. No economy cuts (both obsolete capacity and illegal interme- could afford to lose such a backbone industry all diate-frequency induction furnaces) as well as of a sudden. M&As. The Indian and ASEAN steel industries The government has a role to play in the re- are in the expansion phase, and we can read news structuring process at different levels. It can pro- on capacity addition programs from time to time, vide a policy framework where restructuring can but as its industrialization and urbanization take place. As far as the European steel industry is reach a certain level, it will face similar challenges. concerned, the European Union, member states, Could the European steel industry restructur- and local districts formulated guiding policies for ing experience offer some valuable insights for restructuring their steel industry. For example, evolution of the Asian steel industry? the European Commission adopted Commission
Vol.04 December 2017 77 Featured Articles
Decision No 257/80/ECSC of 1 February 1980 Figure 7. Continuous Casting (% of Crude Steel Production) establishing Community rules for specific aids to FR Germany United Kingdom Italy France Japan US the steel industry, saying: 100 In order to ensure the orderly functioning of the 90 common market, the adaptation of the steel indus- 80 70 try’s production capacity to foreseeable demand and 60 the restoration of competiveness to the industry by 50 means of the extension, modernization, and rational- 40 ization of plant with the best prospects for viability 30 20 must be carried out in an orderly and socially accept- 10 able fashion. 0 And the government can ensure a level play- 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 ing field during the restructuring process. In the Source: worldsteel 1970s’ European steel restructuring experiences, rules were formulated and supervision commit- tees were established. According to Commission aid cases, Sixteenth Report, November 2001. Decision No 2496/96/ECSC of 18 December The government could also facilitate the re- 1996 establishing Community rules for State aid duction of exit barriers preventing timely reac- to the steel industry, tion to overcapacities and mitigate social impacts In order to ensure that the steel industry and oth- of closures. Taking work force reduction policies er industries have equal access to aid for research and in French as an example, the government adopt- development and to aid for environmental protection, ed four measures to relieve the impact, including the compability of the aid with the common market early retirement, job transfers, short-time in should be assessed in light of the existing Community work week, and incentives for voluntary depar- framework for state aid for research and develop- ture. As far as early retirement was concerned, ment……Furthermore, it opens some limited possi- workers at or above 50 were obliged to leave the bilities for operating aid, in particular for relief from company, but workers within different age groups environmental taxes in cases where it is necessary to enjoyed different benefits. For example, workers prevent firms from being placed at a disadvantage who were 50 to 55 could get 75% of gross wage; compared with their competitors in countries that do those whose age ranged from 55 to 60 obtained not have such measures. 70% of gross wage and those who were older than Supervision committees assumed their re- 60 enjoyed normal early retirement benefits. The sponsibilities by producing regular reports based French government covered about 90% of the on actual examinations, like Report from the costs while E.C. reimbursed the state for some of Commission Monitoring of Article 95 ECSC Steel the costs.
78 Asian Steel Watch Legacy from Europe’s Restructuring Experiences and its Implications to the Asian Steel Industry
While macro-economic conditions and gov- At the corporate level, it seems crucial for ernment favorable measures came out, it is then the individual steel company that plays a vital role steelmakers to move from volume to value in the restructuring process. At the corporate by focusing on product differentiation and level, it seems crucial for steelmakers to move from volume to value by focusing on product specification in niche market in that economic differentiation and specification in niche market structures are under transformation and labor in that economic structures are under transfor- mation and labor division deepens. voestalpine division deepens. could serve as a good example. It has transformed from a typical, traditional steel company to a “no n-typical steel company,” with its main products as common steel to steel-based technologies and capital goods; moreover, it focuses on niche markets like premium sheets, rails, switches, but permanently thrown away by history. Nowa- turnouts, bearing steels used in the automotive, days, artificial intelligence, big data, robotics, IoT, railway, aircraft, and energy industry. Sales from smart manufacturing, and other disruptive tech- metal engineering and forming take up nearly niques are drawing increasing attention among 50% of the whole group in 2016. the steel circle and smart steel factories are un- Besides focusing on internal adjustments, der construction or starting production. Highly individual steel companies could pay some due automated, fully digitalized continuous casting attention to changes both in the economy and lines are reported to be established and research society. I was inspired by a steel seminar in Hang- centers founded with a dedication to developing zhou this August, one of whose subjects was even lighter, much more corrosion-resistant and involved in the social and industrial megatrends stronger steels. Megatrends take place also at a (demographics, technologies, process, and IoT), macro-level, like sharing economy that will surely and their possible impacts upon the future steel exert significant impacts on both the whole soci- industry. In the mid-1970s, continuous casting ety and the steel industry. Embrace megatrends, process represented one megatrend in the tech- study them and connect them with our mighty nical field, and some steelmakers in Western industry as nobody could afford to miss any op- Europe installed such newly-introduced process portunity from this Fourth Industrial Revolution. that helped themselves go farther and faster than Steel industrialists need to try and embrace new their peers in terms of efficiency and cost man- things represented by the megatrends. Megatrend agement. Those introducing CCM at a relatively is always there, but it enjoys only different ingre- later time or at a much slower pace were gradually dients in different periods. This is the legacy.
