Korea's Steel Industry: A Forecast of Its Competitiveness in 20 Years' Time
Korea's steel industry is one of the country's most successful industries and is a symbol of Korea's industrial power. Pohang Iron and Steel Company (POSCO) was set up in 1968, with the strong support of then-President of Korea, Park Chung Hee. POSCO is, today, the fourth largest steelmaker in the world with about 2.8% of world market share (Anwar, 2006). Indeed, the domestic steel industry is one of Korea's critical industries, having played an instrumental role in building up Korea's highly-successful automobile and shipbuilding industries with its supply of low-cost steel.
This paper seeks to examine Korea's steel industry, through looking at the sources of competitive advantages behind POSCO. The steel giant is practically synonymous with the Korean steel industry, with the international profile of the industry rising on the back of POSCO's success. Hence, the approach of using POSCO's case study as a basis of looking at the Korean steel industry is, in the author's view, appropriate. In addition, this paper seeks to evaluate the sustainability of these sources of competitive advantages, in a bid to predict the competitiveness of the Korean steel industry in 20 years' time.
The global steel industry is cyclical, highly competitive and fragmented (Anwar, 2006). The competitiveness of steel manufacturing firms are generally judged from several dimensions, including the lead time, where translates into efficiency; cost of production, given that the industry is highly price sensitive; ability of the firm to deliver goods on time and the quality of steel manufactured. Despite its lack of knowledge, technology and capability when it started out, POSCO has grown to be a huge success, known for its low-cost production, technological innovations, efficiency and quality. Its competitive advantages in both cost and quality can be attributed to its innovative technologies, process innovations, strong corporate culture and government support. These sources of competitive advantages are discussed below.
Sources of Competitive Advantages for POSCO
Technology Development: Initially, POSCO had to rely on technology transfer from Nippon Steel to set up its first blast furnace. This technical cooperation lasted until the construction of the third furnace, by which time POSCO employees had built up their expertise (Moon, 2009; Lee & Lee, 2009). Since then, POSCO has been strongly committed to developing its own technologies through heavy investment in R&D and the establishment of Pohang University of Science and Technology (POSTECH) and Research Institute of Industrial Science and Technology (RIST) to come up with new steelmaking technologies and to commercialize them (Lee & Lee, 2009; Breckenridge, 2001; Shin & Ciccantell, 2009). After 15 years of R&D efforts, POSCO has successfully developed a revolutionary technology called FINEX, which is “the only significant commercially successful technological leap made in the past 100 years (Han, 2007)” that does not share the limitations of the conventional steelmaking method. Its use is expected to lower the cost of production, as it is energy-saving, and is also expected to increase the efficiency of POSCO's production process. FINEX serves as a source of competitive advantage for POSCO as it is a breakthrough technology and is not easily replicable. Hence, it can be said to be a sustainable source of competitive advantage for POSCO.
Low Labour Cost: POSCO's cost competitiveness used to be on the back of low labour costs, but as Korea's economy developed, labour costs have risen significantly. However, as compared to integrated steel companies in the United States where workers earn $38 an hour, Korea's $13 an hour wage-rate is considered very competitive (Breckenridge, 2001). Furthermore, Korea's legacy costs are not as heavy. Retired employees at POSCO receive a month's pay for every year worked and the company is also not responsible for medical coverage any longer. This is unlike the situation at many U.S. steel companies, where they have to allocate hundreds of millions of dollars for healthcare benefits (Breckenridge, 2001). However, low labour cost is not a sustainable competitive advantage as developing countries, such as China, can easily beat Korea with its massive pool of cheap labour.
Process Innovation: POSCO has turned to the use of technology to streamline the manufacturing process, as a way of reducing production costs. Since 1999, POSCO has embarked on a Process Innovation initiative, aimed at streamlining the company's core processes For example, Supply Chain Management (SCM) and Enterprise Resource Planning (ERP) were implemented, leading to reduced lead time for hot-rolled coals by more than 50% and increased delivery fulfillment rate by 12.3% (Lee & Lee, 2009). Deliveries to customers were also timelier as communication with customers was improved. Implementation of Six Sigma has also led to better quality control over its steel output. Hence, the initiative has not only improved the efficiency of the production process and quality of the product, but has raised POSCO's ability to provide better customer service as well. However, this is an easily imitable source of competitive advantage as competitors can also improve their processes through adopting systems such as SCM, ERP and Six Sigma.
