Iron and steel helped Korea’s industrial takeoff

By Ahn Choong-yong

Distinguished Professor, Chung-Ang University / Foreign Investment Ombudsman

In the early 1960s, Korea was targeting the establishment of the “Integrated Plant for Iron and Steel Production” strategy, not exactly a conceivable concept for an agrarian economy like Korea which at that time lacked capital, technology, manpower, and iron ore deposits. As a typical poverty stricken economy, Korea had yet to experience a simple transition from less to more skill and capital-intensive industries. Nevertheless, during the compressed industrialization process, Korea has evolved from less to more complex industries in a non-linear fashion. For example, the history of Korea’s iron and steel development proves to be a truly exceptional success story. Within a matter of four decades, Korea’s iron and steel sector emerged to become one of the most successful and efficient in the world. How was this seemingly unthinkable venture conceived, who initiated this infeasible task, and what were the challenges Korea faced?

Visionary political and managerial leadership enabled the jump-start of Korea’s seemingly infeasible foray into iron and steel production

The development of Korea’s steel industry boils down to the inception of POSCO in terms of how it was founded, what difficulties it has encountered from the beginning, and how it developed the necessary skilled manpower. When President Park Chung-hee took power in 1961, he conceived iron and steel making as the core strategy in his vision to transform agrarian Korea into an industrial nation. President Park formulated the first five-year development plan (1962-1967) to focus on iron and steel making. In hindsight, Korea was rather fortunate to have such a visionary political leader like Park Chung-hee coupled with entrepreneurs like Park Tae-joon at the core of the industry’s development. The government created the Pohang Iron and Steel Company, Ltd. (POSCO) in 1968, construction of which began in 1970 at Yeongil Bay in the southwestern city of Pohang on reclaimed wetlands.

Park Tae-joon was the pilot. He was the navigator. He did it his way to make something out of nothing. Park along with 39 warriors was the army. They, armed with a sense of duty not to squander even one penny from an economical Park Chung-hee government directive, began their lonely battle toward creating a steelworks with their bare hands, sleeping curled up and eating rice mixed with sand in the “Rommel House.” The house was a makeshift shelter for workers built on a vast sandy land and the name derived from the brilliant German field commander Rommel in World War II.

Park ultimately personified the rags-to-riches story of Korea’s steelworks history.

Five years later in 1973, POSCO began production with an annual capacity of 1.03 million metric tons. After several expansions, the plant reached an annual capacity of 9.1 million metric tons of crude steel in 1983. In 1987 a second plant was constructed in Gwangyang. At present, POSCO factories are now capable of producing 33 metric tons, to expand further to 40 million metric tons in the near future, thus propelling POSCO to rank the second largest producer in the world.

The history of the Korean steel industry dates back to 1941 when Japan established two steel mills in southern Korea as a way to support its war efforts in China and Manchuria. Until the late 1960s, the industry comprised of roughly 109 obsolete facilities ― predominantly rolling mills, several steel-making mini-mills and a few iron-making installations. Given the outdated and fragmented steel making capacities, the government founded POSCO as a wholly new integrated entity and built it from scratch.

Due to the inherent linkage structure, the steel sector has contributed significantly to Korea’s high growth and employment generation. As the Korean economy matured, despite a slightly declined output inducement coefficient in recent years, the steel sector’s value-added inducement ratio continues to rise. In 2006, POSCO’s output amounted to 47 trillion won, with value added equaling 12.5 trillion won, and generated 124,000 jobs. From 2007 to 2011, POSCO plans to invest a total of 17 trillion won at home and abroad to ensure Korea’s robust economic growth. POSCO has already invested in Vietnam, Mexico, and India, and will continue to expand its investment in line with Korea’s globalizing production network.

Overcoming challenges and dynamic learning

When the Korean government proposed the construction of an integrated iron and steel plant to the World Bank for possible project funding, the World Bank responded with a diagnosis saying that an integrated steel mill in Korea was a premature proposition without economic feasibility. Indeed, Korea faced several challenges in developing its steel industry. First, integrated iron and steel making is highly capital-intensive, but Korea lacked domestic capital. Furthermore, costs were sensitive to scale, but Korea’s domestic market was small and the largest market in her vicinity, Japan, was already home to the world’s most efficient steel producers. Korea lacked iron ore resources and was located far from the sources of supply. Finally, Korea lacked steel-making skills and manpower. As is typical of many mature industries, the steel making process is embodied in the process facilities. The processing technology is well diffused and can easily be imported at arm’s length from machinery suppliers especially from Japanese steel companies and from technical consultants, requiring complex engineering know-how.

The managerial vision of POSCO was well received by Chairman Park Tae-joon from the beginning by focusing on manpower development. He wanted to construct a POSCO plant with Korean manpower by sending batches of engineers and front line supervisors to major steel-producing countries like Japan and Australia for on- the-job training. As a result, the first molten iron poured forth on June 9, 1973, so smoothly and was accompanied by continued improvement as time went on.