Vol.04 December 2017 79 Featured Articles
The Korean Steel Industry in Retrospect : Lessons for Developing Countries
Dr. Chung, Cheol-Ho Vice President POSCO Research Institute [email protected]
Dr. Dong-Cheol Sa Senior Principal Researcher POSCO Research Institute [email protected]
At the end of the Sec- in Table 1, by the mid-1990s it had become the The rise of Korea ond World War in 1945, world’s sixth-largest steel producing country and from the ashes South Korea had se- has maintained this status ever since. of war cured its independence, What was the key to this success? The ex- but five years later, the perience of the Korean steel industry offers Korean War broke out. useful lessons for emerging economies pursuing A GDP per capita at a economic development. Therefore, it would be nominal value hovered around USD 67 in 1953 meaningful to analyze the factors that drove the when the Korean War ended. It remained one of Korean steel industry to success. the world’s poorest countries. However, the South Many emerging economies are seeking to Korean economy grew exponentially following achieve the self-sufficient development of their the government-led economic development ini- steel industries since steel, dubbed “the staple tiatives launched in the early 1960s. Today, Ko- of industry,” is the fundamental industry that rea has joined the ranks of advanced countries, underpins other basic industries, such as the becoming the world’s seventh-largest exporter, automotive, home appliance, shipbuilding, ma- 12th largest economy in terms of GDP, and 30th chinery, and construction sectors. By doing so, largest in terms of GDP per capita as of 2016. To- it contributes to the improvement of compet- gether with this economic expansion, the Korean itiveness across industries, and eventually to steel industry has grown robustly. It today enjoys national economic growth. In addition, with high a lofty global standing just like the overall Korean forward-backward linkage effects, as can be seen economy. In the 1960s the Korean steel industry in Table 2, the steel industry can bring about was starting from nothing: it lacked technology, positive ripple effects in an entire economy, in- resources, and expertise. However, as shown cluding in investment, employment, and growth.
80 Asian Steel Watch The Korean Steel Industry in Retrospect: Lessons for Developing Countries
Table 1. Development of the Korean Steel Industry
1970 1975 1980 1985 1990 1995 2000 2005 2010 2016 Crude steel production (Mt) 0.5 2.5 8.6 13.5 23.1 36.8 43.1 47.8 58.9 68.6 Share of global production (%) 0.1 0.4 1.2 1.9 3.0 4.9 5.1 4.2 4.1 4.2 World ranking 34 29 13 10 7 6 6 5 6 6 Apparent crude steel use per capita (kg) 51 84 141 234 501 827 851 1,015 1,101 1,171
Source: “Steel Statistical Yearbook” worldsteel (2016)
Table 2. Forward-Backward Linkage Effect in the Korean Industry
Machinery and Transport Precision Primary metal Chemical Construction equipment equipment industry Impact coefficient 1.282 1.106 1.220 1.177 1.278 1.092 (Backward linkage effect)
Sensitivity coefficient 1.988 1.945 0.915 0.601 0.931 0.641 (Forward linkage effect)
Source: Numbers are based on 2014, Source: Bank of Korea (BOK)
However, despite these advantages, it is not easy Figure 1. Share of Korea in Global GDP and Steel Consumption GDP Crude steel consumption for latecomers to successfully nurture a local steel 6.0% industry. The field requires massive investments, 5.0% advanced technologies, and operational know- 4.0% how, which requires a long time to accumulate 3.0% before first movers can be overtaken. 2.0%
To identify what made 1.0%
Retrospective view the Korean steel in- 0.0% on the development dustry successful, it is 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: IMF, worldsteel of the Korean steel reasonable to examine industry the history of its devel- opment. The pertinent Figure 2. Korea’s Steel Intensity of GDP patterns differ before 0.08 and after the financial crisis of 1998. Looking 0.07 0.06 at the proportions of Korea’s GDP and steel 0.05 production versus global GDP and global steel 0.04 production in Figure 1, the figures shift notably 0.03 around the financial crisis of 1998. The Korean 0.02 economy and steel industry entered a period of 0.01 full-blown boom times in the late 1980s and Ko- 0 rea’s GDP and steel production continued to grow 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 Source: BOK, worldsteel until 1997. However, everything changed after Note: Steel intensity = Crude steel consumption (kg) / Nominal GDP(KRW)
Vol.04 December 2017 81 Featured Articles
Figure 3. Korea’s Apparent Crude Steel Use, Crude Steel Production, and Net Exports (1,000 tonnes)
80000 Net Exports (RHS) 20000
70000 Apparent Crude Steel Use (LHS) 15000 Crude Steel Production (LHS) 60000 10000 50000
40000 5000
30000 0 20000 -5000 10000
-10000 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Source: worldsteel
the financial crisis: Korea’s proportion within steel use and crude steel production from 1970 global GDP peaked first in 1996 and then crested to 1997 increased at compound annual growth again in 2007. In contrast, Korea’s global share of rates (CAGR) of 12.5% and 17.9%, respectively, steel consumption peaked in 1996, but declined but a mere 2.1% and 2.5% from 1997 to 2016. In afterwards despite some periods of reglobal GDP particular, crude steel use has stagnated since the peaked first in 1996 and then crested again in financial crisis of 2008, and even by 2016 it had 2007. In contrast, Korea’s international share of failed to recover the levels in 2008. Meanwhile, steel consumption peaked in 1996, but declined crude steel production has surged since the op- afterwards despite some periods of recovery. eration of Hyundai Steel’s blast furnace in 2011, This mismatch is attributed to the fact that the and the gap between supply and demand has wid- Korean economy, heavily dependent on IT-driven ened. growth after the financial crisis, had maintained Examining the changes that took place around its share of GDP consistent, but Korea’s share in the crisis of 1998 based on factors related to steel global consumption has been falling faster than use, there are two distinctive items. The first is that of GDP due to declining steel intensity of as shown in Figure 4–a significant slowing in the GDP. Figure 2 shows that Korea’s steel intensity urbanization rate after 1996. Second, gross capi- of GDP peaked in 1995 and began to decline af- tal formation as percentage of GDP declined after terwards. peaking in 1996 (See Figure 5). Along with indus- Figure 3 shows Korea’s apparent crude steel trialization, urbanization is an important driver use and crude steel production trends from 1950 of both economic growth and steel demand. to 2016. The growth rates of apparent crude Gross capital formation, comprised of invest-
82 Asian Steel Watch The Korean Steel Industry in Retrospect: Lessons for Developing Countries
Figure 4. Urbanization Rate Figure 5. Gross Capital Formation (% of GDP)
90% World S.Korea 50%
80% 45%
70% 40% 35% 60% 30% 50% 25% 40% 20% 30% 15%
20% 10%
10% 5%
0% 0% 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Source: IMF Source: BOK, worldsteel ments in construction and facilities, is also close- economy as it shifted from government-driven to ly related to steel demand. Namely, stagnating market-driven. urbanization around the financial crisis of 1998 and a plunge in investment caused by aggravated This article examines the oversupply in the Korean economy led to stagna- Success factors development of the Ko- tion in steel demand. for the Korean steel rean steel industry from Interestingly, the Korean economy shifted industry a theoretical perspective from government-driven to market-driven in and draws policy impli- 1998. The Korean government had implemented cations for latecomers. It seven Five-Year Economic Development Plans, is no easy task to apply with the final installment ending in 1997. Recog- only a single perspective and generalize success nizing the limitations of government-led opera- factors for what has been dubbed Korea’s “Miracle tions in expanding the economy, Korea attempted on the Han River.” Therefore, it is important to to shift to a more market-led economy, but was consider varying economic theories to identity hit by the Asian financial crisis of 1997-98. Korea such factors. accepted emergency loans from the International Based on existing research on the success of Monetary Fund (IMF) and accordingly took mea- the steel industry by academia, research institu- sures to deregulate markets, such as introducing tions, and the media, the author adopted various a fully-floating exchange rate system and open- theories to re-examine the success factors and of- ing the stock and bond markets. As a result, the fer implications for developing nations—catch-up year 1998 became a turning point for the Korean theory, infant industry argument, fourth factor of
Vol.04 December 2017 83 Featured Articles
The experience of the Korean steel industry offers useful lessons for emerging economies pursuing economic development. Therefore, it would be meaningful to analyze the factors that drove the Korean steel industry to success.