Organizational Culture: POSCO has a strong corporate culture which emphasizes continuous improvement and innovation. This can be reflected through its process of organizational learning. For example, at its start-up stage, POSCO kept learning new technologies through experimentation with ingredients, material flow etc (Lee & Lee, 2009). Its 15-year journey to developing and commercializing its FINEX technology is also an example of POSCO's commitment to innovation. Furthermore, POSCO promotes such a culture by encouraging knowledge-sharing among employees and getting them to actively participate in quality circles to improve productivity and quality. Voluntary groups are set up within POSCO to identify and solve problems related to quality and safety (Lee & Lee, 2009). Organizational culture is not something that is easily imitated and POSCO's culture can be a sustainable source of competitive advantage for the firm. Its culture has led to improved quality of products and has further strengthened the firm's cost competitiveness through a conscious effort by its employees to keep finding ways to improve their work and to find new ways to do things, i.e. innovate.
Government Support: POSCO received a big helping hand from the government in its start-up stage and even as it is now internationally competitive, the government still gives considerable support. For instance, they had invested 22.2 billion Won in R&D grants for the commercialization of FINEX (POSCO-India, 2007). In fact, most of RIST's, POSCO's research institute, annual budget is supported by the government (Breckenridge, 2001). Hence, it can be said POSCO, and the Korean steel industry in general, enjoys government support as a competitive advantage because steel is regarded as a strategic industry. Thus, the government renders significant support through subsidies, grants and investments to maintain Korea's competitiveness in the industry. This contributes to Korea's cost competitiveness, but it may not be a sustainable source of competitive advantage as the government can control how much support they want to render and may even withdraw its support completely.
Competitiveness of the Korean Steel Industry in 20 Years' Time
Given the highly competitive nature of the industry, for the Korean steel industry to still remain competitive in 20 years' time requires the building up of sustainable competitive advantages that would allow the country to remain as one of the top steel producers in the world. Steel is expected to remain in high demand for a long-time, given its low substitutability and it is used as an input in many industries, including the production of motor vehicles, ships etc. Even its closest substitute, carbon fibre, for use in car production, is only still in the research stage after several decades (Lundberg, 2009) and it is unlikely that it would be fully commercialized in 20 years. Although this may mean continued business for steel manufacturing firms, whether POSCO will be able to maintain or grow its world market share would depend on its ability to continue producing high-quality, yet low-cost steel, given that there are low switching costs for buyers.
An examination of its sources of competitive advantages leads to the conclusion that the Korean steel industry is likely to still remain competitive in 20 years' time. According to Michael Porter, “companies achieve competitiveness through acts of innovation” (Porter, 1990). For POSCO, innovation is at the very heartbeat of the company and is very much embedded in its corporate culture. At its start-up stage, the company had to be innovative to reduce its dependency on foreign technologies and to come up with its own to increase competitiveness. Thus, its innovative culture was already shaped since its founding. Given that it is so ingrained in the company, from its management to its employees - many of whom have been with the company for decades (Moon, 2009), it is unlikely that its strong corporate culture would deviate much from how it is presently. Furthermore, culture, as a source of competitive advantage, is difficult for others to replicate and is unique to each company. One could even say that the Korean national culture has had strong influence on that of POSCO's, as Koreans are known to be high innovative (as exhibited in their leading positions in many sectors, such as shipbuilding, electronics and semiconductors) and it would be more challenging for other countries to emulate and build the same type of corporate culture.
