The Global Restructuring of the Steel Industry: Innovations, Institutions and Industrial Change (Routledge Studies in International Business and the World Economy, 13)

THE GLOBAL RESTRUCTURING OF THE STEEL INDUSTRY

Th e steel indu stry is one of m an y m aj or wo rl d ind ustries ex te nsively restructured in th is era of globa lizatio n. The Global Restructurin g of the Steel Indu stry ex plains how and why th e steel ind ustr y has shifted from adva nced ca pita list countries to lat e ind ustria lizing countries. Dr awin g upon case studies of th e steel industr y in th e US, Japan , South Korea, Brazil and India, Antho ny P.D'Costa exa mines the relationship between industri al cha nge and institution al respon ses to techn ological diffusion. H e reveals th at govern ments' and firm s' differin g respon ses to innovatio ns lead to an uneven diffusion of techn ology and indu strial reorgan ization . M oreover, when it becomes clear th at existing institutio na l arrangements no longer serve th e industr y well, new arrangements are made which allow for inn ovative beh a viour. O fte n th is h a s cr eated o p po r t uni ties for t echn ol o gic al " leapfrogg ing" and th e emergence of new techn ologies in unexp ected places. The steel industry has con sequ entl y kn own a new dynam ism and th e openended nature of capitalist competiti on has been firml y und erscored . The Global R estru cturing of th e Steel Indu stry is a timely addi tio n to th e literature of world indu stries and offers valuable insights into the new dynamics of industria l capitalism in th e globa lized age. Anthony P.D'Costa is Associat e Professor of Co mpa ra tive Internat ion al Development at th e University of Washin gton , Tacom a, USA. H e has written on ind ustria l restructuring in Asia, Lat in America and th e US and is currentl y researching techn ology leapfr ogging in th e Ind ian software industr y.

ROUTLEDGE STUDIES IN INTERNATIONAL BUSINESS AND THE WORLD ECONOMY 1 STATES AND FIRMS Multinational enterprises in institu tional comp etition Razeen Sally 2 MULTIN ATION AL RESTRUCTURIN G, INT ERN ATI ONALIZ ATION AND SMA LL ECONOMIES Th e Swedish case Thomas Andersson, Torbiorn Fredriksson and Roger Svensson 3 FOREIGN DIRECT IN VESTM ENT AND GO VERNMENTS Catalysts for economic restructuring Edited by John H.D unning and Rajneesh Naru la 4 MULTIN ATIONAL IN VESTMENT AND ECONOMIC ST RUCTURE Globalization and competitiveness Rajneesh Naru la 5 ENT REPRENEURSHIP IN A GLOBAL CONTEXT Edited by Sue Birley and Ian Macm illan 6 T HE GLOBAL STRUCTURE OF FINANC IAL MARKETS An overview Edited by Dilip K.Ghosh and Edgar Ortiz 7 ALLIANCE CAPITALISM AND GLOBAL BUSINESS John H.D unning 8 MULTIN ATIONAL ENTERPRISES FROM TH E NETHERLANDS Edited by Roger van Haese! and Rajneesh Naru la 9 CO MPETITION, GROWTH STRATEG IES AND TH E GLOBALIZATION OF SERVICES Real estate advisory services in Japan , Euro pe and the United States Terrence LaPier 10 EUROPEAN INT EGRATION AND FOREIGN DIRECT IN VESTMENT IN THE EU The case of the Korean consumer electro nics ind ustr y Sang Hyup Shin 11 NEW MULTINATION AL ENTERPRISES FRO M KOREA AND TAIWAN Roger van H aese! 12 CO MPETITIVE IND USTRIAL DEVELOPM ENT IN THE AGE OF INFORMATION Th e role of co-operat ion in the technology secto r Edited by Richard ].B raudo and Jeffrey G.Macintosh 13 THE GLOBAL RESTRUCTURIN G OF THE STEEL IND USTRY Innovation s, institu tion s and ind ustrial change Anthony P. D 'Costa 14 PRIVAT ISATION AND LIBERALISATION IN EURO PEAN TELECOMMUNI CATIONS Comparing Britain , the Net herlan ds and Fra nce Willem Hulsink

THE GLOBAL RESTRUCTURING OF THE STEEL INDUSTRY Innovations, institutions and industrial change

Anthony P.D-'Costa

London and New York

First published 1999 by Routl edge 11 N ew Fetter Lan e, Lond on EC4P 4EE Thi s edition published in the Taylor & Fra ncis e-Libra ry, 200 3. Simulta neous ly published in th e USA and Canada by Routl edge 29 West 35th Street, New York, N Y 10001

© 1999 Anth on y P.D'Costa All rights reserved. No part of thi s book may be reprinted or reproduced or utilised in any form or by any electro nic, mechanic al, or other mean s, now kno wn or hereafter invented, includin g photocop ying and recording, or in any informati on sto rage or retri eval system, witho ut permi ssion in writing from the publi shers.

British Library Cataloguing in Publication Data A cata logue record for thi s book is available from th e British Libr ar y Library of Congress Cataloguing in Publi cation Data D' Costa, Anth on y P., 195 7Th e glo bal restructuring of th e steel industry: inn ovati on s, instituti on s, and indu stri al chan ge/Anth on y P.D'Costa. p. cm. Incl udes bibliogra phical references and ind ex. 1. Steel ind ustr y and tr ade. 2. Steel ind ustr y and tr adeGovern ment policy. 1. Titl e. HD 9510.5.D38 1999 338 .47669142---Dc21 98- 276 03 CIP ISBN 0-20 3-42522-7 Master e-boo k ISBN

ISBN 0-20 3-445 94-5 (Ado be eReader Forma t) ISBN 0-415 -14 827-8 (Print Edition)

TO AVERIC, CAMILLE, AND THEIR GRANDPARENTS

CONTENTS

~~~~

~

List of tables Forew ord A ckn owledgements

Xl X lll X Vll

1 The restructuring of the steel industry Introdu ction 1 Ex plaining indus trial restru cturing 2 Outline of chapters 8 2 An institutional interpretation of steel industry restructuring: an analytical framework Introdu ction 11 Th e restru cturing issue 12 Techno logy and restructuring: an analytical fram ew ork Conclusion 28

1

11

21

3 Technological change and crisis in the American steel industry 30 Introdu ction 30 Strategic ado pt ion of new inn ovation s 37 Th e crisis com po unded 43 Crisis-inspired restructuring: disinvestme nt and institutional change 48 Conclusion 55 4 Technological change and rapid industrial development in Japan and South Korea Introdu ction 5 7 State-led late indu strializati on 5 8 Institutional response to new inn ovations 67 Vll

57

CONTENTS

Excess capacity, maturity, and Japan ese restructuring Conclusion 80

72

5 Technological change and institutional challenges in Brazil, India, and Korea Introduction 82 State-led capitalist industrialization 83 Overcoming structural dependence 88 Institutional challenges to industrial restructuring 95 Technology diffusion and capability in Brazil, India, and Korea 109 Conclusion: institutional capacity and industrial restructuring 117 6 Technological change and the internationalization of the steel industry Introduction 119 US imports and the changing international division of labor Cost of production and labor productivity 125 Global realignments in the steel industry 128 Conclusion 137

82

119

120

7 Innovations, entrepreneurial breakthroughs, and industry restructuring Introduction 140 Th e emergence of minimills 141 Technological breakthroughs in the non-integrated steelm aking pro cess 148 Th e diffusion of new technologies and restructuring 155 Conclusion: new technologies and industrial restructuring 165 8 Interpreting technological change and industrial restructuring Introduction 169 Restructuring and capitalist industrialization 170 Institutional chang e and restructuring 173 Technology, strategy, and the int ernational division of labor Conclusion 182

140

169

177

Notes Appendix: institutions visited and/or contacted for data collection Bibliography

184 200 202

~~

2ll V11l

FIGURES

2.1 2.2 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 4.1 4.2 4.3 4.4

A virtuous cycle of technological cha nge and ind ustria l expansion An ana lytica l framework for industria l restructuring Diffusion of Bessemer and ope n hearth furnaces (OH F) in th e US Unit opera tio ns in steelma king sequence: integra te d blast furnace-b asic oxyge n furnace-continuou s castin g and minimill (electric arc furnace) Adop tion of basic oxygen furnace (BO F) and continuou s casting (CC) in th e US and Jap an Lar ge-sized blast furn aces in th e wo rld Rising steel impo rts in th e US Relat ive profitabil ity of th e US steel industr y (% of equity) Financing investm ent in th e US steel industr y Excess capacit y in th e US steel industr y ARMCO's plant imb alanc es and rounding-out process Korean investm ent in th e steel industr y Incr easing size of blast furnaces (BFs) and basic oxyge n furnaces (BO Fs) in Jap an Co nvergence of auto ma tio n in Jap an an d Korea Declining cap acit y utilizati on in th e mature econo mies,

1973-90 4.5 5.1 5.2 5.3 5.4 6.1 6.2 7.1 7.2

26 27 32 34 41 42 43 44 45 49 50 60 70 72

73

Restructuring and pr ofit ability of th e Japan ese steel industr y Output expans ion by th e Kor ean steel industr y Brazilian investme nt in th e steel industr y, 1972-96 Ca pa city util ization in Indi a PO SCO 's learning cur ves for blast furnace (BF) opera tion Th e cha nging division of lab or on th e US west coast Cha nging pattern of Jap an ese ex ports Rising tr end in Jap an 's electric arc furn ace (EAF) size US scra p supply, 1960-84 IX

76 89 94 110 113 131 133 145 147

LIST OF FIGU RES

7.3 7.4

8.1

Ispat 's expa nding steel business Planned new plants and new techn ologies in Ind ia Demand and supp ly of steel scra p in Korea

x

161 163 179

TABLES

1.1 3.1 3.2 3.3 4.1 4.2 4.3 4.4

Cha nging structure of global steel producti on (% of tot al ) M ajor steel product mar ket s by type of opera tio n and end use M ajor innovat ion s in th e steel indus try Investm ent cost for mod ernizati on and gree nfields Post-war development of th e Jap an ese steel industry Financing PO SCO's mill s Co ntinuo us casting rat io Th e rat ion alizati on pr ogram of Jap an ese steel firm s

(1987-96) 5.1 5.2 5.3 5.4 5.5 6.1 6.2 6.3 6.4 7.1 7.2 7.3 7.4 7.5 7.6

Integrat ed steel cap acit y expansio n in Brazil (million ton s) Investm ent and ex pansio n of India's integra te d public and priva te secto r steel industr y Co mpa rison of int egrat ed greenfiel ds in Brazil, India, an d Korea Empl oyment in th e steel ind ustry Diffu sion of mod ern technology: basic oxygen furn ace (BO F) an d continuou s ca sting (%) Th e cha nging int ern ati on al division of lab or : US imp ort stru cture (%) Average cost per ton of pro duction (US$) Princip al for eign joint ventures in th e US integra te d steel segment PO SCO 's overseas ventures Th e diffusion of electric arc furnace (EAF) technology Average size of min imill plants in th e US and Jap an Recent technological br eakthroughs in alternative steelma king pr ocesses Greenfield investm ent costs: minimill and integrat ed in th e US Foreign player s in US minimills Diffusion of new minimill technology in th e US Xl

3 35 36 47 62 67 71

78 89 90 99 102 111 122 126 130 135 142 144 149 152 154 157

LIST OF TABLES

7.7 8.1 8.2

Restructuring of the Japanese minimill sector Forecasts of Korean steel industry ('000 tons of crude steel) India's supply and demand position in 2001-2 ('000 tons)

Xli

159 171 178

FOREWORD

Steel and steel-based engineering have long been regarded as the thews and sinews of modern industrial and military power. This was apparently demonstrated yet again in what the Japanese call the Pacific War of 1941-5, where the overwhelming US superiority in ships, airplanes, and armaments gave it victory over the indomitable Japanese soldier, prepared at all times to kill or to die for his country or Emperor-right or wrong. Governments which have deliberately embarked on a plan for industrializing their countries, therefore, have paid special attention to the development of an indigenous steel industry. This book provides a fascinating analysis of the reasons for the staggering success of the post-World War II Japanese steel industry until it was overtaken in international competitiveness by the Korean industry, and also a connected account of the much more mixed record of the Brazilian and Indian steel industries. All these four histories are strongly influenced by state intervention, but with very different outcomes, the reasons for which D'Costa sets out in this book. His analysis is not limited to explaining the differential fates of the late, and late late, industrializers. He sets them against the background of international competition in prices, costs of production, technology, investment, and capacity-building, and provides a succinct account of the doings and the causes of the downfall of the once-mighty US steel industry. Most processing technologies connected with steelmaking were and continue to be characterized by strong economies of scale. Add to that the fact that large amounts of finance are needed to implement best-practice technologies on scales that yield the lowest cost, and that steel is a major input in most capital goods and is likely to experience strong ups and downs in demand, the need for large firms in the industry becomes a matter of sheer common sense. The controllers of the US industry realized it better than others, and through mergers they created the first billion-dollar firm in the world, the US Steel Corporation. After that, the steel industry in the US went from strength to strength and emerged as the leading producer of steel, with a very big gap between it and the rest of the producers, at the X11l

FOREWORD

en d of World War II. However, a captive and enorm ous domestic market and the oligopolistic structure of the industry produced a complacent and lethargic attitude towards technical ch ange. Four decades ago, W.E.G .Salt er ex plode d the myth that in ad vanced capitalist countries most firms use best-practice technology most of th e time. Leads and lags in th e diffu sion of technology, industry structure and various kinds of protection or subsidies en joye d by the firms can gen erate a large spread of technolo gy and productivity. But the US steel industry set a record of delayed adoption of best-practice technology by setting up mo st of th e 44 million tons of new capacity in the shap e of op en hearth furnaces wh en th e ba sic ox ygen furnace (BOF) had alr eady proved it self as the best-practice technology for steel smelt ing. Th e en ormous amount of US aid to the allies and som e developing countries, often em bodied in high-cost products tied to aid, contributed to this development, along with the risk- avers e divisions of an oligopolistic industry cocooned in a protect ed domestic market. However, as soon as th e Japanese and th e German steel industries set up enough capacity with BOF and continuous casting (C C) technologies, th e US industry lost its dominance in the exp ort market and found its home turf threatened by imports of for eign steel and enginee ring products. Th e lat er history of th e US steel industry is on e of painful and halting adjustment and downsizing, with various kinds of govern ment help summoned to prop up an ailing giant. Although this story seems to be but a repetition, on a lar ger scale, of what happened to many segments of British industry in an earlier era with th e th en newly industrialized countries emerging to overtake th e pioneer, th e Japanese and th e Korean challenge to the US and many segments of th e European steel industry seems to h ave imparted a new quality of aggr essiven ess to the competitive race. This new quality inh eres in th e fact that, whil e parts of British, American or even continent al European export demand for steel originated in colonial or dependent economies with som e cu shion for high er prices or lower quality, th e Japanese and th e Kor ean exports have depended almost entirely on competitiveness in pric e, quality, customer suitability, and delivery tim e. D' Costa provides a fascin ating and con vincing account of wh y, out of th e three countries-Brazil, India, and South Kor ea-which can be said to ha ve mounted a state-led pro gram of development of their respective steel industries in th e po st-war period (although in th e case of Brazil, thi s effort actually began in th e 1930s), onl y Kor ea ha s been abl e to develop an industry wh ich is competitive by global standa rds. Thi s contrast in th e actual outcome of th e state-led development dri ve, of course, applies more or less to th e entire spectru m of indu stries and to th e economy in general and ha s deep social and political roots; but it also deri ves partly from differenc es in geopolit ical conjuncture. Th e government s of those states which man aged successfully to promote XI V

FOREWORD

industrialization also managed to keep a distance between themselves and particularistic economic interests. Even if they strove to promote capitalism, it was the interest of the capitalist class and the economy, rather than of a particular section, that the state promoted. By contrast, in the states where intervention produced only mixed results, particular sections of capitalists managed to influence the decisions of the state, which often turned out to be inefficient, contradictory, and time-inconsistent. State autonomy, of course, has deep political and social roots. One major condition was that in the initial or heroic phase of industrialization, foreign capitalist interests played no role in government decisions. Another condition was the elimination of a landlord class which had often proved a hindrance to the full functioning of markets and the release of entrepreneurial energy even as it acted as an ally of foreign capitalists interested in exploiting the domestic market for manufactures in return for securing markets for landlord-controlled primary products. A successful developmental state also sought to educate the whole population, since learning how to learn has been one of the key conditions for industrial success in the modern world. The implementation of an industrialization plan requires "social capability" on the part of entrepreneurs and politicians while it also requires "macroeconomic capability" on the part of the managers of national finance and investment. In the case of South Korea, the task of macroeconomic management was considerably eased by the availability of enormous quantities of untied aid and military assistance from the US and her allies down to the 1970s. But the government of that country made sure that, even if initial investments in pasco were subsidized, they generated increasing surpluses over time, and thus did not become a drain on public sector resources. More generally, the continued generation of a surplus by the public sector, complemented by balance of payments surpluses in the long term, seems to be a necessary attribute of the macroeconomic capability of a developmental state. By contrast with South Korea, both Brazil and India were hampered by a shortage of foreign exchange when shopping for the best technology. However, the difficulties of the latter were greatly compounded by their deficiencies in learning and decision-making. They generally planned for plants of suboptimal scale, burdened the companies with large interest payments, allowed gestation lags to grow beyond the norm, failed to recover subsidies doled out by the public sector, and devoted too little time, decision-makers' attention and resources to the absorption of new technologies and their upgrading through continuous learning. The last deficiency can be illustrated by the contrasting strategy adopted by the Japanese to absorb BOF technology for steel smelting. When the Japanese found out about the BOF technology invented by an Austrian state enterprise, they sent out several teams with representatives of industry, the Ministry of International Trade and Industry (MITI) as well as steel technologists, in order to try and absorb the invention as thoroughly as xv

FOREWORD

possible. They also quickly invested large amounts in setting up BOFs. In India, even when the Germans set up the Rourkela plant with BOF technology, the learning process was tardy and halting, with inefficient investment decisions continually spoiling it. In both Brazil and India, but more damagingly in the latter, the inefficiencies of small, long-gestation, high-cost plants were compounded by low rates of utilization which blocked opportunities for learning and incremental productivity improvements. The entry of new private firms setting up minimills has only mitigated the problem, but full adjustment to new technologies and fiercely competitive global conditions will require vigorous and efficient government decisions as well as new entrepreneurial drives. The enforced economic liberalization both these countries have gone through has made the state less capable of decisiveness and autonomy, even if more private entrepreneurship may be waiting for a suitable opportunity for investment and profit-making. D'Costa has managed successfully to weave the stories of growth and readjustment of a major industry in the developed market economies with the emergence and faltering of new players from developing countries. He has thereby demonstrated that trajectories of development and underdevelopment of international capitalism are intimately connected. His analysis of the rise of POSCO and the South Korean steel industry as a major player in global competition also indicates that, despite its recent troubles, the remarkable growth of the South Korean economy was not a fluke, but was based on vigorous decision-making, shrewd bargaining, and assiduous learning during the whole period of its twenty-five-year-old history. I hope other readers interested in the subject of development and underdevelopment will find this book as instructive and enjoyable as I have found it. AMIYA KUMAR BAGCHI

Reserve Bank of India Professor Centre for Studies in Social Sciences, Calcutta

XVI

ACKNOWLEDGEMENTS

To write a book on the steel industry at the turn of the twenty-first century might seem like academic lunacy. After all, steel was the heavyweight of the late nineteenth and early twentieth-century industrial capitalism in Britain and the US. With the proliferation of high-tech industries in our time, steel is no longer the center of attention. Fortunately, the industrial ascent of Japan and later South Korea in the second half of the twentieth century and numerous scholarly studies conducted within the broader field of economic development have provided intellectual justification to carry out this study. The near limitless help from the industry representatives around the world-providing logistical support and supplying data-contributed to my sanity in bringing this project to a close. I embarked on this study as part of my PhD dissertation at the University of Pittsburgh soon after the devastating 1982 recession in the US. My arrival in Pittsburgh at that time was an eye opener. Accustomed to the typical developing country problem of "how to increase industrial output" I was not prepared for the idea that industrial development was not simply a matter of capacity expansion but also included cutbacks and reduction. How to relate the two became my central intellectual concern. Already Immanuel Wallerstein's "global" perspective had made inroads into established academia and provided me with an avenue for adopting a "holistic" approach to explain global restructuring. But the broad sweep of the Wallersteinian approach was unable to capture the micro-level details of industrial change. There was little room for agency in his larger system. Those working within the statist framework provided a welcome break from this macro-structural perspective in understanding how social actors are able to shape developmental outcomes. The work of Peter Evans and Alice Amsden, among others, showed how industrial change could be institutionally planned and consciously implemented. Others, such as Ann Markusen, who was instrumental in many ways in supporting my study, sought to empirically establish industrial restructuring as an important component of regional industrial shifts in the US, including the steel industry. That innovations at the micro level had an immense role to play in industrial XVll

ACKNOWLEDGEMENTS

change was best conceptualized by Nathan Rosenberg's pioneering work on technology. By systematically breaking away from mainstream economics, Rosenberg provided an alternative perspective to understanding the technological basis for industrial change. Finally, in India, Amiya Kumar Bagchi's long-standing critical, historical scholarship on Indian development and Ram Prasad Sengupta's command of the Indian steel industry were inspirational in carrying out this study. Our many conversations over the years gave me a clearer view of industrial change in the local context. I am also grateful to Dr Bagchi for his willingness to write the foreword to this book. In addition to the intellectual debt owed to the academic community, acknowledged in citations throughout the text, Bob Erickson of Tri-State Steel Conference-a community-based organization that addresses the problems of industrial dislocation-has been not only a good friend and supporter of many of the ideas presented here but also a supplier of reams of industry-related data. Most of all I am indebted to the numerous industry and government officials in India, Japan, Korea, Brazil, and the US who gave me their time with no expectations whatsoever. It is not possible to mention all of them and most of these individuals would prefer to remain anonymous. However, I feel it would be fit and proper to acknowledge some of the institutions they represent for accommodating my many requests for data and plant visits. The fieldwork was done in several phases (see the Appendix). It began in 1987 when I visited India, South Korea, Japan, and Brazil. Subsequent work of shorter duration was carried out throughout the 1990s. In 1987, Arvind Pande, then the Head of Corporate Affairs, Steel Authority of India Limited, arranged for the logistical support to carry out interviews with the industry staff, including plant visits in Durgapur and Burnpur. In 1997, as the Chairman of SAIL, he was kind enough to send me additional statistical information on the Indian steel industry. In 1996, M .N.Dastur and Company, well-established steel consultants in Calcutta, also provided research materials. The Korean Iron and Steel Association arranged my discussions with the Pohang Iron and Steel Company and plant visits in Pohang and Kwangyang in 1987. In 1995, S.B.Hong, Vice-President of POSCO, was instrumental in arranging the logistical support to meet company officials, inside and outside of POSCO. Since then, he and his staff have always responded enthusiastically to my follow-up data requests. Joohan Kim of the Korea Institute for Industrial Economics and Trade was also kind enough to send me recent data on the Korean industry. Shinichi Yasuda of the Japan Iron and Steel Federation and Tadamasa Sakonji of Nippon Kokan have been my principal contacts to obtain materials on the Japanese industry. In addition to organizing my meetings with other firms and the Keihin Works, over more than a decade I have maintained a professional relationship with both of them, exchanging XV11l

ACKNOWLEDGEMENTS

information on the industry. Nozumo Kawabata of Tohoku University was very generous in sending me Japanese government-published statistical data on the industry. In Brazil, through the good offices of Luiz Bresser Pereira, then the Finance Minister of Brazil, I had the good fortune to be formally affiliated in 1987 with the Economics Department at Fundacao Getulio Vargas in Sao Paulo. Friends and acquaintances provided infrastructural and social support to carry out fieldwork in Brasilia, while SIDERBRAS, now defunct, arranged for the numerous interviews and visits to Acominas in Belo Horizonte and Usiminas in Ipatinga. The staff at the Institute Brasileiro de Siderurgia in Rio de Janeiro very willingly sent me the data I requested. A project of this nature is inconceivable without the financial support of the many institutions that extended their limited resources. I am especially grateful to the Center for Latin American Studies, University of Pittsburgh, which administered the Tinker Foundation's small travel grant for my Brazil fieldwork. As a fellow of the Fulbright program (Washington, D.C.) and the American Institute ofIndian Studies (Chicago) in 1991 and 1992 respectively, I was awarded funds for a project on the restructuring of the Indian auto industry. I was able to carry out some follow-up interviews on the steel industry in India and Japan during this time as well. In the summer of 1995, a Korea Foundation Fellowship (Seoul) allowed me to update my work on the Korean steel industry, while the Korea Development Institute provided me with a congenial intellectual atmosphere. A fellowship from the Korea Program of the Social Science Research Council, New York, enabled me to write up some of the research carried out in 1995. Makoto Kojima of Chiba University of Commerce invited me to Japan as a Visiting Scholar at the University's Institute of Economic Research. During that brief visit in December 1996 I was able to update my data on the Japanese industry. My university in Tacoma has been supportive of my work, even with increasingly tight budgets. A small grant in 1995 enabled me to meet several foreign steel technology firms in Pittsburgh. In 1996, the Founders' Endowment Fund of the University of Washington, Tacoma awarded me a summer travel grant to carry out additional research on the Indian steel industry. The bulk of the writing was done in 1997 at the National University of Singapore where I was a Senior Fellow at the Department of Economics and Statistics. The tropical weather and the freedom from administrative duties certainly made writing a pleasure. With the arrival of our daughter in late 1997 I had to postpone completion of the manuscript. Work continued in Fayetteville, Arkansas, and Minneapolis in the extremely hospitable homes of my in-laws and relatives. A second fellowship from the American Institute of Indian Studies allowed me to wrap up the final chapter in the warm and friendly environs of the city of Bangalore-before the full-scale launching of my research into the Indian software industry. Perhaps a bridge has indeed been created between the late nineteenth and early twenty-first centuries! XIX

ACKN OWL ED GEMENTS

For every author th ere is always, I hope, a solid sounding board. In my case, Janett e Rawlings has been more than that. She not onl y put up with reading severa l vers ions of a rather dr y, perc entage-driven manuscriptmeticulously editing th e document line by line-but also provided invaluable suggestions to improve th e analysis by detecting inconsistencies and other shortcomings th at typically get conveniently hidden from th e author. M y hat' s off to her for her patient efforts to improve th e manu script. M y parent s deserve a special th ank you for th eir un stinting support in my academic endeavors, even if at tim es it wa s not always clear to th em wh ere it would all lead. I am grateful for th eir patience an d under standing. In th e end non e of th ese indi vidu als or institutions ar e responsible for an y of th e err ors and omi ssion s. A.P.D . Bangalore

xx

1

THE RESTRUCTURING OF THE STEEL INDUSTRY

Introduction Pitt sburgh in th e nineteenth and early twenti eth centu ries was th e epicenter of globa l steel pr oduct ion . It hou sed US Steel, th e wo rld's first billion dollar company. Seventy-five years later, th e American steel industr y was in a deep crisis. Nearly 46 million ton s (rnt) of steel capacity during the 1978-88 period was ph ased out, a third of which was in th e Pittsburgh region alone. In 1988 Carnegie M ellon Un iversity in Pitt sburgh received a mi llion dollar s from th e Poh an g Iron and Steel Co mpany (pa sco )- the sta te-ow ned South Korean firm-for metallurgical research. Technical sta ff from newly formed nat ion s in th e 1950 s and 1960s were sent to Ca rnegie Mellon for tr aining in th e art and science of steelma king. At th e time Korea was too poor and politically disorgani zed to even contemplat e con structing a steel mill. Tod ay pa sco is th e wo rld's second largest steel firm with an annual revenu e of over $10 billion . Th us th e endowment to Ca rnegie M ellon was more th an a gift; it was a mark of commercial clout and ind ustria l success. Its financi al and techn ical collab or ati on with US Steel was ano ther sign of shifting industri al power. Th e industry had com e full circle with US Steel's preeminent globa l position now reduc ed to number six. In the 1980s other changes were in the offing. Kenn eth Iverson of NUCOR, a steel industr y maverick, challenged US Steel and other lar ge American producers on th eir ow n turf by risking new technologies to produce sma ller vo lumes of low value steel efficiently. Th e diffu sion of a new genera tion of minimills in th e US and elsewhere in jected a new lease of life for th e industr y as a who le and reduc ed entry barriers for capita l-scarce econo mies. H alfway aro und th e wo rld, th e M itt al br others from Ind ia were bu sy expanding th eir steel bu siness, not only in Indi a, but in overseas markets as well. Sta rting with sma ll plants in Ind on esia and Ind ia, since th e 1980s th e M itt al fam ily has been investin g in new technologies and acquiring steel mills in M exico, Ca na da, Ir eland , Ge rma ny, and Kazakh st an. Entrepren eur ial ism and innova tions in the steel indu stry are alive and well in new and often unexpected places. 1

THE RESTRU CTURI N G OF THE STEEL INDUSTRY

The 1980s also marked the en d of the tradition of the state-owned steel industry. The aggressive privatization of Brazil's integrated steel industry initiated by Presid ent Collor de Mello in the late 1980s transferred nearly 80 perc ent of Brazilian steel output to private ent it ies. In 1991, India for th e first tim e in th e post-independenc e period is privatizing public sector firms, including steel, and has op en ed the integrated steel sector to individual entrepreneurs. With fre er play of market forces, the gigantic, oligopolistic industry, once a favorit e sector of governments for transforming economies, is now under competitive pr essure. No longer insulated, the heavy industry is finding ways to become leaner. Foreign partners ar e welcome in sh ar ing proj ects and on the whole the industry has become more trans nationalized. Th e purpose of this study is to explain three main developments in th e industry that have led to th e continuous restructuring of steel production capacity (see D'Costa 1995a). This is essentially a process of reorganizing and adjusting capacity under changing conditions. The first development is a spatial on e. Global steel production is no long er confined to th e US and Western Europe (see Tabl e 1.1). Lat e industrializers such as Japan, Brazil, and Korea have broken the monopoly of US dominance. More importantly th ere has been an absolute declin e in steelmaking capacity in the US. This calls for an examination of ex pansion and contraction of industrial capacity in th e world economy as exemplified by th e ascent of Korea's pasco and th e declin e of us Steel. The second development is th e disequilibrium set in motion by new innovations. N ew investment and market opportunities have been op ened up, challenging the traditional large-scale, integrated producers with alt ernative, smaller, and more flexible minimills. The US steel industry has been reju venated and entry barriers for entre prene urs elsewhere have been low ered. Consequently, further reor ganization of steelm aking capacity must be acknowledged. The third new development is institutional change. No long er ar e governments as deepl y engaged in th e industry as th ey have been since the post-war period (see Tabl e 1.1 ). Increasingl y entre prene urs and th e pri vate corporate sector around th e world ar e entering th e industry and internationalizing it in an unprecedented wa y. Explaining industrial restructuring A popular explanation for industrial restructuring is changing comparative advantage (Lawrence 1984; Balassa 1985). As wages increase, costs of producing steel increase in the US, making low-wage developing ar eas formidable competitors. Thus shifts in industrial production are driven by changing prices. A more institutionally driven perspective also ex plain s the changing international division of labor on th e ba sis of low wages (Froebel et at. 1981). Multinational capital in search of low wages reorganizes its manufacturing 2

Table 1.1 Changing struc ture of global steel pro duction (% of tot al) 1960

1970

1980

1990

1996

Topfirms and their world rankingsfor 1976-

1987-1996 Brazil

0.95

1.29

3.32

4.18

5.50

India Japan

1.36 9.18

1.50 22.30

2.06 24 .16

3.02 22.42

4.75 21.55

-

.

South Korea Taiwan Western Europe

0.05 45.22

0.11 0.07 38.59

1.86 0.92 35.04

4.70 1.94 32.99

8.48 2.69 35.48

US

37.36

28.51

22.00

18.23

20.65

241.06

418.44

461.05

492.62

458.50 b

World capitalist production (rnt)

SIDERBRAS: 39-3-NA (state-owned industry, recently privatized) SAIL: 18-14-7 (state-owned) Nippon Steel: 1-1-1 (private with state intervention) POSCO: 43-6-2 (stare-owned) China Steel: 1996 rank 24 (stare-owned) British Steel: 4-3-3 (now private) Usinor-Sacilor (France): 12-2-4 (state-owned) US Steel: 2-11-9 (private)

Sources: Ame rica n Iron and Steel Institute, Annu al Statisti cal Repo rt, various yea rs; Intern ation al Ir on a nd Steel Institute, Int ernat ional Iron an d Steel Statistics, var iou s yea rs No tes a = negligible b excludes former East Euro pean bloc, Soviet Union, China, and N orth Kor ea, tot al output may vary du e to different classification of count ries in different pub licati on s mt =million metric tons NA = not ap plica ble

THE RESTRUCTURING OF THE STEEL INDUSTRY

activities on a global basis. Persuasive as they seem, these explanations are inadequate to account for the changes in the steel industry. Steel is neither a low-wage product nor is its price determined by the logic of the market. There is very little multinational ownership of the industry. In addition, government intervention has been common, distorting prices in significant ways. If changing comparative advantage is indeed behind the industry's global reorganization and low wage is not a factor, then something other than wage costs must give rise to changing advantage. It is also common knowledge that comparative advantage can be constructed by government investments and technology policy (both are non-market interventions). Both have the effects of raising productivity and shifting production costs favorably. Therefore, rather than rely on the market-based price-driven argument in which the role of technology is assumed away, I will advance an institutional understanding of technological change in the larger capitalist context to explain changing industrial competitiveness. We live in a capitalist world and industrial production is driven by commercial motives. In this world we can only assume that industrial expansion is a good thing and industrial contraction is a problem. Technology is a key determinant of industrial production. I argue that the uneven spread of steel capacity is a consequence of the uneven diffusion of technology. Those with superior technology are able to out-compete their rivals, leaving the laggards in considerable disarray. Firms and entrepreneurs of course make strategic choices, circumscribed no doubt by the commercial and institutional environment in which they operate. Past choices and future expectations also dictate current technology choices. Innovations are not exogenously given but are integral to capitalist competition. Thus restructuring is driven by differential access to technology and is subject to the imperatives of capitalist competition and the idiosyncratic nature of technological change. To explain why the US, the industry leader, can get technologically behind while late industrializers like Japan and Korea can forge ahead, a more nuanced understanding of technology strategy in its proper institutional setting must be sought. Like any system, capitalism is subject to crisis. Falling demand or excess supply are typical problems of capitalism. Adjustment to imbalances is a typical response. But adjustments are not instantaneous, which smoothly functioning markets would predict. Strategic considerations are paramount. Even if technological change is a structural requirement for capitalist competition, some firms find it "rational" not to innovate, while others make do with selective investments. This could render firms technological laggards. Also governments are often forced to subsidize their failing national industries, thus prolonging ageing industries for political reasons. Still others, wishing to exploit commercial opportunities or developing country governments wanting to join the industrial club, aggressively invest in production capacity, seeking out new, cheaper technologies. In this scenario 4

THE RESTRUCTURI N G OF THE STEEL INDUSTRY

supply and demand never quite match as innovations and firm strategy continuously introduce disequilibrium, making restructuring an on-going activity. Industrial cri sis and expansion is th er efore part of th e same process of un even capitalist development, inevitably influenced by the une ven diffu sion of technology. We can explain capacity shifts by (a) show ing how strategic technology choice in th e larger institutional setting of th e US set th e American industry on a different technological traj ectory; (b) how lat e industrializing states, by mobilizing capital and technology, added to global steelmaking capacity; and (c) how new entre preneur s ar e reconfiguring th e industry in new w ays. In each case technological change, with its attendant responses by firms and governments, shapes th e structure of the global industry. It is pos sible to demonstrate th e deep connection between th e US industry's response to an industry crisis leading to a delay in innovation and rapid expans ion of steelmaking capacity in late industrializing countries. Th e industry-wid e crisis could be systemic-structural or cyclical-exac erbated by late industrializing states' aggr essive approach toward transforming th eir national economic structures. We can also theoretically posit that competitive industrial expansion is not inevitable. Not all states succeed in econ omic transformation. Those states that ar e institutionally coherent and not subject to political exegesis can better cop e with new innovations for capitalist development. Others merely muddle through even as th ey add to industrial capacity. Technological traj ectories ar e thus heavily influ enced by institutional responses to ch ang e and the institutional capability for harnessing that change (Amsd en 1989; Lall1996) . Th e diffusion of technology is also conditioned by systemic factors. The post-World War II high econ omic growth wa s conducive to innovation-led economic change in the capitalist countries but was particularly unhelpful for developing countries wi shing to esta blish technologically complex industries on th eir own terms. With weak domestic dem and, limited capital, infra structural bottlenecks, and government regulations, developing countries were not attractive sites for technology transfers. However, systemic crisis leading to slow-grow ing industrial demand led sever al steel technology suppliers to sell technology to developing countries. Th e "boomerang" effect wa s inevitable: technology recipients became future competitors. States that w er e institutionall y coher ent and aggressive could ex plo it sys te m ic opportunities such as a glut in th e equipment market to acquire modern technologies. The diffusion of technology is conditioned by both growth and crisis in th e capitalist system . If innovation is a structural requirement for capitalist competition it is not unr easonable to expect new technologies th at lower costs and enhance quality. The history of industrialization is replete with such exam ples. Which new technologies ar e develop ed and why th ey develop introduce further elements of strategic choice in an otherwise highly abstract capitalist system (see Ruigrok 5

THE RESTRUCTURING OF THE STEEL INDUSTRY

and van Tulder 1995). It is not the systemic nature of innovative behavior that is of interest here, but rather the effects of innovations on the users of previous technology. New technologies need not displace existing production; that is determined by the institutionally driven diffusion process. Rather, it is the creative tension between the old and new technologies that sets the restructuring process in motion in new directions. There is also the possibility of technology leapfrogging on the part of latecomers to the industry. Whether leapfrogging actually takes place is dependent on the institutional capacity to absorb new technologies and the national economic and policy environment in which they are adopted. Thus innovation and uneven development are inextricably linked, making the restructuring of the industry significantly openended. The capitalist system is global but it takes on particular national features. Thus Japanese capitalism is different from its US or Korean counterparts, even if they all share the institution of private property. What differentiates them is the policy environment and the ways by which national capitalism is regulated. Self-regulation has been common in American industry, whereas state regulation of private capital has been typical in most late industrializing countries. However, as capitalism itself changes, institutional arrangements governing capitalist regulation also must change (Aglietta 1979; Gordon et at. 1985). Restructuring thus can be interpreted as part of a larger institutional shake-up, from the breakdown in the Keynesian consensus to coping with mass production systems in volatile markets (Piore and Sabel 1984; Morales 1994). It therefore should come as no surprise when the state intervenes in an attempt to resolve the industrial crisis. Conversely, persistent losses by the state sector could also prompt the privatization of production units and the emergence of entrepreneurs bent on commercial profits. It is this understanding of institutions that allows us to differentiate an otherwise unified economic and industrial system undergoing change. Here too there is strategic choice, inducing gradual institutional changes to stabilize the national version of the capitalist system. There is also an open-endedness as new institutional arrangements shape the evolution of the industry. By contextualizing the restructuring process in the larger capitalist system with technological change as driving industrial contraction and expansion, we are able to move beyond the logic of the market to explain the reorganization of production capacity in the world economy. This is not to reject the comparative advantage argument or dismiss the importance of prices in industrial change. Rather, the market mechanism with its attendant shifts in economic variables, when analyzed in conjunction with softer aspects of institutionally driven technological change, provides a much richer understanding of industrial reorganization in general and steel restructuring in particular.