production, Lewis turning point, and endogenous react and how well latecomers overcome their growth theory. disadvantages and make the most of their advan- tages. As first movers wish to retain their own The catch-up theory was advantages in the market, they often ignore new Explanation of represented by Seoul technologies and fall into the first-mover trap. Success factors National University Pro- On the other hand, latecomers are disadvantaged based on catch-up fessor Keun Lee.1 This by their requirement of massive funds and gov- theory part mainly leans upon ernment support in the initial stage, but they are his explanation and able to skip stages by adopting first movers’ ad- analysis. According to vanced technologies at low cost, and even become the catch-up theory among countries, industries, first movers themselves. If willing to take risks, and companies, there are windows of opportu- they are given an opportunity for leapfrogging. nity, in which latecomers can catch up with first This catch-up theory explains how the Korean movers. Four representative windows are the economy was able to take a window for oppor- “Miracle on the Han River.” emergence of new technological and economic tunity and succeed in catching up to advanced paradigms, recession in business cycles, changes economies. This is also true not only for the steel in demand conditions, and industrial policies and industry, but for other sectors as well, including 1 government restrictions. electronics, automobiles, and petrochemicals. Keun Lee and Jee-hoon Ki, Even when a window for opportu- The catch-up cycle for the Korean steel indus- Rise of the Latecomers and “ nity opens, not every latecomer is able try is divided into three stages. The first is the Catch-Up Cycles in the World to seize the opportunity and outper- entry stage (1968 – 1972) when its development Steel Industry,” Research Policy, Volume 46, Issue 2 form first movers. The result varies was fueled largely by goverment activism. The March 2017, Pages 365–375 depending on how the first movers Korean government incorporated POSCO as a
84 Asian Steel Watch The Korean Steel Industry in Retrospect: Lessons for Developing Countries
state-owned company in 1968, and enacted the up phase, POSCO was able to secure greater cost Steel Industry Promotion Law to actively support advantage than ever before. the establishment of the Pohang Steelworks. In To summarize, the Korean goverment estab- addition, POSCO was provided with a variety of lished the state-owned steel company POSCO in benefits: long-term loans at low interest rates, es- an effort to enter the steel industry, and reces- tablishment of infrastructure, reduction or aboli- sions in the global steel industry and domestic tion of taxes and tariffs, and reductions in utility industrial policies provided Korean companies rates. with opportunities. Due to stagnation in the The second phase is the gradual catch-up global steel industry in the 1970s and 1980s, stage (1973 – 1986) in which global economic POSCO could save on costs of new investment. recessions sparked by the first and second oil Namely, the success of POSCO is characterized shocks offered a sort of opportunity to Korea. by path-following at the early stage and then by Pohang Steelworks began producing steel in stage-skipping. 1973 and expanded production capacity through 1983. Under the global recession that followed As suggested by the the first oil shock in 1973, POSCO was able to The infant industry catch-up theory, the purchase old equipment at prices lower than nor- argument and Korean government has mal. The government also implemented policies the government’s role played a pivotal role in to nurture heavy and chemical industries (1973- the growth of the steel 1979), focusing on six sectors—steel, petro- industry. Examining gov- chemicals, machinery, shipbuilding, electronics, ernment policies of the and non-ferrous metal. This significantly drove time, it basically implemented development strat- up steel demand. egies based on the infant industry argument. The Third is the forging ahead stage—a period of core of this argument is that nascent industries soaring expansion after 1987. POSCO started often lack the competitiveness of their better-es- building its Gwangyang Steelworks in 1981. The tablished competitors in other countries and thus second oil shock of 1979 and subsequent eco- require protection until they are able to attain nomic recession had provided a chance for POS- similar competitiveness and contribute to national CO to catch up with first-movers. POSCO took development. This argument was first fully articu- advantage of this recession to promote competi- lated in the 1790s by the US statesman Alexander tion among equipment suppliers and managed to Hamilton and later systematically developed by buy equipment at reduced prices. Moreover, the the German economist Friedrich List. Korea is a recession also offered a further opportunity for good example of turning a disadvantaged industry POSCO to introduce cutting-edge technologies at into one with a comparative advantage. reasonable cost. During this stage-skipping catch- The Korean government’s role at that time
Vol.04 December 2017 85 Featured Articles
One of the most important theories to explain the splendid growth of the Korean steel industry is the fourth factor of production—entrepreneurship and leadership.