Furthermore, POSCO's strong commitment to R&D is likely to persist, especially since it has just invested in a new R&D centre which is set to open in June 2010 (Han, 2008). Its FINEX technology is revolutionizing the steel industry and the competitive advantage this technology creates for them is likely to be enjoyed for many more years to come. With it, POSCO has proved itself to be at the forefront of steel manufacturing technology and it would take time for its competitors to replicate this technology or to create something that surpasses it. Given its penchant for continuous improvement, it is unlikely for POSCO to be complacent, but likely for it to keep improving on its FINEX technology to make its production process even more efficient. Hence, that would help to increase the technological gap between POSCO and its competitors.
Moreover, given the importance of the steel industry to the Korean economy and to its national pride, the government is likely to continue supporting the industry. However, the caveat is that POSCO has to remain competitive to earn its benefits from the government, as past history has shown that the Korean government has not hesitated to withdraw its support from uncompetitive and failing companies (Chau, 2001).
Threats to the Korean Steel Industry
In spite of its strong likelihood of remaining competitive in the future, there are some threats which the Korean steel industry has to manage. The biggest of which would be the rising Chinese steel industry, which is able to compete in terms of cost, given its low cost of production. However, at present, the quality of Chinese steel is poor and the country has to import steel from other countries (Economy Watch, 2007), including Korea. The Chinese steel industry is highly fragmented and made up of many inefficient small and medium steelmakers. Hence, there is an ongoing consolidation aimed at increasing the efficiency of Chinese steelmakers and the competitiveness of Chinese steel (Yuan, 2009). Thus, in time to come, Chinese steel could be a strong competitor in the industry. The Korean steel industry can manage this threat from China by lowering production costs through innovation and process improvements, as these are more sustainable methods with long-lasting effects, rather can compete through lower costs of factors of production, which it may find hard to do especially since Korea's labour costs are much higher than that of China's. Even as the Chinese steel industry starts to come up, the Korean steel industry can still compete, if not on price, through using newer technologies, then through producing higher quality steel, perhaps placing even greater focus on the production of specialty steel. However, at present, it appears that POSCO is well-poised to manage this threat well because of its heavy focus on R&D and innovation.
Another threat that the Korean steel industry has to deal with is increased mergers and acquisitions that are happening in the industry (The Financial Express, 2006). For POSCO, this means that it has to compete with more large firms with increased resources. For instance, the largest M&A in recent years is that of Arcelor and Mittal to form ArcelorMittal, the world's largest steel company with 10% of global market share (Hannaford, 2006). However, this threat is likely to be manageable by POSCO, given that it has made its own slew of acquisitions in recent years (Reisman, 2010). Furthermore, its FINEX technology is expected to increase POSCO's ability to compete with other large steelmakers. Hence, the threat of an M&A trend, to POSCO's position in the global steel industry, is rather low.
A third threat to the Korean steel industry would be its ability to secure source of iron ore, the basic ingredient behind the production of steel. Such ability translates into lower costs of production and is, in fact, the lifeblood of steel manufacturing firms. However, the threat from this is lowered with FINEX as it utilizes iron ore powder, of which there is plentiful in the world, with 80% of natural iron ore being in a powder-like state (Yonhap News, 2007). Furthermore, POSCO has just obtained a mining license from the government of Orissa, an Indian state rich in iron ore, which would ensure a supply of up to 600 million tons of iron ore over 30 years (POSCO-India, 2009). Hence, this threat to the POSCO is rather weak.
In conclusion, it is evident that POSCO and hence, the Korean steel industry in general, is likely to enjoy continued success due to the high likelihood that it would remain competitive even after 20 years. This analysis is tightly based on the assumption that the Korean steel industry would continue to invest heavily in R&D to increase the technological gap with its competitors, and that it would not be complacent and place its success and competitiveness in grave danger. The main reason for the expected future success of the Korean steel industry is due to its firm commitment to innovation and improvement, which is the main driver behind Korea's ability to remain cost competitive and to produce high-quality steel. In addition, this firm source of competitive advantage for the Korean steel industry has enabled it to become well-prepared to manage the strong threats to its success, the biggest of which is the Chinese steel industry.
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