6

THE RESTRUCTURING OF THE STEEL INDUSTRY

A note on methodology and data sources I examine the restructuring process by analyzing technological change in the steel industry in general and in the US, Japan, Korea, Brazil, and India in particular. Rather than interpreting industrial restructuring as simply a consequence of changing prices, I see it as a ceaseless process of capitalist expansion in which strategies and institutions interact to diffuse technologies unevenly. I develop an interdisciplinary analytical framework of restructuring by combining the macro dimensions of capitalist development with the institutional aspects of late industrialization, focusing on technological change and the on-going evolution of the industry. More importantly, I allow the data to "speak" for themselves in developing this framework. By tracking the historical conditions, subsequent development, and recent trajectory of the industry in the five countries I am able to capture the restructuring process spanning nearly half a century in a multitude of institutional contexts. The choice of countries has been made to reflect both industry crisis, successful industrial expansion, and cases in between. The US represents a "hard" case of crisis. Japan and Korea are considered "hard" cases of successful expansion, with Japan replicating the American crisis on a smaller scale. State intervention notwithstanding, Brazil and India, unlike Korea, illustrate "soft" cases of industrial change. Institutional differences account for the less robust industrial expansion. However, when more recent innovations and their diffusion are examined, both the US and India display considerable dynamism in introducing new innovations. Neither Japan nor Brazil has been aggressive with new technologies, while Korea continues to maintain its strategy of keeping abreast of most technological breakthroughs. The development of the steel industry as presented in this study is divided into several discrete phases and country groups: •

•

•

•

The US and Japan are seen as mature economies. However, they are separated by the timing of their industry crisis, with the US preceding the more recent Japanese difficulties by nearly a decade and a half. Technologically, Japan has transformed itself from a follower to leadership status. The 1950s to the 1970s is considered to be the first phase of restructuring. Both the US and Japan are on an expansionary path in this phase, albeit on fundamentally different technological trajectories. Japan and Korea are an integral part of an expansionary restructuring process, sharing in different ways a highly interventionist state. Korea's success in the steel industry shows few signs of crisis associated with industrial maturity. Korea is also grouped with Brazil and India as a late industrializer, sharing again in varying degrees an activist state in industrial transformation. 7

THE RESTRUCTURING OF THE STEEL INDUSTRY

• • •

Their industrial performance is ranked in that order. More recently India has been more aggressive than Brazil with new technologies and has spawned internationally successful entrepreneurs. In the second phase, from the 1960s to the 1980s, the three developing countries experience capacity expansion. India and Brazil exhibit similar trajectories in industrial evolution, with the Brazilian industry far more transnationalized than India's. With new innovations, continuing industrial adjustments, and integration of the global economy, the 1980s to the 1990s is seen as the third phase of industrial restructuring.

All five countries display a wide range of technology strategies, state policies and institutional capacities, and diffusion of technologies. I have used both published data and information that I have collected over the past decade in the various countries, mainly through company documents and interviews with industry officials at various levels. Fieldwork was conducted in India (four times), Brazil (once), Korea (twice), Japan (three times), and the US (once). These data were collected to understand firm strategy, national technological trajectories, and industry developments in general under changing domestic and international conditions. Outline of chapters Chapter 2 develops an analytical framework for examining the restructuring process of the capital-intensive steel industry. It begins by critically examining the "logic of the market" explanations for industrial restructuring. It identifies the omission of technological change as a serious flaw in explaining shifting competitiveness. A number of perspectives are synthesized to develop a framework that can account for technological change and uneven diffusion. Restructuring, or the changing international division of labor, is a consequence of strategic responses to innovation by both private firms and late industrializing states. Chapter 3 presents the technological evolution of the US steel industry. It covers the historical development of steel technology and its diffusion in the US. The production process is described so as to identify technology as a major determinant of competitiveness. The chapter demonstrates the slow diffusion of modern technologies in the US, exposing US firms to competitive pressures. For the US the crisis of overcapacity is treated in conjunction with the constraints of cost of technology, declining productivity, and competition from other producers. The results have been technological obsolescence, mounting debts, and imbalances in plant and equipment. The fourth chapter introduces the rapid expansion of the steel industries in Japan and Korea. The two countries are paired to examine the "fastsecond" approach at work. The historical background of technological 8

THE RESTRUCTURING OF THE STEEL INDUSTRY

capability is also examined. The chapter shows that competitiveness can be changed by waves of investment in modern technologies. Learning-by-doing adds further to technological capability. The waves of investment mobilized by the state adds to the global capacity. Japan, like the US, is confronted with the challenges of excess capacity and the need to restructure. This chapter shows that systemic crisis is possible under different institutional arrangements. Chapter 5 brings in the three late industrializing countries to discuss restructuring, specifically the role of the state. Only Korea is shown to possess the institutional capacity to mobilize investment funds and introduce modern technologies. Though Brazil and India have been able to overcome the initial barriers to technology and expand capacity their industries have been fraught with difficulties. For example, construction delays, cost overruns, mounting debts, faulty technologies, and poor project planning have been common in both the Brazilian and the Indian steel industries. Technology diffusion has been slow. In these two countries institutional arrangements, such as industrial relations, were not conducive to high productivity and competitiveness, unlike the Korean case. This chapter demonstrates that state intervention does not guarantee industrial success; rather, the quality of that intervention is critical in maintaining technological capability. After examining the evolution of steel technologies in the five countries, Chapter 6 charts the changing composition of US imports to indicate how they have shaped the international division of labor. As some countries, such as Japan, moved ahead technologically, US firms have been unable to compete with foreign exporters in certain product and regional markets. To rejuvenate the industry and meet shortages of certain steel products in the US, new institutional arrangements, such as joint ventures, between US and Japanese firms became inevitable. Likewise, privatization in Brazil and the opening up of the Indian industry to private capital have been introduced to strengthen their respective industries. Institutional changes accompanying the restructuring of the steel industry have pushed state-led capitalist regulation to the background. The seventh chapter presents new innovations in the industry as the basis for another round of restructuring. Modern minimills capable of producing steel cheaply have opened up opportunities for entrepreneurs. The diffusion of this technology is discussed in terms of comparative costs-both capital and operating-and product markets. In keeping with the reduced role of the state, these innovations have also accompanied new institutional arrangements, such as entrepreneurialism and flexible industrial relations. With lower entry barriers several players have entered the fray, making the industry even more competitive. The restructuring has taken on a new direction as several smaller firms with new technologies challenge the established industry with low cost output. This chapter confirms the centrality of innovations in the open-ended capitalist industrial system. 9

THE RESTRU CTURING OF THE STEEL INDUSTRY

Rather than summarize the salient dynamics of the industry's evolution, the last chapter brings up several interrelated issues at the systemic and industry-specific levels . Based on the empirical materials presented in this study, the final chapter raises some questions on the contemporary relationship between capitalist industrialization and restructuring and accompanying institutional changes. By focusing on possible innovations and industry strategy it also presents some predictions on the direction of further restructuring.

10

2

AN INSTITUTIONAL INTERPRETATION OF STEEL INDUSTRY RESTRUCTURING An analytical framework

Introduction The objective of this study is to explain the global reorganization of the steel industry, away from advanced capitalist centers to newly emerging ones. Rather than simply viewing this process as a consequence of changing economic forces, I show that the reorganization of production capacity is related to technological change and its uneven diffusion. The diffusion process is influenced by institutional responses to technological change. Here institutions include mainly capitalist firms organizing production for commercial gain and states pursuing capitalist industrialization. The analysis of steel industry restructuring is driven by two key questions: • •

What is the larger context in which restructuring is taking place? What are the mechanisms-economic, technological, and institutionalby which the industry is being organized at the global and national levels?

This chapter presents "restructuring" as an organizing concept to analyze capitalist development in general and reorganization of industrial capacity in particular. In this study, global restructuring refers to the process by which steelmaking capacity is being spatially reorganized across nations (see Ballance and Sinclair 1983; Fagan 1989). Restructuring also refers to the various ways by which a national industry adjusts to the capitalist imperatives of competition, profitability, market control, and national development (D'Costa 1989). More specifically, restructuring is viewed as a complex process by which the steel industry is evolving as a result of technological developments, corporate strategy, and government policies. With innovations and the diffusion of technology at the core of capitalist industrialization, restructuring of the steel industry globally can be conceptualized in terms of different national technological trajectories. By juxtaposing the factors that lead 11

INSTITUTIO NAL INTERPR ETATION OF RESTRU CTURING

innovating countries like th e US to fall behind technologically with th e mechanisms by which late industrializing countries acquire technologies we can est a blish th e un even diffusion of technology and the process of restructuring. I develop an analytical framework by first outlining th e standard economic explanations ad vanced for explaining industrial restructuring. In addressing th ese issues I bri efly review th e "logic of th e market " ar gument, consider ed integr al to the dominant paradigm for ex plain ing recent industrial chang e. I show that th e logic of th e market, though per sua sive, do es not ad equately capture some of the dynamics of technological change and industrial restructuring. Consistent with th e empirical materials at th e in d us t ry level, I proceed to sy n t hes ize eco n o m ic r eason in g with in stitutional interpretations of t echnolo gical change and industrial development in both ad vanced capitalist countries and lat e industrializing countries to provide a multilayered understanding of th e restructuring process.' Th e last section develops an analytical framework for explaining global restructuring and industry-specific dynamics in th e five countries under in vestigation. The restructuring issue The restructuring of th e industr y can be seen as th e contraction of industri al cap acit y in th e ad vanc ed capitalist countries, such as th e US and Western Europe, and expansion in lat e industrializing countries, such as Jap an and Brazil. By addressing wh y in some countries capacity falls, whil e in others it rises, th e restructuring process can be viewed as part of th e larger process of uneven (capitalist) development in which technological change pla ys a large part (Cyph er 19 79; Markusen 19 79; MandIe 1980; Warren 1982; Browett 1985; Hamilton 1986; Bryan 198 7; Abramovitz 1989). Historically, indu stri al chang e, th e materialist transformation of society, has been a cons equ ence of th e expa nsion of th e capitalist mode of production (Bagchi 1984a). Th e unceasing pur suit of profit-making through production and subsequent market excha nge is th e proc ess of capital accumulation by which th e original value of invested capital is globally reproduced and ex panded. Successful capital accumulation proc eeds either through low wages and long hours of work or by introducing new innovations that increase labor productivity.' However, thi s self-expansion of capital is subject to con straints, such as labor resistance and competition among capitalists, resulting in varying rat es of industri al change (Baumol et at. 1994:12 ) and th e un even spread of industri alization over space and tim e (Boyer 1996:31 ).3Th e globa l reorganization of th e steel industry can be located in the larger accumulation process in which technolo gical change pla ys a significant rol e.

12

INSTITUTIONAL INTERPRETATION OF RESTRUCTURING

The logic of the market The dominant paradigm of changing comparative advantage purports to explain global industrial shifts. Rising costs (or changing relative prices), resulting from market forces, are said to cause industrial decline in the US and Western Europe, and more recently Japan. Similarly, "right" marketoriented policies, "correct" prices for labor and capital, and "realistic" exchange rates are said to be behind East Asia's industrial expansion (Balassa 1981a, 1981b, 1985; Bhagwati 1985). With free trade, changing factor prices (mainly high wages) is seen as driving the industry away from advanced capitalist countries (Anderson and Kreinin 1981). In this mode of reasoning, industrial restructuring is natural and inevitable, with firms using least-cost combinations of factors of production, costlessly substituting them when prices change, and maximizing output. With shifting costs, firms are expected to deploy their capital in other profitable activities, leaving the production of steel to more cost-efficient producers, such as those in the newly emerging markets of Korea and Brazil. Another variation on the comparative advantage theme is advanced from the demand side. Developed capitalist countries are adjusting industrial capacity downward as a response to a decline in demand, whereas rising demand in late industrializing countries is prompting additions in capacity. The decline in demand in mature economies is due to shifts in the structure of the economy (Barnett and Schorsch 1983; Lawrence 1984; UN Economic Commission for Europe 1984). Heavy industry is less important as "steel intensity" (the ratio of apparent steel consumption to GDP) has already reached high levels. Technological change substituting steel with lighter products has also compounded the declining trend in steel demand. Economic maturity has also meant excess capacity, that is, production capability exceeding consumption requirements. Accordingly, restructuring incorporating the downward adjustment of production capacity, in line with demand, is a natural response to changing economic circumstances. The economically driven argument, whether from the supply or the demand side, is valid. Changing comparative costs and demand shifts are bound to have a bearing on the pattern and magnitude of production. However, there are several deficiencies in this mode of reasoning. First, we cannot assume that the market mechanism, operating through the system of price signals, will necessarily adjust supply capacity even if changing economic conditions dictate such a step (see Evans and Alizadeh 1984; Kaplinsky (ed.) 1984; Edwards 1985; Colclough and Manor (eds) 1991). Firms can deploy excess capacity as a strategy to deter entry of rivals or to flood the market to drive out competitors (Baden-Fuller 1990:5). Second, given the static nature of the comparative advantage argument, it is impossible to evaluate the longterm effects of an investment (Schmitz 1984:6-7; Chang 1993:134-7; Moreira 1995). The dynamic efficiencies and externalities that result from lumpy 13

INSTITUTIONAL INTERPRETATION OF RESTRUCTURING

investments are difficult to predict. Thus an investment may appear to be unjustified at a point in time when there is comparative disadvantage. Third, there are political reasons why the dictates of comparative advantage are difficult to follow (see Barry Jones 1986; Jones 1986; Meny and Wright 1987; Caporaso and Levine 1992). Institutional impediments, such as the reluctance of national governments to layoff politically mobilized factory workers (Daems 1990) is one example. Fourth, from the demand side, economic maturity implies declining consumption of steel. This view, however, overstates the trend since it does not capture the changing composition of direct imports of steel nor does it account for consumption of imported steel embodied products, such as autos and consumer appliances (Locker! Abrecht Associates Inc. 1985). Fifth, and most importantly, the logic of the market argument assumes away innovations. Consequently, the creation of comparative advantage by strategic investments in technology is not captured by the freely functioning market system. Even if well functioning markets exist, late industrializing countries cannot be assumed to adjust passively to shifting costs (see Hobday 1995). Steel production is capital-intensive, with significant technologies embodied in capital equipment. How late industrializing countries mobilize resources and acquire technology is not explained. Similarly, why firms in industrialized countries would suddenly change from being dominant players to inefficient ones is only explained in terms of changing prices. Tyson and Zysman (1983:24), critiquing the market-based approach, conclude that government policies shape national comparative advantage. Thus the argument is not whether costs change but rather why and how they change. Competitiveness is not driven by changing prices but by technological change (Dosi and Soete 1991; Hart 1992). If policies influence technological outcomes then there is a strategic element to be considered. This follows Marx's as well as Schumpeter's understanding of capitalist dynamics, where changing the means of production is the basis for reproducing the capitalist system as a whole, and individual capitalists in order to compete deploy, innovations in anticipation of monopoly rents (Schumpeter 1975; Cooper 1993). To understand the restructuring process it is therefore imperative to center our analysis on changing innovations and their diffusion as the basis for competitiveness. Given the serious omission of technological change, except in some abstract optimizing behavior of profit maximization or cost minimization, market logic understates the strategic nature of technology in altering competitiveness (Rosenberg 1976:61-6; Nelson and Winter 1982).4 The logic also eschews state intervention since it is tantamount to price distortion, ignoring the possibility that prices can be deliberately manipulated to obtain predetermined outcomes. In fact, one important facet of the global restructuring process has been precisely state involvement in deliberately creating steelmaking capacity even when the prevailing comparative advantage dictated otherwise (see Malecki 1995). 14

INSTITUTIO NAL INTERPR ETATIO N OF RESTRU CTURING

An alternative interpretation of restructuring implies that productionoriented firms strategically invest in technology whil e most states try to manipulate prices to foster national capital accumulation (Hamilton 1983, 1986; Limqueco and McFarlane (eds) 1983; Fransman 1986a; Deyo (ed.) 1987). Whil e price competition today is an important feature of the steel industry,few governments have left the fate of the industry to market forces. An oligopolistic industry structure, significant economies of scale, and various policy-induced entry barriers ha ve made price competition a consequ ence of past strategic investment in technology.' From an industrial development point of view, th e advantages emerge not from low wages alone, as predict ed by th e comparative advantage argument, but from the positive extern alities associ ated with technology (Enos 1991; Arthur 1994). As an intermediate input, th e steel industry, with its dense intersectorallinkages (a fa Hirschman), has been the perfect industry for strategic investment by late industrializing countries, thus altering the global distribution of steelmaking capacity. Th eor etically, restructuring is therefore a result of a conscious investment and innovation strategy and not just a matter of adjusting passively to market forc es. By addr essing who invests , in which t echnology, why, and how investment funds ar e mobilized we will obtain not onl y an institutional understanding of technological change and its diffusion but also the sociopolitical context in which industrial investm ent takes plac e. Generally, developing countries because of th eir economic backwardness ar e immune from the "contagion " effect of technology transfer (Baumol 1994:73), impl ying a significant institutional effort to secure modern technologies. Technological ch ang e is integr al to capitalist competition but it ma y not be profitable for all firms at all tim es to adopt new technologies. Th e strategic decision not to innovate could lead to competitive problems." In th e same vein, to escape from econ om ic backwardness, the proj ect of industrial tran sformation calls for stra tegic investm ent by th e state (Ger schenkron 1962). However, since late industrializing countries ar e borrowers of knowhow, access to for eign technologies and th e institutional capability to acquire them becomes an important link to the ad vanced capitalist countries (Am sd en 1989 ).7 Al so, a s th e t echnolo gy ga p widen s the n eed for government int ervention in late industrializing countries increases (Hikins and Amsden 1994). However, given individual firm strategies and different state capabilities in orchestrating economic transformation, we can expect lags in the diffu sion of modern technologies. The resulting un ev en development and pos sible productivity converg enc e in certain industrial sect ors between forerunner s and latecomer s throu gh learning induces capitalist competition sever e en ough to w arrant the reorganization of national production. Technological breakthroughs could further alt er th e str ucture of the industry. Restructuring is therefore industrial change resulting from th e different national technological tr ajectories as well as from th eir interaction in th e glob al economy (see Shin 1996). 15

INSTITUTIONAL INTERPRETATION OF RESTRUCTURING

Technological change and industrial strategy The structural requirement of a competitive capitalist system is technological change. " With private property relations integral to the capitalist system, innovations ensure monopoly appropriation of economic benefits (Kay 1975:155-6). Brenner captures this dynamic rather well when he writes: [it is] only where capitalist property relations prevail that all the economic actors have no choice but to adopt as their rule for reproduction the putting on the market of their product (whatever it is) at the competitive, i.e., lowest price. It is only in such an economy that all economic actions are perpetually motivated to cut costs. (Brenner 1986:34, emphasis in original)" However, with oligopolistic firms, characterized by imperfect markets, economies of scale, and high investment costs, the firms may not be motivated to innovate and cut costs. Instead competition could be regulated either by joint actions of member firms, say by an informal cartel led by US Steel in the US, or by the state, as in Japan. This kind of sector regulation is normal in capitalist development when overproduction, arising from individual firms maximizing their market shares, especially in an economic downturn, has to be avoided to prevent a price collapse (Best 1990). The decentralized nature of capitalist decision-making is inherently destabilizing, thus necessitating sector regulation for industry stability. The tension is apparent: collective effort in maintaining industry stability versus the individual firm's desire to innovate and stay ahead of rivals. Whether a firm will adopt an innovation or not will depend on the perceived costs and expected benefits of new technology. 10 A long-term outlook will be more conducive to new technology adoption than short-term profit expectations, especially when the gestation period for capital-intensive, heavyindustry projects tends to be several years. The industry-wide effect of new technology is the lowering of (relative) productivity under the old technology. Increasing capital intensity means increasing investment costs and replacing old technology with the new." This also implies that existing plant and equipment must be devalued even when its useful economic life may not have ended. In such a situation firms are "locked in" by historical events and institutional inertia (Arthur 1994; Nelson and Wright 1994:133). This poses an adoption dilemma for firms that have been dominant under the old technology. 12 If the profit outlook for the industry is grim, extrapolated from recent experience and changing competitive conditions, firms will be reluctant to make new investments by devaluing existing assets. The oligopolistic industry structure ensuring significant collective control over the market is also likely to discourage innovation. Instead, firms will try to prolong the use of old 16

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technology. In trying to maintain its political legitimacy the state may be compelled to prop up technologically inefficient capital through subsidies and protectionist policies. It is therefore logical to expect the coexistence of different vintages of technology in the industry and varied commercial performance. This sets the stage for increased mobility of capital, either as reinvestment in the same industry or investment in other industries and economic sectors. An industry crisis is likely to encourage diversification of assets. Industrial restructuring in the advanced capitalist countries has been an institutional response to systemic and industry-specific crisis (Weeks 1981:215). The systemic crisis has been precipitated by technological change (Boyer 1996:41,54). The innovation cycle has been shortened, technologies are seamlessly transferred in different locations, and automation has increased labor redundancy. As a result, existing institutions are unable to cope with increasing market volatility. In capital-intensive, heavy industries, the slowdown in investment was exacerbated as the post-war high growth era came to an end (Aglietta 1979; Mandel 1980a: 31,1983; Gordon et at. 1985; Boyer 1990). The internationalization of capital contributed further to the investment crisis (Jenkins 1985; Bryan 1987:273). With other profitable sectors around, steel firms have been slow to introduce expensive new innovations. Instead, capital flight has been common, providing industrial capital with the option of diversifying out of their main line of business into finance or investing in low wage areas (Bluestone and Harrison 1982).13The exhaustion of post-war institutional arrangements, such as Keynesian-type demand management and state welfare programs, introduced an institutional crisis and triggered a fundamental realignment of the economy (Gordon et at. 1985). The crisis put a prolonged brake on expanding and reproducing capital, represented by the falling rate of profit, technological obsolescence, plant shutdowns, and slow growth in productivity (Bradbury 1987). The structural transformation of the US economy from heavy industry to services, accompanied by manufacturing investments abroad by US-based transnational corporations, and the rise of new competition from East Asia marked the beginning of a new capitalist epoch (Marshall 1987; Kotz 1990).

Long waves and industrialization At the macro level investment behavior is also influenced by "long waves" (Marshall 1987).14 The post-war period witnessed vigorous capital accumulation leading to increased profits (Mandel 1983:108-46). The economic upswing, however, was followed by a downswing, accompanied by overcapacity in industry and declining profitability. Imbalances in investments in consumer and capital goods sectors result in surplus capacity (Mandel 1980b; Forrester 1981; Freeman (ed.) 1986). Surplus capacity is a typical outcome of capitalist competition. When the climate for investment is 17

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favorable, firms, in a herd-like manner, invest in fixed capital, resulting in overcapacity." This behavior also leads to the cyclical nature of capitalist economies. Even where investment is coordinated, whether by cartels or by the state, technological change (with attendant rising minimum efficient scale) can contribute to overcapacity. Specifically, overinvestment in fixed capital in the upswing is accompanied by technological change. The ensuing intercapitalist rivalry can reduce profit rates (Devine 1983). The profit squeeze can also arise due to increased bargaining by labor (Glyn and Sutcliffe 1972). Whatever the causes and duration of these swings, they are not limited to anyone variable, nor is their periodicity fixed (Gordon et at. 1985:22-41; Wolff and Resnick 1987:185-92; Rosenberg and Frischtak 1994). However, it is important to recognize the massive restructuring built into the cyclical swings of the capitalist system.I" Thus in a downturn we can expect devaluation of existing capital and disinvestment in specific industrial branches, often resulting in mergers, joint ventures, and diversification. At the industry level, economic downswings in capitalist centers could also result in the transfer of standardized technologies to less developed areas. Following the logic of the product cycle (Vernon 1966), Markusen (1985:2742) suggests a link between long waves and the profit cycle. If the generalized profit crisis (downswing) coincides with mature markets (stagnant demand) then standardized technologies (signaling loss of monopoly rents) could be deployed in new markets where profit rates are higher (Robles 1994). The spatial implication is apparent: under competitive pressure production capacity is likely to be diffused, with original centers being abandoned (Markusen 1985:43-50). The global restructuring of labor-intensive industries such as garments, footwear, and microelectronics (Froebel et al. 1981; Nash and Fernandez-Kelly (eds) 1983) are typical examples of new production centers.'? To maintain commercial viability, under duress firms from mature economies transfer technology to late industrializing countries for "harvesting" profit (Markusen 1985:35). Many latecomers to industrialization which meet the preconditions for capital accumulation emerge as new markets and new centers for production, displacing older industrial sites (see Nelson and Wright 1994). Accordingly, industrial maturity almost always guarantees foreign competition in the more standardized products and processes, as home demand experiences a declining trend and higher profits are expected in new production centers.

State-led capitalist development and technological change To catch up with forerunners, the state strategy in late industrializing countries has been to maintain a high rate of investment and to secure modern technology, often pursued through debt-based financing (Soon 1994:128). At the systemic level, maturing markets and profit crisis in advanced capitalist economies theoretically make it easier for late industrializers to acquire technologies. The state in these areas is able to exploit the windows of 18

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opportunity for sponsoring capital accumulation, especially those that link capital and intermediate goods sectors (Desai 1979:39-46; Marx 1981:56598; Lichtenstein 1983:91 ).18 At the early stages of industrial transformation there is systematic state intervention for industrial upgrading (see Evans 1985). The presence of a weak capitalist sector and an entrenched land-owning class is not conducive to dynamic industrial change. Access to foreign technology remains critical to industrial restructuring, with significant institutional investments to ensure the flows of technology and mobilization of savings for industrial investments (Jones and Sakong 1980; Sen 1983; Jones 1987; Larrain 1989).1 9 All states are assumed to intervene in one form or another, although they differ in their style and effectiveness in bringing about structural transformation (Evans 1995:10). Far from the crude Marxist conceptualization of the state as the "instrument of the bourgeoisie," the role of contemporary states is contested. The state's interest may deviate from the interests of capital (Scokpol 1985), pursuing expansionary accumulation purely as part of "national" interest (Miliband 1983; Sen 1984). The state may even compete with private capital (Laux and Molot 1988).20 Its effectiveness will depend on its relative autonomy from various social groups (Poulantzas 1973). East Asian states are characterized as "developmental," possessing "a bureaucratic elite capable of administering the [economic] system, and [insulating] its bureaucrats from direct political influence so that they can function technocratically" (Johnson 1987:142). The state in this instance acts as a "surrogate entrepreneur," socializing risks for national private capital (Evans 1992: 14 7). States intervene more readily in late industrializing countries partly because of their overdevelopment relative to society (Alavi 1972, 1975) and partly because "the required level of capital for some activities can be reached only by the state" (Corona 1986:211). The state supports capitalist expansion through fiscal and economic policies, such as maintaining low energy prices, subsidizing industry, and controlling wages. The state undertakes and underwrites risky capital-intensive industries with long gestation periods. These are also industries with significant backward and forward linkages (Hirschman 1958; Gerschenkron 1962; Anglade and Fortin (eds) 1985; Evans and Rueschemeyer 1985). State autonomy does not mean complete insulation from societal forces (Evans 1995). If removed from the larger social context the autonomy of the state could result in rent-seeking activities that are detrimental to expansionary accumulation (see Calder 1993). Therefore, to be effective the state must work with private capital. The state must be "internally coherent" and be "externally connected" (Evans 1992:176). States that are pulled and pushed by various social groups, as in India, do not have the capacity to maintain a high investment rate (Bardhan 1984). Internal coherence translates into administrative capability in designing and implementing national goals for industrial transformation (Wade 1990; Haggard 1992)Y Most states are not 19

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internally coherent because of constraints imposed by the larger national institutional context. Multiple econ omic, political, and regional int erests can undermine th e national decision-making process (see H erb ert-Copley 1994). Therefore, to be effective the state must be responsive to private accumulation needs, just as it must be sufficiently ind ependent to pursue th e project of national industrial tr ansformation." It is clear that an industrial policy is necessar y to develop local technological capability, capture extern alities, and attain export competitiveness (Chang 1993). What is not so clear is which industrialization strategy is preferable, one based on trade, that is, export-oriente d industrialization (EOI), or on e center ed on domestic production for th e home market, that is, importsubstitution industrialization (lSI). The transitory nature of policies make such rigid ISI/EOI classifications problematic and em p ir ica lly often unrecognizable (Weiss 1991 :32-4 1). What is incontrovertible is the evidence of economic difficulties, especially in th e extern al sector, confronted by those countries which ha ve pursued autarkic industrial polici es for a prolonged period. This has littl e to do with th e rol e of th e state per se since a capable state is still necessary to administer and execute outward-oriented development polici es (see Manor 1991 :312). Th e decisive factor in successful industrial policy has been a tr ad e policy that maintained a competitive exchange rate (Sachs 1985) and stimulated ex ports without necessarily removing import restrictions (Moreira 1995),23 Even though "economic backwardness" prompts states to take an acti ve interest in fost ering capital accumulation onl y a few states succeed. " States that ar e institutionally weak or whose political legitimacy is in doubt ar e unable to marshal th e necessary financial and infrastructural resources to acquire modern technologies or induce local technological development . The diffusion of for eign technology requires the development of absorptive capacity on the part of the recipient. Past investment, technological en de avors, accumulated ex pertise, an d a technology policy ar e all critical for acquiring best practices and for th eir effective utili zation (Okimoto 1989:37; Chesnais 1991:144; Hatzichronoglou 1991:196-7,206-11 ). Thus econ omic "backwardness" per se is not a precondition for successful intervention (Boyer 1996:39). Rather, institutional coh erenc e allows the state to set industrial development priorities and execute them with imported technology. As Elster (1986:63) notes, in a different, but relevant context: [S]uccessful learning and borrowing requires that the backward country be just a littl e behind, since otherwise th e prerequisites for making good use of th e advanced technology will be lacking.. . [Therefore] we [cannot] assum e that diffu sion of technology will take place when th e conditions for accepting and using it ar e abs ent. Th e "advantages of backwardness" sh ould be relegated to th eir proper place. 20

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Closing th e technology gap impli es th e adoption of best-practice technologies and supplementing th e technological effort with investment in infrastructural services and the pro visioning of key intermediate industrial inputs and human capital (Dahlman 1978; Enos 1982, 1991; Lall (ed.) 1984; Niosi and Faucher 1991:123). When industrial transformation is dep endent on large-scale technologies, th e capacity of the state to acquire, manage, and op erate technologies becomes crucial (Thomas 1982; Fransman 1985, 1986a) . Effective utiliz ation of technology demands th e process of adapting a given technology to local conditions, inducing "l earning-by-doing" (Dahlman and Westphal 1982; Nelson and Winter 1982; Dahlman 1984; (Ros enb erg 1984; Fransman 1986b; Lall1987:14) ,zs The implication of this is that th e mere transfer of technology is not sufficient for technological mastery. Rather, th e national institutional context and an innovation system gear ed toward building technological capability ar e of paramount importance (Chudnovsky et al. 1983; Amsden 1985; Amsden and Kim 1986; Banuri (ed.) 1991; Niosi (ed.) 1991). If industries in lat e industrializing countries ar e able to deploy innovations effectively and on a sustained ba sis th ey ar e likely to be on a differ ent technological traj ectory from those industries that have consciously decided against investment in new technologies. The introduction of modern technologies by lat e industrializing countries can set th e global restructuring of th e steel industry in motion.s" Technology and restructuring: an analytical framework Generally, th e global reorganization of th e steel industry results from a set of institutional responses to capitalist competition. Pri vate firms aim for commercial viability whil e states seek to transform th eir economic structures through capitalist industrialization. Technological change and its diffu sion rem ains central to changing industrial competitiven ess. However, in the context of system-wide crisis, investm ent in new technology is not necessarily th e most strategic option for pri vate firms (Scheurman 1986; Tiffany 1988). Besides, past investment decisions can "lock in" early entrants to the industry with older technologies while lat e industrializing states can attempt to narrow th e technological gap by acquiring for eign technologies and building local technological capability. At th e national level, states enjoying "emb edd ed" autonomy ar e better placed to mobilize in vestment funds, maintain an inv estment momentum, and secure best-practice technologies. A high investment rate at th e national level not onl y narrows th e productivity gap but also contributes to excess cap acit y at th e global level (see Howell et al. 1988). Consequently, th e industry is glob ally reorganized whil e individu al states and firm s pursue variou s stra tegies to launch new capacity and cop e with excess capacity respectively.

21

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A stylized version of restructuring Capitalist imperatives of competitiveness and state-led promotion of development in which core industries are targeted are two aspects of the global restructuring process. Initial technological change can be both a curse and an opportunity. New technology means writing off previous investment but it also means lower operating costs and enhanced efficiencies. The actual diffusion would be dictated by past investments and expected profits. The spread of technology is also facilitated by late industrializing states pursuing capitalist transformation. The ensuing change in competitiveness brings about restructuring. As new innovations emerge the industry will be reordered again III new ways. At the industry level the shift from one kind of technology to another within the same industry is akin to a change in the "technoeconomic paradigm" (Perez and Soete 1988). The technological frontier shifting from open hearth furnace (OHF) technology in the post-war period to the basic oxygen furnace (BOF) presented itself as a strategic problem for firms with heavy investments in OHF, while for latecomers in general this was a unique opportunity to leapfrog, given their lack of allegiance to any older technologies. In the same vein the emergence of smaller, more flexible electric arc furnace (EAF) technologies constituted another "paradigm" shift, offering new opportunities for technology-led industrial restructuring. The strategy to adopt new innovations is dictated by cost-benefit considerations, both short-and long-term. Institutional arrangements, such as an oligopolistic industry structure and reliance on capital markets for funding new projects, have a bearing on innovative behavior. Large firms dominating the US market have had little incentive to adopt new technologies (Crandall 1981; Adams and Mueller 1982; Oster 1982; Acs 1984; Kawahito 1984; Markusen 1985; Barnett and Crandall 1986; Hogan 1987; Adams 1990). For US firms, spiralling investment costs in a climate of low profitability created an investment crisis. Foreign competition added to the pressure. Both retained earnings and the capital market, typical sources of investment funds, became inadequate sources of financing expansion and modernizing production facilities. The demand for high dividends in the US generally curtailed spending on manufacturing innovations (Lazonick 1994:184). Restructuring in the US therefore was characterized by heightened capital mobility away from the steel industry. Late industrializing states, such as Japan (Shinohara 1982; Vestal 1993), Brazil (Baer 1969), and India (Johnson 1966; Liedholm 1972; Sidhu 1983) began promoting their respective steel industries well before the crisis that confronted the US and European sectors. However, the launching of the Korean industry coincided with the crisis . The massive investment program guided by the state and supported by the banking sector and aggressively pursued by steel firms expanded steel capacity in Japan severalfold in a few 22

INSTITUTIO NAL INTERPR ETATION OF RESTRU CTURING

years. Unlik e in th e US, th e large size of firms and plants in Japan has been conducive to rapid adoption of innovations with scale advantages. Surplus capacity in Japan was inevitable and was lat er compounded by th e rapid expansion by Brazil and South Kor ea (Enos and Park 1988; Amsd en 1989; D'Costa 1994, 1996). However, unlike th e US, th e Japanese government, in conc ert with th e industry, instituted "recession" cartels to maintain output and pric e stability and to reorganize capacity gradually. Indi vidual firms cut back capacity, consolidated existing production faciliti es with incr emental innovations, and minimally diversified into non-steel op erations. All four late industrializing countries, engaged in national capitalist development, overcame th e initial structural barriers of investment and technology, making industrial polic y th e single most important instrument to regulate the pattern and dir ection of industrial change. However, institutional impedim ents in Brazil and India continued to inhibit investm ents necessary to keep abr east of industry innovations. The status quo changed as institutional arrangements were reordered and new innovations offered new opportunities for capacity expansion. Th e privatization of th e industry in Brazil and th e gradual opening up of th e Indian industry to private entreprene urs generated a favorable investm ent climate, whil e new technologies requiring less capital reduced en try barriers drastically for Japanese, Indian, and Korean entrepreneurs. Compounding the rapid global growth of steelmaking capacity has been the accelerating economies of scale in modern steelmaking technologies. Lags in diffusion and the resulting technological ob solescence reduc ed profits and dampened future investm ents. As a result th e entire industry was pushed into a vicious cycle of plant imbalances, plant closur es, cash flow problems, obsolete excess capacity, high er operating costs, and rising corporate debt (Marklew 1995). Th e institutional response as part of capitalist rationality can be expected to result in ad hoc investment programs and diversification into non-steel sectors. Und er thes e circumstances, expansion of cap acity is rul ed out, though individual plants could witness marginal increases by rationalizing operations. Unable to cop e with structural difficulties, th e industry was compelled to seek a collective solution from th e state. In som e fundamental wa ys capitalist regulation in the US shifted from assertive self-regulation to more state involvement (Hudson and Sadler 1989). In steel production, because of economies of scale and a wide product range, rising productivity is generall y a function of technological change." With technology embodied in capital equipment, th e size of equipment becomes a defining paramet er of productivit y. As steel production is investment-intensive (Crandall 1981), most developing countries cannot secure modern technologies. In addition, firms prefer to transfer technology to advanced capitalist countries becaus e of better infrastructural support (Baark 1991 :911). Finally, larg e-scale technologies require high capacity utilization, a condition most developing country markets find hard to fulfill. This implies 23

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that in periods of high growth, modern technology is most likely to flow to industrialized countries. Conve rsely, economic slumps in industrialized countries may increase opportunities for lat e industrializers to purchase modern technology. Steel firms th emselv es ar e designers and developers of steel technologies. With a per sistent downturn when few new investments ar e planned in th e sector, thes e firms attempt to maintain their commercial viability by selling technologies. This industry crisis in th e advanced countries is a favorable condition for hard bargaining by states which ar e looking for state-of-the-art technology. An autonomous state with a long-term industrial strategy can significantly influ ence th e terms and conditions of technology transfer. First, autonomy provides greater freedom to pursue technology-based econ omic growth. Second, since pric es of technology ho ver between th e minimum acceptable price to the seller and th e maximum pric e offered by th e bu yer, there is plent y of room for bargaining. States pu sh ed by concerns about str uct ur al competitiveness begin to act as quasi-entrepreneurs and seek to minimize th e cost of technology and restrictive practices imposed by suppliers . If th e state is not overwhelmingly burdened with demands from existing political forc es, it can bargain effectively and decisively with for eign companies for bestpractice technologies. Th e international transfer of technology takes numerous forms. Principal among them ar e turnkey proj ects and technology licen sing, with or without for eign equity. Theoretically it can be ar gued that turnkey proj ects (exc ept for process industries with em bodied technology in equipment) are least likely to contribute to local learning since mo st aspects of th e proj ect, from conc eption to completion, ar e undertaken by for eign suppliers. Thi s makes it difficult to unp ackage th e technology and contain co sts. Second, if for eign equity is invol ved in turnkey proj ects, th en for eign suppliers ma y hinder th e complete transfer of technical knowledge to th e ho st economy, resulting in large for eign exchange outflows in the form of imports of spares, repatriation of profits, ro yalti es, and technology fees. It ma y th erefore be prudent to encourage full-fledged local participation in turnkey proj ects, retain ownership with national capital, and minimize restrictions on th e use of th e technology. Irr especti ve of th e mode of technology transfer, local participation in terms of equity, as well as in physical planning, con struction, staffing, and continuous training ar e critical ingr edients to building technological capability. These seemingly mundane activities cumulatively ens ure that a firm is on th e technological learning curve. Th e transfer of technology by innovators, which for steel technology ar e equipment suppliers, many of whom ar e steel producers th emselv es, takes place through licensing and turnkey proj ects . The involvement of th e supplier is pa ssive in the first case and acti ve in th e second. However, in either case th e bu yer must be active in th e adoption and adaptation process. Because inno vation is mainly of th e incr emental type, even mature technologies such 24

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as those em bodied in equipment ar e always undergoing improvements. For a lat e industrializer the ability to continue "imitating" changing technical specifications of equipment means not onl y sustained investments in plant and equipment but also conscious efforts to keep up with the shifting frontier," Diffusion of modern technology at th e industry level calls for capacity expansion. The high capital requirem ents for modern steel mills also call for inv estment planning and coordination, a process which can only be orchestrated at th e state level. Lat e industrializing countries en dowed with a proactive state can take advantage of th e crisis afflicting th e industry lead ers. Mobilizing capital and securing technology on a sustained basis can plac e th e industry on a higher technological trajectory. Stat es unhampered by a multitude of social and political demands ar e best abl e to keep up with int ernational standards . For others, capacity ex pans ion is more mundane and do es not reflect the competitive edge of th e industry. Over staffing, poor organizational and managerial capability, low productivity, financial losses, and rising debts ar e typical outcomes. The dominance of th e state sector in an envir onment of institutional weakness nullifies whatever entrepreneur ial urg es exist. Rentsee k in g act ivity is normal und er th e circumstances, resulting in a technologically underdeveloped industry. D evelopmental st at es (a fa Johnson) ar e not lock ed into such institutional incap acit y. Instead, th ey can choose the right technology, bargain effectively with suppliers, complete proj ects on tim e, and keep production co sts low (Eno s and Park 1988:215). Th ey follow a strategic path of state int ervention in closing th e technology gap, taking maximum advantage of the increa sing size of industrial op er ations (Figure 2.1) . A developmental state can sustain a virtuous loop of investm ent and productivity. By providing sub sidies to big firms or establishing state-owned enterprises (SOEs), th e state can distort relative prices and induce industrial growth in targeted sectors like steel. The mobilization of investment is conducted by th e state (Johnson 1984; Woo 1991) through th e centrally go verned banking syste m . Variou s instruments such as tax br eaks and preferential tariffs ar e used to prop up domestic industr y. High investment in th e industry eases technology acquisition and thus sustains high productivity growth, leading to further industri al expa nsion. Com petitiveness is thus a consequenc e of productivity differenc es, arising from state-administer ed allocation of resources. To disaggr egate the proc ess of global and industry level restructuring we combine the ideas contained in the stylized version of restructuring with that of the virtuous loop (see Figur e 2.2). We begin with capitalist competition, ensuing technological ch ange, and resulting industrial cri sis. Small- scale technology is superseded by technology with progressively increasing economies of scale. Thus th e small er integrated bla st furnace (BF)-open hearth furnace (OHF)-ingot process gives wa y to th e large-scal e BF-basic ox ygen furnace 25

INSTITUTIONAL INTERPRETATION OF RESTRUCTURING

BIG FIRMS SOEs Oligopoly f - - - -

subsidies

STATE

Distorted relative prices

t

SUbCOnjctin g

I

market pow er

Small firms

I

rC

Rising wages

Rising productivityand output

<$> Economiesof scale State-of-the-art

Growth & concentration

I

High investment Technology acquisition Learning-by-doing

Figure 2.1 A virtuous cycle of technological change and industrial expansion Note: SOEs=State-owned enterprises

(BOF)-continuous casting (CC) integra ted process. Capitalist firms and late industria lizing states strategically adopt new technologies, with delayed adoption by US firms and a fast -second approach by japan." Slow and rapid strategies create a technological gap, with increasing obsolescence on the one h an d and increasing competitiveness on the ot her. Rapid expansion by Japan and economic maturity of the US contribute to excess capacity (Ballance 1987:215). Ot her late industria lizing countries with similar goa ls of industria l tr ansfor mation add to the excess capacity prob lem. The institutional response to the crisis of declining profitability, rising corporate debt, and plant imbalances due to a slowdown in investments is plan t closures, selective modernization, and co llaborations wit h those who have the capi ta l and know-how. Declining investment in plant and equipment imp lies the "distress" sale of technology. The institutional capacity of late industria lizing countries pursuing an industrial po licy determines the na tu re of technology transfer. Those with embedded autonomy are better positioned t o bargain with tec hnology supp liers for the acquisition of bestpractice standards. The effect of the first roun d of major restr uct ur ing is a new international division of labor in whic h new producers capture a sizable po rtion of the domestic ma rket, especially in underserved local ma rke ts, pa rticu larly in certain types of products. Thus, the scrapping of blast furnaces and steelmaking BOFs imp lies a shortage of semi -finished products such as slabs . Inadequate investment also means the inability to meet new demands 26

IN STI T UTI O N AL IN T ER PRETATI O N OF RESTRUCT URI N G

Capitalist

r--- competition

f

/

New innovations

-,

DRI-EAFthin-slab COREX

Technological change BF-BOF-CC

~

I

State-led rapid industrialization

K

adoption

Delayed adoption

Chon~".