can be categorized into five patterns. First, it es- began constructing the Gyeongbu Expressway tablished a state-owned company and provided connecting the southern and northern reaches of focused government support. This is a “selection South Korea, it was met with pessimism and the and concentration” strategy. In fact, this strategy opinion that pouring such a tremendous amount is seemingly the only choice for a country lacking of money into infrastructure was inappropriate the resources, technologies, or capital for nur- while people were struggling to make a living. turing key industries. The second is an industrial However, the construction of infrastructure in- strategy centered on heavy and chemical indus- creased logistics efficiency and enhanced indus- tries. Industrialization is key in that it has a high trial competitiveness. In addition, steel demand industrial linkage effect and can easily create high was created while the infrastructure was being added value based on improved effectiveness. A erected. virtuous cycle was effectively created in that the The fourth pattern is import restrictions and development of heavy and chemical industries in- export-driven growth strategies. The government creased steel demand and fueled the steel indus- delayed market openings for as long as possible try, while the rise of the steel industry secured in an effort to help the industry gain competi- economies of scale to supply cost competitive tiveness and sought export-driven strategies with products to steel-consuming industries. Finally, a view to overcoming the small domestic market. the steel-consuming industries were able to grow The export-driven strategy is advantageous for a further. country with a low sovereign credit rating seeking Third, the government was actively involved to borrow foreign funds for purchasing facilities, in building infrastructure, such as roads, railways, as well as to ensure global competitiveness in the and ports, even in the early stages of economic competition for exports. development. When the Korean government Fifth, the government has stepped forward to
86 Asian Steel Watch The Korean Steel Industry in Retrospect: Lessons for Developing Countries
instill labor consciousness, and was actively in- volved in sourcing experts for the industry. Under the slogan “Let’s live well,” the government in- spired passion and boosted labor consciousness. In response to Koreans’ fervor for education, the government expanded educational systems and provided talent to companies in a timely manner.
One of the most import- The fourth factor ant theories to explain of production– the splendid growth of entrepreneurship the Korean steel indus- and leadership try is the fourth factor of production—entrepre- neurship and leadership. There are three basic factors of production: land, Source: POSCO labor, and capital. In addition, entrepreneurship is often appended as an additional factor. When the Korean government began nurturing the steel industry, very few expected success. The Ko- ed that the government allocate Japanese war rean government sought international financing reparations to build a steel mill, and eventually to build a steel mill in the 1960s, but the Interna- made the impossible possible. In 1986, 17 years tional Bank for Reconstruction and Development after the IBRD report, Park met the author of the (IBRD, now the World Bank) issued a report skep- report, Dr. John W. P. Jaffe on business trip to tical of Korea’s steel industry prospects in 1969. London and asked him whether he still believed The report insisted that it was too early for Korea his report was correct. Jaffe stood by his original to enter such a capital and technology-intensive analysis, but added that the report turned out to industry as steel, and advised it to first devel- be incorrect since not all variables were known. op more labor-intensive industries. Namely, it One was Park Tae-joon. There is another interest- claimed that a strategy of producing intermediate ing anecdote, as well. When the Chinese leader products to replace imports would increase steel Deng Xiaoping visited Nippon Steel in August production costs in Korea as well as export costs 1978 and asked Chairman Yoshihiro Inayama for and eventually erode the country’s global com- help to build a steel plant like that of POSCO, Mr. petitiveness. Inayama said, “It’s impossible. A steel company Then-CEO of POSCO, Park Tae-joon, suggest- is not built with money or technology, but with
Vol.04 December 2017 87 Featured Articles
Figure 6. Proportion of Employment by Industry Figure 7. Annual Changes in Working-age Population and Real Wage Index Agriculture 80% (thousands) Annual change in working age populartion (LHS) Service Real wage index (RHS) 1200 70% Industry 800
60% 700 1000 600 50% 800 500 40% 400 600 30% 300 400 20% 200 200 10% 100
0% 0 0 1963 1973 1983 1993 2003 2015 1971 1976 1981 1986 1991 1996 2001 2006 2011
Source: World Bank Source: UNCTAD, Economic Statistics Yearbook
men,” he added, “but China does not have a man rural labor. In the case of Korea, only 20% of the like Park.” Deng replied, “I shall import Park Tae- population lived in urban areas in the 1960s, joon.” Additionally, a report published in 1991 by but 30 years later in the mid-1990s, this figure the Mitsubishi Research Institute analyzed that had surged to about 80%. Under the policy with a major factor for the success of POSCO was the emphasis on industy, massive industrial employ- outstanding leadership, insight, and drive of Park ment was created thanks to the transfer of sur- Tae-joon. plus rural labor. Examining the proportion of em- ployment by industry as shown in Figure 6, the Another success factor share of agriculture continued to decline, while Korea’s was the demographic that of industry increased into the early 1990s demographic changes taking place at but fell afterwards. There are several reasons for changes and the time and the sub- this. One may be that the decline in cheap labor the Lewis sequent urbanization migration pushed up manufacturing labor costs turning point and industrialization. and reduced industry job creation. Figure 7 shows Urbanization increases that annual changes in the working-age popula- steel demand by creating construction demand. tion also slowed profoundly in the 1990s, and the Rural to urban migration allows cheap labor and real wage index surged in the 1990s prior to the lays a foundation for successful industrialization. Asian financial crisis. The renowned economist Jeffrey Sachs said in Such changes can be explained by the Lewis his book The End of Poverty that China was able turning point, named after Nobel Prize winner W. to achieve economic reform based on its cheap Arthur Lewis. The Lewis turning point describes a
88 Asian Steel Watch The Korean Steel Industry in Retrospect: Lessons for Developing Countries