The capacity expansion in the steel industry tended to involve increased capital and dynamic learning because of large indivisible additions embodying new technologies and a higher capital/labor ratio. POSCO was continuously confronted with processing changes. Simultaneously, the company broadened its product line, inducing further changes in processes. Indeed, creating value in the steel industry involved a large number of stages in the process flow. POSCO had to learn, for example, how to operate a sintering plant, a coke oven, a blast furnace, a basic oxygen furnace, ingot casting facilities and a plate mill. Each stage demanded a different set of technical skills. Overall, productivity depended on many factors such as the correct mixture, the quality of raw materials, the balancing of capacities, the scheduling of raw materials, and relieving of bottlenecks. Later POSCO expanded to a continuous casting and cold–strip mill. With continuous expansion and improved process technology, POSCO was able to produce high value-added wire rods, plates, billets, electrical, cold-rolled and galvanized steel sheets.

In spite of all these obstacles, POSCO has become one of the lowest-cost steel makers in the world. The dynamics of comparative advantages suggested by Korea’s steel making history are those of overcoming obstacles to create advantages by rejecting the current endowment of resources as arbiter of how income is to be earned in the future. Professor Alice Amsden of Massachusetts Institute of Technology cited POSCO’s story (see Asia’s Next Giant: South Korea and Late Industrialization) to support her hypothesis that creating competitiveness in late industrialization amounts to taking the risk of deciding what skills on the part of individuals and what technological capabilities on the part of firms, are both possible and profitable. At such a point, competitiveness depends on inventing linkage in learning. Being established as an enterprise fully owned by the state, POSCO’s success rejects the conventional view that a state-owned enterprise is invariably inefficient. A well-managed state enterprise can then be successfully privatized. Indeed, Chinese leader Deng Xioaping was quoted as saying that the POSCO story could well be emulated by Chinese state-owned enterprises.

Emerging as a global leader in “green” steel production

Generally, creating a competitive advantage through learning rather than innovation is less risky because the learner has both a model and a teacher to guide it. In POSCO’s case, its model and teacher was the Nippon Steel Company of Japan. Although creating advantages through learning is tenuous in one respect, the learner faces more competition than an innovator. The innovator, however, protects its competitive position with a new product or low-cost process. The learner has nothing to protect it but lower wages, and these become increasingly insignificant as a competitive weapon the more skill and capital intensive the sector becomes.

Against such considerable odds, Korea at present has established the status of a global leader in the field of iron and steel making. POSCO has become one of the most efficient plants in the world, and has also become the first to introduce FINEX production technology, which is based on direct use of ore fines and non-coking coal to meet environmental standards ahead of global competitors to ensure a sustainable growth in the green steel industry. Since FINEX eliminates coking and sintering processes unlike the conventional blast furnace route, it is environmentally friendly and cost competitive thanks to the use of pure oxygen for coal gasification and the in-situ CO2 removal system. As POSCO continues to succeed in its on-going drive to produce “green steel” for all of its production processes, Korea is likely to enhance its status as a high-tech manufacturing hub in Asia.

Chairman Park, a junior military colleague of President Park Chung-hee, who successfully turned around the state-owned and mismanaged Korea Tungsten Corporation, intended at the outset to combine the steel plant construction itself with in-house manpower training and technology mastery through learning by actually using the necessary techniques. Unless technical self-sufficiency was conceived from the beginning, Korea might continue to depend on foreign technology and foreign intermediate parts. With a built-in R&D intention, Chairman Park established an in-house University Program in 1986 by establishing Pohang University of Science and Technology (POSTECH) to carry on in depth research with the goal of nurturing a synergistic partnership in a tripartite collaboration framework combining industry, academia, and research. It is amazing that POSTECH is now recognized as a world-class engineering school which attracts the brightest and best talents and invites distinguished foreign faculty and researchers. At the moment, 1,300 students are enrolled in the undergraduate program and 1,500 students in the graduate program, specializing in frontier science and engineering fields such as nanotechnology and bio-physics, among other areas. POSTECH now endeavors to become a cradle for future Korean Nobel laureates in science and engineering.

Ahn Choong-yong is a distinguished professor of the Graduate School of International Studies at Chung-Ang University. He is also a Foreign Investment Ombudsman at the Korea Trade and Investment Promotion Agency. He is currently a member of the Presidential Council on National Competitiveness and The Chairman of Regulatory Reform Commission. He had also served as the president of the Korea Institute for International Economic Policy (KIEP) from 2002 to 2005, the chair of the APEC Economic Committee and chair of the Board of Choheung Bank, as well as president of several academic societies, including the Korea International Economic Association and Econometrics Society. He has maintained a keen interest in public policy, serving in positions such as consultant to the World Bank, UNIDO chief technical advisor to the Economic Planning Unit of Malaysia to design Malaysia's industrial master plan and president of several academic societies in Korea. He has also won various honors, including the Economist of the Year Award from Maeil Economic Daily in Korea, the Okita Policy Research Award by the National Institute for Research Advancement in Japan and the Free Economy Publication Award by the Federation of Korean Industries in 2002. Since receiving his Ph.D. from Ohio State University in 1972, Dr. Ahn has published many articles in prestigious international journals, including the Review of Economics and Statistics, the European Economic Review, the Japanese Economic Review and monograph papers for North-Holland, Cambridge University Press and Springer.