I .. competitIveness

Excess capacity Changing international division of labor

Plant closures Partial modernization Jointventures

Technological obsolescence

)--

CRr

Technology transfer Institutional capacity lSI Capacity expansion

RESTRUCTURING

~

Proftt rate

Debt Plantimbalances

I Figure 2.2 An analytical framework for industrial restructuring Notes: BF=blast furnace; BOF =bas ic ox ygen furnace; CC =continuous cast ing ; ISle im por t substitution industrialization ; Dk le dircctly reduced iron ; EAF=electr ic arc furn ace

such as high-end galva nized and coa te d sheets. Sho rtfall in th ese pro ducts is met by new pr oducers who have made th e necessar y investments and have been able to keep up technologically. The sup pliers of th ese pr oduct s to th e US h ave been Jap an , Kor ea, and Brazi l, amo ng others . After a series of adjustments by th e industry as a who le to indus tria l crisis an d growth, th e pro cess of restruct uring is once agai n set in motion . Th is time, too, th e dise qui libri um is genera ted by new innovatio ns. Alternative, sma ll-scale steelmaking pro cesses are develop ed to reduce inves tme nt and 27

INSTITUTIONAL INTERPRETATION OF RESTRU CTURING

operating costs. Incr emental innovations in EAF, new casting processes, such as the thin-slab, and scrap substitutes, such as directly reduc ed iron, repr esent a fundamental shift in steelmaking technology. Entry barriers ar e low ered and investment opportunities op en up. Other related technologies ar e also found in the market, substituting expensive coke ovens and blast furnaces but complementing th e traditional BOF process. With easier industry entry, ent repre n eur ial breakthroughs become more common. Oligopolistic competition is weakened by smaller, flexible, and more adv enturous firms willing to challenge the traditional markets of integrated producers. And in some cases, as in India, wh ere entre preneur ial activity has been limited, th e removal of state-imposed institutional constraints marks the beginnings of new arrangements in capitalist development. State-led capitalist regulation in lat e industrializing countries is no longer ad equate to cop e with incr eased mobility of capital. The maturity of private capital under state tutelage and the global restructuring alr eady underway introduce new international pressures. For the industry as a whol e there is no other option but to restructure and regroup with ren ewed vigor. Conclusion Restructuring is a two-pronged process, on e in which firms in earl y industrializers, for strategic reasons, forgo their dominant position in th e industry by not investing in new innovations and states in lat e industrializing countries seek out strategic industries for capitalist development. A supportive institutional envir onme nt for industrial catch-up in a world of diffusion of best-practice standards introduces the possibility of technological convergence. The shifting technological frontier also op ens up opportunities (and constraints), alt ering the competitiven ess of firms located in different countries. Who takes advantage of the new technology dep ends on a host of institutionally determined factors, the principal on e being innovative behavior. The process of capitalist industrialization by latecomers was favorably initiated by exploiting large-scale blast furnace technologies while the same technologies posed a formidable investment barrier for both established and new producers. However, changing competitiveness is not assumed away. Instead, th e issue is how institutional capacity influences th e adjustment process on th e on e hand and th e process of acquisition, diffu sion, and effective deployment of technologies on the other. By reducing entry barriers, the emergence of small er, alt ernative technologies offers unpreced ented commercial and technological opportunities for both advanc ed and late capitalist economies. With th e retreat of th e state from industrial production in lat e industrializing countries, we can expect entrepreneurs to exploit th e advantages of new technology. The restructuring process is neith er linear nor sequ ential. Rather, it is an on-going on e, in which the interplay between technological evo lut ion and the 28

INSTITUTIO NAL INTERPRETATION OF RESTRU CTURING

institutional responses continues to dictate the dir ection and quality of capitalist production. Th e industry is far less int ernationalized than other industries. The rol e of multinationals from mature econ omies has been largely in th e ar ea of technology transfer. While this has certainly contributed to a shifting international division of labor, foreign ownership of the steel industry is limited. Th at may change. As technology becomes more wid espread and as th e private sector begins to playa greater rol e in the industry, we can anticipate incr eased internationalization. New technologies with commercial pro spects will attract entre prene urs who are less tied to past technologies. With each round of innovations and restructuring n ew industrial locations will eme r ge. Counterintuitively w e can argu e that these ar e not just low-cost late industrializing countries but also advanced capitalist countries as restructuring and technological change for eclos e previous options and op en up new opportunities . As capitalist competition drives technological change, entrepreneurs, wh en presented with new opportunities, ar e likely to continue that competitive tradition. It thus should com e as no surprise to find th e contraction, expansion, and subsequent rejuvenation of th e steel industry integral to un even capitalist development of th e world economy.

29

3

TECHNOLOGICAL CHANGE AND CRISIS IN THE AMERICAN STEEL INDUSTRY

Introduction In this chapter we examine the strategic response of the US steel industry to technological change. We show that past investments in old technology and risk-averse behavior of US firms placed the industry on a lower technological trajectory. The slow diffusion of modern technology and import competition in the US undermined the financial strength of American steel firms, leading to obsolete excess capacity. The industry responded with major restructuring at the plant level, reorganizing production assets by eliminating capacity and selectively modernizing plants. Unable to cope with the crisis, the industry also abandoned its self-regulatory approach in favor of a more cooperative business-government partnership. However, protectionism did not resolve the issue of technological backwardness. Instead, the net results of adjustment have been a loss in steel capacity, a decline in the level of employment, plant imbalances, and technological lethargy. The chapter is divided into three main sections. The first provides historical background to the evolution of steel technologies in general and the US steel industry in particular. The second covers the strategic response of US firms to technological change, identifying the reasons for the slow diffusion of modern technology in the US. The final section examines the crisis of the industry and the different ways by which the industry has restructured, including changes in institutional arrangements for capitalist regulation. Occasional references to the Japanese industry are made for comparative purposes.

The historical back drop Prior to the long economic downturn, from the early 1870s until the end of the nineteenth century, the US steel industry was highly fragmented. In 1898 there were over 200 establishments in the US with a total capacity under 15 mt (Gold et at. 1984:490,580). The depression of the 1870s and the ensuing 30

CHANGE AND CRISIS IN THE US STEEL INDUSTRY

"merger movement" of the 1890s produced significant industrial concentration. For the US economy as a whole there were over 3,000 mergers during 1898-1902 (Agnew 1987:58). In 1901, US Steel Corporation was formed through a series of mergers involving about 165 separate companies. It became the world's first billion dollar company and controlled over 60 percent of the US steel market (Edwards 1979:42). The principal technology employed was the crucible process, which was suited to small-scale production.' In 1864, Sir Henry Bessemer's "converter" for transforming iron into steel was introduced in the US (Rosenberg and Birdzell 1986:246). A blast furnace (BF) was used to melt iron which was then converted to molten steel in a Bessemer furnace. Just a few years later, in 1870, the first open-hearth furnace (OHF) was introduced. The diffusion of this technology at the expense of the Bessemer was quite rapid (see Figure 3.1). OHF technology allowed the use of local ores and also had the advantage of fuel efficiency. Additionally, capital cost was reduced due to the smaller scale of operations (Paskoff 1990:85). Toward the end of the nineteenth century almost three-quarters of total output was under the Bessemer process. However, by 1915 nearly three-quarters of steel production used the OHF process. In the US, OHF output peaked around 1950. After 1960, two other technologies, the electric arc furnace (EAF) and the basic oxygen furnace (BOF), gained the industry's acceptance. Technological change in the steel industry has been toward increasing scale of production. This was as much a "technical" requirement as it was a "political" one. For example, large firms (and plants) became synonymous with economies of scale as costs fell and output expanded.' Confrontation between large corporations and labor induced firms to adopt capital-intensive production (Rosenberg and Birdzell 1986:212). The size of OHFs ranged from 40 to 50 tons capacity compared to the 5 to 15 tons capacity under the Bessemer process (Gold et at. 1980:534). Between 1899 and 1935 the average furnace capacity increased by more than seven times, reaching 300 ton capacity in some cases. As the size of steelmaking OHFs increased so did the size of ironmaking blast furnaces. By 1935 there were seventy-two steel establishments with a total capacity of 57 mt; about 90 percent of that production used the open hearth process (Gold et al. 1984:140,531). Large size also meant underutilization of capacity during economic slowdowns. For example, the utilization rate from 1915 to 1935 averaged less than 60 percent with about 51 percent of capacity lying idle during the Great Depression (1929-32) (Iron Age, various issues, and American Iron and Steel Institute, Annual Statistical Report, various issues). In contrast to the US experience, Japan at the turn of the century had a small iron and steel industry, with several producers using the small-scale, traditional tatara method. The Meiji regime, on grounds of national development, initiated large-scale steel production toward the end of the nineteenth century. Although the Bessemer process was adopted by the Meiji 31

CHANGE AND CRISIS IN THE US STEEL INDUSTRY 100 90 80

....:::l

70

-,

.e- 60 :::l

0

iii 50

....'0 '0 ;;§? 0

40 - - . Bessemer --OHF - - - - . Electric --BOF

30 20 10

1896 1900 1905 1910 1915

1920 1925 1930 1935 1940 1945 1950

1955 1960 1965

Figure 3.1 Diffusion of Bessemer and open hearth furnaces (OHF) in the US Sources: US Department of Commerce (1975); Amer ican Iron and Steel Inst itute, Annual Statistical Report. various issues

regime, the military's prefe rence for lar ger and better-quality output dicta ted the adoption of the mo re expensive OHF (Morris -Suzuki 1994 :80, 126).3 These plants we re much smaller than those in the US. For example, the Tanaka faci lity had O HF with on ly 10 tons capacity (Okazaki 1990:173). In 1901, the same yea r US Steel was founded, the Japanese set up the sta te owned Yaw at a Works with th e help of German technology. This was Japan's first modern faci lity. From a production level of 230,000 t ons of finis hed steel in 1914 , Yaw at a inc reased its ou tput t o 900,000 t ons in 1929. The corr esponding figu res fo r Japan 's total steel ou tput we re 280,000 tons and 2.03 mt (ibid.: 168 ). Japanese plant size inc reased dramatically but it remained behin d US norms . Relat ively low wages in Japan discouraged the imports of th e mos t modern techn ologies being developed in th e US and Europe. In 1934 Yawat a Steel was merged with six other firms to crea te th e Japan Iron and Steel Company, in which the sta te held 70 percent of the equity (Kap lan 1972 :13 8-9). Nine years later thirty-five blast furnaces produce d a peak outpu t of 7.65 mt steel (Vesta l 1993:11 6), an annual average output of 219,000 ton s per furnace. Post-war raw ma teria l sho rtages had red uced ca pacity ut ilization, prompting government interventio n in various ways. Under th e America n occupation Japan ese steel subsi dies were eliminate d and US aid cut back. The immediate effect of subsidy elimination was a slowing down of capacity growth but in the medium term it forced Japanese firms to be mo re cost conscious . The " deco ncentra tion" laws imposed by th e US-led 32

CHANGE AND CRISIS IN THE US STEEL INDUSTRY

Supreme Command of the Allied Powers in 1950 denationalized Japan Iron and Steel Company, splitting it into Fuji and Yawata Steel.

Post-war innovations in steel production Very broadly, there are three main types of production units that manufacture the entire range of steel products: (a) the integrated segment, (b) the minimill sector, and (c) high-quality alloy and stainless steel producers (specialty steel). Both the integrated and minimill segments produce carbon steel products, while specialty steel firms, often using minimill technology, produce nonferrous alloys. The principal raw materials used for integrated production are iron ore, sinter, coal, limestone, and small quantities of scrap. These inputs are charged into the blast furnace (BF) to make molten pig iron or hot metal. The hot metal is then charged into a basic oxygen furnace (BOF) to be converted to molten steel (see Figure 3.2). The raw steel is poured into continuous casters (CC) or poured into ingots. Either way they are converted to semi-finished products such as slabs, blooms, and billets." Continuous casting is superior to ingot casting as semi-finished products can be made directly without the intermediate stages of transferring the molten steel, pouring into soaking pits, and reheating. These products are then rolled and further processed into various finished products. Minimills are smaller units than integrated plants and use scrap (and directly reduced iron ore) as the chief raw materials. An electric arc furnace (EAF) is used to purify and melt the scrap before the molten steel is continuously cast and rolled into final products. This technology emerged as early as 1880. With the high cost of electricity, EAFs were used mainly for more expensive aluminum refining, and only in 1901 was the production process applied to the steel industry, particularly for specialty steels (see Athreye 1994:54).5 Minimill products generally do not have the high metallurgical properties that are possible using integrated production. Thus it is not surprising to find 60-75 percent of output in major steel producing countries coming from the integrated segment. Many integrated plants have EAFs as auxiliary units to make use of "home" scrap generated by integrated mills. Integrated production is very hardware intensive. As we have seen, the tendency of steelmaking technology has been toward increasing scale of operations. In the post-war period, steel equipment, such as blast furnaces and BOFs, has witnessed dramatic increases in size. And in keeping with future output expansion, new integrated plants or greenfields are designed with the minimum efficient scale (MES). Naturally, the investment required for such plants has been high. On the other hand, minimills cost much less because of their smaller scale. With major differences in process technology, integrated production is mainly for flat products. Flat products include sheets and plates that find wide application in automotive, machinery, and consumer 33

C

Torpedo . ) car

RH-degassing

Bituminous coal a) Glets

(

Wire rOdS")

C~atesa) Minimill production process (can be combined with blast furnace)

Hot rolled sheets in coil

Figure 3.2 Unit operations in steelmaking seque nce: Integtated blast furnace-basic oxygen furnace-conti nuous casti ng and minimill (electric arc furnace) N ote: aesteel products

CHANGE AND CRISIS IN THE US STEEL INDUSTRY

appliance sectors (Table 3. 1). Thi s specialization is a shift from pa st practices wh en both lon g and flat products were produced by int egrated mills. With minimills being bett er suited to low value added, high carbon lon g products, th eir strength ha s been in bars, wir e rods, and small shapes, principally used in construction . With recent inno vation s, minimills are increa singl y encro aching on th e flat products market (see Cha pter 7). Tabl e 3. 1 pr esent s major steel products by process and end use. Technol ogic al ch an ge in the stee l in dus try pr ogr essed t oward cost efficiency an d product qu ality. Ad vanc es h ave been dir ect ed t o removin g impurities, such as ph osphor ou s from the iron ore, reducin g pr oduction tim e, im provin g product qu ality, or introducing new pro ducts. All of th ese developments wer e dictated by cost and qu ality con sideration s (see Tabl e 3.2 ). For exam ple, th e sho rter pr ocessing time of Bessem er s compar ed to OHFs was mor e th an offset by better-qu ality output and reduced ene rgy costs. Tw o radic al steel technologies were introduced in th e pos t-wa r per iod : th e BOF in 1952 an d continu ou s casting (CC) in 1950. 6 Both entai led th e use of lar ge-scale blast furnaces. Th e BOF spee de d up th e pr oc ess o f convert in g iro n t o stee l. Fr om 100 minutes t ak en by the OHF, pr oc ess time by a BOF was r educed t o 6 0 m inutes a n d less. At th e time o f its Table 3. 1 M ajor steel pro duct mark ets by type of operation and end use

Product

Integrated process

Minimills

Flat products Hot rolled sheets Cold rolled sheets Coated sheets

x x x

Plates Welded pipeltube

x x

x

x x

x x

x x x x x x

x x

Long products Hot rolled bars Wire rods Reinforcing bars Small structural shapes Large structural shapes Rails Wheels and axles Seamless tubes

x

End use

Pipe makers/auto Auto/appliances Auto/appliances/ construction/containers Construction/machinery Oillgas/construction Auto/construction Wire makers/ construction Construction Construction Construction Railways Railways Construction/auto/oil/gas

Sources: Barnett and Crandall (1986:11), Amer ican Iron and Steel Institu te, Annual Statistical Reports, var ious yea rs; a nd Depa rtment of Planning, County of Alleghe ny (1988:3- 4-3-5) Notes a Recent entry by minimills b Limi ted productio n 35

Table 3.2 M ajor innova tio ns in th e steel industry Process Bessemer Bessemer Besserner-T

Year introduced

1856 1878

Capacity/heat (tons)

70 60

Timetaken (minutes)

25 30

Production advantage

Cost savings as no fuel is used.

1868 1958

100-500 200

900 350

Scrap from Bessemer could be used. Better quality steel, better process control, heat is generated using waste gases. Reduced energy costs, better quality.

Electric process EAF Larger EAFs

1914 1970

25-75 (special steel) 100-200 (ordinary)

330 240

Replaced small-scale crucible steel, larger output.

Oxygen-based BOF Rotor Kalldo Oxygen-bottom Maxshute

1952 1953 1954 1968

350 (initially 60) 100 150 220 (initially 30-80)

Continuous casting

1950

OHP OHF Ajax"

Source: Athre ye (1994:55- 7, 65-8 ) Note a

=o xygen injection

35 (initially 60) 90 80 25 (initially 30- 80)

Better quality, larger output, possible short-heat time so scale advantage.

Better quality, reduced energy costs, higher yield.

CHANGE AND CRISIS IN THE US STEEL INDUSTRY

commercialization the BOF was less expensive than the OHF, both in terms of energy costs and capital costs. Continuous casting, developed in 1950, bypassed the laborious ingot stage and the energy-intensive reheating of ingots for finishing. Instead, it allowed the direct pouring of molten steel to produce semi-finished products, such as slabs, billets, and blooms. Strategic adoption of new innovations

Path dependence and technological inertia The rise and fall of an industry over the long haul is the outcome of several factors. The decline of British steel has been explained by systemic factors such as loss of comparative advantage, but also by idiosyncratic factors such as its pursuit of free trade policy and entrepreneurial failures (see Suzuki 1990).7 Firms make strategic decisions, and past actions influence future decisions. The historical experience demonstrates that the choice of technological systems is institutionally derived, even if resource availability and cost factors have a bearing on that selection. For example, in Britain abundant skilled labor favored the adoption of more capital-intensive OHF technology. This technology was also appropriate for producing rail products. With numerous railroad projects in the British empire, the choice of OHF was inevitable. Similarly, American competitiveness of the nineteenth century rested on cheap ore prices. The Bessemer furnaces facilitated the use of such ores, compelling large-scale operations and encouraging vertical integration. In the US the dominance of US Steel, within an oligopolistic industrial structure, did not encourage innovation-based competition. Instead, the industry collectively sought market stability and high financial returns.! In the pre-war period prices were rigid, while in the post-war period they were "upward rigid," meaning they kept on increasing at regular intervals (Adams and Mueller 1990:84). This was not unusual, given past collusive schemes in the industry such as the Pittsburgh Plus system." More importantly, the strategy of US Steel to maintain control over markets by regulating steel prices (Tiffany 1990:249) had a telling effect on the choice of innovations. American steel firms avoided new technologies since high profits were ensured in any case with self-regulated prices. It would have been irrational to incur additional investment in new technologies. The war-related jump in steel demand requiring output expansion also conditioned the adoption of "well-tried equipment and operating practices" (Gold et at. 1980:545). In the immediate post-war period the American industry was reluctant to expand steel production capacity, conveniently avoiding new technologies. It feared overcapacity (Tiffany 1988:17-18, 65) and strategically deployed older technology to meet new competition. Such an attitude was not unjustified as the US government, against the wishes of the industry, had invested over $2 37

CHANGE AND CRISIS IN THE US STEEL INDUSTRY

billion in the industry, increasing steelmaking capacity by 30 percent (Scheurman 1986:47). The industry remained conservative despite 90 percent capacity utilization during the 1940s. Concerned with full employment and anticipated steel shortages in the post-war economic boom, the US government encouraged additional capacity in the industry. The industry was once again reluctant to follow through. However, US economic growth did ultimately encourage some expansion in steelmaking capacity. Whatever new steelmaking capacity was created, the American industry opted for the older OHF and not the recent BOF. The general conservatism toward new technology was further reinforced by incremental improvements in OHF technology. For example, although "oxygenation" techniques, such as in the BOF, were already in use, these techniques were also introduced in the OHF. The industry was thus locked-in to older technology (Barnett and Schorsch 1983:22-30). Also, the Korean War demanded rapid capacity expansion and under such circumstances it was rational to adopt true and tried technology rather than tinker with the new. These "sunk" costs associated with the OHF further hindered the diffusion of new innovations. The 44 mt of steel capacity added during the 1950-60 period (American Iron and Steel Institute, various years) were mostly in older OHF rather than in BOF technology. Regional concentration also limited the diffusion of new technology. Of the forty-three new open hearth furnaces constructed from 1950 to 1953, thirty-nine were located in Pennsylvania, Ohio, Indiana, and Illinois (Hogan 1971:1321). In keeping with the general scale trend, the industry introduced larger OHFs, some over 600 tons. By 1960, the US industry had 90 percent of total capacity under OHF technology. Both institutional response and technical developments decisively locked in the industry for the foreseeable future on a technological trajectory different from the industry's technological frontier. Only in the mid-1960s did large US firms adopt the BOF on a wider scale, almost fifteen years after its first commercial application in Austria (Adams and Mueller 1990:89).10 By then the cost of and efficiency in the use of oxygen had become favorable and virtually the entire industry agreed on the superiority of the BOF over OHF. l l The US industry operating within a capitalist context simply could not ignore the benefits of new innovations. It invested an average of $2 billion a year from 1965 to 1970, raising BOF production to nearly 50 percent of output (Tiffany 1990:257). However, technological change in the American industry was too little and came too late. It was already on a lower technological trajectory. Regional imbalances and the rising cost of inputs, both a legacy of the industry's market stabilizing strategy, rendered investments in new technology ineffective for competitiveness. They were insufficient to meet new post-war market demand and inadequate to compete with other producers who were on a different technological trajectory. Population and industrial growth in California created heavy demand for steel products, 38

CHANGE AND CRISIS IN THE US STEEL INDUSTRY

which existing mills could not adequately meet. The new finishing facilities, such as rolling mills, were targeted for war-related plates and heavy structurals production, whereas peacetime needs were largely in consumer items, such as sheets and strips. The pre-war west coast market demand was approximately 3.5 mt whereas production capacity was only about 2 mt. The shortfall was met by Bethlehem's Sparrows Point plant in Maryland and Tennessee Coal and Iron in Birmingham, Alabama. The inland location of these mills was unattractive, making delivery of iron and coal difficult to far-flung markets. Also, in a short-sighted move, US firms shied away from investing in the west coast market. For example, US Steel, Bethlehem and National Steel abandoned post-war plans to construct new plants in the west coast region." Only Kaiser Steel retained a major facility in California. However, Kaiser failed to make timely investments for modernization, which resulted in the plant's technological obsolescence." There were problems with plant siting as well. During World War II the US government financed new steel plants but the bulk of the investment benefited the existing steelmaking belt, extending from the northeast to the midwest. The northeastern region garnered nearly 75 percent of war-related new capacity due to low construction costs at existing plant sites and the availability of. skilled labor. The non-traditional areas secured only four major new integrated steel plants-two in Texas and one each in California and Utah.!' The more remote and obsolete plants in the Pittsburgh region were not phased out despite underutilization of capacity." Technological conservatism was also dictated by oligopolistic industry structure. The vertical integration favored by American big business was popular with steel firms, giving them firmer control over prices through backward linkages to raw materials, such as coal and iron ore. However, new cheaper sources of high-quality ore in Latin America and elsewhere reduced the competitiveness of US firms as they were saddled with high-cost captive mines. The development of ocean-faring bulk carriers further eroded the cost advantages of US firms and gave importers of raw materials an unprecedented advantage. The purchase of government-owned steel mills by existing firms strengthened the industry structure." The stability of market shares in the post-war period is indicative of the absence of innovation-led competition. Approximately 70 percent of national production was accounted for by eight firms, compared to 84 percent in 1904 (American Iron and Steel Institute, various years, and Iron Age, various issues)." ? The reshuffling of individual firms through mergers, spinoffs, diversification, and plant shutdowns did not significantly alter the market structure." The oligopolistic structure continued to discourage the massive investments required for new plants and directed managerial attention to controlling market shares and policing their industry rivals. The US industry attempted to avoid market instability at great cost. One approach was the strategic adoption of existing OHF technology rather 39

CHANGE AND CRISIS IN THE US STEEL INDUSTRY

than the BOP. Another was maintaining industrial peace. After the longest steel strike, in 1959, the US industry with the help of a labor agreement sought to reduce the costs associated with high wages and liberal pension schemes. An Experimental Negotiation Agreement between the industry and organized labor came into effect in 1973 that swapped a 3 percent real wage increase plus other benefits with a no-strike clause (see Barnett and Crandall 1986:40-1) . The industry preferred to share a part of its high profits with its labor rather than lose a large, captive steel market in the US to industrial disruptions.

Diffusion lags and import competition in the US There are two reasons for the relatively slow diffusion of BOF technology in the US (Oster 1982). The first, as already indicated, is "pathdependence." Past decisions as well as idiosyncratic factors dictate future strategies. Thus large sunk costs or improvements in existing OHF technology rendered the new BOF commercially unattractive, particularly from a short-term, cash flow point of view. The second is that institutional arrangements influence innovative behavior. The dominance of US Steel among a coterie of large firms produced a non-competitive environment (Adams and Mueller 1990). The Japanese were not handicapped by an oligopolistic structure like that of the US. There were large firms but they were of more or less equal size . Recognizing significant energy savings and higher total productivity, Japanese industry aggressively introduced new technology (Figure 3.3). The Japanese, unencumbered by past investment in OHF technology, were willing to experiment with the BOF, which used far less scrap (in combination with iron ore) than the OHF (Yonekura 1990:223-4). Declining international prices for raw materials such as iron ore and coke provided the Japanese with significant advantages over the US (Crandall 1981:20). Cheaper global sourcing of raw materials created significant opportunity for the Japanese to invest in large-scale, deep water mills. Market stability was important for the Japanese but it did not come at the expense of the massive benefits of new technologies (Borrus 1983:72). Almost from the very beginning of the post-war era, Japan had moved on to a different technological trajectory than the US. However, Japanese firms were also subject to the logic of path dependence. For example, among the big Japanese firms Kawasaki Steel with recent vintages of "proven" OHF technology was the last to introduce the BOP. But by 1965 Japan already produced nearly 70 percent of steel using BOF technology compared to US share of under 20 percent. In the 1960s Japanese steel firms created gigantic plants, taking full advantage of economies of scale to lower operating costs. In 1952, when the US dominated the global steel industry, it had four plants with 4-6 mt capacity, while Japan had none (Adams and Mueller 1990:83). 40

CHANGE AN D CRISIS IN T H E US STEE L IND USTRY 120

100

/....-------

'5ao

% o ~ Ul

-...

r

..........

--- --

I I

60

I

,

/

,

/

40

I


t

-.,.---

/

'0

~ s:

.........

t

/

/

--USBOF - -Japan BOF ----·USCC --JapanCC

/

20

/

1970

1980

1990

Figure 3.3 Adoption of basic oxyge n furn ace (BOF) and continuo us casting (CC) in th e US and Japan Sources: Amer ican Iron and Steel Institute, Annual Statistica l Report, various years ; Japan Iron and Steel Federation, Monthly Report, various issues

By 1988 the US had three plant s of th is size comp ared to Japan's two . H owever, Jap an had ten plants above 6 mt while th e US had only two. The size of steelmaking operatio ns increase d pro gressively with larger blast furnaces. Of th e 149 large-sized blast furnaces above 2, 000 m' , listed in th e Korean Iron and Steel Associa tio n's Steel Statistical Book, 199 7, pr ior to 1975 only 7 percent of th e BFs exceeded 3,000 m'. After 1975 th e sha re was over 20 percent (see Figure 3.4). The Japanese ke pt abreas t with such changes by introducing unu sually large-scale blast furnaces. For exa mple, in th e same list th e US had only seven BF' s while Jap an had th irt y-two. Th e average US size was 2,747 m! com pared to Japan' s 3,860 m ", There were only two furnaces in th e US th at exceeded 3,0 00 m! while Jap an had twentythree, three of th em over 5, 000 rrr'. Unlike th e US industry, large size in Jap an did not inhibit industry innovations, rather, it encouraged it. The 1959 steel strike ma rke d the beginn ing of a new tr end in th e US steel industry. Imports for th e first time exceeded exports. The slow rat e of BOF diffusion and increasi ng inpu t costs exace rbated th e import tr end . Increasing for eign competitio n, especially from Japan , compe lled US firms to ado pt th e BOF on a wide r scale, speedi ng up th e process after an initia l lag of ten years (see Figure 3.3). Th is expansion substi tu ted BOF technology for th e OHF 41

CH AN GE AND CRISIS IN THE US STEE L IN DUSTRY 6,000

• 5,000

E

4,000

:::3

~

~ 0 III

3,000

0-

III 0 U.

III

2,000

• ••• ••

• • • • • •• • • *••• •• •• ••• • ••* ••••• • : ••

...

••• • •• •

1,000

0 1960

*••• •*

• •

••

•

••• • • •• •• •• • •

• Blast furnace capacity (cu m) Linear (blast furnance capacity (cu m»

1970

1980

1990

2000

Figure 3.4 Large-sized blast furnaces in the world Sourc e: Korea Iron and Steel Associat ion (1997)

process, which by then had become definitively obsolete. Steel capacity in the US expanded on ly marginally, increasing at an annual rate of 0.6 percent from 1959-78 (Crandall 1981:24-5). The convergence of BOF diffusion between the US and Japan resulted mo re from the dras tic phasing ou t of OHF capacity ra ther than new additions of BOFs. Japan, on th e ot her hand, increased no t on ly its BOF ou tput but also sha rp ly ex panded total steel ca paci ty, fr om less than 10 mt in 1955 to nea rly 100 mt by 1970. Its exports to the US also increased sha rp ly. The technological conse rva tism of US pro ducers combined with aggressive expansion by foreign firms introduce d unprecedented import competitio n in th e US ma rk et (Harris 1983). Imp orts as a sha re of ap pa rent consumption rose cyclically th ro ugh out the pos t-wa r perio d (see Figure 3.5) . Im port competition was especia lly acu te in th e western region, which abso rbed a disprop ortion ate sha re of these im ports as growing region al dem an d for highquality steel products cou ld n ot be met efficiently by mill s locat ed in th e tradition al indus tria l belt. Prohibitively high inland tr an spor tation costs added to th e severity of com peti tio n. Natio na lly, impo rts of steel increased by over 200 perce nt fro m 1959 to 1970. In th is period imp ort penetr at ion (imports as a sha re of appa rent consumptio n) for the US as a who le increased fro m 6 42

CH ANGE AN D CRISIS IN T H E US STEE L IND USTRY 35

30

t ,, ,

.,

•

...

,,"

,"

•

, " \,'

t

"

---- . Imports - - % Imports

5

O¥-r-r--'-T""""T-r-...-r---r-...,.,r--r--.-.---r--.-...-r--,---.--r--r--'-T"""""T-r-...-r--,---.--r--r--.-.---r--.-...-r~ 1~

1~1~

1~1~1m

1m

1m

1~

1~1~

1~1m

1~

Figure 3.5 Rising steel imports in the US Source: American Iron and Steel Institute, Annual Statistica l Report, various years

percent to over 14 percent. For the western region th e increase wa s far grea ter: from 12 percent to 28 percent. Californ ia accounted for approximatel y 75 percent of the western sta tes' demand (Warren 198 8:275 ) and Jap an increased its sha re from 39 perc ent to 83 perc ent of imports in the region (US International Trade Co mmission 1989a: 4-1 ). By 19 70 Japan supplied 21 percent of th e west co ast market (H oga n 1971:1471 ). The crisis compounded

The profit crisis and the investment barrier Industrial ex pa nsion in th e US rested lar gely on pri vat e initi ati ve, relying on retained earn ings and ra ising equity capital for new investm ent. H owever, with declining profitability it becam e difficult to rai se new capital (Figure 3.6). In th e 1950-78 peri od, th e rate of return on equity after tax es for iron and steel firm s exceeded th e US manufacturing aver age in onl y six years (Crandall 1981 :29 ).19A delayed investment strategy once set in motion further constrained capital spending for plant modernization. Low-cost producer s such as Japan could deliver high-qualit y steel at lower prices. Of th e thirteen years spa nning th e 19 75-8 7 period, net income (total revenues-total costseprofits) w as negative for five years (1982-6 ), and total losses during 43

CH ANGE AN D CRISIS IN T H E US STEE L IND USTRY

18 16

..... '

,,

, , ... '" , , , ,

,.

,, \ ......