moment at which surplus rural labor is depleted. established POSCO Technical Research Lab, RIST, This in turn typically causes urban wages to rise and POSTECH to develop technologies unassist- and economic growth to dwindle. When a coun- ed. POSCO has earmarked more than 1% of sales try reaches this point, there occurs a mismatch for R&D in order to foster advanced technologies between the supply of and demand for labor, and build high value-added production systems. leading to a spike in wages and the entrenchment POSCO’s relentless efforts paid off over time. of a high cost-low efficient structure across soci- In 2007, POSCO built the world’s first commer- ety. Korea experienced such a Lewis turning point cial FINEX plant, which was able to replace the in the 1990s, and its GDP growth rate and steel conventional blast furnace-based steelmaking demand growth rate have slowed gradually ever process. Today POSCO is even selling its unique since. technologies overseas, such as POIST (POSCO Innovative Steelmaking Technology), FINEX, and The endogenous growth CEM (Compact Endless Cast and Rolling Mill). The endogenous theory, first suggested by It is attempting to improve profitability by in- growth theory– Paul Romer, holds that creasing sales of WB/WF (World’s Best & World’s accumulation of technological innovation First) products. In short, these continuous efforts technological is not driven by exter- to secure global competitiveness through techno- innovation, nal forces, but through logical innovation has been a key contributor in knowledge, knowledge accumulated the Korea steel industry overcoming fierce com- and human capital by human capital, and petition with other advanced steel companies and that such technological eventually emerging as a steel powerhouse. innovation significantly contributes to economic growth. Notably, corporate efforts and govern- Based on its analysis on ment support for achieving technological innova- Lessons for the development and tion is one of the most important factors for the late-arriving success factors of the success of the Korean steel industry. developing nations Korean steel industry, For example, at the time of its establishment this article offers several POSCO adopted technologies from Nippon Steel policy implications for and worked diligently to learn everything it could developing countries. from this advanced Japanese steelmaker, from The first is the importance of the govern- operational technology to product technology. As ment’s role and strategic decisions. At an early the Korean steel industry grew rapidly after the stage of economic growth with only scarce re- late 1970s, steel companies in Japan and other sources, it is necessary to maximize efficiency advanced countries became no longer willing to through selection and concentration. Korea offers transfer new technologies. Therefore, POSCO a good example in that the government priori-
Vol.04 December 2017 89 Featured Articles
Developing countries can draw lessons from Korea’s experiences and overcome the disadvantages faced by latecomers. They can make full use of the given opportunities to catch up. Then, there will be more positive cases in developing countries mirroring the success that took place in Korea.
tized economic development through its Five- until the industry had gained the required degree Year Plans and allocated resources accordingly. As of competitiveness. Taking into account this a capital-intensive process, the steel industry fac- importance of strategic decision-making, devel- es high entry barriers and can secure economies oping countries should make optimal decisions of scale only with a certain degree of production based on their own conditions and drawing upon capacity. Therefore, the government should focus the experiences of advanced countries. resources on the steel industry and provide ben- The second implication is entrepreneurial efits in terms of finance, taxation, foreign loans, leadership and a “can-do” attitude. Korea’s na- and technological development. One viable strat- scent steel industry was able to overcome its egy is establishing a representative state-owned comparative disadvantage and write a new chap- company and focusing resources on nurturing it. ter in its history because of POSCO founder Park The government’s strategic choices are of high Tae-joon’s passion, drive, sacrifice, vision, and importance as well. For instance, despite negative strong leadership. This has been acknowledged public sentiment, at the early stage of economic by Korean scholars, in the media, and even by developement the Korean government concen- foreign industry insiders. In addition to this trated resources on infrastructure construction, entrepreneurial leadership, another factor was which later served to increase logistical efficiency involved—Korean workers’ labor consciousness and drive economic growth. In addition, the au- and desire for economic growth. With their “can- thorities implemented policies with emphasis on do” attitude, Korean laborers’ hard work is cer- heavy and chemical industries that triggered mu- tainly the foundation for the country’s industrial tual growth in steel and steel-consuming indus- development. However, this consciousness move- tries and finally realized economic growth as well. ment was also led by the government—a fact that The Korean government also protected its market developing countries should keep in mind.
90 Asian Steel Watch The Korean Steel Industry in Retrospect: Lessons for Developing Countries
The third is the importance of industrial oversupply. In Korea, oversupply significantly policy based on medium- to long-term outlook worsened after 2010 as capacity expansion poli- for supply and demand. As shown in the case of cies were implemented despite sluggish demand. Korea, there are several key variables to consider Finally, there is the importance of determined for mid- to long-term steel demand outlook: de- drive of technological development and R&D in- mographic shifts, industrialization, urbanization, vestment. Before becoming a steel powerhouse, and the advent of the Lewis turning point. Based the Korean industry underwent an extensive on these variables, demand forecasts should be period of knowledge accumulation, technology updated annually and supply policies should be development, and R&D investment. Without im- carefully implemented to prevent a widening of provements in product competitiveness through the gap between supply and demand. Steel de- technological advancement and cost competitive- mand in Korea plunged after the two financial ness, it is impossible to survive in global compe- crises of 1998 and 2008, but the variables affect- tition. ing mid- to long-term steel demand had begun to In conclusion, developing countries can draw change even before. Considering this, it would be lessons from Korea’s experiences and overcome advisable for developing countries to first exam- the disadvantages faced by latecomers. They can ine these variables and take pre-emptive actions. make full use of the given opportunities to catch In other words, economic crisis management is up, since luck is what happens when preparation important. If a crisis occurs, capital investment meets opportunity. Then, there will be more pos- growth plunges and steel demand falls into pro- itive cases in developing countries mirroring the longed recession, resulting in an aggravation of success that took place in Korea.
Vol.04 December 2017 91 Featured Articles
Learning from the Experiences of the Japanese Steel Industry in the Lost Decades
Dr. Lee Jin-woo Senior Principal Research POSCO Research Institute [email protected]
As the impact of the “China Effect” has declined, lower than in the past. global steel demand has slowed apace. Since Another issue is that steel overcapacity re- turning to negative growth in 2014, China’s steel mains high, while demand is low. According to demand has remained on a low-growth trend. OECD, global crude steel capacity is approximately Despite some recoveries, steel industry experts 2.38 billion tonnes. Given that global demand was predict that Chinese domestic steel demand will about 1.63 billion tonnes in 2016, an excess capac- remain sluggish at 0~1% through the near future. ity around 751 Mt can be assumed. This decline in China, a country that has provided This overcapacity issue is inevitable over the over 45% of global steel demand, is the major near-term as steel mega-projects initiated four to contributor to low growth across the global steel five years ago are still underway in China and oth- industry. Despite a recent slight recovery, China’s er Asian nations. Since China accounts for more steel demand will not return to the accelerated than 60% of global steel overcapacity, the degree growth of the past. It is unclear weather other to which restructuring is realized there will be a emerging markets such as India and Southeast decisive factor in addressing the issue. It remains Asia, which are regarded as potential substitutes to be seen whether the Chinese government, for the Chinese market, will grow at the rates an- which in the past has reacted to overcapacity only ticipated. Despite recent recoveries, it seems that tepidly out of fears over tax revenue reduction structural stagnation of the global steel market and job decline, will roll up its sleeves and actively will continue for a time as steel-consuming in- see restructuring through to success. dustries grow slowly. The shipbuilding industry is In East Asia, there are three major steel-ex- in a dire situation, facing what has been called an porting countries—China, Japan, and Korea. In “order cliff.” The manufacturing industry includ- response to current sluggish domestic demand, ing automobile growing at only 1-2%, a rate much the competition for steel exports among the
92 Asian Steel Watch Learning from the Experiences of the Japanese Steel Industry in the Lost Decades
Figure 1. Global Crude Steel Overcapacity Trend
2,500 Capacity Demand Over capacity 2,381 2,317
2,102 2,000 1,893 1,668 1,630 1,554 1,500 1,410
1,000 751 649 548 500 483
0 2010 2012 2014 2016
Source: worldsteel, OECD
three is bound to intensify. East Asian steelmak- ment of new steelworks and relentless efforts ers’ active attempts at expanding exports is accel- to enhance productivity during times of high erating steel industry protectionism in advanced growth, Japan’s steel industry achieved a pro- countries, including the USA and Europe. These duction system that could outperform its coun- advanced economies have recently raised trade terparts in Europe, the USA, and other advanced barriers protecting their domestic steel markets countries. However, ever since production peaked by imposing high anti-dumping duties, not only in 1973, it has undergone a difficult period of on Chinese steel, but on Korean steel as well. prolonged low growth. It has repeatedly experi- How did the Japanese steel industry find solu- enced decades of stagnation, from the oil crisis of tions during the period of sluggish demand it has the 1970s and appreciation of the yen after the undergone since the 1970s? The experience of Plaza Accord in the 1980s to the bursting of the their Japanese counterparts might provide lessons Japanese asset price bubble in the early 1990s, for East Asian steelmakers as they navigate tumul- the Asian financial crisis of the late 1990s, and tuous times. the global financial crisis in the late 2000s. Despite ongoing shrinkage of steel demand, The Japanese steel in- Japan’s crude steel production has been main- Lessons dustry enjoyed splendid tained at around 100 Mt—a fact that is of special from the Japanese growth for 25 years: a note. Japanese steelmakers turned their eyes to steel industry whopping CAGR of 22% overseas markets with a view to overcoming stag- from 1948 to 1973. In nation. Major steelmakers including Nippon Steel the early 1970s, Japa- and JFE built overseas downstream facilities and nese crude steel produc- supplied materials to the domestic upstream tion first exceeded 100 Mt. With the establish- sector. They have also entered foreign markets
Vol.04 December 2017 93 Featured Articles
Figure 2. Japanese Steel Industry Trend (Crude Steel Production, Nominal Use, Operating Profit) Crude steel production Nominal use Operating profit (Mt) (%)
120 15
13 200
11.3 11.1 11 10.2 10.2 9.9 80 9 9.1 9 9 8.7 8.6 8.2 8 8.1 7.5 7.1 7.3 7 60 6.1 5.9 5.5 5.5 5.7 5.1 5 5 4.3 4.3 3.9 4 4.1 3.8 3.6 3.6 40 3.3 3.4 3.2 3 3.1 2.8 2.3 2 1.3 1.4 1.3 1 1 0.9 20 -1 -0.1 -0.7 0 -3 ’70 ’73 ’76 ’79 ’82 ’85 ’88 ’91 ’94 ’97 ’00 ’03 ’06 ’09 ’12 ’15
Source: The Japan Iron and Steel Federation (JISF)
alongside their Japanese clients to increase steel and distribution structures. Rather than proving exports. For these reasons, the Japanese steel a legal or institutional barrier, the closeness of industry has been able to sustain its 100-Mt pro- supply chains, which is firmly entrenched as a duction system. practice in the Japanese steel sector, is naturally serving as a trade barrier. The characteristics of During lean years, the these practices vary by steel-consuming industry. Why are Chinese Japanese steel industry In the construction sector, there remains the steel products was not idle in its efforts phenomenon that even if a foreign steel company not particularly to increase steel exports obtains approval under Japanese Industrial Stan- competitive as well as protect the dards (JIS), Japanese project owners overlook im- in Japan? domestic market. The ported steel imports during procurement. There Japanese domestic steel is even the case of designing companies expressly market is totally distinct from Korea’s, which stating standards and product names of Japanese is inundated with Chinese steel. In 2015, only blast furnace companies on the specification 430,000 tonnes of ordinary steel were imported statement. In terms of auto steel, high technol- from China to Japan. Chinese steel products have ogy barriers, intensive purchase of Japanese not been well-received in the Japanese market. products, and demanding delivery conditions There are several reasons for this, including make it difficult for Chinese imports to enter the long-established characteristics of Japan’s steel Japanese market. and steel-consuming industries, trade practices, Trading companies play an interesting role in
94 Asian Steel Watch Learning from the Experiences of the Japanese Steel Industry in the Lost Decades
Figure 3. Japan’s Ordinary Steel Imports by Country (Ording Steel Products)
Korea (1,000 tonnes) Taiwan China 2011 4,483 Others 2,951 818 638 76
2012 4,460 3,092 846 459 63
2013 4,159 2,868 950 284 57
2014 4,908 3,235 1,013 595 65
2015 4,339 2,896 976 425 42
0 1,000 2,000 3,000 4,000 5,000
Source: The Japan Iron and Steel Federation (JISF)