6 4 - - Steel

2

- - - _. Manufacturing

0+---'---'-"---'--'--'--'--'--'--'--'--'--'--'--'--'--'--'--'--'--'--'---""'-'--' 1~1~1~1~1~1~1~1~1~1m1m1~1~

Figure 3.6 Relative profitability of the US steel industry (% of equity) Sources: Cra nda ll (1981); Nationa l Academy of Engineering (1985 )

thi s period exceeded th e tot al profits during 1975-87 by over $3 billion. Th e rat e of return in th e in dus try during 1955-8 3 exceede d th e ave rage manufacturing rat e in only four years (Na tio na l Academy of Engineering 1985:113 ). Th e steel secto r did not perfo rm as well as th e manufacturing indus try as a who le, with relat ive profita bility declining dr astically during th e oil embargo period of th e 1970s. With th e profit crisis intensifying, it became increasi ngly difficult even to maintain pla nt and eq uipment in goo d wo rki ng order. As depreciat ion allowances did not keep pace with actua l repl acement costs, existing plant and equipment cou ld not be upgraded to best-pr actice sta ndards. Traditionally, the industry did not rely on long-term loans for investment purp oses. H owever, with th e wo rsening profit situation th e US industry 's long-term debt began to rise dr amat ically, making long-term commitments to new innova tio ns even more remote. Until 1966 the ratio of long-term debts to total externa l financing (equity-sloans) remained unde r 25 percent. H owever, th e debt to eq uity rat io, th ough low by Japan ese sta nda rds, rose to nearly 45 percent in 19 78 from 11.2 percent in 1950. A high proportion of sha reho lders' eq uity mea nt a larger portion of net income being pai d as dividend s." While net inco me declined significantly over time wit h severa l years showing negat ive income in th e 1980s, cash dividend s remained stea dy (Figure 3.7). Only during 1975 and 1976, th e two years in which capita l ex penditures excee ded $3 billion , did combined dividen ds fall to abo ut 44 percent of net income. Th is was the lowest ratio since 1938. But in 19 77 net income was $22.3 million whereas 44

CH AN GE AND CRISIS IN THE US STEEL INDUSTRY 10,000 -- --

8,000

Net income

- - Long-tenn debt - - - - capital expend~ures

6,000

- - Cesh dividends

4,000

o

c:

~ 2,000 ~ 1953 1956 1959 1962 1965 1968 1971 -2,000

-4,000

-6,000

Figure 3.7 Financinginvestment in the US steel industry Source: American Iron and Steel Institut e, Annual Statistical Report, various years

dividends amounted to $555 million. This meant that pr eviousl y earne d cash reserves were disbursed as dividends." Th e long-term debt of th e industry stood at over $5.5 billion at th e end of 198 7, having increa sed six-fold since 1950. In th e 1980s and 1990s, th e average annual lon g-term debt of th e US steel industr y exceeded $6 billion. The US steel industry has been unable to keep up with in vestment requirement s. Th e slow diffu sion of BOF and relat ed techn ologies and low financial returns dict ated th e pace of investm ent. Between 1961 and 19 70 much of the investment of about $16.5 billion went into replacing open hearths with BOFs and th e installation of a number of continuous hot strip mills. H owever, giant blast furnaces pion eered by th e Japanese to complement th e larger BOFs were not pursued by Americ an firm s. Thus moderni zation ha s tended to be piecemeal, selected new equipment oft en being retr ofitted with ob solete equipment. As a result many US plant s suffered from plant imbalances and cost inefficiencies. Even th ou gh th e annual average investm ent exceeded $2 billion, th e amount represented an average replacement rate of und er 3 percent during 1950-78 (Office of Techn ology Assessment 1980 ). On average, capital expenditures on plant and equipment varied from $1 billion to $2.7 billion per year. Th is implied a persistent gap between replacement cost and actual investm ent in plant and eq uipment. M od ern ization of th e Americ an steel industr y ha s been also limited by th e 45

CH ANGE AN D CRISIS IN TH E US STEE L IND USTRY

massive cap ital outlays asso ciated w ith incr easing econo mies of scale. The Office of Technol ogy Assessment of the US Co ng ress estimate d a tot al expe nditure of $2 8 billion or $2.8 billion a year for mod ernizati on , covering roughl y 13 8 mt of capacity. Thi s did n ot include an y greenfield cap acit y. The actual expenditure for th e last thirty years has been con sider abl y less. Steel corp or at ion s had neither th e intern al reserves nor th e market reputation to raise capital from th e market . Th e ability to invest in new technology became especia lly difficult with th e rising cost of new plants. Severa l estima tes calculat ed in th e 19 70 s show investm ent cost per ton of steelma king cap acit y in th e US to vary between $1,000 and $1,500 (see Tabl e 3.3). With rising costs, other estima tes have been higher. Assuming a minimum efficient plant size of 3. 5 mt of steel per year, th e investm ent requirement varied between $3.5 billion and $5.2 billion . Assuming further sca le advantages accrui ng from plant expa nsion, tot al investm ent requirement easily reach ed $10 billion for a single plant. Clearly thi s was out of th e reach of most steel firms in th e US. M or e recent actua l expe nditures for new plants are closer to $3, 000 per ton . Greenfield plants in Brazil and India, such as Acom in as and Vizag, spent $3, 000 and more per ton of cap acit y. Add ition ally, dom estic con sumption of steel was leveling off, further discouragin g new in vestments. The con venti on al steel -inte nsi ty index , measuring steel con sumption as a sha re of national income, shows a stea dy decline: from nearl y 100 net ton s for every $1 milli on (1972) to 58 ton s (US Dep artment of Co mmerce 19 85 ). The annua l gro wth rat e of steel-intensity use" was 0.1 percent during 1960-73 and -5 .1 perc ent during 19 73-8 7 wh ereas th e US steel con sumption growth rate during th e two per iod s w as 4 percent and -2.7 percent respecti vely (Tilto n 1990:40 , 42 ). Clearly, under th ese condition s to commit severa l billion dollar s in new techn ologies wo uld have been an irr ati on al investm ent. As an investm ent stra tegy, rounding out old mill s was a cheap er optio n. The investment cost ranged from a low of 2 7 percent to 60 percent of greenfield costs. This stra tegy enta iled outright elimina tion, replacement , and/or addition of specific pieces of equipment. For example, severa l plants in th e US shut down blast furnaces, ph ased out OHFs and repl aced th em with BOFs, an d installed new continuou s caster s in existing mills. As a result investm ent costs have been equipment-specific and included costs for inpl ant site pr epar at ion. P Greenfield plants con structed pr ior to th e ado ption of BOF s incorp or at ed sma ll-sized equipment in general with little ro om to accommod ate more recent vintages. Installing new equipment required reorganizati on of the plant, which in man y cases was not possible du e to lack of ph ysical spa ce and result ed in severe plant imb alanc es. But the cost per ton of additio na l cap acity of bro wnfield ex pa nsio n h as been less th an greenfiel d project s as much of th e internal infrastructure is alrea dy th ere.

46

CH ANG E AND CRISIS IN THE US STEE L IND USTRY

Table 3.3 Investment cost for moderni zati on and greenfields Plants/projects

Costper ton

Remarks

Information source

3.4 mt capacity 2 mt capacity, including 2nd and 3rd tier infrastructure 2 mt plant, all infrastructure 4 mt plant, all infrastructure 2 mt in 1976 dollars

Paine Webber (1990: 16) Astier (1985: 30)

($) General estimate General estimate

1,105 1,250-1,500

General estimate

2,000-3,000

General estimate

1,500-2,000

General estimate

900

General estimate

3,500

India

1,000

India

1,154

Vizag, India

3,000

lISCO, India

1,178

Kwangyang, Korea 1,000 1,132 Kwangyang

605 637

CST, Brazil

370 480 1,043

A<;ominas, Brazil

2,250 3,050

2 mt in 1985 due to project delays 2-4mt 2-4 mt (@ Rs131 US$) 1.2 mt 2.15 mt, rebuilding at existing site General estimate for 2.7 mt W2,444 billion (@ W800IUS$) 2.7 mt W1,649 billion (@ W1,0001 US$) 2.7 mt with land purchase 2.7 mt second stage 5.4 mt 3 mt slab capacity without caster 2 rnt with no caster, uninstalled rolling mills Same as above but including interest burden due to project delays

Astier (1985: 30) Astier (1985: 30) UNIDO Secretariat (1986: 23) UNlDO Secrerariat (1986: 23) UNlDO Secretariat (1986: 23) Metal Bulletin (March 3, 1988:27) Personal interview, New Delhi with RIm', August 1987 Etienne etal. (1992: 177) UNIDO Secretariat (1986) Computed from Paine Webber (1985: 1-11) pasco (1987: 6)

pasco (1987:

6)

pasco (1987: pasco (1987:

6) 6) Umegaki et al. (1985: 2) Wolters (1981: 6) Acominas, personal communication (1988)

Note a Rl N l. e Rashtriya Ispa t N iga m Ltd , th e govern me nt firm spe cifica lly cr eat ed and o pera te the Viza g stee l plant

47

to

man a ge

CHANGE AND CRISIS IN THE US STEEL INDUSTRY

Crisis-inspired restructuring: disinvestment and institutional change In response to the multifaceted industry crisis of declining profits, investment barriers, lagging technology, and increased import competition, US firms pursued a number of interrelated strategies, including selective expansion and modernization, in the 1960s and 1970s. Several new large-scale blast furnaces, BOFs, and continuous casters were installed. The boom years of 1973 and 1974 added to optimistic demand projections. As a result some greenfields were planned in addition to the two mills that were constructed in the post-war period. However, when the industry's collapse coincided with the rise in oil prices in the mid-1970s, US firms not only shed most expansion plans but pursued a prolonged process of strategic disinvestment and modernization. It also transformed the industry's governance structures by moving away from self-regulation to more state intervention. The industry not only sought protection from imports but individual firms consolidated their assets through mergers and strategically established for eign collaborations. These institutional changes were aimed at prolonging the use of obsolete excess capacity, containing the onslaught of imports, and stemming the financial hemorrhage.

Excess capacity, restructuring, and plant imbalances Two self-reinforcing elements embedded in surplus capacity can be strategically effective for political and economic action. When domestic capacity is deemed surplus because of the actions of foreign firms it is easier to find a collective solution at the political level. Government intervention in favor of domestic industry is generally sought. Second, excess capacity can be deployed to preempt competition. The threat of price wars through dumping acts as an entry barrier. In the US excess capacity arose because imports increasingly cut into the slow-growing domestic market. Paradoxically, the excess capacity in the US was a handicap rather than a defensive tool since Japanese and other producers could technologically compete with US firms. Eliminating excess capacity without jeopardizing cash flow became the basis for industrial adjustment. The post-war economic boom in the US maintained high rates of capacity utilization, despite inroads made by for eign producers. However, with the economic slowdown of the 1970s, growing technological obsolescence, and aggressive exports by Japan and the European Community, excess capacity became a serious problem in the US (Figure 3.8) . The gap between installed steelmaking capacity (or capability) and production widened significantly in the 1970s and 1980s. Persistent low capacity utilization forced American producers to withdraw output from the market. Excess capacity induced a multilayered restructuring process aimed 48

CH AN GE AND CRISIS IN THE US STEEL INDUSTRY 180 160 140

I

/ ..... \

120 c::

I

.sa; 100

\..

'," -,

I

-./

',,' ~

~

, ...... _ - ' \

~

"

"

~ 80

\,1

,

I , -, .'

e

:E

" I

I/J

"" \ />

1,,' ~'

,

,

'"

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r

60

t

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40

- - - _. Production

20

- - Capacity

O+--'---.-,.....,---.-,.....,---.--r-T--r--r-T--r-.--r-.-.--r-.-r-r-,-r-r-,-r-r--r-;r-r--r-;---.-,.....,---.-,.....,-, 1~1~

1~1~1~

1m 1m

1m1~1~

1~1~

1~1~

Figure 3.8 Excess capacity in the US steel industry Source: American Iron and Steel Institute, A nnua l Statistical Report, various years

ultimately at bringing domestic sup ply in lin e with demand (see also hl.Iallachain 1993). During 1977-85 almost 40 mt of steel capacity wa s removed (Barnett and Crandall 1986:47-8) . As a result of such capacity elimination, th e US industr y ha s been able to close th e gap between capacity and m ark et d emand . Thi s process of adju stment en ta ile d seve r a l interdepend ent, and often ad hoc, strategies. Of th e ten firm s and thirty plants involved, eleven were completely shut down, fifteen were partially closed, three were sold, and one lat er reop ened after initi ally being shut down. M ost of th e faciliti es affected were finishin g mills and onl y six of th em involved steelmaking faciliti es. Curiously, four of th e six included partial shutdown of BOFs. Th eir vintage, size, and th e basic imbalance between ironmaking, steelma king, and finishing facilities in individual plants led to their elimination. An excess cap acit y of steelmaking relative to finishin g impli es reducing th e form er or, if the market holds, expanding the latter. M ark et cond itions favored plant shutdowns and replacement of plant and equipment selectively. For exa mple, Bethl ehem 's Spa rrows Point plant added a new blast furnace in 19 78, which was cap able of producing 10,000 tons per day compar ed to three others producing less th an a third of th e new furnace. It also replac ed two 220-ton BOFs with two 280-ton BOFs and combined th em with th e existing seven open hearth furn aces. Armco' s restructuring ex perience is in structive of th e systema tic yet piecemeal respon se to techn ological obso lescence and excess capacity faced 49

CHANGE AND CRISIS IN THE US STEEL INDUSTRY

by US firms (Figure 3.9). Between 1973 and 1985 th e company halved its steelmaking capacity to 6 mt. It shut down its H ouston plant, which it had earlier upgraded by replacing open hearth furnaces wit h electric furnaces. Armco also shu t down two other EAF uni ts. H owever, removing obsolete capacity crea ted its own problems, forcing firms like Armco to find ways to rectify the imba lances among the remaining facilities. For example, by shutting down its hot strip mill in Ashland, Kentucky (a finishing facility), Armco had to transfer slabs to its Middletown plant in Ohio and reship them back to Ashland for cold ro lling (a higher value-added process). Other firms pursued broadly similar strategies, although each plant dicta ted

ARMCO's restructuring 1985

Steelmaking capacity: 1973

ToB.Omt

From 12 mt Partial shutdown (Great Lakes) Replaced OHFs with EAFs (increased capacity to 2 mt in Houston)

Closed Houston plant (1 mt, BFs, EAFs)

Closed 2 smaller EAFs

.. Increased capacity

Eliminated capacity

Transfer hot strips for cold rolling Rolling hot strip Middletown, OH, BOFs (2), OHFs (6) Coke shortage Excess rolling capacity

Transfer slabs

1983 Plan to add new 5,500 tons/day BF shelved Estimated cost: $380 m, compared to $45-00 m for relining

Figure 3.9 ARM CO 's plant imbalances and rou ndi ng-out proc ess Source: Adapted from Ho gan (19 84) No tes: OHF=open hearth furn ace; EAF=electric arc furn ace; BF=blast furn ace; BOF=basic oxygen furnace; on-oue, KY=Kentu cky

50

CHANGE AND CRISIS IN THE US STEEL INDUSTRY

specific measures depending on the state of plant and equipment and the overall balance of equipment and output. For example, National Steel found itself with excess hot metal (more blast furnace capacity relative to steelmaking) and not raw steel, consequently eliminating obsolete blast furnaces. Bethlehem Steel also pursued similar strategies by reducing steelmaking capacity at its Johnstown, Pennsylvania, mill and partially shutting its Lackawanna plant in New York state. But in the process of shutting down the steelmaking unit at Lackawanna it was left with excess coke, prompting its sale to Weirton in Pennsylvania (which had shut down its coke ovens). Other Bethlehem plants, such as Burns Harbor in Indiana, short of coke, absorbed some of Lackawanna's excess.v'

Crisis and institutional restructuring As selective modernization resulting in plant imbalances did not resolve the problem of technological handicaps, the industry sought to reorganize the institutional basis for capitalist regulation. It extended the mechanism of self-regulation by consolidating steel production enterprises through mergers. It selectively introduced new technologies by creating joint ventures with foreign companies. The industry also lobbied the government for direct assistance from the state and secured the support of labor to protect the domestic industry. This was a significant departure from the industry's longstanding institutional arrangements with both the government and labor where relationships have been distant and hostile respectively. The merger of numerous small firms in the late nineteenth and early twentieth centuries marked the beginning of a dominant American steel industry. However, most mergers in the post-war period have been desperate strategies by smaller firms for survival. Between 1950 and 1970 there were forty-three cases of mergers among steel-related firms (Federal Trade Commission 1975). Of those, only fourteen of the acquiring companies had assets in excess of $400 million. Corporate mergers in the US steel industry have not been conducive to innovation. Instead, the purchasing company, by absorbing the undervalued assets of another company, strengthened itself financially but did little for technological development. Typically, fixed assets so purchased have been disposed of to reduce debts and/or increase cash flow for the purchasing company. However, given the anti-monopoly stance of the US Department of Justice, every merger proposal is scrutinized so as to prevent increasing concentration in the industry. Often selling off certain units is a condition of the merger." But the formation of LTV Steel through acquisitions and mergers had quite the opposite effect on its technological prowess. As early as 1956 Bethlehem's merger plans with Youngstown Sheet & Tube were blocked by the Justice Department. In 1968 LTV Corporation, engaged in aerospace, defense, and energy products, absorbed Jones and Laughlin (J&L)-a steel 51

CH ANGE AND CRISIS IN THE US STEEL INDUSTRY

firm. A decade later, J&L merged with Youngstown Sheet & Tub e and shut down th e Young stown plant in 19 79 . It merged again in 1984 with Republic Steel. 26 With successive mergers LTV has becom e th e second largest producer in th e US and also one of th e mo st debt-ridden;" LTV's problems have been acute. Th ere have been severe plant imbalances and mounting debt. It s Aliquippa works was virt ually abandoned after dispo sing of th e bar mill. Th e Indiana H arbor plant near Chicago ha s been short on coke, whil e th e Cleveland facility no lon ger ha s an y cok emaking faciliti es. In addition, th e Cleveland plant has excess hot rolling cap acit y. LTV's Pittsburgh plant, integrat ed at one tim e and now burdened with idle EAFs, do es not produce steel but supplies coke to Indiana H arbor. The Buffalo, New York , plant has closed perm anentl y and th e shutdown of Youngstown plant s have created iron deficits at th e Warren, Ohio, plant. LTV Steel, despite ha ving a market share of 13 .6 percent in 1986, had a loss of over $3 billion and ha s been und er bankruptcy proc eedings for several years (USInternational Trade Commission 19 88:11-76 ). Th e compan y also had 75 percent of th e indu stry's underfunded pension claims, amounting to $2.3 billion and covering nearl y 152,000 workers (US Int ernational Trade Co mmission 198 7a: 30). Th e American steel industry as a whole represented 79 perc ent of all und erfunded pension claim s in th e US. The persistent industr y crisis and its growing severity in th e early 1980s pushed th e US industr y to form several joint ventures with international competitors (see Chapter 6 ), seek govern ment assista nce, and pr ess for labor conc ession s. Th e industr y specifically sought foreign capital and techn ology to reorganize itself. It also abandoned production as it sought for eign collaboration . Amon g th e four plants th at were to be sold as part of th e merger condition between National and US Steel were US Steel's works in Geneva, Utah, and Pitt sburg, Ca lifornia. Obviou sly thi s wa s not an attractive proposition as both plants cat ered to th e western region. Immediately following th e breakdown in th e merger negoti at ion s, US Steel in mid-1986 shut its Geneva, Utah, works and lat er sold it. 28 Ju st prior to its shutdow n, ho wever, US Steel negotiated with PO SCO of South Kor ea to finance and supply hot band s from Kor ea to th e Pitt sburg works, effectively replacin g th e Geneva plant. As self-reg ulation became increa singly difficult, th e US industr y justified govern ment protection on grounds of "unfair" for eign competition (Howell et at. 1988:510-15 ). Beginnin g in 1968, the US government impo sed Voluntary Restr aint Agreements (VRAs) to counter th e surge in imports, allegedly a result of Japanese and West European unf air tr ading practices. Th e VRA s or imp ort qu ot as were qu antitati ve limit s placed on steel imp orts and were effective until 19 74 . Th ey were designed specifically to pro vide US firm s with some respit e from for eign competition (see H arris 1994 ). VRA s were negoti at ed bilaterally on a country-by-country and product-by-product basis between th e US executive and govern ments of expo rting countries. With th e 52

CH ANGE AND CRISIS IN THE US STEEL INDUSTRY

collapse in th e US steel market and th e subsequent financi al cri sis of several companies, th e Carte r administration introduced another policy to protect dom estic steel producers from Japanese "dumping." Thi s wa s th e Trigger Pr ice M ech ani sm (TPM ) which esta blishe d a minimum floor price for imports." Thi s polic y was short-lived (see Howell et al. 1988 :520-2). The VRA s and th e TPM did provide some breathing space for th e US indu str y. By limiting imports th e govern ment allowed domestic producers to generate additiona l revenu es. The govern ment expected the indu str y to utilize th ese additiona l resources for modernization. But th e principal effect of such protectionist policies was an incr ease in dom estic and imported steel pric es (Crandall 1981 :10 3-15 ). During th e 1968-74 period pric es of US steel products ro se dramatically. From 1960 to 1968, th e period pr ecedin g th e VRA s, steel price increa ses averaged a mere 0.45 percent a year; in th e first four years of th e VRA s prices increa sed by nearly 7 percent a year (Adam s and Mueller 1990:85 ). Th e periodic extension ofVRAs help ed for eign firm s expo rt higher-grade steel products to th e US as th e agreements were ba sed on tonnage and not value. Thus in dollar terms imports have increased despit e recent declines in tonnage. Effectively, th e VRAs con stituted a market sha ring arran gement between domestic and for eign suppliers. For example, in 1968 th e value of 18 mt of tot al imp orts int o th e US was $1.98 billion , wh erea s in 19 70 th e value was $1.97 billion for 13.4 mt (Ho gan 1991:144). Similarly, th e TPM, effective 19 78-82, allowed US steelma kers to rai se th eir pric es. As a result many steel con sum ers were forc ed to look for for eign sources of steel to keep th eir costs down . Th e appreciation of th e US dollar also made it difficult to keep imports at bay. Indirect imports of steel also increased during th e TPM period. The Reagan and Bush administra tions imposed similar quotas. However, with many plants closed th ere was a new crisis, namel y, market sho rtages of several steel products. In 1982 the US-EC Steel Arr angement limited European Community shipments to roughly 5.5 percent of US con sumption of certain agreed-upon products. In 1984 Bethl ehem Steel, along with th e Unit ed Steel Workers of America, jointly filed an anti-import petiti on , ultimately securing an extension of th e VRA s to 1988, which were further extended to 1992. During thi s period US steel pr ice increa ses were moderat ed by a depressed economy, imports, and competition from minimills. As bl ast furnac e technology is well suited for th e pr oduction of quality semi-finished steel products such as slabs, th e phasing out of all integrat ed steelmaking capacity on th e west coa st creat ed supply bottlenecks. By 1988 sho rtages of semifinished steel products were acute in th e west coast region . Between 198 3 and 19 88 th e western region's sha re of US imports of semi-finished steel doubled from 15 percent to 32 percent (US Int ernational Trade Commission 1989a :5-2 ). Ironically, a policy of keeping out imp orts ha s been accomp anied by exemptions . For exa mple, steel compani es in th e 1980s demanded th at imp orts of semi-finished products be incr eased above th e qu otas." Thi s 53

CHANGE AND CRISIS IN THE US STEEL INDUSTRY

reflected the plant imbalances that arose from disinvestment and the opportunistic strategy of processing imported slabs. Labor from the US steel industry was also inducted into the restructuring process. In order to downsize and cut costs firms retrenched workers and demanded wage concessions. Since the creation of the United Steel Workers of America (USWA) in 1936, American labor has made substantial gains in wages and benefits. The USWA has also effectively negotiated work rules and limits on subcontracting. In the 1980s, however, international competition and the lack of major investments by US firms put American workers on the defensive (Moody 1988:1-5, 177-8, 312-13). Under the threat of plant closures concessions on wages, benefits, work rules, and the increased hiring of non-union labor have been extracted from steel unions. USWA, contrary to previous practice, no longer bargains with the industry as a whole, but negotiates contracts with each company separately." This has ultimately weakened pattern bargaining, a process that had previously provided some security to steel workers as a whole. Steel industry restructuring undertaken by US firms has resulted in the loss of 300,000 jobs since 1980. The industry also demanded wage concessions to keep plants operating. However, many steel firms shut down plants after extracting concessions from labor (Moody 1988:312-13; Markusen 1989:28). In the mid-1980s Wheeling-Pitt and LTV first negotiated concessions from labor, then filed bankruptcy, and subsequently sought additional wage and benefit cuts. Many affected workers remained unemployed for prolonged periods or have been unable to find full-time jobs. Those who did find jobs outside the steel sector have tended to earn far less than their former wages with fewer or no benefits (Bluestone and Harrison 1982:57; Deitch 1987; Harrison and Bluestone 1988:63-5). Some workers voluntarily chose and others were forced into early retirement. However, many of these employees found that their companies, such as LTV, could not honor their pensions and other benefits. The industry's restructuring measures have produced some of the intended results. For example, labor productivity increased faster than wage growth. From 1950 to 1980, US wage rates in the steel industry grew much faster than productivity: 208 percent versus 72 percent (base year 1950). However, since then productivity growth has outpaced wage growth. From 1980 until 1987 the hourly wage rate in real terms decreased by 7 percent, while physical output per worker improved by 95 percent (computed from American Iron and Steel Institute, various years)." At the same time, the number of hours worked per week has increased by 15 percent. Thus the decline in wages has been accompanied by the intensification of work. This near doubling of productivity in the 1980s has been a result of large-scale rationalization of the industry and the selective infusion of new technology in existing steel production facilities. The slow diffusion of new technology marked the beginning of a long 54

CH ANGE AND CRISIS IN THE US STEEL INDUSTRY

restructuring process that included corporat e and plant rationalizations. Competitive pressur e from global producer s in th e context of excess ob solete cap acit y induced a wid e ran ge of rationalization steps. They included th e strategy of disinvestment , reorganiz ation of production capacity through plant shutdow ns, partial modernization, and merger s. Restructuring also entailed institutional changes as th e industr y was no lon ger capable of regul ating itself. It sought govern ment protection and called upon its workers to lobby th e govern ment. Th e con vergenc e of lab or 's int erest with that of industr y man ager s reflect ed a new kind of industrial rel ations, an in stitutional arran gement th at has been formalized very effectively in th e new genera tion minimills (see Chapter 7). N otwithstanding th e painful adjustment process, th e industr y crisis had some redeem ing features. It forc ed steel companies to bring cap acity into line with market demand and to cut costs. It also introduced new plant and equipment selectively, th ereby reju ven ating th e int egrat ed segment of th e US steel industr y in a limited way. Conclusion Th e evolution of th e US steel industr y h as been complex . From a po sition of glo bal dom in anc e, the Amer ican industry in the post-w ar period faced con sider able technolo gical challenges. Th e development of steel technolo gies ha s been gea re d t ow ard reducing co st s an d increasing qu ality. As a con sequence, new proc esses, using different raw materials, emerged. Ca pitalist competition notwithstanding, th e US industr y stru cture was not conducive to ad opting po st-war steel innovations. The American industr y, dominated by US Steel , w as lar gely insulated from th e wo rld economy. The industry's lat e start in adopting th e BOF was dict at ed by past investm ents in OHF and incr emental inn ovat ion s introduced for th e OHF. Becau se it was thus on a slower technological traj ectory, the US indu stry was susceptible to competition ba sed on newer technologies. The industr y's obsession with pric e stability through market-sharin g arra ngements for eclosed the option of deplo ying more efficient technologies, even if varia ble costs under th e older OHF technology were higher th an newer BOF technolo gy (Borr us 19 83:78 ). It was a stra tegic choice not to utiliz e additional capacity. Fallin g behind technologically, th e industr y foun d itself sh ort on cash for cap ital investm ent. The imp ending pr ofit crisis exa cerba te d th e situa tio n, gene rating obso lete , ex cess cap acit y. Restructuring of th e industry w as inevitabl e. The US industr y opte d for perman ent cap acity withdra w al and selectively repl aced older technology w ith newer ones. Th e industry actively courted th e govern me nt for protecti on and sta te largesse. It also mobil ized orga nized labor to cut costs and meet th e imp ort challenge. Th ese stra tegies postp on ed pr ice competit ion , slowed down th e diffu sion of new technologies, an d creat ed th e spa ce to diversify int o non-steel bu siness. Th e industr y has adjuste d to new econo mic condit ion s. There is a lean er 55

CHANGE AND CRISIS IN THE US STEEL INDUSTRY

and meaner US integrated segment. But it has been technologically defanged. There are very few US technology suppliers today, despite the historical leadership of the US in steelmaking technology. The industry, following its conservative outlook, has avoided large-scale research and development expenditures. The depressed market conditions further eroded its technological lead. In 1984 the US steel industry spent $390 million on research and development, representing approximately 0.6 percent of sales, whereas the manufacturing average was 2.6 percent (US Congress 1987:31). On the other hand, Japanese R&D expenditures have been 1.5 percent of sales, exceeding US expenditure in both absolute and relative terms (Japan Iron and Steel Federation 1987:18,29). In 1993 Nippon Steel had 2,800 personnel in R&D (non-steel business included) compared to an estimated 800 people in the entire US steel industry. It thus comes as no surprise to find American technology firms withering away. Mesta Machine, a worldrenowned US-based supplier of rolling mills, which supplied equipment even to Japanese firms, went bankrupt due to low home demand (plant visit, Keihin Works, Nippon Kokan, Tokyo, October 1987). The restructuring of the US steel industry has been intricately related to changing innovations and institutional responses to those changes. In failing to innovate, the US industry not only failed to meet the import challenge but in the process it also gave up its technological leadership. As the next chapter shows, late industrializing countries, such as Japan, not only relied on the state to mobilize investment capital and acquire technologies from abroad but they consciously decided to remain on a higher technological trajectory. The Japanese restructuring is thus expected to be of a different sort: a virtuous cycle in which a high investment rate in new technologies, rising productivity and profitability, and reinvestment are likely to dictate the evolution of the industry. The resulting differences in technological trajectory are expected to contribute to the global reorganization of production capacity.

56

4 TECHNOLOGICAL CHANGE AND RAPID INDUSTRIAL DEVELOPMENT IN JAPAN AND SOUTH KOREA

Introduction The post-war experiences of th e Japanese and Korean steel industries have been vastly different from that of th eir American counterparts. As this chapter demonstrates, these two East Asian economies exhibited an industrial robustness rarely witnessed in history. Both countries cashed in on new steel technologies while the US industry initially opted for proven technologies and later struggled to cop e with technological obsolescence. In contrast, Japan and Korea aggressively invested in and diffused modern technologies by adopting th em rapidly. At the heart of this technology strategy lay th e unflinching support of their governments, a form of capitalist regulation that ran counter to the self-regulation practiced by th e US industry. By being on different technological traj ectories, both Japan and Korea decisively altered the global distribution of capacity. But the continuing evolution of the Japanese industry also indicates the crisis inherent in capitalist industrialization. The systemic nature of th e problem suggests that, no matter what the form, capitalist regulation has its limits. This chapter highlights the role of the late industrializing state in orchestrating investment, strategically acquiring technologies for capitalist industrialization, and attempting to resolve the crisis of overcapacity. The chapter is divided into three main sections. The first provides the investment and financial background to state-led development of the steel industry in the two countries. The second section pr esents the strategic acquisition of modern technology and its diffusion in Japan and Korea. The final section discusses the nature of the industry crisis in Japan, the response of the state, and the industry's implementation of specific measures to resolve it.

57

CHANGE AND DEVELOPMENT: JAPAN AND S.KOREA

State-led late industrialization

The background Japan's decision to give priority to the development of its steel industry has been responsible for rapid industrial change. The state underwrote the supply of steel, an intermediate output used by virtually all manufacturing sectors. State-orchestrated industrialization has long been a strategic policy. During the Meiji era (1868-1912) transportation and communication infrastructure were given national priority along with the development of the iron industry. To develop the steel industry the Japanese sought best-practice standards and enthusiastically embraced foreign technologies. Much later, Korea carefully emulated the Japanese practice of selectively licensing foreign technologies and ensuring their rapid adoption. By centering its economic development program around heavy industry the Korean government also gave priority to the development of the steel industry. Notwithstanding similar state strategies and technological evolution, the rapid expansion of steelmaking capacity in Japan and Korea took place at different times and rested on different institutional arrangements. The Japanese industry has a much longer history than Korea's and it experienced its greatest growth between 1955 and 1970. Modern steelmaking in Korea, though introduced during Japanese occupation (1910-45), was virtually started from scratch in the early 1970s, by which time the Japanese industry had already entered its mature phase. Moreover, in Japan the limited government ownership of the industry ended in 1950, before the breakup of the reconstituted Yawata Group. On the other hand, the giant Korean steel company pasco has remained in the hands of the government since its inception in 1968. The steel industry structures in the two countries are also very different. The Japanese industry is characterized by an oligopolistic structure with five to six large firms competing vigorously for market shares. In Korea the industry is virtually monopolized by the government company. In 1995 the top five Japanese firms produced 62 percent of the country's crude steel output, with Nippon Steel, the world's largest steel firm, controlling over a quarter of the Japanese market. In 1970 Nippon Steel was created by a governmentsponsored merger of two independent steel companies. Korea's pasco controls nearly 64 percent of the Korean market, with much higher shares in high value-added products. Structural differences aside, both countries illustrate a mode of capitalist regulation in which the state patronizes rapid industrialization by strategically acquiring modern, large-scale technologies, and coordinating investment. In the Japanese case this approach dates back to the pre-war period. The largescale Kamaishi integrated ironworks was a product of state intervention (Morris-Suzuki 1994:74-5). The more noteworthy case was the state-owned Yawata integrated steel works set up in 1901. The Japanese government relied 58

CHANGE AND DEVELOPMENT: JAPAN AND S.KOREA

on German technology to lay the foundation of a modern steel industry. In 1933 Yawata produced under a million tons of steel products, which represented 35 percent of the Japanese market (Nippon Steel Corporation 1973). Capitalist regulation in Japan and Korea went beyond state-led industrial production. In Japan it also included subsidizing private production and strategically streamlining steel operations through mergers. In the 1880s several Japanese state-owned enterprises were sold to private firms at ridiculously low prices. For example, the Kamaishi Works was sold for ¥12,600 after the government had spent nearly ¥2.2 million to build it (Morris-Suzuki 1994:78). In 1934 Yawata was merged with six other companies and later sold off to private parties, a practice that the US government also exercised with its war-related steel mills. The state was even more involved in Korea. It established a steel company, arranged financing from domestic and foreign sources, and managed the enterprise from the very beginning. More importantly, the Korean state regulated the industry by barring private firms from setting up large-scale integrated mills and orchestrating industrial transformation by undertaking sustained investment in the steel industry.

Waves of investment for capacity expansion Critical to capacity expansion has been sustained investment. In the immediate post-war period, the Japanese government, in alliance with private business, pursued an aggressive steel industry expansion program. There were three "modernization and rationalization" plans for the Japanese industry, beginning in 1951 and ending in 1973. With the banning of loans and subsidies by the US occupation forces in the immediate post-war period, major expansion plans were drawn up by the Japanese government to rationalize the industry. In 1960 Japanese investment stood at ¥215 .2 million, which increased by 470 percent by 1965 (Ministry of International Trade and Industry, obtained from Japan Iron and Steel Federation, Tokyo, October 1987). Investment in the subsequent five-year intervals increased by 215 percent by 1970, 105 percent by 1975, and 47 percent by 1980 (¥11,686 billion). Sustained investments more than doubled crude steel capacity to 28 mt by the end of the Second Modernization Program in 1960. Capacity again doubled by the end of the Third Program (1956-60) to 53 mt, and again by 1972 to 124 mt (see Sato 1987). By this time Japan surpassed the US in steel production. Similarly, Korean crude steel capacity doubled in 1973, the year in which Korea's first modern blast furnace was fired. It doubled again in 1976, 1979, 1986, and 1992. Today Korea's capacity stands at nearly 40 mt. Investment in Korea rose from a mere W 0.53 billion (about $1.67 million) in 1970 to W 77 billion in 1985 (equivalent to $87 million). In 1996 it stood at W 604 billion (see Figure 4.1).1 59

CHANG E AND DEVELOPMENT: JAPAN AND S.KOREA 700

600

500

100

1_

O+-"-=;:=;;=:::::;=---'--r--.---.---.-~~~~...,...-...,...-..--.........,,.--,~~--.-~~--.--.--. 1~

1~1~1~1~1~1~1~1~1~1~1~1~

Figure 4.1 Korean investment in the steel industry Source: Kor ea Indu strial Bank , Survey in Facility Investm ent (obta ined from Kor ea Institute of Science and Techn ology)

Both countries invested heavil y in th e steel industry to expand capacity and transform th eir economies. The sustained incr ea ses in investm ent were also du e to technological change. As we ha ve seen, th e general tr ajectory of technological change in th e industr y h as been toward lar ger equipme nt, taking ad vantage of econo mies of scale. As a result , steel production became more capital-inten sive and correspondingly demanded larger outlays on plant and equipment. To keep abreast of new innovations high investm ent wa s m and atory. However, more th an gove r n me n t st im ulus throu gh expans iona ry pol icies, it wa s national int erest that justified East Asian steel production (see Woo 1991:133-5; Sheridan 1993:24-9, 132; Williams 1994:66). Th e pace of investm ent has been in line with th e ra pid po st-war dem and in Japan and Korea . The post-war recon struction of Jap an , th e Kor ean War, th e Vietnam War, an d th e ex port-or ient ation of both Jap an and Korea suppo rted th e heavy investm ent pro gram. The wave of investm ent wa s selfgenera ting in a virtuous clo sed loop fashion (see Cha pter 2 ). A high rat e of investm ent led to technological development, resulting in competitiveness. With expan ding domestic an d globa l dem and, a high rate of cap acity utilizati on was maintained, brin ging down unit opera ting costs, and incr easing profitability. Hi gh pr ofit s led to further investm ent.

60

CHANGE AND DEVELOPMENT: JAPAN AND S.KOREA

Financing the steel industry Both Japan and Korea as late industrializers licensed foreign technologies. They also established institutions best suited for the acquisition and diffusion of modern know-how. First and foremost the state underwrote the steel projects by giving high priority to the industry. Second, it adopted a policy of rapid investment by mobilizing resources. The state used policy instruments such as preferential credit and infrastructure support to create steelmaking capacity. Third, it encouraged technological modernization by facilitating the importation of foreign know-how. The state often bargained with foreign suppliers on behalf of its national producers. From the demand side the state ensured rapid economic growth using a variety of macroeconomic policies . Most importantly, the state encouraged international competitiveness by seeking out state-of-the-art technologies.