the Japanese steel market. They are addressing networks and funds to ensure a stable supply of the complexity of supply chains in the Japanese high-quality materials. steel market and helping sustain trade between In the supply chain connecting Japan’s steelmakers and steel-consuming industries. steel-producing and -consuming industries, Trading companies in Japan share market there exists a long-established order. They do not information and support steelmakers and change existing suppliers or find new suppliers steel-consuming industries in making rational simply to save costs. They tend to exclude new decisions. In particular, trading companies vicar- players as much as possible and create a closed iously respond to detailed requests from Japan’s club of their own. Any who attempt to disrupt steel-consuming industries, for example, high this order are ostracized from the market. diversity in products and services (steel type/ It clearly is not feasible to mimic Japan’s prac- product specification, lot, size, etc.). Steel com- tices and policies for short periods in an effort to panies have taken advantage of the distribution defend against steel imports. Notably, however, networks of trading companies as a means to we can learn lessons from Japan’s practices which maintain market stability. By doing so, the steel have stubbornly persisted. Many Japanese steel- industry can focus on production to the greatest makers tolerate a rather high cost structure for degree possible while avoiding potential volatil- a time and select steel materials through a long- ity in production output through fierce market term perspective, thus increasing the overall competition. On the part of steel-consuming competitiveness of their own supply chains. In industries, they can utilize trading companies’ close cooperation with existing suppliers and cli-
Vol.04 December 2017 95 Featured Articles
Many Japanese steelmakers tolerate a rather high cost structure for a time and select steel materials through a long-term perspective, thus increasing the overall competitiveness of their own supply chains. In close cooperation with existing suppliers and clients, they have overcome challenges and worked diligently to keep quality and service high.
ents, they have overcome challenges and worked US trade pressure on the Japanese steel industry diligently to keep quality and service high. was at its peak. With cost competitiveness far below that of their Japanese competitors, US In the 1980s, the Jap- steelmakers faced dire deficits and regarded Jap- Japanese response anese steel industry anese steel products as a threat. At that time, the to trade conflicts became a focus of trade only solution for US steelmakers seemed to be to after the 1980s conflicts with the USA take the offensive against Japanese imports. The since Japan was export- US steel industry desperately demanded that the ing high-quality steel to government and Congress strengthen trade re- the USA and importing strictions on Japanese steel imports. They raised little. Today, however, US pressure surrounding a groundless suspicion that Japan subsidized its Japanese imports is less severe compared to that steel industry, and claimed that Japan made use faced by Chinese and Korean imports. Japan has of an artificially low yen to allow unfairly low been withstanding US trade pressure for more steel prices. The United Steelworkers Union and than 40 years; it seems to have become resis- eight steel companies pressed the government tant. The Japanese government and the steel to pursue trade measures, such as Section 301 of industry have cooperated on formidable strategic the US Trade Act, to protect the domestic market reactions. Examining how Japan has overcome from Japanese steel imports. The US adminis- US trade pressure can provide lessons for steel tration, while a champion of free trade, could companies seeking to formulate global corporate not help but make concessions to this pressure. strategies and for policy malkers in response to Some politicians switched their position to one the Trump administration. of active support for the interests of the US steel One example falls in the early 1980s, when industry in an effort to win votes. The US steel
96 Asian Steel Watch Learning from the Experiences of the Japanese Steel Industry in the Lost Decades
industry at that time aimed for strong quanti- authorities was to prevent trade conflicts with tative restrictions on Japanese steel imports. In the USA. To this end, the government has been the end, the US government requested its Jap- actively involved in coordinating actions among anese counterparts to restrain the proportion domestic steel companies. Japan’s Ministry of In- of Japanese steel products in the US market to ternational Trade and Industry (MITI), a channel below 5.8%. for negotiations over the US-Japan VRA, listened In response to intensifying US trade pressure, to opinions from the management of steel com- the Japanese trade authorities and steel industry panies and reflected them in policies. The MITI vented anger, but at the same time they took held regular meetings with steel companies and swift conciliatory action. Japan accepted a Volun- steel-exporting trading companies in order to tary Restraint Agreement (VRA), which is a nego- share the developments taking place in the ne- tiated arrangement through which an exporting gotiations and craft strategic reactions. Through country willingly agrees to limit its exports by restrictions and the private-public operation of or- means of legislation or some other manner of ganization, the government implemented policies enforcement within the exporting country. The for controlling Japanese steelmakers’ production basic direction of Japan’s trade policy at the time output and export volume. Japan tried its best to was acknowledging and adapting to a US-led prevent trade conflicts by monitoring export vol- trade order. In negotiations over the VRA with umes to the USA through an export authorization the USA, the Japanese government and steel system and by operating an export association to industry showed an interesting response—they coordinate shipments to the country. willingly accepted US requests, but sought as The response by Japanese steelmakers also de- many benefits as possible in return. serves attention. They did not pursue opportun- The greatest challenge for Japan’s policy ist individual reactions, but complied with gov-
Vol.04 December 2017 97 Featured Articles
The Japanese government and steel industry’s responses from the past cannot be perfectly synchronized with the current situations facing the steel industry today. However, significant implications can be found in the strategies they applied.
ernment policies and took orderly action. They steel companies did not slacken their efforts to avoided reckless competition over exports, and expand their markets for long-term businesses, instead formulated medium- to long-term strat- such as auto steel. They also worked to strength- egies for the US market. Although not satisfied en local networks and forge friendly relations with the US demands, they thought that it would through technology transfers with US steelmak- be advantageous for them to at least maintain ers and M&As with local companies. In short, their market share and survive in the lucrative US Japan managed to bring Americans around to a market. They perhaps shared the conception that relatively favorable feeling toward the country by it would be better to accept US requests to the de- instilling an image that Japanese steel imports gree possible in the short term, but gain benefits are of generally high quality and contribute to over the long term. the development of the US steel and steel-con- Over the course of the 1980s, Japan actu- suming industries. ally reduced steel exports to below the level The Japanese government and steel industry’s requested. They diversified their export targets responses from the past cannot be perfectly syn- from a focus on the USA to include Southeast chronized with the current situations facing the Asia and other emerging markets. They pursued steel industry today. However, significant impli- qualitative growth for the US market rather cations for steel companies and policymakers in than quantitative expansion. They also shifted East Asia can be found in the strategies they ap- their product portfolio for the US market to plied: the Japanese government’s priority on the high value-added products. Instead of export- avoidance of trade conflicts, systematic responses ing steel products at cheap prices, they focused through private-public cooperation, and Japanese on increasing sales to long-term end users and steelmakers’ efforts to protect their access to the pursuing high value-added exports. Japanese US market over the long term.
98 Asian Steel Watch Learning from the Experiences of the Japanese Steel Industry in the Lost Decades
NSSMC Oita Works
Source: https://fi.wikipedia.org/wiki/Nippon_Steel_%26_Sumitomo_Metal
The history of restruc- at developing high-value-added products, such as Characteristics turing in the Japanese auto steel, electrical sheet, and high-quality steel of Japan’s steel steel industry is also construction materials, and also in seeking new restructuring interesting. The patterns markets for these products. It became inevita- differ greatly before ble for them to increase per capita productivity and after the 2000s. through facility revamps and rationalization of From the late 1970s human resources. They took active steps to do to the 1990s, restructuring occurred through so in order to minimize labor expenses and im- two different methods: facility revamps and prove labor productivity. It is a daunting task to workforce rationalization. Japanese companies conduct massive labor restructuring in Japan, concentrated on improvements to their opera- where job security is considered paramount. The tion rate by cutting production capacity, mainly rationalization was conducted via personnel re- among major blast furnace companies. Looking arrangement through diversification to non-steel at changes in BOF crude steel capacity, it peak- businesses. Moreover, they utilized a form of ed at 141 Mt in 1977, but plunged to 81 Mt by job transfer or dispatch from steel companies to 2003. As a result, the industry’s operation rate partner companies, steel trading companies, dis- increased from about 60% in the late 1970s to tribution companies, or steel-using companies. surpass 90% in 2003. Nippon Steel took radical Since the 2000s, restructuring of the Japanese measures to shutter inefficient facilities during a steel industry has been conducted through inte- period of sluggish demand, but also attempted to gration and reshuffling among companies. As the improve product quality. They spared no efforts 30-year-old cooperation between Nippon Steel
Vol.04 December 2017 99 Featured Articles
Steel companies need to diversify their export destinations, products, and portfolios in the medium- to long-term. Rather than focusing excessively on short-term profits, major steel companies should solidify ongoing stable trade relations as part of their marketing strategies.
and JFE eroded, the industry was reorganized into advancement and sophistication of the industry. two main camps under Nippon Steel and JFE. In Rather than remaining complacent with stable 2002, Kawasaki Steel was combined with NKK. business during a period of high growth, the Nippon Steel and Sumitomo Metal Industries industry should take the opportunity to trans- merged to become the country’s largest steel mak- form itself. The ideal direction for a restructuring er, Nippon Steel and Sumitomo Metal Corporation would be a scaling down in size, especially in (NSSMC). The industry attempted to increase its uncompetitive low-quality steel, as well as en- global competitiveness by enhancing economies couraging the pursuit of qualitative growth. This of scale through integration and reducing redun- means making the steel supply chain more com- dancies via reshuffling. Even recently, the Japa- petitive. In detail, the steel industry can develop nese government has encouraged the industry high-value-added products and create demand to continue with restructuring of companies, for in the long term, taking into account changing example through the integration of NSSMC with trends for future steel-consuming industries. It Nisshin Steel. Overall, the restructuring strategy is also important to sustain efforts to develop for the two major steelmakers has involved scal- high-quality steel for eco-friendly vehicles, ener- ing up in size, but for the entire industry this has gy, construction, and infrastructure. The industry meant reducing redundancies and streamlining. will have to evolve in order to satisfy increasing social demands for safety in infrastructure and Restructuring in the buildings amid an increasing tendency toward Lessons steel industry should natural disasters. for the steel industry not simply be aimed at In periods of low growth, steel companies are in a low-growth capacity reductions, but prone to cutthroat price competition in an effort period focus on the continuous to maintain their operation rate, and steel-using
100 Asian Steel Watch Learning from the Experiences of the Japanese Steel Industry in the Lost Decades
companies tend to lean toward cheaper steel For survival in times of sluggish domestic materials to reduce production costs. However, demand, steel companies place a top priority on such an undesirable situation can undermine maintaining their operation rate. To this end, the competitiveness of the entire industry. It sustaining and expanding exports remains an becomes all the more necessary for stakeholders important task. These days, the export environ- in steel and its backward and forward industries ment has become challenging under a strong to put their heads together and set rational direc- trend toward protectionism. Under these circum- tions. Importantly, steel products produced via stances, steel companies need to diversify their the supply chain of a given steel company should export destinations, products, and portfolios in remain competitive in non-cost areas compared the medium- to long-term. Rather than focusing to competing products. Steel distribution com- excessively on short-term profits, major steel panies and related SMEs along the supply chain companies should solidify ongoing stable trade should also join forces to hone their competi- relations as part of their marketing strategies. tiveness. Distribution companies need to boost From a long-term perspective, it is important for their specialties in the market, for example by them to maintain consistent pricing and trade strengthening their capability to suggest proper volume policies in order to build trust among products to end users or improving just-in-time their customers. Steel companies should also (JIT) responsiveness. In addition, companies that strive to boost cooperation with steel-consum- have duplicated functions in the market would ing companies, such as with joint development do better to seek integration in pursuit of break- and equity investments. Through such efforts, throughs. They should secure economies of scale the steel industry will be better able to overcome through integration and save costs by minimizing challenges and move forward toward a better fu- duplication. ture.
Vol.04 December 2017 101