Financing the Japanese industry Fearing a "weak" Japan the US occupation force reversed its policies to break up Japanese industrial conglomerates and reduce state control in Japan. With the impending departure of the Allied Powers, the Japanese government in 1950 focused on steel expansion as a means to economic reconstruction (Yamawaki 1988:281). The Japanese state regrouped, creating a modified version of its pre-war state-industry-banking nexus (Nakamura 1985:56-7). This institutional arrangement was instrumental in mobilizing largescale extern al financing, as opposed to relying on internal retained earnings and shareholders' equity as in the US . Based on infant-industry and dynamicefficiency grounds, the state subsidized coal prices and protected the steel industry through tariffs (Shinohara 1982) . It also orchestrated a massive investment program relying on long-term credit. The Japan Development Bank was a leading agency in channelling resources to targeted industries such as steel. The financing of the Japanese steel industry has been largely carried out with long-term bank loans. In subsequent years, as the industry prospered internal funds became more important for investment. There were three major rationalization and modernization plans beginning in 1950 and ending in 1973 (Table 4.1). With the advent of the Korean War in 1950, Japanese production by 1955 experienced a "windfall boon" as "special procurement" by US forces injected nearly $3-56 billion (Tsuru 1994:57). Both steel and auto industries benefited from this extern al demand, raising the industries' income (as a share of equity) from 5.4 percent in 1949 to 30 percent in 1951. The Ministry of International Trade and Industry (MITI) was instrumental in facilitating and coordinating investments among the six major privately owned firms. The Japanese government devised various ways to raise capital for the 61

CHANGE AND DEVELOPMENT: JAPA N AND S.KO RE A

Table 4.1 Post- war developm ent of the Japanese steel industry

Ist Rationalization Plan (l951-5) 2nd Rationalization Plan (1956-60) 3rd Rationalization Plan (1961-73)

Total loans: 52% Long Term Credit Bank: 25% Other banks: 20% Own funds: 23% Total loans: 45% 28.2 mt cumulative capacity Long Term Credit Bank: 15% Total investment ¥622.7 billion Other banks: 27% Own funds: 31 % 127.7 mt cumulative capacity Total loans: 37% Long Term Credit Bank: 8% Total investment ¥5,543.5 billion Other banks: 27% Own funds: 48% 11.3 mt cumulative capacity Total investment ¥128.8 billion

Sou rces: Adap ted from Kawahi to (1972); Vestal (1993 :119, 122 , 12 6); and person al int erviews with j ap an Iron and Steel Federat ion and Lon g Term Credit Bank of j ap an , Tok yo, November 1987

industr y. In 1952, th e Ministr y of Fin anc e identified four sectors, including steel, for concessionary loans. Fin ancing wa s mad e po ssible in part by th e indu str y through govern ment tax breaks, accelerated depreciation, and other fiscal incentives. Th e allocation of cheap loans by th e govern ment to th e industr y signa led th e pri vate banks to lend money to th e industr y as well. Other incenti ves for mobilizing investm ent resources included tax-deductible export income. But one of the mo st ingeniou s wa ys the government encouraged th e industry to invest in new capacity wa s its liberal depreciation policies. In some instanc es 50 perc ent of equipment purchases could be depr eciated in th e first year (Yamawaki 1988:286-8). However, th e bulk of th e investm ents, nearl y 45 percent, came from banks (Vestal 1993:119). Th e long-term credit banks pro vided nearl y 25 percent of financing for th e First Rationalization Plan of 1951-5 (over ¥ 31 billion) . Comme rcial banks, at th e behest of MITI, contributed another 11.2 percent at preferential terms (Kawahito 1972:27). Und er th e Second Pro gram nearly 31 percent of investm ents were met from int ernal sources, an increase of 7 percent from the first pro gram, while the share of government and commercial bank loans fell to 15 percent. A quarter of th e total investment fund wa s secured from international agencies, tru sts, and insurance companies. The Kor ean War boom attracted capital to th e industry in th e form of stocks and bonds, with nearly 25 percent of total investm ent in th e first two plan s. The first rationalizati on program generated sufficient internal resources to finance the second and subsequently th e third program. Stocks as a share of financing incr eased to 27 perc ent in th e third program (Kawahito 1972:41, 59). The importance of long-term debts, however, did not wane. As the government underwrote mo st of th e loans th ere wa s sufficient room to manipulate interest rates. The control of banking acti vity by th e Finance Ministry pu shed many Japanese banks to compete for and expand th eir loans 62

CHANG E AND DEVELOPMENT: JAPAN AND S.KO REA

to tar geted industri es. It also ensured th at savings depo sited in th e po stal system were ch annelled into heavy industr y investm ent (Jo hnso n 1984:20611 ). The Lon g Term Credit Bank of Jap an was specifically esta blished to pro vide long-term loan s to targeted firm s in targeted indu stries, such as Ni ppon Steel Co rpo ra tion and Toyot a. As one banker not ed: Th e mech ani sm is very, very goo d. Jap an' s average savings rat io aga inst disposabl e per son al incom e is between 20-25 percent. Even if th e rat e was 2 or 3 percent th e peopl e wo uld still dep osit th eir mon ey in banks. Th e savings by th e genera l public is not relat ed to th e interest rat e. We issue five-year bonds and collect th e mon ey from the public. At th e same time the city banks purchased our bonds an d debentures from us. With our bonds th e city banks can obta in mon ey from th e central bank [Bank of Jap an]. This mon ey in turn is used to mak e sho rt-term loan s. But by bu ying our bonds th ey are effectively obtai ning lon g-term fin anc ing from us for th eir client s as well. So we basically length ened th e sho rt-term loan . We are wo rking together to grow with indus tria l corpor at ion s. (Perso na l interview with Lon g Term Credit Bank, Tok yo, Octo ber 1987) Even when firms issued sha res th ey were purch ased by banks, thus opening up ano ther avenue of lon g-term lending. With th e gove rn ment-contro lled sprea d under 1 percent th e effective lending rat e for lon g-term financ ing was kept low, thus susta ining investm ent s. Th e govern ment not only influenced th e pace of investm ent in th e industry but also indirectl y suppo rted th e developm ent of related industri es, such as electrica l an d n on-electrical mach inery an d shi pbuilding . By m ob ilizin g resources, th e gove rn ment laid th e foundati on for self-susta ining gro wth, permitt ing th e steel industry to be ind ependent of gove rn ment financ ing of steel proje cts. By th e end of th e th ird pro gram, th e Jap an ese industr y h ad mobil ized nearl y 50 percent of its own fund s, tw ice th at of th e first plan. Thus financing was not a major bottleneck as th e Jap an ese industry was profitable during th is period of rap id growth. Govern ment-spo nso red, debtled financing of investments rem oved any barrier s th at typic ally might have been found in an underd evelop ed cap ital market.

Fina nc ing the K orean industry The Kor ean gove rn me nt h ad an even grea te r impa ct on th e creat ion of its steel industry. The outco me is all th e mor e rem arkabl e since Jap an h ad gai ne d signifi cant opera tio na l ex perience at its Yaw at a Works whereas th e Kor ean govern me nt h ad virtua lly n o exposure t o lar ge-scale industria l pr oject s. The Kor ean gove rn me nt found inge nio us method s for mob ilizin g 63

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resources, initially through war reparation funds from the Japanese and lat er through bargaining with equipment suppliers and multilateral aid donors. However, like Japan, Kor ea also relied on long-term loans subsidized by th e government. Since the banking system was largely state-controlled and th e steel industry virtually a government monopoly th ere were few institutional impediments to securing finance. With tight control over foreign exchange and bank credit th e Kor ean state dir ected investment toward targeted sectors and "[herded] bu sinesses by [manipulating] the financial system" (Woo 1991:172). Kor ea's steel proj ect attracted significant loan capital, both domestic and for eign, because of th e industry's strategic importance in th e region. Th e Japanese government had alr eady decid ed to move into non-polluting, high-technology industries as part of its industrial upgrading program. Extending loans and technical assistance to Kor ea was one wa y to restructure th e steel industry in th e region. However, POSCO's reliance on foreign loans declined significantly even as it undertook massive expansion . Th e initial success in absorbing foreign technologies created a technologically efficient firm, leading to an ability to rais e capital internally and from the domestic financial market . Building a modern steel industry in Korea was a major objective of President Park Chung Hee. During his first years in office in th e early 1960s, Park approached international lenders to finance an int egrated steel mill, but th e plans were rejected by int ernational lending agencies as too ambitious. In 1968, a consortium of companies from th e UK, France, West Germany, and Ital y was formed to build an int egrated mill. However, negotiations broke down and this proj ect was abandoned. Th e same year, the US Export-Import Bank was also asked to finance the steel proj ect, but rejected th e plan. According to on e US official: "both AID [US Agenc y for International Development] and the [World] Bank had some reservations about assigning a high priority to th e iron and steel proj ect " in Kor ea (Shorrok 1985:28). This rejection was based on th e static comparative advantage argument and th e perception that Kor ea "could never master th e technology" (Woronoff 1983:158). Th e World Bank and others also indicated conc ern about Kor ea's ability to repay foreign loans and about th e large capacity of th e plant relati ve to th e Kor ean economy (see Stern et at. 1995:163-5). A third attempt was made to secure foreign loans and this time Park's regime succeeded in securing Japanese aid. In th e early years of Park's rule, th e US government pr essur ed Kor ea to recognize Japan diplomatically. Although considered political suicide at th e time, recognition of Japan allowed Park to maintain the public posture of market liberalization, diversify global linkages, and ultimately adopt Japan as a model for deepening Korean industrialization. Th e US, for its part, desired a division of labor that would involve Japan in East Asia (see Cumings 1987; Yamazawa 1987) as a leading partner. At th e same time, surplus capital 64

CHANG E AND DEVELOPMENT: JAPAN AND S.KOREA

accumulated by Japan during th e Kor ean War would ostensibly find an outlet in South Korea. Despite significant opposition from th e Kor ean public, th e Japan-Korea Normalization Treaty of 1965 was signe d. Park demanded war reparations (Property Claim Funds) from the Japanese as part of the Normalization Treaty. In this way he not onl y deflected some of th e public outcry but was abl e to garner about $500 million from Japan as war-related compensation. Th e Kor ean government succeeded in marshalling sign ificant extern al resources to finance its steel proj ect . All of th ese funds were granted to Kor ea without th e standard controls of th e World Bank or other int ernational bankers. This meant that th e Kor ean state was free to choose technology, size and location of plant, and product composition. In 1969, th e governments of Japan and Kor ea and a consortium of Japanese steel companies headed by Nippon Steel agr eed on the financing and technical assistance for a steel mill. Th e plan was to construct an int egrated steel mill in th e southern coastal village of Pohang. Of the $500 million coming from Japan about $140 million was ultimately pumped into th e Pohang proj ect (Sunoo 1989:88). A loan of $123 million was later negotiated with Japan. Since the steel proj ect was a top priority of th e Korean government, resources for th e steel mill were given priority over other proj ects using both domestic and war reparation funds . In quick succession several important decisions were made by Presid ent Park. In 1967 he chos e a retired military general, Park Tae Joon, to lead th e steel proj ect . H e arranged $30 million from the war reparation funds and another $50 million from Japan's ExportImport Bank. Thus virtually all start-up funds for pasco were arranged from Japanese sources. In 1968 th e state-owned company pasco was established. In 1969 technology suppliers were identifi ed . The "Steel Industry Promotion Law" of 1970, valid for ten years, was pass ed, granting pasco access to long-term, low-cost for eign capital, reduced pric es on electricity, discounts for rail transport, and limited foreign competition at home (Amsden 1989 :297). Th e law was extended for another twent y years but ultimately discontinued in 1986. The construction of th e first phase of th e Pohang plant was completed between 1970 and 19 73. The steel industr y received a further boost from th e H eavy and Chemical Industrialization (H CI) Program (19739), designed to shift th e Korean economy away from light industry and fost er capital accumulation on a deeper scale (Auty 1992) . By 1983, three expansions had been undertaken, rai sing th e total capacity of th e Poh an g plant to 9.6 mt from its initial 1.03 mt in 1973. In 1981 pasco announced that it would construct a second integrated plant at Kwangyang on the southwestern coast. Despite initial financing problems th e Korean st ate onc e again succ essfull y mobilized resources. pasco wanted to continue its relationship with Japanese steel companies; however, Japanese equipme n t suppliers w er e no longer inter ested in supplying technology to a growing competitor. pasco now captured 56 65

CHANGE AND DEVELOPMENT: JAPAN AND S.KOREA

percent (1.2 mt) of the imported steel market in Japan (McCulloch 1987). Thus POSCO was forced to look elsewhere for nearly $500 million in foreign credits, almost 20 percent of the $2.7 billion needed for the first-phase construction of the Kwangyang mill. The reluctance of Japanese suppliers spurred a search for alternative technology sources. This response had its intended impact. When Japanese suppliers realized that POSCO might purchase the equipment from other (West European) suppliers, they resumed aggressive competition for the contracts against European companies (personal interview with Voest-Alpine, Seoul, October 1987). Ultimately, the Japanese could only win a contract for hot strip mills. In this global competitive environment POSCO was able to secure low-cost loans, with interest rates ranging from 6.75 percent to 6.95 percent and repayment periods between eight and eleven and a half years (Enos and Park 1988:21516; Innace and Dress 1992:153-5).2 POSCO's autonomy combined with a sluggish demand for steel equipment world-wide allowed it to successfully mobilize financing and technology," Indeed, the competition among equipment suppliers for contracts with POSCO became so fierce that Korea rejected some subsidies that were offered by suppliers because it was feared that these subsidies would create problems with the General Agreement on Tariffs and Trade (GATT). Shorrok (1985:40) adds that a "disagreement between the UK and South Korean governments [arose because] the Koreans had refused government to government aid to reduce the interest on the deal for fear of stirring up trouble with the US." For POSCO, obtaining easy repayment terms was not the problem. Rather, the company had to ensure that its competitors did not interpret POSCO's access to low-cost loans as "unfair." It was of course not easy to mobilize resources from abroad, given the scale of the project, the reservations of foreign lenders, and Korea's lack of a proven record in steel production. However, the government guaranteed loan payments and several lenders including the US EXIM Bank entered the fray. What is evident from Table 4.2 is the increasing importance of domestic capital. The share of foreign capital declined from 64 percent (Pohang's second stage) to 17 percent (Kwangyang's fourth stage). The ability to generate internal funds was facilitated by policy funds. These were resources mobilized from banks and specifically targeted for industrial projects. The steel industry secured funding in conjunction with the Heavy and Chemical Industries Program (1977-81) when over 30 percent of total domestic credit fell under policy loans (Kang 1994:144). Maintaining low interest rates relative to the market (the curb rate) helped the steel and related industries significantly. In fact, real interest rates for policy loans were mostly negative until 1982. By this time the Korean steel firm had become highly profitable and hence could easily rely on its own funds for investment. Having successfully obtained financing and technology from both Japanese and European suppliers, the site preparation for Kwangyang Works was 66

CH ANGE AND DEV ELOPMENT: JAPAN AND S.KOREA

Table 4.2 Financing POSCO 's mills

lncreCompletion mental date annual capacity Pohang mill Stage 1 Stage 2 Stage 3 Stage 4 Total

1.0 1.6 2.9 3.6" 9.6 b

Kwangyang mill Stage 1 2.7 Stage 2 2.7 2.7 Stage 3 Stage 4 3.3 Total 11.4 Total

23.3 d

Early completion (days)

07/1973 05/1976 12/1978 05/1983

54 31 144 152 380

05/1987 07/1988 12/1990 10/1992

57 110 58 28 253

Construction costs ($ million) Domestic funds c

Foreign capita!"

Total costs

Cost per ton

123 199 618 945

(41) (36) (45) (53)

178 (59) 348 (64) 766 (55) 839 (47)

301 547 1,384 1,784

292 348 477 496

1,394 (74) 893 (79) 2,362 (77) 1,888 (83)

479 (26) 236 (21) 725 (23) 374 (17)

1,873 694 1,130 418 3,087 1,143 2,263 686

634

Sources: PO SCO Pr ess Releases, va rious yea rs ; Kan g (19 94 :16 6): Poh a ng Ir on and Stee l Com pa ny (n. d.); plant visits, Poh an g and Kwan gyan g, August 1995 Notes a In two phases b After completin g stage 4 in 1983, 0.5 rnt was increment ally added c Percent of total costs in par enth eses d By 1 995 a n a dd itio na l 2. 1 rnt in cr em en tal capacity was ad ded (D ' Costa 19 9 8a )

initi at ed in 1982. Within fift een years, with four stages of construction each with rou ghl y 2 .7 mt capacity, Kw an gyan g' s tot al cap acit y stood at 11.4 mt . An unu sual source of financing has been cost savings in con struction. Like its pr ed ecessor at Pohang, every stage of con struction at Kw an gyan g wa s completed ahead of schedule (Table 4.2 ). In th e 19 70s wh en unit con struction costs were estimated to be $4 00-$500 per ton , Pohang' s first stage wa s completed at $287 per ton . Th e savings on capital investm ent for stage on e wa s roughl y $100 million. Similarly, wh en construction costs ro se to $1,500 per ton of capacity in th e 1980s, pasco ex pen ded onl y h alf as much. Alth ou gh precise estima tes ar e hard to come by, it is easy to ga uge th e hu ge savings mad e by completing pro jects quickly. Institutional response to new innovations Aside from mobilizing finances, the Japanese and Korean governments actively sought to dictate the term s and condition s of techn ology tr an sfer. Using various instrument s, th ey negoti at ed w ith for eign suppliers for affor da ble modern technologies. There was, ho wever, a notable differenc e between th e industr y 67

CHANGE AND DEVELOPMENT: JAPAN AND S.KOREA

structures of Japan and Korea. The Japanese government took advantage of the domestic competitive environment bequeathed by the US. Thus the breakup of Japan Iron and Steel Company in 1950 into Fuji and Yawata created an industry structure with five or six large firms of roughly equal size. With few opportunities for monopolistic behavior the state was able to diffuse recent innovations widely. The US industry was also characterized as an oligopoly but it did not exhibit an innovative approach. In Korea the institutional arrangement was different. Given the severe entry barriers associated with large-scale, capital-intensive projects, the steel project was conceived as a monopoly from the beginning. However, as it will be shown, the Korean state enterprise pasco was neither technologically conservative nor a rent-seeker. Like Japanese firms, pasco pursued an aggressive technology strategy, seeking the best industry standards already set by the Japanese themselves.

Technology acquisition strategy in Japan and Korea In orchestrating the development of the steel industry, the Japanese government, through MITI, targeted the steel industry through tax exemptions, special depreciation rates for those purchasing new equipment, subsidies for corporate research, and infrastructure development. It also controlled technology flows using the 1950 "Law Concerning Foreign Capital" for technology licensing. By favorably allocating foreign exchange MITI encouraged the imports of foreign steel technologies. Between 1950 and 1957, forty-two Class A steel technologies were directly imported by firms (Yamawaki 1988:284). This doubled by the end of 1965, and rose to 136 during the 1966-73 period. Virtually all the top Japanese steel firms in the 1950s imported technologies from North America and Western Europe (Vestal 1993:139). In addition to encouraging the acquisition of modern technologies, MITI also intervened to keep royalty payments low by playing off one supplier against another as the stock of foreign know-how increased. It coordinated technology imports to avoid duplication and checked firstcomer advantages by initially staggering imports and then ensuring rapid diffusion. For example, only one firm was permitted to license the basic oxygen furnace (BOF) technology from a foreign supplier and another firm to sublicense the technology to domestic firms (Morris-Suzuki 1994:191). In this way many firms would also have equal access to foreign technologies (Lynn 1982:83). By speeding up the diffusion process, MITI reduced Japan's dependence on imported scrap, which was used with the older open hearth furnace. Maintaining a competitive industry structure was also critical to the technology diffusion process. As the major Japanese firms were more or less of the same size there was competitive rivalry on the one hand and sharing of information on the other. Both supported capacity expansion, in the first instance by capturing market 68

CHANGE AND DEVELOPMENT: JAPAN AND S.KOREA

shares through investment and in the second instance by researching and following up investment programs of rival firms. Thus, during the Second Rationalization Plan the construction of several large blast furnaces by the Japanese was a response to investment made by rival firms (Yonekura 1990:221). With no dominant industry leader, the industry structure in Japan was not only conducive to the adoption of recent innovations but the competition for market shares led to higher production capacity. With a high interest burden due to reliance on loan capital, financial solvency depended on high market shares and only then was an investment strategy in new, large-scale technologies a viable response. Following the Japanese approach, Korea also adopted large-scale, modern technologies. Although the very presence of a powerful Japanese industry created a psychological barrier, the Korean government could exploit this to its advantage. By extracting reparation funds and directing them to the steel project, the Korean government obtained both Japanese capital and technology. More importantly it sought to introduce best-practice technologies. It is thus not surprising to find that Chairman Park of POSCO rejected Nippon Steel's initial recommendation of 2.6 mt capacity for the Pohang plant in favor of 9-1 mt. The Korean government constructed both its integrated plants at coastal sites, allowing POSCO to minimize transportation costs for imports of raw materials and exports of finished steel products. Confronted with similar resource endowments, Korea followed the Japanese strategy of constructing large-scale tidewater plants. Both mills entailed significant land reclamation at considerable cost (Shin 1986:17; plant visit at Pohang and Kwangyang, October 1987). Harbors, rail and road services, and other infra structural facilities, such as wharves with large berthing capacity, and material-handling equipment were also built. The decision to construct tidewater mills with their attendant infrastructural requirements was part of a long-term strategy to promote international competitiveness. Technical progress in the steel industry increased the minimum efficient scale (Gold et at. 1984; Ray 1984; Adams and Mueller 1990; Mowery and Rosenberg 1991), which made tidewater mills ideally suited for importing raw materials and exporting finished steel products on a very large scale. The diffusion of modern technology in Korea was singlehandedly carried out by POSCO-the state firm-which relied on integrated steelmaking technology. Not only did the size of plants increase but POSCO's successive expansion incorporated best-practice technologies. Kwangyang, which was built after Pohang, began with larger initial capacity than Pohang and each expansion introduced even greater capacity. POSCO's plant at Kwangyang matched Japanese standards, considered to be the industry

leader."

69

CHANGE AND DEVE LOP MENT: JAPAN AND S.KO REA

Th e diffusion of large-scale technology in capacity expansi on Both countries acquired large-scale blast furnaces and basic oxygen furnaces. As shown earlier, the rapid diffusion of modern technologies in Japan reduced th e technological gap quickly and decisively vis-a-vis th e US (Chapter 3). Th e Korean industry beginning in the 1970s also followed a similar tr ajectory, ado pting th e mos t recent steel techno logies. As early as 1955, two Japanese companies evince d an interest in obtaining BO F techno logy (Mo rris -Suzuki 1994 :193), only three years after Voest-Alpine of Austria had commercia lly intro duce d th e innovation . The Japanese preferre d th e BOF as it did not req uire as muc h scrap as th e open hearth technology. By 1972 Japan had 22 percent of th e wo rld's BOF capacity. Japanese firms extended their innovative activity to both ironmaking and steelmaking facilities, pio neering some of th e largest blast furnaces and BO Fs in th e wo rld (Figure 4.2 ). In 1959 a 1,500 rn ! BF was installed by Yawata. Ano ther twenty-five BFs of over 2,000 m! in inner volume, with average volume of 2,883 m' , were intro duce d between 196 6 an d 1972 (Ni ppo n Steel Co r pora tio n 1973:34 ). Blast furn aces increase d in size, fro m an average capaci ty of 0.5 mt per year in 196 8 to over 2 mt (Figure 4 .2). To keep up with th e increase d output from larger BFs, new BOF s also increase d in size. Kor ea's sequencing of techn ology adop tio n followe d th e Japanese stra tegy of keeping up with cha nging economies of scale. Beginn ing with a sma ller BF (1,160 rn ' ) commissioned in 1973, PO SCO insta lled seven more large BFs with an average volume of nearly 4,000 m ", Similarly, BOF adoption by Korea

3,000,000

I 2,500,000 ~

:t: C ::J

~

c. E ::J

2,000,000

~ 1,500,000

,',

~

- ... __ ....

.. ---- ... _---

...

:5 1,000,000

!

500,000

I~

--'

t

- - BF ---- BOF

o+-~~~--,-~~--,-~~~...,.....,~~~--,-~~~....--~~~--,-~.,.....,......,

1~1~1~1~1~1m1~1~1~1m1~1~1~1~1~1~1m1~

Figure 4.2 Increasing size of blast furn aces (BFs) and basic oxygen furn aces (BOFs) in Jap an Sour ces: Ministry of Int ern ation al Trade and Industry [Jap an], Yearbook of Iron and Steel Statistics, var ious years, and Capital Ex penditures of Industries, var ious years

70

CHANGE AND DEVE LOP MENT: JAPAN AND S.KO REA

kep t pace with the cha ngi ng size of BFs, moving from 100 to ns/hea t to 250300 tons/heat by th e lat e 1970s. The consequence of Kor ea's tech nological stra tegy has been the crea tion of two very lar ge integra ted plants with an average crude steel capacity of 10 .5 mt eac h. By 1980 almost all indus trialized countries had phased out th e obso lete OHF technologies in favor of BOFs. H owever, th ere have been vast qua litative and quantita tive differences in the production capabilities of Japan and Korea. For example the diffusion of continuous casting has been phenomenal (Table 4 .3). Continuous casting bypasses the stage of ingots and reheating and instead produces continuously semi-finished products like slabs and blooms from the mo lten steel made by the BOP.Costs are reduced significantly by increasing throughput, saving energy, increasing yield, and enhancing quality. As steelmaking outpu t is increased with large BFs and BOFs, it was imperative to adopt large casting mac hines as well to capture cost savings. The Japanese firms aggressively adopted this techno logy (Yonekura 1990:225). The Korean industry followed suit, with about 20 percen t of output unde r CC in 1975, tripling the ratio by 1985, and today covering nearly all of its steel output with this technology. Another area of innovation for bo th Japan and Korea has been au tomation and compute rization of process contro ls (Figure 4 .3 ). The diffusion of computer applications in the steel industry of Japan has been one of the highest in the wo rld (see Ohashi 1992:21-5). Analog computers we re introduced as early as 1962 by Fuji Steel. With increasing sca le of operation, wider product range, and stringent quality req uirements, greater process control has become a technical req uirement. In the 1990s, Nippon Steel Corporation possessed 85 percent of the 241 process control computers installed in the Japanese steel industry (Hasegawa 1996:89 ). The degr ee of automation speeded up in the 1970s as new microelectronics technology made inroads into traditional industries such as steel. Immediately fo llowing the availability of such technologies, Nippon Steel Corporation pioneered the Table 4.3 Continuous casting ratio

1975 1977 1980 1983 1985 1987 1989 1990 1994

Japan

Korea

US

W Germany

Brazil

31.1 40.8 59.5 86.3 91.1 93.3 93.5 93.9 96.9

19.7 31.7 32.4 56.6 63.3 83.5 94.1 96.1 97.8

9.1 12.5 20.3 32.1 44.4 59.8 64.8 67.4 88.9

24.3 34.0 46.0 71.8 79.5 88.0 89.8 91.3 95.6

5.7 17.4 33.4 44.3 43.7 45.5 53.9 58.5 59.3

Sources : Intern ational Iron a nd Stee l Institute, International Iron and Steel Statistics , vanous Issues 71

CHANGE AND DEVE LOP MENT: JAPAN AND S.KO REA 1.2

g ~Co E

8

.e-~

I

0.8

0.6 ---- Japan

- - Korea

e 0.4

I

." 0.2

£

--------- ---------- --------------

--- --- -~_.--------

o+----~-~--~--~--~--~--~-~--~--~

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

Figure 4.3 Co nverge nce of au tomation in Ja pan and Korea Sources : Korea Iron and Steel Associat ion, Steel Statistical Yearbook , 1995 ; Japan Iron and Steel Federat ion , Th e Steel Industry of Japan, var ious years

intro duction of process and info rmation control system computers at its Kimitsu an d Yawat a Works . The Korean steel industry quickly ma tched the Japanese no rm in app lying computers for pro cess con trols (Figure 4.3 ). Of the 9,057 computers installed in industry as a who le, 143 (1.6 percent) were in the iron and steel industry (Korea Ir on and Steel Associa tion 1995:24 8). In 1993 this rat io was slightly lower as computerization in ot her secto rs grew faster than in the iron and steel industry. Rolling mills accounted for mos t of the increase, from four units installed in 1984 to 160 in 1993. Between 1985 and 1995 the Korean iron and steel industry expe rienced nea rly a hundred-fold increase in the app lication of process computers (Korea Iron and Steel Association 1997:260 ). In 1984 Japan and Korea had one process control computer for every 160,000 tons and 1.0 4 mt of annual steel output respectively. By 1990 Japan had lowered th e ratio to 110,000 tons, while Kor ea almos t ma tched it at 120,000 tons thr ee years later. Excess capacity, m aturity, and J ap an ese res tructuring As we have seen in Chapter 3, the excess capacity tha t the US industry expe rienced was due to its technologica l leth argy, compounded by increased competition from countries like Japan. Thus th e globa l restru cturing of th e industry was shaped by excess capacity and consequently cutbacks in US capacity and by large-scale expansion of the industry by countries such as Japan an d Kor ea. H owever, within th e overa ll Eas t Asian ex pansio n of capacity we need to disti nguis h two phases: (a) Japanese ex pansion and (b) 72

CHANGE AND DEVELOPMENT: JAPAN AND S.KOREA

Japanese slowdown and Kor ean growth. Th e unity of this sequ ence, as we have just observed in this chapter, lies in their state-led strategic adoption of modern technologies, adding substantially to the global stock of steelmaking capacity. However, Japan was not immune to the crisis of overcapacity. Rapid industrial build-up by Japan also contributed to its own excess capacity, a problem that was compounded by Japan's economic downturn (see Figure 4.4) . From the mid-1970s onward, Japan's utilization rate dropped considerably, hovering under 70 percent throughout th e 1980s. The problem of excess capacity in Japan is similar to that in the US in that capitalists in a herd-like manner responded to profit opportunities by increasing their individual production capacity. As each Japanese firm competed to maintain its market share, it had to ex pand capacity without being left behind. Acting autonomously in an environment of unprecedented economic expansion, firms could not individually restrain themselves from investing. This is a classic capitalist dilemma: how to individually accumulate without undermining the larg er system. The Japanese state, very successful in goading the industry to expand capacity, was not as successful in restraining output. It was only partially successful in restraining firms from cutthroat competition. Although th e state established recession cartels during the economic slowdown, the industry was not altogether immune from ensuing price competition. With the maturity of the Japanese economy, its steel industry was also saddled with excess capacity. Consequently, the industry also has had to implement various restructuring measures. The Kor ean industry is on a differ ent path. Its expansion preceded th e energy crisis of the 1970s and th e industry grew rapidly during a period when Japan had already initiated the serious task of capacity cutbacks. Though

100 90 80

70

8>

, ...........,,, "

.. .

\,

60

,..

::;;..

-

S

5i50 ~ 40

Q.

---- Japan 30 -

20

US

---- ECtotal

10

Figure 4.4 Declining capacity utilization in the mature economies, 1973-90 Sou rce: Pain e Webb er, World Steel Dy nami cs, various issues

73

CHANGE AND DEVELOPMENT: JAPAN AND S.KOREA

the Korean expansion was fuelled largely by domestic growth, export markets were critical to its expansion. Subjected to the same technological requirements of scale economies, Korea also constructed large plants and thereby contributed to global steelmaking capacity. Restructuring of the industry in East Asia therefore must be seen as Japan's response to rapid capacity buildup at home and Korea's continued industrial expansion.

State-led industrial rationalization in Japan Japanese overcapacity dates back to its expansion period of the 1960s and 1970s. The heavy investment program of the Japanese steel industry exceeded even the government's expectations as actual demand materialized ahead of (projected) schedule. For example, the government's 1959 estimate for 1970 demand of 38 mt was revised to 48 mt within a year, and 48 mt actually attained in 1966 (Vestal 1993:126). The real output in 1970 was a staggering 93 mt, of which 18 mt was exported. Already MITI worked with individual firms to preview their investment plans, comparing them with demand forecasts. The Ministry provided investment guidance to the entire industry by estimating capacity utilization rates. It is important to recognize that MITI could not coerce any firm to change its investment plans. The government left the industry's investment coordination largely to the industry, which led to its rapid expansion.' Price controls introduced by MITI also were not very effective." Ironically, price coordination to reduce cutthroat competition had the unintended consequence of encouraging firms to maximize their market shares. This led to even greater investment in steelmaking capacity (Yamawaki 1988). With a secular decline in capacity utilization, investment coordination to stabilize prices took on greater urgency. Consequently, the Japanese government consolidated the industry by reducing duplication of investment and strengthening it financially. The government merged Yawata and Fuji to form the New Japan Steel Company and attempted to create recession cartels with other steel companies (Vestal 1993:132),7 The overcapacity problem of the Japanese economy was exacerbated by rising wages, yen appreciation, and the energy crisis of the 1970s. With economic slowdown at home and abroad, excess capacity was no longer a temporary phenomenon. Capacity utilization remained well below the breakeven point. Successful cost-cutting measures through enhanced energy efficiency and higher labor productivity could not fully compensate for the macroeconomic effects of the rising prices of Japanese exports. Firms individually tried to capture foreign markets through cutthroat competition, sometimes selling below costs. Stagnating domestic consumption added to the Japanese industry's problems. From 1971 onward the total supply of steel (production plus net imports) averaged 71 mt. The structure of the Japanese economy had changed, shifting from manufacturing to the tertiary sector. Some heavy 74

CHANGE AND DEVELOPMENT: JAPAN AND S.KOREA

industries such as shipbuilding also declined drastically. Macroeconomic developments, such as cost-push inflation and rising wages, added to the industry's problems. Excess capacity was acute in the Japanese minimill (electric arc furnace) sector as well. In 1974, capacity utilization for this segment was 64 percent, falling to 52 percent in 1977 (Uriu 1989:16). A weak demand from the construction sector wreaked havoc on electric furnace mills. Prices of minimill products fell from the breakeven mark of¥60,000 to ¥50,000 per ton (Uriu 1989:64). These developments set off antirecessionary measures which included price controls, recession cartels, and capacity cutbacks. Between 1978 and 1987 fifty-three older furnaces were phased out. However, total electric arc furnace capacity increased as new (larger) units were commissioned, aggravating the excess supply problem (see also Uriu 1996). The Japanese government has made repeated attempts to coordinate production among firms. 8 However, as in capacity expansion controls, it has been only partially successful (Gold 1974-5:1-18). Output coordination, designed to reduce capacity, was renewed via the Basic Stabilization Plan of 1979-83. MITI worked with industry associations, major firms and their customers, and other independent experts to assess the extent of excess capacity (Chow 1992). Loans were provided to "depressed" sectors for cost reduction measures and diversification, a problem acutely felt by the older and smaller EAF units. In 1986 the "Extraordinary Act for Smaller Enterprises in Designated Areas" and in 1987 "An Act to Facilitate Smooth Structural Adjustment" were devised to help the big corporations adjust to large-scale deindustrialization.?

Industry crisis and firm-level restructuring in Japan Under worsening industry conditions, the Japanese steel industry has been also subject to restructuring. Rising energy costs of the 1970s contributed to reduced demand and competitive pressures for Japanese firms. Though less volatile than US capacity utilization rates, the massive post-war build-up of steel capacity in japan could not avoid the problem of excess capacity. Virtually all major capitalist economies confronted the specter of oversupply. In Japan the problem became acute as several EAF units had begun to take on the big integrated producers in selected markets, forcing firms with integrated mills to undertake a long process of restructuring. During the 1981-90 period, capacity utilization of integrated producers averaged only 60 percent for Japanese firms, 71 percent for US companies, and over 95 percent for POSCO (Baber et at. 1993: IV-14; Kang 1994:188). Lower utilization in Japan had a telling effect on profitability as the interest burden was high due to new plant and equipment. Although the average profit rate during 1967-81 was higher for Japan than the US (Kawahito 1984:3; see also Baber et at. 1993: 11-3), except for a few years profit rates 75

CHANGE AND DEVE LOP MENT: JAPAN AND S.KO REA

have not been significantly higher. O n th e other hand, since 1981 the rat io of opera ting pr ofit over sales for th e Japanese steel industry as a who le has been low (Japan Iron and Steel Ex porte rs' Associa tio n 1997 ). In th e fifteen-year period ending in 1995, th ere were two industry downturns: fro m 1982 to 1986 and from 1992 to 1995. Th e highest rat io during these two troughs was 6.5 percent and th e lowest 0. 8 percent (see also Figure 4.5 ). Th e big five Jap anese steel companies earne d relatively low returns in th e 1980s, including a negat ive 0.9 percent in 19 86. Profitabil ity has been also low during th e most recent recession ar y period of the early 1990 s. In 1992 , the rat e of return was 0.9 perc ent foll owed by two successive yea rs of negat ive returns. M aintaining high opera ting rat es (to lower unit costs) was not feasible as it implied severe pr ice competition and ens uing tr ade friction . Eliminat ing cap acit y appeared to be th e most sensible long-term restructuring stra tegy. The Jap anese stra tegy of adjusting cap acity to chan ging mark et condition s has been gra dual and systema tic. Unlik e in th e US, th e Jap anese industr y did not suffer from technological obso lescence. Certain items, such as plates and wire rods, were tar geted first. Excess cap acity in wire rods has been partially due to a slow down in con struction growth and incr easing comp etition from minimill s such as Tok yo Steel, th e lar gest EAF producer (see Hi gur ashi 1994 :16-18; see also Chapter 7). Th e shipbuilding industry, a heavy con sumer of plates, confronted its own overcapacity problems. For exa mp le, th e average annua l pr oduction of both heavy and medium plat es during 19 77-87 was 10 .54 mt , with a peak of 12 .75 mt in 1977 . By 198 7 thi s figur e had declined to a bo ut 8 mt-a 37 perc ent decline. Ni ppo n Kokan, with significa nt investm ent in th e ship ping industr y, has elimina ted a number of its plat e mills. In 198 7-8 it built only five ships compared to ten in 1986-7 (Metal

7.1

8

7.4

6

~

4

2.9

2.6 2.1

CD

e

2

~

a. 0 1984

1985

1986

1987

1988

1989

1990

1991

1992

-2

-4

Figure 4.5 Restru ctu ring and pro fita bility of the Jap anese steel ind ustrySource: Jap an Iron and Steel Federation, var ious issues No te: a Big Five companies, incl udes non -steel business

76

1995

1996

CHANGE AND DEVELOPMENT: JAPAN AND S.KOREA

Bulletin, June 16, 1988:22). Since 1977 Japanese exports of plates have been halved, indicating a worldwide glut in shipbuilding capacity and a significant build-up of capacity in Korea.' ? In 1987 Korea exported 31.2 percent of its total exports of steel (in dollar terms) to Japan, representing an increase of nearly 63 percent from the previous year (Jardine Fleming Securities 1988:6). In the 1988-93 period, Korea's share of Japan's steel imports was over 28 percent. In 1995 Japan absorbed 54 percent of Korea's total exports of 5.22 mt. By consolidating the production of high value-added coated sheets, Japanese firms targeted several specific facilities to be phased out. However, the upturn in the world market in the early 1990s, partly a product of capacity reduction in the US and elsewhere and partly due to demand growth in the Asian region, has dampened Japanese rationalization. The industry has been cautious also because of recent investments in specialized production and large outstanding loans. With "no big plans for expansion" (personal interview, Japan Iron and Steel Federation, Tokyo, October 1987), the Japanese industry initiated selective phasing-out of plant and equipment and consolidating investments. Restructuring also entailed cost-cutting measures, downsizing production capacity, reduction in workforce, and diversification into non-steel areas (Table 4.4). As Japanese exports became less competitive du e to the appreciation of the yen and the US industry faced shortages of high value-added steel products, virtually all big Japanese firms establishe d joint ventures in the US (discuss ed in Chapter 6). This strategy allowed them to circumvent US import quotas and exploit the shortages of high-quality flat steel products in the US market and meet expanding demand in Asia.'! The Rationalization Program after the 1992 "bubble" explosion has been less concerned with steelmaking capacity adjustment. Instead, the focus has been on balancing downstream activities and reducing operating costs, namely administrative and labor costs. The integrated producers have aimed to reduce their combined cost by ¥960 billion. To balance steelmaking with product markets, Nippon Kokan shut down its seamless pip e division and Kawasaki and Sumitomo ceased production of laminated damping steel sheets used in high-end washing machines (Japan Economic Almanac 1995:120). In the first round of major restructuring (1986-90), the top five integrated producers together eliminated 39,000 workers, about 20 percent of their workforce. In the 1994-6 round another 25 percent of the workforce or 25,800 jobs wer e slashed, including 25 percent or 5,100 white collar jobs (Sakonji 1997:5). Workforce reduction in the Japanese industry has used ingenious methods. For example, all 37,000 employees at Nippon Steel Corporation were ask ed to take two mandatory days off at lower pay. In many other cases workers were redeployed in other divisions ." Also, with the help of an employmentadjustment government insurance program, workers wer e encouraged to seek early retirement. These measures resulted in Nippon Kokan's actual cost reduction exceeding its ¥200.3 billion target by ¥0.3 billion (Sakonji 1997:6). 77

Table 4.4 The ra tiona lizatio n program of Japanese steel firm s (1987-96)

Company

Facility reorganization

Personnel reduction

Business diversification

Overall industry approach applicable to all companies (1994-6)

Nippon Steel 0987-90)

Of 12 BFs, five to be shut down, one each in Yawata, Sakai, Kamaishi, Hirohata, Muroran. One BF to be restarted and production to be consolidated at Yawata 0), Nagoya (2), Kimitsu (3)", Oita (2). Capacity reduction from 34 mt to 24 mt. Hot strip and cold rolling mill to be shut down at Muroran. Introduction of "scrap reduction process" at Muroran and Hirohata. Heavy plate production to be reduced at Hikari and Nagoya. Some wire and pipe rolling will be also curtailed.

Yes, by 19,000, with one-third redeployed in new business

Electronics, communication, biotechnology. Target sales \'4 trillion by 1995

• Bringing supply and demand into balance. 1996 and 1997 production approximately 98 mt (first round restructuring reduced blast furnaces from 32 to 25)

Nippon Kokan Blast furnaces to be reduced to 4. 0987-8) Steelmaking plant and plate mill to be closed at Chiba . One BF to be shut down at Keihin and the second to be enlarged. Production to be consolidated at Fukuyama, currently the world's largest mill with 16 mt capacity .

Yes, by 6,000

Yes, ceramics and new materials. Increase sales to \'1 billion by1990

• Rationalization of production and reduction of administrative overheads (first round restructuring entailed a reduction of 39,000 employees in five big companies; second round restructuring entails leaner headquarters and reduction of 5,100 white collar staff) • Reduce excess downstream production, such as tubes, plates • Diversify into high-technology industries

Yes, electronics and service sector

• Diversify markets, especially in South-East Asia

Consolidation of Kashima. Shutdown Yes, by 6,000 of plate and seamless pipe mill at Wakayama and Amagasaki respectively. Also shutdown ofBF at Wakayama and re-ignition of a larger one .

Yes, increase sales in electronics and non-ferrous metals to \'90 billion by 1988

• Price competition (international parity)

Yes, by 6,000

Yes, increase sales 3.5 times in new business to ¥350 billion by 1989

• Reduce debts

Kawasaki (1987-8)

Shutdown of most facilities at Chiba Works, including plate mill. Will consolidate at Mizushima.

Sumitorno (1986-8)

Kobe (1986-9)

Consol idation at Kakogawa.

Nisshin Steel (1986-9)

Yes, by 5,300

Yes, by 1,700

• Adopt minimill "lean" business practices

• Forge coordinated strategy with minimill affiliates

Sources: Company docum ents an d person al interviews with Jap an Iron and Steel Federation, Tokyo, October 1987, N ovember 1991 , and Decemb er 1996 Notes Figures in parenth esis for Nippon Steel indicat e nu mber of BFs a = to re- ign ite a BF

CHANGE AND DEVELOPMENT: JAPAN AND S.KOREA

For the industry as a whole, profit rates, though not remarkable, have bottomed out (see also Figure 4.5). The last form of restructuring undertaken by the Japanese steel industry has been investments in non-steel sectors. Unlike some of the US firms, Japanese companies have tried to branch out into areas in which they have some accumulated experience. However, as they have not been profitable nor successful in absorbing surplus steel workers, Japanese companies are rethinking their new business strategy. The five top steelmakers during the 1984-7 period established sixty-three small, new affiliates. Areas included the development of new materials, such as ceramics; high technology, such as electronics; chemicals; and real estate, among others." Today the focus is more on engineering, an area of which the industry has vast accumulated technological experience, and the efficient use of company-owned land. Nippon Steel has begun a process of "systems integration," by interfacing its production expertise with "future-oriented" industries, such as "unmanned operation technology," super metals, recycling, and large-scale integrated processing devices, as well as by fusing seemingly unrelated areas such as steelmaking, electronics and advanced materials, life sciences, fundamental technologies, and basic research. Conclusion The evolution of the Japanese and Korean industries demonstrates the critical role the state has played in placing them on a higher technological trajectory. The state not only mobilized finance through its national banking system but also assisted domestic firms to secure modern technologies from abroad. By maintaining an investment momentum both countries have, albeit at different times, kept abreast of new innovations in the industry. Best-practice standards, as embodied in large plant and equipment, were diffused quickly. By inducing a self-reinforcing link between investment and productivity, the steel industry in these two countries continued to witness rapid expansion. The institutional arrangement between the state, business, and the banking sector has been important for capitalist industrialization in Japan and Korea. However, Japan has not been immune to the crisis of capitalism. Rapid development of the industry has meant surplus capacity. With the maturity of the Japanese economy and output expansion by countries such as Korea, the Japanese steel industry had to initiate restructuring. The measures implemented are similar to those introduced by the US industry: phasing out capacity, consolidating production, cutting costs, and diversifying into new business. But there are some differences in the restructuring process of the two countries. The Japanese industry has not had to close plants on as big a scale as the US industry. Its industry remains technologically sound. More importantly, the restructuring process has been largely self-led. Except 80

CHANG E AND DEVELOPMENT: JAPAN AND S.KOREA

for small sub sidi es from th e go vernment to meet certain costs associated with industry adjustment, much of the disciplining of the industry to coordinate investm ent and production is carried out by th e industry itself. Exc ess capacity and increased competition has forc ed th e industry to abandon th e competitive but traditional "cost plus rea sonable profit" approach in favor of ref erencing pric es (plu s co st of importing) to th e mo st competitive int ernational producer. By combining our understanding of th e evolution of th e steel industr y in th e US, Japan, and Kor ea we ar e left with a number of issues pertaining to industrial restructuring in the lar ger capitalist context. Fir st, differ ent technological traj ectories result from institutional responses to innovation. As we ha ve seen, th e strategy of th e Japanese and Korean government s to invest heavily in modern technology contrasts sharply with th e reluctance of US firm s to adopt new innovations. Thi s wa s a result of past decision s as well as of ch an ging economic conditions. Second, as we will see, thi s uneven diffu sion of technology contributed to changing competitiveness (discu ssed in Cha pter 6 ). Third, states can promote capitalist development and industrial transformation as lon g as th e ba sic production fundamentals ar e adhered to. Th ese include, but ar e not limit ed to , best-practice standa rds, a high rate of investment , and a strategic focu s on industrial development. Th e Japanese case also demonstrat es that sta tes are not always capable of monitoring capitalist development. As we will see in th e next chapter, n ot all states ar e cap abl e of bringing about rapid industrial transformation. Thi s brings us to th e fourth issue: th e inevitability of capitalist cri sis. The Japanese case clearly indic at es th at overproduction is a typic al problem of mature econ omies. The incr ea sing economies of scale and th e diffu sion of modern technolo gy adde d to ex cess capacity and contributed to the reor ganization of steelma k ing capacity in th e world economy. Although th e Kor ean steel industr y sh ows few signs of serious economic difficulties, it rem ain s an op en qu estion wheth er th e rap id development of th e Korean industr y is also subject to th e same forc es of economic maturity and industr y crisis (see Cha pter 8). Thus far th e indicati on s ar e of a different sort , a major financial crisis which th e Kor ean economy has not witnessed in th e recent pa st. The near 50 percent depreciation of th e Kor ean won in lat e 1997 is likely to cut both wa ys for the industr y: high prices for imported raw materials and increased expo rt competitiveness. But given its pa st technological focu s and investm ent pattern, th e Kor ean steel industr y can be expected to weather th e cri sis.

81

5

TECHNOLOGICAL CHANGE AND INSTITUTIONAL CHALLENGES IN BRAZIL, INDIA, AND KOREA

Introduction A strategic industrial policy, contributing to technological strength, has been the foundation for expanding industrial capacity in Japan and Korea. By maintaining an investment momentum the state ensured best-practice standards and enhanced the long-term competitiveness of the steel industry. New innovations were rapidly adopted and the state worked with the private sector in industrial transformation. The autonomy of th e state was critical for securing modern technology and sustaining the high rate of capacity expansion . The lat e industrialization of Japan and Kor ea has been bas ed on institutional arrangements that have been conducive to successful technological borrowing. Similarly, other late industrializing states, such as Brazil and India, attempted to control a core sector strategically to bring about national industrial development. The state complemented private capital by providing a critical int ermediate industrial input, which was to be further processed by the private sector in various downstream activities, such as construction, automobiles, shipbuilding, and appliances. However, unlike Japan, th e monopolization of the more expensive, integrated segment rather than the smaller scrap-based minimills in Brazil and India indicates the state's privileged role in national economic transformation. Capital scarcity and access to technology have been daunting entry barriers for private capital.' At the same time, the state, with greater r esources, has attempted to regulate industrialization on its own terms through dir ect participation in large-scale, integrated mills . Clearly, late industrialization has a bearing on capacity expansion . The qu estion is: under what conditions does state intervention guarantee successful industrial transformation and thus global restructuring? This chapter explores state-led capitalist industrialization in Brazil and India. However, the objective is to bring out not only the specifics of how the states in thes e two countries intervened but also to demonstrate that state intervention per se cannot guarantee technological progress. The two states share "lateness" with Japan and Korea. However, th e institutional 82

CH ANG E AND CHALLENG ES: BRAZIL , INDIA, KOREA

weakness found in Brazil and India sets them apart from th e East Asian duo. Like Kor ea, both Brazil and India initially had to overcome th eir structural dependence by securing foreign technologies and mobilizing resources . However, unlike Kor ea, th ey have had a harder time fostering capitalist industrialization. Th e weak institutional ba sis of th e state undermined th e development of a technologically dynamic steel industry. Paradoxically, th e private sector steel mills have not been at th e cutting edge either. From this we can deduc e that institutional barriers wer e as much structural as the y were polic y-induced . By differentiating th ese two cases from th e Kor ean one we hope to establish the ways by which institutions circumscribe th e proc ess of technology diffusion and contribute to global restructuring in a nuanced way. The chapter is divid ed into four main parts. Th e first pres ents state-led industrialization in Brazil and India-principally in th e form of industrial policy. Three areas are covered: state ownership of the industry; public bailout of privat e steel firms; and the regulation of steel prices. The Kor ean experience is discussed for comparative purposes. The second part shows how th e state, in both Brazil and India, overcame initial structural dependence to set up a domestic steel industry. By negotiating technology and finance with for eign suppliers, the state succeeded in creating new industrial capacity and expanding it gradually. However, the initial momentum in establishing th e industry was lost as institutional weakness und ermined th e abilit y to keep up with changing technology. Th e slower pace of change in Brazil and India relative to Korea is examined in the next section. Th e high investment requirement for new innovations associated with rising economies of scale made it difficult for th e state to mobilize sufficient resources. The effects of th ese constraints hav e been proj ect delays, escalating debts, and economic losses. Th e final section compares technological change and its diffusion in the three late industrializing countries, clearl y demonstrating the sup erior technological capability of th e Kor ean state-owned enterprise. State-led capitalist industrialization

State ownership and industrial policy State ownership of steel plants in independent India began in th e 1950s. Three large, privatel y held plants existed prior to India's ind ependence in 1947. Two of th ese, th e Tata Iron and Steel Company (TISCO) and th e Indian Iron and Steel Company (lISCO) still coexist with state-owned firms . In Brazil dir ect state invol vement came much earl ier. By 1941 th e National Steel Company (CSN) was form ed; by 1948 Brazil's first coke-bas ed integrated plant was completed. In Kor ea, as we saw in the pr evious chapter, th e state created th e national steel company POS CO in 1968. Th e circumstances and the conditions und er which th e state int ervened in th ese countries have vari ed 83

CH ANGE AND CH ALLENGES: BRAZIL , INDIA, KOREA

in detail. In all three countries reducing import dep endence has always been a national obj ective. In th e post-war period each state dominated its respective steel industry and only recently has th ere been a dilution of state ownership. With few ex cept ions, state ownership has been largely confined to large-scale, integrated mills producing high valu e-added flat products. Th e private sector is active in the much smaller, scrap-based EAF units producing cheaper long products. In all three countries roughly 60 perc ent of total steel output is from state-owned mills (Steel Authority of India Limited, various years; Institute Brasileiro de Siderurgia, various years; and Pohang Iron and Steel Company, 1996; see also this volume, p. 142). In th e mid-1980s, th e shares for Brazil and India were even higher: 75 and 70 perc ent respectively. Although th e bulk of Brazil's int egrated mills ar e now in pri vat e hands, nearly 80 percent of its steel capacity was under th e gov ernment prior to privatization in the early 1990s. In India state owner ship in 1996-7 stood at 56 perc ent (Joint Plant Committ ee 1997). The division of labor between th e state and th e private sector was quite clear cut. Th e form er produced flat products using the integrated proc ess, whil e the latt er produced long products using electric arc furn aces. Th e Indian state sector controlled roughly 48 perc ent of flat products in 1979-80. By 1996-7 th e state sector had increased its output of flat products, such as plates, coils, and sheets, to 78 percent. Privately owned TISCO , with an integrated plant, also produced flat products. However, 57 percent of its total output was devoted to long products, such as bars and rods (Tata Iron and Steel Company 198 7). In the Brazilian case, prior to privatization virt ually 100 percent of flat product production was und er th e state. Three integrated mills in Brazil, form erly all state-owned, also produced nearl y 100 percent of flat products. In Korea the industry structure is similar, with POSCO producing th e bulk of flat products. All three countries exhibit a rising share of flat products in th e overall product mix, indicating greater complexity in its industrial structure. Industrial policy in all three countries also regulated th e number of players in th e industry, effectively by barring entry of pri vate capital, domestic and for eign. Brazil was th e onl y country among th e three wh ere minor for eign ownership was permitted in th e int egrated segment. Th e Indian government in the early 1950s allowed TISCO to ex pand capacity to 2 mt but was prudent enough to make sure that th e company did not enter the flat products market in a big way. This would hav e undermined production at stateowned Rourkela and Bokaro plants . It also deni ed th e Birlas, on e of th e larg est famil y-owned, highly diver sified bu siness houses, an entry into th e steel business (Krishna Moorthy 1984:60) . In Kor ea, H yundai's requ ests to enter th e int egrated steel segment ha ve been repeatedly deni ed for fear of overcapacity, even though state-owned POSCO has continued to ex pand output. 84

CHANGE AND CHALLENGES : BRAZIL, INDIA, KOREA

Bailing out privately owned steel firms In addition to restricting the number of firms in the industry-a classic form of capitalist regulation-each late industrializing country also designed policies to support private sector development, including firms in the private sector. For example, the Indian Industrial Policy Resolutions of 1948 and 1956 reserved all new capacity in the iron and steel industry for the state. But private operations, such as TISCO and lISCO, were spared from nationalization. The government, by virtue of a nationalized financial system since 1969, also owns 37 percent of TISCO's shares (Krishna Moorthy 1984:308). After several years of disastrous performance, in 1972 lISCO was nationalized. State intervention in bailing out private firms is also part of capitalist regulation, even if prompted by the immediacy of a political crisis. In Brazil the government was forced to purchase several loss-making firms, such as Piratini, Cofavi, Cosim, and Usiba. In other cases, although limited foreign ownership was permitted, over time the government had to inject needed funds, increasing its equity by default (SIDERBRAS 1987:4; and personal interview, SIDERBRAS, Brasilia, December 1987). Even the Korean government has been engaged in bailing out private sector steel firms. As recently as 1997 the Korean government was engaged in rescuing Hanbo Steel, a privately held minimill, from a colossal debt of $5.8 billion by finding a buyer. POSCO also purchased the $1.2 billion debtridden Sammi Steel, a specialty steel producer in the private sector. In all these cases the state undertook production and assisted private capital in their commercial viability, serving as the basis of capitalist transformation and, by extension, contributing to global restructuring of the steel industry.

Price control and industrialization Perhaps the most effective form of intervention to promote capitalist industrialization has been the imposition of price ceilings for critical industrial inputs . As steel is used in virtually all manufacturing and infrastructure development, the state's intervention to maintain low steel prices has been common in most late industrializing countries. Rising steel prices also tend to be inflationary and hence the state has an interest in price controls. In an oligopolistic setting price is determined by "cost plus margin" and in the absence of competition the temptation to charge high prices is also great. The irony is that the state cannot act like a capitalist to promote capitalism; that is, despite its near monopoly control the state must restrain itself from making superprofits. Prices are regulated to ensure that downstream users benefit from cheap steel, even if it means heavy losses for state-owned firms. The general Brazilian policy has been to keep prices as low as possible (Dahlman 1978:95). With 1969 as the base, Brazilian steel prices until 1987 without exception have varied negatively from this base (personal 85

CH ANG E AND CHALLENG ES: BRAZIL , INDIA, KOREA

interview, SIDERERAS, Brasilia, December 1987). Th e World Bank, in on e of its internal reports, remarked that price controls cost Brazilian steel producers over $14. 5 billion during th e 1977-88 period (World Bank 1992:60), while another state em ployee in 1987 claimed a loss of $6.5 billion solely due to price controls (personal interview, SIDERBRAS, Brasilia December 1987). Th ese loss es have been a part and parcel of state-led capitalist regulation. As th e Indian state increas ed its grip ov er th e country's econ omy, administered steel prices since th e 1960s became important in order to strengthen th e overall state sector. From 1961 to 1981 prices of Indian steel products have been administered by th e Joint Plant Committee (JPC), a cartel form ed by all integrated producers, including TISCO and th e nationalized railway department (a large consumer). Most of th e state steel sector's output is absorbed by other public sector firms, euphemistically term ed "priority" sectors. Thes e include defense, railways, power, coal, engineering, oil, post and telegraph, irrigation and th e like. In 1985-6, 41 percent of th e state sector's output was sold directly to other government departments (Steel Authority of India Limit ed 1987a: 222-8). Even th e only private sector integrated company, TISCO, supplied over 30 percent of its output to th e public sector during 1986-7 (Tata Iron and Steel Co. 1987). Although prices were deregulated in 1981 th ey remained until recentl y under the indirect control of the Ministry of Steel: th e Iron and Steel Controller-who headed th e Joint Plant Committee. As one staff member of th e government's steel company noted: There has been a policy of und erpricing so far. Even today it continues. The reason is that we are in th e public sector so profit is not our motive. It is to supply steel to actual users on a subsidized ba sis. There ha ve been products, such as railway mat erials, sleepers, and structurals that we hav e sold at a loss. Becaus e a high percentage of th e steel we produce is used by one government sector or another our ability to raise prices is limit ed. It is the government that has to ultimately pay for th e high er pric es. We don't hav e th e freedom to change prices. Our only obj ective has been to ensure supplies. All pricing polici es go to th e Ministry. Even th e distribution of steel is controlled by the Iron and Steel Contro ller who ultimately determines th e allocation of final output according to priority sectors. (Personal interview, SAIL, N ew Delhi, July 1987) The symbiotic relationship between th e state and private capital was even more pronounced in Brazil as th e state propped up transnational capital for industrial transformation (Evans 1979). Th e economic and political cri sis of th e 1960s, conjoined with th e inflationary growth of th e previous decade, diminished investment outlets. Th e shortfall in demand along with capacity 86

CH ANG E AND CHALLENG ES: BRAZIL , INDIA, KOREA

interview, SIDERERAS, Brasilia, December 1987). Th e World Bank, in on e of its internal reports, remarked that price controls cost Brazilian steel producers over $14. 5 billion during th e 1977-88 period (World Bank 1992:60), while another state em ployee in 1987 claimed a loss of $6.5 billion solely due to price controls (personal interview, SIDERBRAS, Brasilia December 1987). Th ese loss es have been a part and parcel of state-led capitalist regulation. As th e Indian state increas ed its grip ov er th e country's econ omy, administered steel prices since th e 1960s became important in order to strengthen th e overall state sector. From 1961 to 1981 prices of Indian steel products have been administered by th e Joint Plant Committee (JPC), a cartel form ed by all integrated producers, including TISCO and th e nationalized railway department (a large consumer). Most of th e state steel sector's output is absorbed by other public sector firms, euphemistically term ed "priority" sectors. Thes e include defense, railways, power, coal, engineering, oil, post and telegraph, irrigation and th e like. In 1985-6, 41 percent of th e state sector's output was sold directly to other government departments (Steel Authority of India Limit ed 1987a: 222-8). Even th e only private sector integrated company, TISCO, supplied over 30 percent of its output to th e public sector during 1986-7 (Tata Iron and Steel Co. 1987). Although prices were deregulated in 1981 th ey remained until recentl y under the indirect control of the Ministry of Steel: th e Iron and Steel Controller-who headed th e Joint Plant Committee. As one staff member of th e government's steel company noted: There has been a policy of und erpricing so far. Even today it continues. The reason is that we are in th e public sector so profit is not our motive. It is to supply steel to actual users on a subsidized ba sis. There ha ve been products, such as railway mat erials, sleepers, and structurals that we hav e sold at a loss. Becaus e a high percentage of th e steel we produce is used by one government sector or another our ability to raise prices is limit ed. It is the government that has to ultimately pay for th e high er pric es. We don't hav e th e freedom to change prices. Our only obj ective has been to ensure supplies. All pricing polici es go to th e Ministry. Even th e distribution of steel is controlled by the Iron and Steel Contro ller who ultimately determines th e allocation of final output according to priority sectors. (Personal interview, SAIL, N ew Delhi, July 1987) The symbiotic relationship between th e state and private capital was even more pronounced in Brazil as th e state propped up transnational capital for industrial transformation (Evans 1979). Th e economic and political cri sis of th e 1960s, conjoined with th e inflationary growth of th e previous decade, diminished investment outlets. Th e shortfall in demand along with capacity 86

CHANGE AND CHALLENGES : BRAZIL, INDIA, KOREA

expansion in flat products generated substantial excess capacity. It was only with the military regime's liberal (protectionist) policies that some of the dynamic industries, such as the automotive sector, developed under the aegis of transnational capital. By Third World standards the Brazilian state has successfully fostered a relatively large auto industry (Mericle 1984). From a mere 38,000 units in 1960 its output jumped to 731,000 by 1989, representing an average annual growth of 63 percent (Dicken 1992:271). In 1995 Brazil produced 1. 7 million vehicles, spurred on by various incentives offered in the past to the foreign-owned auto sector, such as income concentration policies and low-priced steel. With sluggish domestic demand in the 1980s, export competitiveness necessitated cheap steel (personal interview, Acominas, Belo Horizonte, December 1987).2 As the auto industry controls a large number of jobs and is a major foreign exchange earner its power and influence has been substantial. 3 The strong relationship between the state and private (foreign) capital to foster capitalist development was succinctly captured by a Brazilian scholar: The production of capital and consumer goods was promoted by the bourgeoisie and by the military on the assumption that it would create the necessary economic structure for accumulation. Now there is a strong, well diversified economic structure but which is highly internationalized... The creation of BNDE [the National Bank for Economic Development] was a clear manifestation of an industrial push and the underwriting of private capital accumulation. Now we have the triple alliance with the state controlling a large part of the economy. The debate is how to destaticize. But the bourgeoisie wants the state. (Personal interview, Otavio Ianni, Catholic University, Sao Paulo, November 1987) In contrast, the Korean strategy for accumulation attempted to interface nationally owned upstream and downstream economic activities. By keeping prices low, the state-owned company followed the Japanese example of supporting metalworking industries (transportation equipment, machinery, consumer durables) and infrastructure sectors (roads, bridges, railroads, ports). Kim (1985:10) notes that "in addition to the construction and shipbuilding industries, the [government's attention] turned to the automotive industry." POSCO's cost competitiveness was passed on to steel-using industries in the form of lower prices." These included many export products manufactured by the very large, family-owned business conglomerates (chaebols). Capitalist regulation is best witnessed by the government's refusal to be a rent-seeker during economic booms, even though POSCO's management privately admits its interest in raising prices. There is a tacit understanding between the government and POSCO that prices must be maintained at "competitive" 87

CHANGE AND CHALLENGES : BRAZIL, INDIA, KOREA

levels. The raison d'etre for capitalist transformation is not high financial surplus per se; rather, it is the creation of an industrial foundation on which capital as a whole expands. ' Instead of propping up foreign capital as in Brazil or incurring heavy losses as in India, the Korean state steel company by being competitive nurtured a dynamic capitalist class. Overcoming structural dependence In the absence of a dynamic capitalist class in Brazil or India, state intervention in the steel industry was inevitable. But it was another matter to overcome the structural dependence on international capital and technology. The postwar reconstruction boom tended to crowd out capital and technology flows to developing countries. Their entry at the time meant that these countries had a harder time in negotiating credit and securing capital equipment with suppliers located in the advanced industrialized countries. From the beginning state-led capitalist regulation was designed to create a national productive system by reducing the inherent structural barriers found in a competitive capitalist system. We have seen how the Japanese government in concert with private business and the Korean government on its own quickly built up a technologically competitive industry. The context in which the states in Brazil and India overcame the initial hurdles is presented below.

Establishing a domestic steel industry As late industrializes, India, Brazil, and Korea were able to enter the steel industry by bargaining and exploiting any opportunity that arose in the international geopolitical situation. Korea was the most successful in rapidly establishing an internationally competitive industry (Figure 5.1). The growth and expansion has been spearheaded by POSCO-the state-owned firm. However, Korea's private sector in the last decade also added significant capacity: nearly 10 mt, Since the late 1960s Brazilian integrated capacity has also grown significantly (Table 5.1), with an incremental addition of nearly 10 mt of capacity in the 1970s. In three phases, spanning two decades, the Brazilian state added a net integrated capacity of 14.5 mt. The state controlled five large integrated facilities along with a few smaller non-integrated units, which had resulted from bail-outs of private firms. The integrated segment's output in 1996 stood at 18 mt. The Indian state actively promoted heavy industry through its five-year plans (Table 5.2). From less than 2 percent of total public sector outlays during the first plan, the Indian steel industry steadily gained nearly 8 percent of total outlays in the third five-year plan. While steel's share of public sector outlays fell, overall outlays in nominal terms roughly doubled in each successive plan period. Correspondingly, the state's steelmaking capacity 88

CHANGE AND CHALLENGES : BRAZIL, IN DI A, KO REA 45,000 40,000

--Korea .--.--. POSCO

35,000

- - Power (Korea)

30,000

or

.a

25,000

o

:5 <-

20,000 15,000 10,000

o 1~1~1~1~1rn1m1~1m1m1~1m1~1~1m1~1m1m

Figure 5. 1 Output expansio n by the Korean steel industry Sources: Korea Iro n and Steel Associat ion, Steel Statistical Yearbook, var ious years; Pohang Iron and Steel Company, perso na l com munication N ote: Data for POSCO for selected years; Power (Korea) is a linearized trend for Korean output

Table 5.1 Integrated steel capacity expansio n in Brazil (million ton s)

Plants CSN (0.27)' COSIPA USIMINAS CST A<;OMINAS

Initial capacity

Phase I

Phase II

Phase III

1996

1967-74

1970-9

1973-88

output

1.4 0.5 0.5

1.7 1.0 1.4

2.5 2.3 2.4

4.6 3.5 3.5 3.3 (1976-83) 2.0 (1975-86)

4.4 3.6 4.0 3.6 2.4

Sources: Soares (19 87); Institute Bras ileiro de Siderurgia (1 997) Note a Ini ti al cap ac it y

increased fr om 3 mt to nea rly 15 mt , capt uring ove r 80 percent of th e co untry's integ ra te d ca pacity. From th e fo urth plan onward, inves tment in th e Indian steel industry remained leth ar gic until th e mid-1980s, when 3 mt of capacity was added between th e six th (198 1-5) and th e seventh (1986-90) plan . Both Brazi l and Ind ia co ntribu ted significantly to th e global stock of steelmaking capacity. Brazi l, like Kor ea, also became a major exporte r of steel products to the wo rld ma rke t (see Chap ter 6). H owever, th e quantitative success camouflages some of th e built-in deficiencies that were often inherited wit h structura l dep endence or were simp ly integra l to th e pro cess of late industria lization. As discussed below, for Brazil and India to establish a 89

Table 5.2 Investment and expansion of India' s integrated public and priv ate sector steel industry'

Five-year plans in plan (FYP)

Overall allocation Shareofpublic in plan (Rs billion) sector outlay to total outlay (%)

Shareofpublic sector steel outlay to total outlay

(%)

Share ofpublic sector steel to totalpublic sector outlay

Annual ratedcapacity of crude steel at the endof FYP (mt) Public sector

Private sector

Total

1.Y 3.0< 3.0 2.0 2.0 2.2 2.3 3.1f

1.5 6.0 8.9 8.9 10.6 11.6 14.7 17.9

(%) 1st (1951-56) 2nd (195(H)l) 3rd (1961-66) 4th (1969-75) 5th (1975-81) 6th (1981-85) 7th (1986-90) 8th (1992-97)

37.60 77.20 126.71 247.59 671.45 1,722.10 3,481.48 7,980.00

52.13 60.52 67.69 63.73 59.72 56.62 51.70 45.24

0.88 4.53 5.29 4.53 3.33 2.32 1.84 1.83

So urce: Steel Authorit y of Ind ia Lim it ed (1996) No tes a Total of six pub lic secto r integrated plant s and one private sector plant b Neg ligible c Two privat e secto r plant s (TISCO 1.0 rnt and IISCO 0.5 rnt) d Three 1.0 mt publi c secto r plants e Ca pacity expansion T ISCO 2 rnt and IISCO 1 rnt f IISCO 's ca pa city ph ased out to 0.45 mt, new greenfield Vizag with 3. 0 mt commissioned

1.68 7.49 7.81 7.10 5.58 4.10 3.57 4.04

b d

3.0 5.9 6.9 8.6 9.4 12.4 14.85

CHANGE AND CHALLENGES : BRAZIL, INDIA, KOREA

financially and technologically sound steel industry was not easy. Brazil's relatively early entry during a period of mounting global political tension and India's desire to launch a large-scale industry rapidly during a period of high economic growth in the advanced capitalist countries constrained their ability to secure modern technology. However, in both cases, the state became the dominant player in mobilizing finance, acquiring technology, and expanding output.

Mobilizing finance and acquiring foreign technology In the 1920s Brazil imported nearly 100 percent of its domestic consumption (Baer 1969:61). By 1936 Brazil was producing about 74,000 tons of steel, somewhat reducing its import share. Local production in the 1920s was confined to small charcoal-based units, with Belgo Mincira, a foreign company, producing the largest share of Brazilian output. Rising imports and the refusal of Belgo Mineira to expand capacity prompted state intervention. International tensions prior to World War II, which restricted access to steel technology from the world market, compelled the military to investigate the possibilities of establishing a steel industry in Brazil (Hilton 1982) .6Under President Getulio Vargas, the Minister of War in 1931 created the National Steel Commission. Although local capitalists were wary of the government's attempts to set up a large coke-based integrated works they were never excluded (Evans 1979:89). However, the scale of investment and the complexity of integrated steel production was much too daunting for Brazilian private capital. Bargaining with the governments of Germany and the US in the late 1930s to obtain capital equipment ultimately paid off for Brazil, a typical strategy late industrializing countries resort to in order to override structural dependence. However, US Steel withdrew from the project when it failed to secure equity control. This reflected the general vulnerability of borrowers of technology. Similar to the Japanese unwillingness to transfer technology to Korea, US Steel also found it against its interest to transfer technology and forgo exports to the growing Brazilian market." However, lest the Germans clinch the deal, the US Export-Import Bank in 1940 promised to provide $20 million to finance the project (Baer 1969:76). The loan was raised to $45 million. State involvement of the supplier country is also typical of such transactions, aimed to promote national capital, in this case American equipment suppliers. In 1941 the National Steel Company (CSN), at Volta Redonda in the state of Rio de Janeiro, was formed. About 50 percent of the initial investment requirement of $25 million was provided by the savings and pension banks (Baer 1969:76). The supply of slabbing and rolling mills was delayed by Mesta Machine of Pittsburgh as international war-like conditions emerged. As a result, the cost of the project increased by 60 percent. In 1948 the first integrated plant with a capacity of 0.27 mt ingots was completed. 91

CH ANG E AND CHALLENG ES: BRAZIL , INDIA, KOREA

The Indian experience with extern al suppliers has been similar to Brazil's in terms of financial depend ence, scale of plants, and process technology acquired. Western countries and international agencies, particularly the World Bank, did not favor state-sponsored heavy industrialization in India." TISeO notwithstanding, India's technological capacity and financial resources were limit ed. However, th e government's plans were ambitious, targeting three 1.0 mt plants. Strategic bargaining by th e Indian state with for eign pla yers was essential. Britain, wh en first approached, imm ediately turned down th e requ est . Soon after, a West German consortium offered to construct a 0.5 million-ton plant at Rourkela in th e eastern state of Orissa. Th e Germans offered onl y very small blast furnaces . Not to be outdone, Prime Minister Jawaharlal N ehru successfully signed an agr eement with the Soviet Union for a 1 mt plant at Bhilai in central India." Both Britain and West Germany agreed to provide technical and capital assistance. Th e West German consortium went further by drastically altering th e design of th e plant in favor of larg er blast furnaces, and introduced India's first BOFs. However, doubling th e designed capacity of the German plant to 1 million tons entailed inordinate dela ys. Their engineering skills notwithstanding, th e Germans squ eezed th e additional capacity into th e original plant layout causing overcrowding and effectively curtailing future possibiliti es. 10 The British-aided plant had no detail ed proj ect reports, reflecting th e weakness of th e Indian state in bargaining with technology suppliers. The project was also plagued by construction delays. All three 1.0 mt plants commission ed in India with th e aid of British, German, and Soviet assistance exhibited a vari ety of technological and financial attributes. Th e post-war expansion of th e steel industry in Brazil was state-owned more by default than by design. Unabl e to marshall resources, the industrialists of Sao Paulo, with the state of Sao Paulo as a partner, yielded to federal financing for the eOSIPA plant near the city of Sao Paulo. Loans from th e government's National Bank for Economic Development, which set up th e new steel company in 1953, were progressively converted to equity (Baer 1995:249). The plant was finall y completed in 1965 . Rather than rel y completely on for eign suppliers for th e eOSIPA plant, th e state-owned eSN worked with Am erican and British suppliers to equip the plant. The participation of a local firm indicated local technological capability. However, like other plants of th e tim e, e O SIPA installed very small BOFs. Initially firms from advanced capitalist countries were heavily involved in late industrializing countries as suppliers of both capital and technology. Foreign ownership, however, was restricted. As Japan continued to expand capacity at home, its need to ensure secur e sources for raw materials became critical. Brazil and India with high-quality iron ore depo sits wer e considered important sites. Japanese firms selectively invested in min es in both countries and in Brazil even participated in a steel proj ect. In addition to e O SIPA, another int egrated steel plant, USIMINAS, was proposed in th e Brazilian 92

CHANGE AND CHALLENGES : BRAZIL, INDIA, KOREA

state of Minas Gerais." After creating the company in 1956, negotiations were held with the Japanese, Germans, and some East European countries. Nippon Steel of Japan headed the consortium for the construction of a 0.5 million-ton capacity plant. Production was started in 1962. In lieu of planning and equipment supply, the Japanese agreed to 40 percent of equity (Baer 1969:81). They also provided 60 percent of equipment credits at 6 percent interest payable over fifteen years, with interest-free loans for the first three years. Such soft terms were a result of Japan's coming of (industrial) age, and USIMINAS was designed to be a showcase project (Dahlman 1978:45). It was a modern plant, incorporating 50-ton BOFs. It may be recalled that in the late 1960s the Japanese also participated in Korea's first integrated steel project in Pohang. They supplied capital and technology but, unlike in Brazil, were barred from owning equity. 12 The pattern of ownership in Brazil, however, remained skewed in favor of state ownership. Structural dependence implied that shortfalls arising from construction delays must ultimately be borne by the state. This was true in the Brazilian case, even with foreign capital participation. As in the case of the COSIPA plant in Brazil, when Japanese construction costs escalated, the National Bank for Economic Development (BNDE) was compelled to inject additional funding. As a result Japanese equity was diluted to about 20 percent (Fischer et al. 1988:167), falling to about 13 percent before COSIPA's privatization in 1991. The federal government, through BNDE, had over 50 percent equity of both COSIPA and USIMINAS. The local state governments owned about 24 percent each in their respective plants. Government companies, including steel firms and the state-owned mineral producer CVRD, and some small private groups controlled the remaining shares. Increasingly, however, with successive expansion of its integrated plants, SIDERBRAS-the state steel holding company-absorbed the financial liability of these plants. The financing of Indian plants was relatively straightforward: the bulk of the funds came from the state treasury, the rest from foreign sources. India's economic status and its geopolitical alliances ensured relatively easy terms and conditions for financing capital equipment for the first three 1.0 mt plants. Interest rates varied from 2.5 percent to 6.3 percent with repayment periods ranging from three to twenty-five years (Krishna Moorthy 1984:87). West Germany had the most stringent conditions and also entailed a greater share of foreign exchange requirement (56 percent) while the Soviet Union offered the easiest terms at 2.5 percent interest for twelve years with a foreign exchange component of 49 percent (Krishna Moorthy 1984:90). For the three 1.0 mt plants, the foreign exchange component was around 51 percent of the initial investments. The first expansion of these plants reduced the foreign exchange component to about 47 percent.

93

CH AN GE AND CHALLEN GES: BRAZIL, INDIA, KOREA

Growth of steelmaking capacity In 1971 the First National Steel Plan of Brazil outlined an installed capacity of 20 mt by 1980. This target was not met, even though the rate of expansion was quite rapid. Between 1960 and 1970, steel output tripled from 1.9 mt to nearly 6 mt, whil e between 1970 and 1980 output tripled again to 15 .3 mt (Guerra et at. 1989:40). Investment was high, picking up from 1976 until 1979 and declining thereafter. The Brazilian debt crisis dampened th e investment momentum in th e 1980s, picking up again in the early 1990s (Figure 5.2) . Nearly $21 billion was invested, with an annual average of nearly $1.5 billion. Aside from capacity expansion of existing plants, two greenfields (CST and Acominas) were constructed . CST is a technologically modern plant with major equipment from Japan and Italy. Kawasaki Steel of Japan and Finsider (part of th e Ita lian state-owned Italisider) each hav e 13 percent capital participation in CST (personal communication from CST, May 1988). Prior to its privatization, Acominas was 100 percent state -owned. For India's fourth integrated plant in Bokaro, th e Soviets came forward with assistance aft er President Kennedy could not persuade th e US Congress nor the American steel industry to participate in Indian state ventures. US Steel had insisted that management of th e plant be entrusted to th em for at least ten years. This was unacc eptable to the Indian government and India withdrew its requ est for US aid . 13 Even Mr Tata of TISCO, the private sector integrated firm, tri ed to convince the US of the inability of th e Indian private sector to raise the necessary capital. N egotiations were renewed with Britain, West Germany, Japan, and the Soviet Union with th e expectation that no single country would be abl e to finance the entire proj ect and, at th e sam e 3,500 3,000 2,500 'E'2,000

~

'E

e i.seo

i

!

1,000

~

500 o+-~~~~~~~~~..--~~~~~~~~~..--~~~~~~~

1m

1m

1~

1~

1~

1~

1~

1~

1~

1~

1~

1~

1~

Figure 5.2 Brazilian investment in the steel industry, 1972-96 Sou rces: Institute Brasileiro de Siderugia (various years); Instituto Brasileiro de Siderugia, person al communication

94

CHANGE AND CHALLENGES : BRAZIL, INDIA, KOREA

time, that India would not have to depend on anyone country. The Soviet Union, however, offered to provide financial and technical assistance for the entire project. In subsequent years India also upgraded its three 1.0 mt plants and as part of its steel expansion plan added two integrated greenfields: at Bokaro in the eastern state of Bihar and at Vishakapatnam in the southern state of Andhra Pradesh. The Soviets also participated in the Vishakapatnam (Vizag) plant. It is India's most modern integrated plant. Of the total project cost of Rs 60,000 million (equivalent to $4,615 million) only 6.5 percent has been provided by the Soviet Union (personal interview, Rashtriya Ispat Nigam, New Delhi, July 1987).14 While an Indian consultancy firm has been retained to oversee the construction of the Vizag plant, reliance on foreign technology and capital has continued." Up to the steelmaking stage the Soviet Union has collaborated on the project. Two rolling mills were provided by the former Czechoslovakia and the third by former West Germany. The collaboration with the former eastern bloc country has been based purely on financial conditions. Its financial package is a soft loan carrying an interest rate of 2.5 percent repayable over 20-25 years. It is also payable in Indian rupees through barter trade. On the other hand, the West German loan carries an interest rate of 14 percent. The reluctance or the inability of domestic private capital to undertake large-scale, capital-intensive projects meant that the state had to be involved in a big way. These late industrializing states have also been interested in promoting capitalist development as a whole. Because the state owned a substantial part of the industry, it wielded significant clout and bailed out private firms in distress. Price controls have been extensively used to regulate the industry. The state has relied on these instruments to support capital accumulation as a whole. Creating new capacity required strategic negotiation by the state with foreign suppliers. Brazil and India have been less successful than Korea in acquiring modern technologies. The inability to acquire best-practice standards by late industrializers reflects partly the unwillingness of the suppliers to provide modern technology and partly state weakness in bargaining effectively with international suppliers. Institutional challenges to industrial restructuring Without a doubt, the states in all three late industrializers overcame the problem of resource mobilization and technology availability, albeit from different sources and in different degrees. They successfully added capacity, contributing to the general shift of productive capacity away from the advanced capitalist countries. However, the expansion in Brazil and India has not gone unchallenged. Several problems have subsequently arisen, mainly in the areas of technological capability and financial performance. States in these two countries, despite their heavy involvement in the economy and 95

CHANGE AND CHALLENGES : BRAZIL, INDIA, KOREA

industry, have been subject to institutional weakness. This was in spite of the independence of Indian businesses and the state from foreign capital (Encarnation 1989). This institutional weakness is different from "social capability," which centers on the development of human capital (see Abramovitz 1989). Rather, institutional incoherence is a result of the penetration of political and social forces that effectively undermine the state's regulatory capacity to organize industrial production. This could be in the form of political appointments of state sector personnel, often resulting in the lack of continuity in management. Both Brazil and India have been subject to such forces and therefore exhibit far greater degree of organizational and institutional weakness than Korea. The Korean government was quite successful in keeping popular forces at bay. History was on its side as well. Korean state autonomy evolved from the dissolution of archaic social structures (Hamilton 1986, 1983; Amsden 1989:27-54; Kwon 199D and US geopolitical interest (Haggard 1992). Relying on state-guided capitalist industrialization (Lim 1985:35), the military leadership under Park Chung Hee forged new institutional arrangements between the state and workers. State support of dynamic yet state-dependent industrial groups and repression of labor were the two main foundations of capital accumulation. State autonomy was enhanced by sacking officials and creating a centralized, technocratic Economic Planning Board (EPB) and nationalizing and reorganizing the banking sector (Haggard 1992:64-5; Koo and Kirn 1992:125-6). Dissent and opposition were silenced by both force and rapid growth, making bureaucratic economic management relatively easy (see Lim 1985:71-2; Deyo 1987, 1989; Ogle 1990). As in the Brazilian and Indian cases, the ideology of industrialization was grounded in nationalism. However, unlike India, Korea did not shut out foreign capital, and unlike Brazil it preferred loans over foreign direct investment (Griffin 1991:122-3). Additionally, the state's access to and extraordinary control of foreign exchange allowed it to select investment projects and orchestrate big business expansion. Unlike Korea, where the military state was insulated from everyday politics, the Brazilian and Indian states have been captured by capitalists and organized workers alike. While in Brazil private capital, domestic and foreign, sought to extract state largesse, such as subsidies, public sector unions in India, with the help of the state, protected their relatively high-paying jobs. Consequently the performance of the stateowned sectors in Brazil and India has been less than spectacular, despite significant capacity additions. How institutional incapacity has technologically and financially hamstrung the steel industries of Brazil and India is discussed below.

96

CHANGE AND CHALLENGES : BRAZIL, INDIA, KOREA

The constraints of new technology and institutional weakness The relatively early entry of Brazil and India understandably resulted in small plant size, typically under 1 mt. India's three 1.0 mt plants in the 1950s and 1960s were ambitious by most standards. However, blast furnace innovations by the Japanese had raised the minimum efficient scale significantly. Related changes in rolling mill technology added further to overall scale of production. It was not unusual to find integrated plants ranging from 2 .0 to 10.0 mt annual capacity. Consequently total capital requirements, as we saw in Table 3.3, also increased dramatically, running into billions of dollars. The evolution of capacity expansion in Brazil and India shows that neither one has been able to keep up with changing economies of scale. By 1973 Brazil's largest plant was under 2 mt and the average size of three stateowned integrated mills was 1.37 mt. On the other hand, India's Bhilai plant built by the Soviets had already reached 2.5 mt by 1967. The average size in the 1970s for the four original state-owned integrated plants was 1.9 mt, considerably larger than those of Brazil. However, both averages fell considerably short of the prevailing Japanese average of 7.6 mt (National Academy of Engineering 1985 :34). In the past two and a half decades both Brazil and India increased their plant size but could not maintain best-practice scale economies. With further investment, Brazil was closer to attaining economic scales with average plant size of over 3.5 mt of crude steel capacity. This was attained over several years in several phases. The Indian average, on the other hand, dropped drastically for want of investment funds, technical problems with existing capacity, and the government's bailing out of lISCO, a technologically obsolete firm. In the mid-1990s India's average plant size, including its most recent greenfield, stood at 2.56 mt . This average is considerably lower if real capability is considered. For example, two plants located in the eastern state of West Bengal, lISCO and Durgapur Steel, have been unable to produce at their designed capacity. On average they have had a utilization rate of only 47 percent during the 1988-93 period (computed from Steel Authority of India Limited 1994:21). It is instructive to note that POSCO, Korea's stateowned firm, began with a 1.03 mt capacity in its first stage construction of Pohang and attained a size of 5.5 mt by 1978. By 1995 average integrated plant size stood at 11 .5 mt, exceeding the Japanese average. To ex plain divergent capacity expansion and technology development paths two observations are in order. First, the timing of investments was critical: by entering the industry early, structural barriers were more pronounced for India and Brazil. Second, Korea's later entry but rapid convergence with Japanese standards intuitively alerts us to the importance of institutional coherence as it was able to establish state-of-the-art plants. 97

CHANGE AND CHALLENGES : BRAZIL, INDIA, KOREA

The fact that Korea's technological trajectory was higher than India's or Brazil's indicates that structural dependence can be overcome. It was only in the post-1970 period that Korea constructed its two integrated mills. Therefore it is plausible, assuming similar institutional coherence, that Korea forged ahead because of timing of investments. With declining demand in the advanced industrialized countries and technological obsolescence in the 1970s and 1980s in the mature countries, Korea could induce competition among equipment suppliers and extract state-of-the-art technology at low cost for its integrated mills. For example, pasco purchased a blast furnace from Davy McKee, a British firm, at an interest rate of 4 percent below OECD standards. With increased competition among equipment suppliers, ironically the sellers have also become dependent on creditworthy buyers." This ability to bargain with equipment suppliers could not be reproduced in Brazil and India because of a lack of strategic vision. The institutional delays in project completion also undermined bargaining effectiveness. Both countries set up greenfields: CST and Acominas in Brazil, and Vizag in India in the 1980s, the decade in which pasco's Kwangyang Works was constructed. Yet a closer examination shows that plants in Brazil and India, despite their recent vintage, display various symptoms of poor planning. 17 These are in the areas of technology choice, product mix, siting, and investment costs. Comparing costs internationally is difficult. The reluctance of firms to divulge the actual terms and conditions make the numbers at best reasonable estimates. Brazil's greenfield CST, with a 3 mt of annual slab capacity (without continuous casters) has been estimated to cost a massive $3.13 billion, an average of $1,043/ton (Table 5.3). Of this outlay, 70 percent was for construction and equipment, while the remaining 30 percent was for site preparation and interest payments during the construction period." CST's equipment, up to the hot metal stage, is "world class," with a blast furnace capacity of 3.285 mt producing a yield rate of about 89 percent (from the ingot up to the slabbing stage). However, CST did not produce high-grade products and it was commissioned earlier than Korea's Kwangyang Works. Yet its investment cost was higher than Korea's Kwangyang Works of $6371 ton, which was less than two-thirds the cost of CST. 19 pasco also claimed that the second phase of another 2.7 mt capacity cost only $370/ton. Such a low cost has been attributed to the completion of most of the infrastructure in the first phase. The average investment per ton for 5,4 mt worked out to only $480. The total investment was a little more than $2.5 billion. Technologically Brazil's CST, Korea's Kwangyang, and India's Vizag plants share similar characteristics: modern, large-scale blast furnaces, BOFs, and computerized process controls. However, there are several glaring shortcomings when CST and Vizag plants are compared to Kwangyang. First, the investment cost per ton: all the non-Korean plants have a much higher cost than Kwangyang, with Vizag's cost at $3,000 per ton. Admittedly, there is 98

Table 5.3 Com parison of int egrated greenfields in Brazi l, Ind ia, and Korea Plant

Country

Blast furnace size (."r)

BOF

CC

Capacity

Location

Main products

($)

Slabs Semi -finished products Long products Flat products

Cost/ton

A~ominas

Brazil Brazil

1,043 3,050

3,707 2,294

2 x 280 2 x 200

No' No

3.3 2.0 b

Coastal Inland

Vizag Kwangyang

India Korea

3,000

3,200 3,800

3 x 130 2 x 250

Yes Yes

3.0 2.7 d

Coastal Coastal

CST

63r

Notes a b c d

Under construction Rolling mills purchased but not installed Other estimates are $480, $605 , and $ 1,000 per ton (see Table 3.3) First phase only, tot al capacity tod ay is 14 rnt

CHANGE AND CHA LLENGES : BRAZIL , INDIA, KOR EA

considerabl e disag ree ment over PO SCO's claims of $637/ton (perso nal interviews, Ni ppo n Steel Corpo ra tio n, N ippo n Kokan, Jap an Iron and Steel Federation, Tokyo, October 198 7; SIDERERAS, Brasilia, Decemb er 19 87). H owever, if we use th e market rate of $1,000 per ton, we still find PO SCO to be investm ent com petiti ve. Th ough CST's costs are margin ally higher, its plant and equipment are well below Kwangyan g's technologically. Unlike Kwan gyan g' s wide ran ge of flat products, CST pro duced semi-finished slabs for th e expo rt market. Until recentl y, CST has relied on th e tr ad ition al ingot casting meth od , thereby bypassing investment in expe nsive continuou s casters and rollinglfinishing mills. Second, Acominas is locat ed inland whereas CST is not . Jap an , followed by Korea, has demon str at ed th e efficacy of tidewat er locat ion s to impo rt raw materials and ex port finished products. Coas ta l locati on s also have builtin econo mies of scale as expo rt markets can be potentially tapp ed sho uld th e need arise. CST was design ed fo r th e ex po rt m arket and Kaw asak i's participation has had a bearing on its siting. For Acom inas, on th e other hand, th e nearest port and most major markets are over 400 km away. It relies on imp orted coke that has to be tr an sported over long distanc es by rail. 20 Third, th e product mix of output either deviat ed from actua l market demand or was simply poorly planned ." All th e non-K or ean greenfields produce relat ively low value-added products, for example semi-finished slabs, billets, and long products, such as wire rod s. Wh ile slabs can always be finished int o high-qu ality flat products, including coat ed sheets, billets and lon g products are essentia lly destin ed for th e con struction market where qu ality is not a major requ irement . India's latest integrated greenfield at Vishakapatn am has been one of th e most ex pensive plants in th e wo rld. Its choice of product mix (lon g pr oducts) is qu esti on abl e as we ll, give n cheap er alte rnative techn ologies for such products. Acominas' pro duct mix was designed to meet th e emerging railway pr oducts market but th e Brazilian Nationa l Railwa y Proj ect never took off. Thi s is not surprising given th e powerful tr an snat ion al autom ob ile industry lobby. Th e hu ge investm ent incurred for th e wro ng products when th ere are far less expensive alternative technologies, such as DRI/scrap-based processes, reflects th e institutio na l wea kness of th e two governments. The ina bility of both th e Indian and Brazilian govern ments to avoi d such elementa ry yet very costly technical blunders can be attributed to th e lack of sta te auto no my. Wh erea s PO SCO could bargain hard with for eign suppliers precisely becau se of its insulati on from politic al and bureaucratic meddling, Brazil and India were beholden to vario us political forces and regional rivalries. The inefficiency of th e Indian public secto r steel compan y was partly a result of bureaucrat ic regul at ion th at undermined coh erent decision-mak ing. N ume ro us gove rnment age ncies wo rke d at cr oss purposes, slowing th e investment mom entum and creating a technologically deficient industry. Th e 100

CHANGE AND CHALLENGES : BRAZIL, INDIA, KOREA

haphazard manner of technology upgrading is evident from the fact that new technology such as BOF-CC is adopted for expansion without scrapping the old technology such as the OHF and ingot casting. The Soviet-assisted Bhilai plant is a classic example where both old and new technology coexist, leading to technological fragmentation (see D'Costa 1998a). While such decisions are based on cost considerations they do not address the establishment of long-term viability of capital accumulation through technology-induced productivity increases. As Sengupta (1984:207-8), a longtime observer of the Indian steel industry commented: for any innovation and expansion involving expenditure of more than RslOO million [= $7 million] the Public Investment Board comprising representatives of Planning Commission, Departments of Expenditure, Economic Affairs, Industrial Development, Technical Development and the one controlling the industry has to approve the proposal after careful examination...and the Bureau of Industrial Costs and Prices has been responsible for investment and pricing strategies .. . As a consequence profit objective has been relegated to the background and the motivation of accumulation of capitalist production has been replaced by a variety of vague objectives and norms resulting in uncoordinated decisions and inefficiency.. . Unlike the Brazilian state-owned firm, the Korean state-owned company has been able to reduce its dependence on foreign capital and enhance its financial strength. For example, POSCO reduced the foreign loan component from 53-4 percent for Pohang to 29-3 percent for Kwangyang (Pohang Iron and Steel Company 1987:4). Whereas self-financing was 75 percent for Pohang, it was 100 percent for Kwangyang, clearly reflecting greater availability of internal resources (see US International Trade Commission 1988:10-16). Almost all foreign loans for the Pohang plant have been repaid and only about 40 percent ($676 million) for Kwangyang remained unpaid in the early 1990s (Pohang Iron and Steel Company 1992:8). POSCO also raised revenues through stocks. In March 1988 POSCO released more than 25 percent of its stock that was owned by private banks to the general public. Three months later they were traded at nearly triple the original value (Metal Bulletin, June 16, 1988:31). The value of the 21 percent of POSCO's 91.8 million shares was approximately $8.34 billion (W717IUS$). This represented nearly 6 percent of the value of all shares listed on the Seoul Exchange at the time." While normal profits have been low by private sector standards, POSCO's offer of stock dividends in lieu of cash dividends was readily accepted (US International Trade Commission 1988:10-16). Standard & Poor granted POSCO an A+ credit rating, the highest attained by any South Korean company or any steelmaker in the world (Busin ess Times 1992:67-8). Raising loans on the foreign credit market is no longer a problem for the South Korean steel industry nor is POSCO dependent on the Korean Treasury. 101

CHANGE AND CHALLENGES : BRAZIL, IN DI A, KO REA

Unlike th e institutiona l par alysis found in India, th e articulateness of th e Korean stra tegy speaks vo lumes for institutional ca pacity. POSCO , with th e help of th e sta te, maint ained an investment momentum and ke pt up with techn ological change. The Korean com pany found ingenio us metho ds to create a wo rld -class steel industry. With institution al autono my POSCO could resort to " delay tactics" to secure best-pract ice technologies (perso na l interview, POSCO , Poh an g, Oc to ber 1987). O ne delay tactic enta iled a negoti at ing pro cess whereby PO SCO first progressively stiffened th e term s and condi tions of purchasing technology to elimina te all but one potential sup plier and th en negot iat ed a techn ology tr an sfer at favor able prices. Once th e terms were accepted, th ey were quickly followed up for effective tr ansfer and abso rptio n of techn ology (Enos and Park 1988:234 ). Th is kind of auto no my was missing in th e Indian and Brazilian steel companies.

Institutional capacity and industrial relations Th e r ec ent gree n fiel ds con structed b y Br a zil a n d Indi a , th ou gh technologicall y not far behind Kor ea's, suffer from a host of commerc ial and fin an cial pr obl em s. The expans ion of steel cap acit y in Brazil and India has been also acco mpa nied by unfettered growth in employment at th e industr y level. While employment growth is difficult to check under a rapid inves tme n t pr ogr am, Korea h as n ot succum be d t o the pr essures of maximizing employment even th ou gh PO SCO 's public secto r sta t us m akes lab or red undanc y difficult. In contrast, India and Brazil have foll owed a growth path th at is quite out of line with industr y sta nda rds (Table 5.4 ). Th e five Indian integr at ed plants with an aggrega te crude steel output of 9-83 mt employed nearly 185,000 employees, comp ared to PO SCO's 23,951 for an output of 20 mt in 1992. India's pr ivat e integr at ed firm, TI Se O , was Table 5.4 Em ployment in th e steel industry

1988-9 India 5 plants (excluding Vizag) Vizag

TISeO lISCO Brazil South Korea b

POSCO

219,997 41,422 38,032 167,414 (1989) 62,128 22,621 (1989)

1994-5 183,459 16,656" 44,736 18,833 77,547 (1996) 72,099 (1993) 20,397 (1995)

Sources: Korea Iron and Steel Assoc iation; POSCO; Stee l Aut hority of Indi a Ltd ; In sti tu te Bras ileiro de Side rurgia, var ious years Notes a Includes operations, tow nship, and captive mines b Iro n and stee l ind ustri es

102

CHANGE AND CHALLENGES : BRAZIL, INDIA, KOREA

marginally better than the state sector, with 43,324 workers producing 2.5 mt of crude steel. This average of 57 tons per worker per year is close to SAIL's 53 tons per worker per year. The 1992 average per employee output for the Brazilian steel industry was 218 tons per year compared to Korea's 420 tons per year (Korea Iron and Steel Association, Steel Statistical Yearbook, 1995; Institute Brasileiro de Siderurgia 1997). Japanese output per employee was 602 tons of crude steel for 1995, reflecting greater automation and more efficient operations. The large discrepancy in employment between India and the others, and by implication in productivity, can be explained by both technological and institutional factors. We have already examined the barriers associated with structural dependence and the challenges emanating from institutional weakness. Indian restructuring has been particularly hard hit by this weakness, compounded by the demands of public sector steel workers in alliance with various political parties. Unions are able neither to aggregate their collective interest nor, given their veto power, to allow the state enterprise to make decisions that are relatively independent of political interference. This difficulty was elaborated by one SAIL member of personnel department staff: The labor laws are on the "concurrent" list at the central and state governments . The laws are formulated by the former and implemented by the latter. For a particular law the enforcement machinery differs from state to state. Durgapur is in a state that is very pro-labor [Marxist ruled] and therefore the management must make concessions to labor. There are three major unions in Durgapur, while lISCO [in the same state] has five. The Trade Union Act permits union formation with a minimum of seven members. With one union, as in the case of Bhilai, it is much easier to negotiate. It is not the demands of labor as a whole that is problematic but rather agitation created by strong unions in specific shops which tend to be very localized. Aside from flexing their muscles in that shop there is a great deal of union rivalry. Furthermore, union leadership is led by persons who do not have any connection with the steel industry but rather belong to major political parties at the state or national level. The over-politicization of industrial relations, particularly by external agents, has led to severe overstaffing on the one hand and labor strife, albeit declining, on the other in many state-owned steel plants. Two of them in the state of West Bengal employed nearly 50,000 employees with a total output of less than 1.5 mt per annum, and average output in 1992-3 of less than 50 tons per employee a year (Steel Authority of India Limited 1994). This is about 6 percent of POSCO's 835 tons per employee output in 1992 (Pohang Iron and Steel Company 1996). Differences in the vintages of capital equipment, capital intensity of the production process, and the degree of 103

CHANGE AND CHALLENGES : BRAZIL, INDIA, KOREA

subcontracting have a bearing on such productivity differentials. Both of these plants in the state of West Bengal are labor-intensive and employed obsolete plant and equipment. However, politicization also has been rampant, accounting for nearly 100 percent of all the major steel industryrelated industrial disruptions in India in the late 1960s and early 1970s (Krishna Moorthy 1984:336) .13 Lately, industrial relations have been on the mend but excess manpower has been a heavy institutional legacy in India (see Rudolph and Rudolph 1987:260-2). A "sons of the soil" policy by which local residents are employed with the gradual absorption of contract (construction) labor as permanent employees has added to the payroll without contributing to productivity." For example, Vizag, India's most recent greenfield, which boasts state-of-the-art technology, was compelled by local political groups to hire a large number of the local population displaced by the plant. Nearly 25 percent of them were illiterate (Venkata Ratnam et al. 1995:269). As project delays mounted, nearly 13,000 individuals claimed to be displaced. Vizag already employs 15,000 workers, with an average output per employee of 200 tons a year. Although this is nearly two to four times the average of older integrated plants, both state and private, it is about a fourth of POSCO's average. The Indian private sector integrated company, TISeO, did not escape this "compassionate" hiring practice found in the Indian state sector and often fuelled by populist politics. At the time of its 1980s modernization program, it recruited 2,000 local unskilled and unemployed workers. Such a practice by the private sector firm may have been motivated by less capital-intensive technology, cheap labor, and a sheltered market. In the Indian case it is clear that lack of state autonomy in the context of patronage politics has generated high levels of steel industry employment but has contributed little to technological or commercial strengths (see Sengupta 1984:213). Brazil also suffers from institutional deficiencies, albeit on a lesser scale than India. The presence of foreign capital and their local partners within the framework of a corporatist regime (see Wesson and Fleischer 1983:56; Bordin 1986) has limited the capacity of the Brazilian state to empower state-owned firms to maintain commercial viability. On the one hand, labor has been repressed under military regimes and, on the other, been pampered into participating in the corporatist arrangement." Thus the favored unions in the industrial sector, particularly those under the public sector, have benefited from this relationship. Generating employment and maintaining high wages in the public sector as state objectives have subsequently followed, creating institutional impediments to technology-based restructuring. Even as early as 1967, when the First National Steel Plan was being formulated, the Special Advisory Group on the Steel Industry reported that there was surplus manpower in the industry (Dahlman 1978:78). High levels of employment have continued in the state-owned 104

CHANGE AND CHALLENGES : BRAZIL, INDIA, KOREA

steel plants. In 1990, the five state-owned integrated plants had an employment level of 59,635 (World Bank 1992:86) and total crude steel output of 15.81 mt in 1991 (Institute Brasileiro de Siderurgia 1996:1/7). Output per employee was approximately 265 tons per year or 32 percent of POSCO's output per employee. In the late 1980s the Brazilian state steel industry apparently employed 40 percent more labor than it actually required (personal interview, SIDERBRAS, Brasilia, December 1987). To be more competitive industry officials at Acominas opined that manpower should be reduced by 10 percent (personal interview, Acominas, Belo Horizonte). In individual plants, such as Acominas, industry officials suggested that as much as 30 percent of non-production staff of 2,000 was excess manpower (personal interview, Acominas, Belo Horizonte, December 1987). But at the same time state managers pointed out that retrenching labor was counter to the "social" objective of maintaining employment. This implied a low diffusion rate of automation on the one hand and reduced autonomy of the state enterprise in expanding best-practice technologies on the other. Korea's POSCO faced a very different industrial relations system. The state established the Federation of Korean Trade Unions (FKTU) to consolidate all unions under a single agency and most unions were co-opted (Deyo 1987:185).26 Labor-management councils were set up at the behest of company management under the state dominated Korean industrial relations (see 1m 1992). Strikes were banned, particularly in public sector firms. In 1987 national labor laws permitted union formation. But they neither undermined the FKTU nor eliminated the consent of the Ministry of Labor for forming unions. Evidence of an anti-labor stance persisted even as Korea in 1991 became a member of the Geneva-based International Labour Organization. Until 1988, POSCO's employees were non-unionized. All grievances were handled by labor-management councils that met once a month. POSCO's management has been insulated from the government, thus enabling POSCO to arbitrate labor disputes effectively. In August 1987 when most of Korea's heavy industrial workers went on strike demanding higher wages, POSCO's employees were conspicuously absent (Business Korea, May 1987:11-12; personal interview, POSCO, Pohang, October 1987). The demands ofPOSCO labor, despite widespread strikes in other related sectors, were contained by a number of strategies. First, POSCO wages have been maintained at twice the manufacturing average and employment is life-time. POSCO employees also get excellent non-pecuniary benefits, such as housing and children's schooling. Second, as a significant portion of the work is contracted out (Amsden 1989:209) and POSCO jobs are coveted, wage demands are stabilized through higher wages for regular workers. The threat of further subcontracting dampens many labor demands. Workers themselves are quite conservative, especially older ones. Third, POSCO management has distributed about 10 105

CH AN GE AND CHALLEN GES: BRAZIL, INDIA, KOREA

percent of its stock to its employees. These strategies, in conjunction with a highly regimented workforce, have made POSCO strike-free and highly competitive. Its employees log an average of over 55 hours per week, higher than most other Korean industries (personal interview, POSCO, Pohang, October 1987).27 Absenteeism is very low and paid leave extremely limited (Amsden 1989:212). With recent democratization of Korean politics (see HartLandsberg 1993:279), independent unionization in POSCO did not catch on (Innace and Dress 1992:176). Formed in 1988 POSCO's union lasted just three years, indicating the weight of "patriarchal company welfarism" (Hoon and Park n.d.: 5) in stifling collective dissent.

Delays, debts, and deficits Inexperience with large-scale projects can understandably lead to delays, cost overruns, and losses. But, as we have seen, even after overcoming structural dependence, institutional weakness has been a continuing feature in Brazil and India. Korea on the other hand avoided most of these difficulties. In contrast to Brazil and India, where project delays and cost overruns were common, POSCO contained construction costs by completing projects on time. Modern facilities notwithstanding, several greenfield projects in India and Brazil have been white elephants. For example, the costs incurred for Acominas and Vizag were too high relative to international norms and did not justify the scale, location, or product mix . With respect to the industry as a whole, while Korea narrowed the technological gap with Japan, several Indian plants became technologically obsolete. It is evident that even as the state coordinated investments and expanded steelmaking capacity it was beset with institutional incapacity. " Compared to Brazil, the Korean experience has been different. For example, POSCO secured cheap supplier credits with 5-7 percent interest and 10-20year repayment periods (Paine Webber 1985:1-9). Low wage rates for construction, round-the-clock construction work, and timely completion of projects contributed to POSCO's lower costs, especially by reducing the interest burden. In contrast, the Brazilian authorities have not been very effective in negotiating with foreign suppliers. Stringent financial terms and the general delays in project implementation raised costs significantly." Further refinancing was needed that carried even stiffer conditions (CST 1985:15). 30 Cost overruns were higher in the case of Acominas, Brazil's newest greenfield plant. Most of the equipment was obtained from Europe, mainly Britain and France. Commissioning the plant took nearly a decade and Phase I remained incomplete as late as 1988. Millions of dollars of rolling mill equipment lay idle at the plant site for several years. Shortage of funds and conflicts over siting nearly doubled the original estimates. In 1978 the estimated cost was $2.7 billion. By the time the plant was completed in the early 1980s the total cost was over $6 billion. Its interest payment alone was $2.246 billion 106

CHANGE AND CHALLENGES : BRAZIL, INDIA, KOREA

(Acominas 1986), an amount exceeding POSCO's first stage investment for Kwangyang. Institutional weakness has also meant financial dependence on international firms and negative return on investment. For example, CST relied on routine supplier credits (or tied loans) to finance equipment imports. But in exchange SIDERBRAS, the state holding company, permitted foreign equity. Part of the agreement also included supplying a fixed amount of slabs from CST to be sold to Kawasaki and Finsider, its foreign partners. These commercial arrangements, while providing a captive market and a source for foreign exchange earnings, were not necessarily the best option for CST. For example, in the first half of 1988 CST's average slab export price was about $l92/ton while the domestic price was $223 (calculated from Metal Bulletin July 21, 1988:25). While export markets bouyed capacity utilization and generated foreign exchange reserves, lower export prices translated into significant losses for the firm and mounting debts as well. In 1987, SIDERBRAS, the state-owned holding company had over $17 billion in loans. Its profitability from 1979 to 1985, measured in terms of net profits as a percentage of sales, has been consistently negative. The highest loss was negative 75 percent in 1985 (SIDERBRAS 1987:38). The Restructuring Plan of the SIDERBRAS System stated that: The margin between cost and revenues gradually narrowed, practically eliminating the companies' ability to generate funds internally. In some cases, these margins became strongly negative. The cumulative effect of domestic controls of flat steel prices resulted in a revenue loss of about US$5.5 billion during October 1978-December 1986. This figure rises to US$8.2 billion when additional financial costs absorbed by the companies to cover the losses with outside financing are considered. (SIDERBRAS 1987:8) Thus the burden of accumulated losses and interest payments on foreign debt worsened on account of administered prices at home and competitive prices in the world market. The state-owned enterprise was caught between government-supported low prices and insufficient investment resources. The National Treasury was not supportive in raising new loans, instead SIDERBRAS had to rely on other sources for investment. Nearly 91 percent of SIDERBRAS' resources were from third parties and only 9 percent was its own capital (personal interview, SIDERBRAS, Brasilia, December 1987). Under such a cash crunch the company was forced to seek the conversion of its $11 billion debt to government equity. Nor has the Indian steel industry been immune from financial hemorrhaging. Various construction delays-over three years for the 107

CHANGE AND CHALLENGES : BRAZIL, INDIA, KOREA

German-assisted Rourkela plant-and cost overruns have been typical. Investment cost for Rourkela, estimated in 1955, increased by over 80 percent by 1963. At the end of 1982-3, with delays in project execution, the expansion cost for Bhilai for an additional 1.5 mt increased by nearly 200 percent within eight years (Krishna Moorthy 1984:107). Although the foreign exchange component declined to 11 percent, the additional expansion was again under open hearth process, a technology that was already obsolete. The Soviet-assisted Bokaro plant also suffered delays and cost increases and, despite easy credit terms from the Soviet Union, could secure neither large BOFs nor any continuous casters." After years of indecision, the Vizag plant was finally completed at double the investment norm. The feasibility report for Vizag was prepared in 1971 and the Detailed Project Report in 1977, but actual construction did not begin until the mid-1980s. The 3.0 million ton expansion stage of the Vizag plant was completed in the mid-1990s. Its product mix of low-value billets, bars, structurals, and wire rods is, commercially speaking, quite inappropriate for a capital-intensive integrated process. It is apparent that the project was hastily conceived, despite years of bureaucratic wrangling. The plant was already beset with problems even before it was commissioned as noted by an official representing the project: Only on hindsight I can say that we could have done better. For rolling mills we should have explored more countries. We gave too little time for potential suppliers to come to a decision. For a project of Rs 3,000-4,000 million at least Rs5 million must be spent on project reports supplementing any serious offer. (Personal interview, Rashtriya Ispat Nigam, New Delhi, July 1987)32 Like SIDERBRAS, the Indian state-holding company, SAIL, suffered from poor project management and commercial planning. SAIL has been profitable, as measured by net profit (after depreciation and interest but before taxes). However, its accumulated end-of-year balance, including adjustments made for dissolved companies, has been consistently negative during the 1972-86 period (Steel Authority ofIndia Limited 1987a: 25). Between 1982 and 1984 the company racked up net losses of over Rs 3 billion . SAIL's internal resource position has been precarious. The problem has been exacerbated as government commitment for steel investments has been waning. " In the seventh Five-year Plan (1985-90), only 1.84 percent of the total plan outlay was devoted to steel (Pingle 1996:229), representing only 25 percent of estimated required funds (personal interview, SAIL, New Delhi, July 1987). A price hike was the only way in which SAIL could redress its financial predicament (personal interview, Joint Plant Committee, New Delhi, July 1987), undermining the very mechanism by which state-led capital accumulation was to take place. 108

CHANGE AND CHA LLENGES : BRAZIL , INDIA, KOR EA

In contrast, th e Korean steel com pany had an annual average of W 233.85 bill ion (nearly $3 00 mill ion ) net earni ngs after taxes during th e decad e beginning in 19 86. PO SCO's return on assets, th ough low, has been positive, reflecting, on th e one hand, modern plant and equipment and, on th e other, maintenanc e of lower pric es for th e larger accumulatio n process. Its int ernal resources ha ve been large eno ugh to maintain a fairly high rat e of investment . From 1992 to 19 96 , PO SCO invested a tot al of $10.69 billion (at W8001 $), or an annua l avera ge of $2. 13 billion (perso nal communication , PO SCO , Decemb er 199 7). In th e same period, th e Korean indu str y as a who le invested tw ice as much as PO SCO. Technology diffusion and capability in Brazil, India, and Korea Aside fr om institution al imp ediments th at del ay pr oject plannin g and executio n, low capacity ut ilizat ion also hamper s th e learning pr ocess. H owever, technical difficulties arising fr om th e ada pta tio n of fo re ign technologies to local condition s can be a source for technological cap abil ity. With accumulated indu strial expe rience techn ology diffu sion can be ex pected to speed up. Whil e th e rate of investment can be th e basis for learning, learn ing also dep ends on cap acity ut ilizati on (see Ram amurti 198 7 ). Dem and determines th e rate of util izat ion of plant and equipment. Plants designed with large econo mies of scale impl y long production runs and hence grea ter susceptibility to utilizati on rates. To maintain high rates of utilizati on Brazilian and Korean plants have tap ped dom estic and expo rt markets. Consequently th eir util izat ion rat es have been high, despite th e cyclical nature of th e steel indu stry. In most years Brazil had over 90 percent utilization rate, while Korea's PO SCO had close to or over 100 percent (Paine Webb er 1987: tabl e 17; Innace and Dr ess 1992:250 ). Indi a's utili zat ion rat es have been mu ch lower, anyw here from under 40 percent in th e case of lISCO to over 90 percent in th e Bokaro plant. Ind ia's capacity util izat ion ha s been low mainl y due to deterior at ion of plant and equipment. Slackening dem and had occas iona l effect as wel l. Capacity util izat ion for Rourkela from 1959-60 to 196 7-8 average d only 67 percent. Lat er, lISCO and Durgapur faced severe pro blems. Th eir combined cap acity ut ilizat ion from 1974-5 to 1992-93 averaged 60 percent (Steel Authority of Ind ia Limited, Statistics 1994 ). Th e sta te-owned Bhilai plant has con sistentl y ma int ained high util izat ion rat es, whereas th e public secto r as a who le and th e sta te-ow ned Durgapur plant have faced con siderabl e difficulti es (Figure 5.3) . Indi a's actual production ha s sha rply deviated from th e rat ed cap acit y. Whereas th e Detailed Proj ect Report cap acit y refers to th e installed cap acity, as sta ted in th e project report it is often an engineering artifact. Th e age of th ese plants, inadequ at e technological upgrad ing, th eir relianc e on poor-quality raw materials, and inadequ at e maint enance have 109

CH ANGE AND CH ALLENGES: BRA ZIL, INDIA, KOREA 120

......

100

.-.. _. _.. -. --' .. ..

<.

--

. .... - ....

- - - - - Public sector

40

••••• TlSCO - - Bhilai

20

- - . Durgapur

Figure 5.3 Capacity utilization in India Sou rces: Krishn a Moor th y (198 4); Steel Auth ority of India Ltd , Stat istics fo r Iron and Steel Industry in India (various years) No te: Bhilai and Dur gapur repr esent India' s two widely var ying performers. TISCO is a privat e comp an y

rendered th em incapable of ach ieving a high utilization of designed capacity. Thus th e rat ed capacity for Durgapur, Rourkela, and lISCO is questionable. Based on actual production, Durgapur's capacity prior to modernization was less than 0.75 mt, for Rourkela 1.41 mt, and for lISCO, a mere 0.37 mt (Steel Authority of India Limited 1994). Not dogged by th e institutional incapacity of th e Indian state-owned indu stry, th e privat e steel firm TISCO performed much better commerci ally. Technologically, however, it faced similar problems of plant and equipment ob solescenc e, excess employment, and low productivity. Its commerci al successes rested on its managerial autonomy but also on its participation in th e state -led price cartel in a she lte re d domestic m arket . It too fac ed technological fr agmentation, with several small, ageing bla st furn aces, and a steel meltin g shop using ob solete OHFs and more recent BOFs. After recent moderni zation and up grading of faciliti es both ingot castin g and continuous castin g coex ist. Th ou gh th e plant ha s avera ged a high capacity utiliz ati on of over 97 percent (Steel Authority of Indi a Limit ed 1994:28 ) and high profits (Krishn a M oorthy 1984:172), its lab or productivity is very low compared to th e Brazilian and Kor ean averages. In 1992-3 its output per employee wa s only 65 ton s per year. Th e inability of Indian int egrat ed plants to obtain m aximum output from pl ant and equipme nt, am ong other things, is also dependent on 110

CHANGE AND CHALLENGES : BRA ZIL, INDIA, KOREA

peri odic investment in m od ernizat ion . In th e Indian case in vestm ent in th e steel industry has been quite erra tic. For th e fir st three Five-year Plans (195 1-66) investment funds allo ca te d to th e public secto r steel pla nts increased dr am atically (Steel Author ity of India Limited 1987b: 14 3; see also Tabl e 5.2 ). But fr om th e fourth FYP onward th e imp ortanc e of th e steel secto r con sistently dimin ished. In th e seventh FYP (1985-90) th e sha re of t ot al gove rn me nt outlays for th e steel secto r was a mer e 1. 8 percent and 3.5 perc ent of tot al plan outlays and t ot al public secto r outlays resp ectively. M o st of th ese expen d it ures h ave been directed t ow ard cap acity ex pansion; only a bo ut 5 perc ent has been spent on updat ing technology (Steel Autho rity of In dia Limited 19 87b : 144 ). Techn ological cap ab ility is also influenced by th e diffu sion of mo dern technology. Under chan ging technology, th e faster th e rat e of ado ption th e grea ter is th e possibility for learning. Korea, for exa mple, rap idly ado pted large blast furnaces and opted for BOFs and continuou s castin g (Table 5.5 ). In contrast, partly becau se of earlier entry and partly becau se of institution al incap acit y, India was saddled with sma ller blast furn aces, obso lete Bessemer and open hearth furnaces, and lagged significantly behind Korea and Brazil in continuou s castin g. Exp an sion and moderni zati on of plants took place in fits and sta rts, with unremarkable industria l perform ance. For example, lISCO , esta blished in 1939 , used th e Dupl ex-Bessemer and OH process. Until 1965-6 capacity utilizat ion average d 90 percent ; recentl y it has been hoverin g aro und Table 5.5 Diffusion of modem techn ology: basic oxygen furnace (BOF)aand continuo us casting" (%) 1960

1965

1970

1975

1980

1985

1990

1995

3.7

19.4

Japan

14.9

69 .0

Brazil

13.3

30.9

55.8 (3.7) 95 .0 (5.6) 4 5.9 (0.8) 11.4

74.3 (9 .1) 98.7 (31.1) 58.3 (5.7) 18.8

83.9 (20.3) 100.0 (59 .5) 87.7 (33.4) 30.5

89.0 (44 .4) 100.0 (91.1) 95.2 (43.7) 44 .6

94.3 (67 .1) 100.0 (93 .9) 97.1 (58.5) 57.0

100.0 (91.0) 100.0 (95.8) 100.0' (71.6) 66.1

93.5' (19.7)

98.4 (32.4)

100.0 (63 .3)

100.0 (96.1)

100.0 (98.2)

US

India

11.1d

(21.7)

S. Korea

Sou rces: Lucke (19 93); Int ern a tion al Iron and Steel Insti tu te (1996); In sti tu te Bt asil eiro de Siderurgia (19 97) Notes a BOF share as percent age of no n-electr ic furn ace steelmak ing b Cont inuous casting shares in pa rent hesis c BOF share nearly 100% and CC figure for 1996 d Figure for 196 8 e Integrated prod uction in Korea began in 1973 - Not a pp lica ble

111

CHANGE AN D CH ALLENGES : BRAZIL , INDIA, KOR EA

40 percent of th e origina l. Although th e Bessmer converters were ph ased out in 198 8, th er eb y m or e th an doubling capac ity util ization , th e plant is technologically obso lete. Plan s to moderni ze it have rem ained on th e book s for severa l years. An internati on al compari son of diffu sion of modern techn ology, such as th e BOF and CC, reveals th at amo ng th e three lat e industria lizing countries Korea' s rat e of diffu sion has been th e fastest. By 19 75, over 93 percent of Korea's integrated output as a share of non-electr ic furn ace output was und er th e BOF, compared to Brazil' s 58 percent and India's 19 percent. Since th en Brazil has closed th e ga p with Korea , while India still lags beh ind . In 1995 , both Brazil and Korea had 100 percent int egrat ed output und er th e BOF compar ed to India 's 66 perc ent. In continuou s casting, Kor ea mat ched Japanese sta nda rds by 1990 with a 96 percent rati o, while Indi a had a paltry 22 percent. Brazil narrowed th e CC gap in th e 1990 s to nearly 72 percent in 1996 . Indi a still lagged behind with only 34 percent. The inabil ity to keep up with mod ern technologies was also compounded by learning diff iculties (see D' Cost a 1998a ). Th e ado ptio n of diff erent processes from diverse sources, varying plant size, and institut ional bottlenecks made buildin g techn ological cap ability a challenging task. For exa mple, th e Rourkela bla st furn aces took five years to reach th e rated cap acit y (Krishna M oorthy 1984:92-4 ), whereas PO SCO's first blast furnace took less th an tw o years . Th e frequ ent cha nges in techn ical par am eters of th e equipment supplied by different foreign compani es (particularly by th e Soviet Union for three of th e five state-ow ned integrat ed plants) result ed in fra gment at ion due to varying vintages of capital equipment th at belon ged to different proc esses being of different sizes, and from different suppl iers.34 Th e gra dua l learningby-d oing by Indi an firm s acco mplishe d in th e last three dec ad es was con siderably reversed (D' Me llo 1986:182 ). PO SCO 's techn ology strategy has been quite different. It sourced similar types of equipment from th e same supplier. Thus Davy McK ee supplied PO SCO with nearl y all its identical blast furn aces. Th e second ph ase expansion of Kw an gyan g was a virtual repr oduction of Ph ase I. It cut down on site prepar at ion and eliminat ed any pot enti al new problem s th at could have arisen with different plant and equipment. Ca pa city ex pansio n based on duplicating modern facil ities and repeating imp orts of similar equipment thu s placed Kor ea's learning on a higher level (Figure 5.4) .35 As can be seen from th e figur e, th e successive installation of similar-sized blast furn aces exhibits increasingly shorter learning cycles. For exa mple, th e second BF took two months to reach a 1,500 ton s/ day/m' tap pin g rati o compared to th e third BF, which reached nearl y 2,000 ton s in th e same period. Techn ological capabil ity is also demon str at ed by th e extent of capacity " stretching," th at is, pr oducing out put that exceeds designed cap ac ity (Da hlma n and Westphal 1982 ). M astering techn ology, improving ope ra ting proc edures, and reducing costs allow ed both Brazil and Korea to exhibit 112

CHANGE AND CHALLENGES : BRAZIL, INDIA, KOREA 2.5

2 ~E

~ III

~l:

g

----- ---

1.5

s

--- -------

.., .. .. .. ..,

~

'

Cl l:

-c,

~

""'..

..... -------------

-.... -..... -

",

.., ...

'

'

.. ..................... '

• • • •• Japan Group --·1stBF ----- 2ndBF

0.5

- - 3rdBF

O+-----,-------,r----.-------,-------,r-----, Bumingin

2

3

4

5

Months in operation

Figure 5.4 POSCO's learning curves for Sourc e: POSCO (company documents )

blast furnace (BF) operation

Notes 1 Japan Group denotes the learning curve based on the initial offer made by the Jap ane se consortium 2 Tapping ratio is the output per day per rn'

various degrees of capacity stretc hing (Enos and Park 1988:190-207). Among the three integ ra ted plan ts in Brazi l, USIMINAS was the most successfu l in stretching capacity and attaining the best productivity rates. In 1977 its output per emp loyee per year of 261 tons exceeded US productivity of 255 (Dahlman 1978:6). Similarly, in th e early 1980s, Pohang's fou rt h phase expansion entailed capacity stretching by 0.6 mt beyond the designed capacity of 3 mt. In the fina l phase of Kwangyang expansion, POSCO was ab le to add an additional 1.0 mt. POSCO's overa ll "incremental" output stood at over 2 mt (plant visit, Poh ang, August 1995). This output did not require majo r spending on capita l equipment. Instead, sma ll steps, such as decreasing tap-to-tap time from four minu tes to one minu te in steelmaking shops, reducing ladle thickness to increase the size of the cha rge, and increasing the number of wo rking days, were behind this incr emental change. Techno logical capability is also enhanced by backward integra tion whereby local firms become important supp liers to the industry (see Taniura 1986 ). In the early stages of lat e industria lization it is difficu lt to increase local conten t. All three governments in the 196 0s and 1970s established capita l goods producing firms in the public and pr ivat e secto rs. In India th e H eavy Enginee ring Co rporation (HEC), an East Bloc-aided project, was set up with 113

CHANGE AND CHALLENGES : BRAZIL, INDIA, KOREA

the sole objective of supplying steel equipment. However, with continued imports of most steelmaking equipment, HEC's technological capability was limited. With poor sales, HEC's worsening financial situation was exacerbated by its already weak technological foundation, undermining the very objective for which the government had set up the corporation. For financial reasons, perfectly capable domestic firms are also unable to compete with foreign suppliers (personal interview, Acorninas, Belo Horizonte, December 1987). In the mid-1980s when Acorninas, Brazil's newest greenfield was constructed, the Brazilian state-owned equipment producer, USIMEC, was helplessly sidelined for want of long-term financing. An Acorninas official, lamenting the contemporary form of structural dependence, remarked: About 60 percent of USIMEC's capacity is idle. There are no orders for equipment. It is because financing projects by USIMEC is difficult. England gave us a long time for repayment of loans for the blast furnace, probably because Davy McKee's orders were small and they had to secure markets. The problem is conditions imposed on loans. The loans we get are supplier credits [that is, tied loans]. So we have to purchase equipment from the firms of those countries whose governments and banks are involved. New technology and money are related and it is very difficult for the developing countries to obtain them. (Personal interview, Acominas, Belo Horizonte, December 1987) The National Bank for Economic and Social Development (formerly BNDE, without the S), relying on the treasury and public pension funds to make its loans, has a special Agency for Industrial Finance (FINAME) to provide low-cost finance to source domestically produced steel machinery. But the Brazilian steel industry had to rely on foreign sources for most of its financial and equipment requirement. As a result, weak linkages with domestic technology suppliers undermined rapid development of technological capability. Brazil has the technical skills for capital goods production but, like India, its learning process has been stunted because of external financing of plant and equipment. Brazil's local content ratio for engineering is very high for the production of steelmaking equipment but very weak in the finishing equipment area. Of the thirty-five areas under five categories of finishing, Brazil has engineering capability in only six (de Oliveira 1989; Guerra et al. 1989:57). Korea, on the other hand, was able to increase its local content rapidly. For its Pohang Works, Stage I entailed over 119,000 foreign engineer hours; by Stage III this was reduced to 491, and by Stage IV, to zero. Value of local content was 12.5 percent in Stage I, rising to 35 percent in Stage IV (Kang 1994:182). Virtually all areas of planning, construction, and engineering could 114

CHANGE AND CHALLENGES : BRAZIL, INDIA, KOREA

now be done by Koreans (see Amsden 1989:309). For Kwangyang, local participation was high. Fifteen firms representing 50 percent of plant and equipment were involved (Pohang Iron and Steel Company 1987:2). To ensure local technological capability for the future, POSCO insisted that foreign firms affiliate with domestic ones. At the plant level, POSCO took several steps to ensure technological learning and high capacity utilization. Enos and Park (1988:183-207) documented several cases of improvements in imported equipment design and operating procedures in POSCO's plants. Several innovations on the shop-floor were introduced. Two schemes introduced in POSCO's plants that contributed to learning were "zero defects" and "improvement proposal." The former ensured strict quality control while the latter sought employee suggestions to enhance operating efficiency. Both schemes resulted in significant cost savings and productivity increases, ultimately allowing the assimilation of imported technology (see also Amsden 1990:26-7). In-house training and overseas education in both technical and non-technical areas was provided for a vast number of POSCO's employees (Kang 1994:181). During the 1970s and up to the mid-1980s, POSCO sent about 1,900 employees overseas for training (Paine Webber 1987:1-3), with emphasis on general rather than specific training (Amsden 1989:210-11).36 In the 1990s, the Indian steel industry, confronted with the prospects of increased foreign competition, introduced a major suggestions scheme (Venkata Ratnam et at. 1995:271-80). By creating a multiskilled workforce, the Indian steel industry has been trying to restructure on the lines of the Korean one (see Venkata Ratnam 1995). In 1992-3, the number of suggestions increased by twenty times, resulting in savings of Rs 1,300 million. The Indian steel industry has extended its training programs to cover more employees. From 1988-9 to 1992-3, the number of trainees more than doubled, while the number sent abroad almost tripled, from 282 to 757 (Sengupta 1995:78). However, India's technological problems remain. While POSCO has been able to rely on its customers to improve products, by an extensive feedback system (plant visits, Pohang Coated Steel Co. and Pohang Steel Industry Co., Pohang, August 1995), the Indian state-owned firm is unable to crack the domestic market in the face of rising competition. For example, Union Steel, using POSCO's hot rolled coil produces galvanized sheets, which are then used by Samsung Electronic Company for refrigerators. By using the product and providing feedback, POSCO has been able to make better hot rolled coils. In the Indian case, the successful Maruti-Suzuki automobile joint venture between the government and Suzuki Motors of Japan does not source steel for auto panels from Indian plants. Instead, all pressed steel has been supplied by Japan (personal interview, Maruti Udyog, Gurgaon and New Delhi, July 1987, July 1991). The fact that a state-owned domestic steel industry is unable to produce the quality of steel required by a state-owned 115

CHANGE AND CHALLENGES : BRAZIL, INDIA, KOREA

auto firm reflects not only an institutional weakness but highlights the state of technology in existing plants." The emphasis on technological capability is further revealed by POSCO's investments in R&D. In 1977, W1.13 billion was spent on R&D, representing 7.3 percent of POSCO's profits (Enos and Park 1988:210). In 1983 the corresponding figures were W9.78 billion and 12.5 percent or roughly $12 million. Though far short of the Japanese norm of around 2.5 percent of total sales, POSCO in the 1990s has doubled its spending from 1 to 2 percent of sales. This norm far exceeds India's share of under 0.5 percent (Sengupta 1995:80).38For Korea, the immediate impact of R&D has been a decline in royalty payments. In the case of Pohang, royalty payments for construction and operating technology declined by 6.5 percent, 17.2 percent, and 100 percent in the second, third, and fourth stages of construction (Enos and Park 1988:189). These reductions are remarkable considering that each phase involved increasing size and complexity of hardware. To add more muscle to its technological capability, POSCO established the Pohang Institute of Science and Technology (POSTECH), patterned loosely after the Massachusetts Institute of Technology and the California Institute of Technology. It includes all engineering and instrumentation fields relevant to iron-and steelmaking (plant visit, Pohang, October 1987; POSTECH Prospectus, 1991-2; POSTECH visit, Pohang, August 1995). In 1987 the Research Institute of Industrial Science and Technology (RIST) was established to develop new technologies. PO STECH and RIST train technical graduates and act as a source of innovation for Korean industry as a whole. POSTECH can be seen as providing a collective good as its training of high-skilled labor benefits other related industries." In 1994 and 1995 POSCO also founded two overseas research centers: POSCO Tokyo Research Laboratories and POSCO Research Center Europe in Dusseldorf, Germany. They have been established to conduct research in core technologies as well as to source technical information. The cycle of technological capability is complete when the technology importer ultimately becomes a technology exporter. In this regard South Korea is still weak in design capability (see Chudnovsky et at. 1983; Chudnovsky 1986; Griffin 1991). However, as a result of its emphasis on technological learning and its success in mastering the engineering processes, POSCO has made some forays into technology supplies. Training of Taiwanese personnel from China Steel, installing a computerized system in Indonesia, and setting up a joint venture with US Steel in California (see Chapter 6) are examples of reverse flow of technology from POSCO (D'Costa 1993). Foreign technology manufacturers are also engaged in the production of steel hardware using Korean skilled workers and local equipment suppliers. Several Korean firms are subcontracted to design steel equipment, such as continuous casters, on behalf of foreign firms.

116

CHANGE AND CHALLENGES : BRAZIL, INDIA, KOREA

Conclusion: institutional capacity and industrial restructuring In examining state-led industrialization, we find that in Brazil and India there have been institutional impediments to technological dynamism. While both countries have been successful in establishing and expanding steelmaking capacity, thus contributing to the general shift in global production capacity, they have not been able to match Korea's investment momentum . Technologically their industries have not been as robust as Korea's. Although early entry to the steel industry may have contributed to the retarded development of the industry, the problems with more recent steel projects in both Brazil and India indicate otherwise. The timing of investments was important for Korea only to the extent that the Korean state had such an opportunity. But exploiting windows of opportunity in its external environment, such as the competitive technology market, was clearly a product of strategic intervention. The autonomy of the state, which was also extended to POSCO, definitely played a role in capturing the benefits of changing technologies. All three countries had some variant of industrial policy but only Korea could use it to build a technologically superior industry. Brazil and India did not have the institutional capacity to invest in modern technology. An overtly bureaucratic approach to industrial governance and populist policies, such as employment creation, limited the development of the Brazilian and Indian state-owned steel industries. State ownership guaranteed capacity build-up in all three countries but ensured rapid industrial change only in Korea because of its ability to maintain an investment momentum and thereby continuously take advantage of new innovations. The effective utilization of imported technologies contributed to local technological capability. However, the state, in attempting to foster capitalist development, could not act like a capitalist. Prices had to be kept low to develop downstream activities. Capitalist regulation required state initiative to develop an industry that would provide a key industrial input at controlled prices . The problem with this approach for capitalist development has been the inability of state-owned firms to generate internal resources and secure modern technologies on a continuing basis. India fared the worst because of the heaviness of the state sector. Low administered prices effectively subsidized a bloated public sector, serving private capital less than the downstream industries under government tutelage. Heavy losses of the stateowned public sector reduced internal savings and thus reduced investments in the industry. Technological obsolescence in India has been rampant and only recently has the government announced investments in the sector. The uneven adoption of innovations created a technological gap even among the three industrializing countries. The implications of the uneven diffusion of technology are many. For this study four points are worth noting. First, different technological trajectories 117

CHANGE AN D CH ALLENGES : BRAZIL , INDIA, KOR EA

ari se principally becau se of strategic choic e and institutional capability. Th e US, Jap an, and Kor ea can be seen as dict ating th e dir ecti on of industri al chan ge-the US and more recentl y Jap an toward reducing capacity and reor ganizing th e rest in various ways, Korea and pr eviou sly Japan by adding technolo gically superior steelmaking capacity at a rapid rat e. Both Brazil and India attempted to tr an sform th e industr y with limited success. Second, stra tegic choic e and institutional cap ab ility are interd ependent. Without a coherent institutional arrangement such as state aut onomy the Indian indu stry could not formulate a technology stra tegy, let alone keep abreast of recent innovati on s. Third, past strategies and institution al impedim ent s could induce new institutional arran gement s, such as a grea ter sta te role in th e US wh en fallin g behind techn ologically, or an increased role for th e private secto r in Brazil and Indi a as th ey too find it cha lleng ing to keep up with inn ovat ion s. Finally, both inn ovat ive beha vior and institutional cap abil ity are necessar y to orga nize capitalist pro duction. One without th e other is likely to diffuse technology unevenly, leading to chang ing competitiveness and th e globa l reorgani zati on of steelma king cap acit y.

118

6

TECHNOLOGICAL CHANGE AND THE INTERNATIONALIZATION OF THE STEEL INDUSTRY

Introduction The US is the world's largest steel market but is no longer the largest producer,' It also is no longer insulated from foreign competition. The US industry's strategy toward new innovations and the rapid adoption of modern technologies by Japan and other late industrializing countries cumulatively produced a realignment of global steelmaking capacity. This shift in the international division of labor, already underway with capacity expansion, was also accompanied by changes in institutional arrangements. As we have seen, the US industry moved away from self-regulation to increased government protection from imports. Late industrializing states relied on capitalist regulation which eschewed market mechanisms for industrial development. With mounting restructuring pressures, the US industry in league with foreign firms established joint ventures in the US, while late industrializers like Brazil and India shifted away from state-led industrialization to greater private enterprise involvement in the industry. The different technological trajectories in the US, Japan, and other late industrializing countries led to varying competitive strengths of national industries. They also gave rise to new industrial governance structures for undertaking capitalist production. Japan and Korea, with newer plant and equipment, became internationally competitive, capturing a sizable share of the US market. This was reflected in the magnitude and changing composition of US steel imports as well as steel exports by the new globally oriented producers. Import penetration was a concrete outcome of long-term investment in technology by both Japan and Korea. As they emerged as major suppliers of high-quality flat products, the US industry with major capacity reductions and slower investment experienced shortages of the same products. The industry sought to resolve the supply problem by establishing joint ventures and securing foreign capital and technology. In this chapter we capture some of the nuances of the changing international division of labor and institutional arrangements by linking past technology strategy to international competitiveness. The countries which were successful 119

CH ANGE AND INTERNATIONALIZATI O N

in adopting modern technology quickly, such as Jap an and Kor ea, ha ve been cost competitive as well. Given the absolut e mark et size, we center our anal ysis on th e US, illustrating how low er cost of production allowed for eign firm s to penetrate th e US market and take ad vantage of th e supply gap s creat ed by poor siting of plants. For eign firm s also esta blished joint ventures with US firm s to fill th e supply gaps, th ereby int ernationalizing th e American steel industr y in a new way. Brazil and India, states with limited institutional capacity and huge financial liabilities, ha ve had to introduce swee ping institutional reforms, such as privatization.? The chapter is divided into three main sections. Th e first examines th e changing int ern ational division of labor as ob served from th e quantitative increase in US imports, th e chan ging str ucture of US imp orts, and for eign competition in regional markets in th e US. Th e second section demonstrates th e imp ortance of cost of production and productivity to changing division of labor. It shows that firm s th at have invested in new innovations and ha ve enjoyed low wa ge costs tend to be int ernationally competiti ve. Firms that invest heavily in new technology also ha ve higher productivity. Th e final section pr esents th e accompanying changes in th e global realignm ent of th e indu stry. The new intern ationalization of the indu stry is discussed with respect to gre ater participation of for eign firms in th e US steel industr y, Asia' s emergence as a new global cent er of production, and th e privati zation of th e Brazilian and Indian industri es. US imports and th e changing international division of labor Unt il 1959 US exports exceeded imports. Since th en th e US bal ance of tr ade in steel has been negati ve. Fr om a mere 1.3 mt of steel imp orts in 1956, tot al imports jumped to 4.4 mt in 1959, to 10.4 in 1965, to a high of 26 mt in 1984. In 1995, 21. 3 percent of apparent con sumption wa s met by imp orts (Americ an Iron and Steel Institute 1995).3 As we ha ve seen in Chapter 3 (Figur e 3.4), th e imp ort tr end was clear: a grea ter sha re of US con sumption wa s being met by imports. Equ ally important, th ere has been a qu alitative chan ge in th e composition of US imp orts. Thi s is a cumulati ve outcome of th e int eraction between two different technological trajectories: th e slow diffu sion of modern techn olo gy in th e US industr y and th e rapid ado ption of large-scale, integrated production units in lat e industri alizing countries such as Japan and Korea.

The changing composition of us imports As US firm s shie d away from investing in lar ge-scale mod ern mill s and ph ased out numerous integr at ed mill s as a response to ob solet e excess cap acit y, sho rtages of basic steel item s emerged. Clos ure of hot-end faciliti es 120

CH ANGE AND INTERNATIONALIZATI O N

in th e US, such as coke ovens and bla st furnaces, led to short ages of sla bs and hot-rolled coil. Slab s ar e semi -finishe d products that ar e furth er processed into hot-and cold-rolled coil s, mo st of which are converted to high-quality galva nized or color-coated sheets . Th e US sho rtage created opportunities for countries such as Brazil , which had in vested heavily in slab producing plants, such as CST. Th e European Uni on, saddled with excess capacity, ex ploite d th e US market condition by ex porting hi gh volumes of semi-finishe d products. On th e other hand, Jap an and Kor ea focu sed on high value-added hot-and cold-rolled and galvanized shee ts, used in automotive and appliance industries, which command high pric es. Given th e importance of th ese sectors to th e US economy it wa s inevit abl e that an y supply shortf all had to be overcome through imports. Th e US indu str y wa s not contemplating an y major investm ent pro gram imm ediately. Th e grow ing imp ortance of ingots and shee ts is also reflected in th e over all import str uct ure of th e US (Tabl e 6.1 ). The chan ging composition of US imp orts is a reflection of th e changing international division of labor. In 19 78 less th an 0.5 mt (or und er 2 percent of total imports) of semi-finished products wa s imported into the US (American Iron and Steel Institute 198 7:46). In 1995 over 5 mt , constituting over 21 percent of total imp orts, con sisted of semi-fini shed products. Th e collap se of th e oil and shipbuilding industri es reduc ed US demand for pipe, tubing, and plates, wh ile th e gro wth of Japanese aut o tr an splants and th e quality con sciousness of American producers induc ed greater demand for high-quality flat pr oducts such as galvanized and coated sheets. Th ere ha s been a decline in th e import volume of galvanized sheets, for example from 2.31 mt in 198 7 to 1.26 mt in 1995. H owever, thi s is not a reflection of falling demand. Rather, th e decline in imports is due to incr ea sed domestic sourcing as a response to rising imp orts.

The structure and source of us imports Th e investm ent and con sequ ently th e technology stra tegy of US firms led to a particular division of labor among ex porters. This is evident from th e pattern and sour ce of US imp orts. For exa mple, in th e 1960s and through th e 19 70 s, over three-quarters of US import need s initiall y were met by Western Eur op e and Japan (Tabl e 6.1 ). In th e 1980s, th ese expo rters were join ed by Kor ea and Brazil. Together th eir combined contribution wa s roughl y 70 percent of US imp orts. In th e 1990s both Japan and Kor ea reduced th eir dependenc e on th e US market while new suppliers such as Ru ssia and Ukraine also entered th e fra y.Jap anese and Korean expo rt sha res fell partly because of grow ing domestic dem and, stra teg ic diver sification of market s toward dynamic Asia , increased su p plies fr om Europ e, and (discu ssed in th e last section) increa sed domestic supplies du e to for eign investm ents in US steel facilities. 121

Table 6.1 T he cha ngi ng internationa l division of lab or : US import structure (%) a

1987 Ingots Total (rnt) Brazil ED Total Asia Japan Korea

1995

1990

HRC

CRC

Galv.

Total

Ingots

HRC

CRC

Galv.

Total

Ingots

HRC

CRC

Galv.

Total

(2.28) (2.52) (2.25) (2.31) (20.41) (5.20) (3.21) (3.10) (1.26) (24.41) (2.36) (2.28) (2.05) (1.26) (17.17) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 20.81 8.72 5.40 34.42 6.70 8.57 25.04 4.85 28.42 20.10 33.16 24.37 b 43.48 38.31 18.77 36.94 40.09 16.37 31.77 27.77 36.32 35.45 33.69 52.41 28.15 24.36 10.98 19.32 20.93 54.23 32.66 35.80 34.85 8.98 33.80 36.97 -

11.43 7.58

23.34 11.16

47. 16 6.91

21.17 6.35

-

9.31 26.48

25.33 6.17

42.22 7.45

18.14 7.7 3

8.04

-

6.85 26.48

18.96

Source : Ame rica n Ir on a nd Steel Inst itute, Annual Stat ist ical Rep ort, vari ou s yea rs No tes a Includes total steel mill prod ucts and excludes othe r iron and steel products and ferro alloys b Russia's 1995 exp orts included ingots and semi-finished products such as slabs Hlc Ceh ot -rolled coils; CRC =cold-rolled co ils; Galv.e galvani zed sheets; "Ingo ts" includes semi-finished products, such as slabs -=negli gi ble.

-

3.59 -

10.13 5.74

CHANGE AND INTERNATIONALIZATION

The European Community as a group remained the largest exporter, supplying the bulk of semi-finished as well as flat products. However, Brazil's share of semi-finished items varied between a fifth and a quarter in 1987 and 1995 respectively. In 1990 it peaked at 34 percent. In contrast to Brazil, Japan and Korea became major suppliers of semi-processed and finished flat products, such as hot-rolled and cold-rolled coils and galvanized sheets. Among Asian exporters, Japan specialized in high-value galvanized and coated sheets. Its exports as a share of total US imports of galvanized sheets often exceeded 40 percent. Korea's exports to the US were slightly less than Brazil's. However, unlike Brazil, Korea focused on high-value products. In 1995, of the 1.4 mt of steel products exported by Korea, over 66 percent was in sheets and strips. The availability of imports almost without exception was guaranteed. The large domestic US market became a dumping ground for the huge West European surplus capacity, estimated at 50 mt in 1981 (Howell et al. 1988:55-7). It was also an attractive market for Japan, Korea, and Brazil. With modern mills, both Japan and Korea also attempted to maintain high capacity utilization. The expansion of their steel industry was driven by domestic demand but at the margin export markets became critical, especially for Japan when its capacity expansion of the 1960s and 1970s exceeded the absorptive capacity of its economy." Korea followed the Japanese strategy of meeting growing domestic demand and exporting the balance. Japan and Korea, with their newer and better production facilities, could meet the US demand for high-quality steel products. On the other hand, Brazilian exports were driven more by foreign debts than by external demand per se. Brazil's economic crisis, institutional incapacity, such as project delays, and government policies that dictated low domestic prices contributed to the industry's poor performance. For Brazilian producers exports provided higher revenues than domestic sales (personal interview, SIDERBRAS, Brasilia, December 1987).5 Japan and Korea captured export markets by rapidly assimilating and diffusing new innovations to enhance their international competitiveness. By the late 1950s, Japanese production costs in major products, such as hotand cold-rolled sheets and plates, fell and converged with US costs and within a decade were less than 75 percent of US costs (Crandall 1981:171-2). Japan's absolute lower labor costs and lower material costs were added advantages. Higher productivity and declining raw material prices, partly a result of a long-term strategy to secure stable supplies, lower transportation costs, and better technology contributed to Japanese competitiveness. In the 1960s Japanese share of material costs per ton to its total costs was roughly the same as in the US, declining considerably thereafter (computed from Crandall 1981:48).

123

CHANGE AND INTERNATIONALIZATION

Import penetration on the US west coast Rapid output expansion in Japan and Korea and their proximity to the US west coast market added a regional dimension to the US import structure. Japan and Korea strategically directed their exports to the underserved west coast markets in the US. With only about 3 percent total national steel capacity, the western states were easy targets for exporters. Besides, consumption in the western states was on the rise. Supply gaps in the western region arose for a number of reasons-idiosyncratic as well as strategic. As we saw in Chapter 3, the war-related steel capacity that was installed in the western region was unsuitable for post-war demand needs. Supplies from the east coast and the southern region were not price competitive. When all plans for constructing greenfield plants on the west coast were shelved, the region provided an easy export outlet for East Asian producers. Between 1983 and 1988 the average consumption in the western states was 10 percent higher than in 1970,6while the corresponding national figure had dropped by almost 34 percent (USInternational Trade Commission 1989a: 4-1). California accounted for approximately 75 percent of the western states' demand (Warren 1988:275).7With changes in bulk transportation and with the coastal siting of plants, Japan, South Korea, and Brazil found it profitable to import low-cost raw materials at world prices from far-flung sources and export finished products to distant markets. From 1959 to 1970 Japan's share of imports in this region increased from 39 percent to 83 percent. In 1970 Japan supplied 21 percent of the west coast market (Hogan 1971:1471). The continental size of the US made shipping costs from one coast to another higher than those between East Asia and the west coast of the US. Shipping costs from the east coast to the west coast ranged between $35 and $70lton (US International Trade Commission 1989b: 3-41). In contrast, the average shipping costlton for various exporting countries was between $35 and $391ton (US International Trade Commissions 1989b: 3-47). In 1986 both Korea and Japan shipped 47 percent of their US exports to the west coast, with the average shipping cost varying between 7 and 8 percent of total costs. Brazil, for obvious locational reasons, shipped a large fraction of its products to the east coast of the US, with shipping costs averaging 6 percent of total costs. Some of the import needs of the US are met by Canada. In contrast to East Asian exports, Canadian exports make their way into the Great Lakes region. Canadian firms exported as a countercyclical strategy. The addition of new capacity during economic slowdowns created the burden of excess capacity (Barnett and Schorsch 1983:225), making nearby US markets natural targets. There are several interrelated reasons for this outcome. First, four major steel plants are sited in Ontario, with three in the southern part of the province, making US markets in the Great Lakes area easily accessible. Second, the proximity of the US market has allowed Canadian 124

CH ANGE AND INTERNATI ONALIZATI O N

producer s to tr eat non-US market s as less important. Third, a significant portion of Cana dian output is destin ed for th e automobile secto r in Canada and th e US. Canadian ste el ex ports to th e US are often processed further in th e US, re-exported back to Ca nada, and finally ex po rte d out of Can ada to th e US (M asi 1991 :194-5 ). Fourth, th e decline in th e Canadia n dollar an d relatively low lab or co st s in Ca n a d a m ak e Cana dia n stee l pr oducts competitive in the US market . Fifth, th e lib eral trad e relations between th e US and Ca na da facilitat es inter-r egion al tr ad e th at reinforces Ca n ada's competitive ad vantage vis-a-vis th e US. Cost of production and labor productivity Among other things, technology influ enc es co st competitiveness in th e lon g term, which in turn genera tes pric e competition in th e market. However, in th e sh ort term, prices ar e al so influenced by cap acity utilization. Low utilizati on, either becau se of obsolescence or becau se of limited markets, keeps costs up. Firms ha ve tri ed to maintain high utili zation so as to cover th eir opera ting costs. Where excess capacity ha s been rampant, prices have often been propped up by various govern ment measur es. M emb ers of th e European Econ om ic Comm unity aver aged less than 75 perc ent utiliz ati on rate during th e 1980-93 period (Pain e Webb er 1994:98 ) with onl y mar gin ally better performanc e by Japan . However, while European countries were strugg ling with ob solete excess cap acit y, Jap an wa s seeking out foreign market s with low-cost output. Similarly, Kor ea wa s able to take ad vantage of its low er cost of production (Table 6.2 ). Korea' s utiliz ation rate wa s above 90 percent and often exceeded 100 percent. In addition to the locational disad vantages faced by US firm s, the American steel industr y also suffered from high costs for vario us reason s. Hi gher lab or costs as well as material co sts contributed to declining US competitiveness. Risin g w age rates, es pecially in the ste el secto r, combined w ith lower international prices of raw mat erials contributed to high er relative co sts. In th e 19 70s nearl y 40 percent of US operating cost was lab or cost, whereas Japan's labor co sts rem ain ed under 15 percent. Kor ea's labor cost w as even lower-between 5 and 6 percent. Ind ia 's lab or share wa s higher th an Japan's, even though Jap an' s wa ge rate wa s severa l tim es that of India's. The share of mat erial co sts w as roughl y similar in all th e five countries, despit e lower energy co sts in th e US an d or e co sts in Indi a and Brazil. Of th e five, India exhibits a higher material cost per ton. India's cost disadvantage has been acute. In 1988 its cost per ton wa s $703 or 1.68 tim es th at of Korea's $4 19 (Sengupta 1994:42 ). Brazil's cost in that year was close to Kor ea' s. On a trend basis, Japan's cost reduction achievements ar e es pecia lly n otew orthy. Sin ce 1980 J apan ha s reduced it s domest ic co st from an ind ex of 100 to 76 (Seng upta 1994:56 ), w hile Korea' s co st s have been ri sin g (see Table 6.2 ) (Park an d Casta ne da 19 87 ). This is lar gely 125

CHANGE AND INTERNATIONALIZATION Table 6.2 Average cost per ton of prodiaction (US$)

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Sou rce:

us

Japan

Brazil

India

Korea

Wor/d

259.8 260.3 296.4 312.7 367.3 442.1 431.3 591.4 465.9 470.8 457.7 440.6 413.0 419.4 441.4 433.7

220.4 241.0 285.7 357.4 331.9 415.1 425.0 407.7 397.9 369.9 413.3 527.8 534.3 588.2 554.8 575.9

409.3 465.8 364.1 423.4 468.5 410.6 488.2 561.6 383.4 501.8 473.0 339.6 574.3 745.8 1,133.5

207.4 220.2 250.1 277.4 356.3 375.0 424.1 468.1 503.1 487.1 504.4 523.7 552.8 579.4 580.4

162.7 150.7 194.2 243.5 212.5 264.0 259.6 254.7 249.2 237.6 234.9 248.3 301.5 337.2 406.4 414.8

252.7 250.4 289.0 326.7 361.0 427.2 414.6 444.2 400.7 378.0 384.6 430.1 444.3 490.2 497.3 505.8

4

Paine Webber in Kang (1994)

Notes

a Average of 61 major steel mills of the world -=not available becau se of domestic inflation that wa s fueled in part by rising wa ge costs and not productivity declin es. Cost esca lation in India ha s been ph enomenal, incr easing nearly fourfold for th e state-sector plants and over fivefold for th e pri vat e sector TISCO . However, TISCO's level of costs in dollar terms ha s been lower th an SAIL's, ranging from 71 percent to 94 percent of SAIL's. While India's dollar co sts per ton have been lower than th e US and Japan for fourteen an d ten years respecti vely during th e 1973-92 period, lower co sts were not du e to productivit y gr owth but rather th e devalu ati on of th e Indian rupee. Between 1973 and 1992 th e Indian rupee fell by over 290 percent. M or eover, th ese costs do not account for quality differences: Indian steel is considered to be inferior to for eign steel. N otw ithst an ding th e difficulties in comp aring co st s among differ ent countries on th e ba sis of a sing le currenc y, th e differences in production costs ha ve resulted from pa st investm ent strategy. Assuming that newer plant and equipment em bodies progressive innovations, th en, all other things remaining constant, Japanese and Korean plants ar e likely to ha ve high er productivity, in terms of both labor and material inputs per un it of output. Thu s th eir higher financial burden, 15-18 percent for Japan and 10-28 percent for Korea, has been more th an offset by lower labor and materi al costs. Korea' s financial burden would ha ve been higher had it not been for th e early completi on of plant construction (Pohang Iron and Steel Com pany 198 7:5-6; 1992:6). H owever, India's lower financial burden, given its older plants, was not 126

CH ANGE AND INTERNATIONALIZATI O N

compen sat ed for by lower wage rates or lower raw material pric es. In th e 1980s, India's overall production costs incr eased rapidly as several plants became technologically ob solete and suffered from institutional con straints. It is evident that shifting costs ha ve been influ enced by the adoption of modern technology and its effective utilization. With significant institutional capacity, Japan an d Korea transformed their raw m at eri al disadvantage into an opportunity for creating a competiti ve industr y. Th ere ha ve been other factors that have influ enced th e mo vement s in costs and th erefore pric es. In 1964 th e Jap an ese wa ge rat e in th e industr y wa s onl y 21 perc ent of th e US rate and by 1987, despit e th e stee p climb in th e va lue of the Japanese yen, it remained under 75 percent (Barnett and Schorsch 198 3:64; per sonal communication, Japan Iron and Ste el Fed eration, July 1988 ). However, after 1985 Japanese co sts in US doll ar terms soared du e to yen appreciation. Until th en Japanese co sts had been competitive, despit e rising energy costs. US production co sts also increased aft er th e 1982 recession , probably becau se of write-offs. However, with capacity adjustments and rounding out imb alanc es in plant and equipme nt, US co sts fell back to competitive levels. Of the three developing economies, onl y Korea has sustaine d low co sts. India's earl ier competitiveness w as ero ded w ith technological ob solescenc e wh ile Brazil has remained a high-co st producer mainly becau se of its financial burden . In th e 1980s, Brazil's financial co sts per ton exceede d $100, th e bulk of which w as for interest pa yments. Korea' s high fin ancial burden du e to its new er plants was more th an offset by its lower wage co sts, in th e 5-7 perc ent ran ge of total co sts or roughl y a qu arter to a third of India's and Brazil's w age sha re . Wa ge costs ha ve been high in India and Brazil becau se of poor labor productivity, featherb edding, and limited automation. However, Korea's wa ges have been ri sing rapidly for the p ast decade and a half. A recent estimate put Korea's labor sh are at 18 .3 perc ent compared to Jap an 's 26 .8 perc ent (Kor ea Development Bank 1997:44 ).8 Cree ping wa ge disadvantage h as not hurt its co st compet iti ven ess yet. In 1996 Korea's co st for a ton of cold-rolled shee t wa s less than Japan' s by a solid $13 5, almo st a 22 perc ent differ enc e. Costs ar e influenc ed by labor productivity. The progressive increases in th e capital int en sity of steel technology implies th at wa ge sha re in the un it co st of output will be low. Thus older, less autom at ed mill s ar e lik ely to require greate r labor input th an newer plants. However, thi s outcome is significantly depend ent on labor productivity, requiring a consciou s strategy to increa se throughput and/or reduc e labor inputs. The Kor ean steel indu str y ha s exh ibite d r apid increases in labor productivit y, which is a further testimony to technological learning. Between 19 73 and 1986, worker-hours per ton of steel decr ea sed from 14 .0 7 to 7.4, an improvement of over 90 perc ent (Paine Webber 198 7: table 17). This compar es fa vorably to Japan' s decr ea se fr om 10 .72 to 6.0 3 w orker-hours (an improvement of 44 perc ent ), 127

CH ANGE AND INTERNATIONALIZATI O N

and a US decr ea se from 10 .88 to 6.4 worker-hours (an improvement of 41 perc ent ). More recent figur es put POS CO's labor productivit y at slightly more th an three worker-hours per ton (Pohang Iron and Steel Company 1996:36) . It is th erefore not sur prising, given Kor ea's technological strength and its institutional capability, that Kor ea has been abl e to contain costs despite rapid increases in wages. Global realignments in the steel industry

The internationalization of the US industry Since th e lat e 19 70 s US firm s ha ve faced incr eased competiti on from foreign producers. American firm s shut down several mills, diversified into non-steel acti vities, and partially moderniz ed some faciliti es. As we have seen, such piecemeal modernization led to serious equipment imb alanc es in many US integrated plant s, making the US indu stry as a wh ole technologically deficient . With limit ed participation in greenfield proj ects, Americ an firm s had lost th eir technological edge. Low profitability ero ded R&D efforts. In 19 84 th e industr y spent $3 90 million on R&D , approximately 0.6 percent of sales, wh ereas th e manufacturing average wa s 2.6 percent (US Congress 198 7:31 ). Japanese R&D ex penditures have been 1.5 percent of sales, a far greater ab solute outlay as its production exceeded th at of th e US by 21. 7 mt (Japan Iron and Steel Federation 198 7:18,29) . In 1988 th e gap in R&D ex penditure between the US and Japan widened even furth er: 0.6 percent versus 2.9 percent (US Int ernational Trade Commission 1990:55 ). Even Kor ea spent a larger fraction of its sales on R&D th an did th e US in th at year," In 1995, PO SCO reinvested 2 percent of its sales in R&D, which amounted to over $200 million (Poh an g Iron and Steel Co mpany 1996:29 ). As th e US industr y reorganiz ed itself, it was left with reduc ed production capability in certain steel products, such as semi-finished slabs, hot-and coldroll ed coil s, and high value-added galvanized sheets. To compete more effectively and regain control of th e dom estic market, American firm s sought fin anci al as well as technological inputs from th e very firm s th at had imp osed competiti ve pressur es. Th e partnership s were opportune . Th e US had th e market whil e th e for eign producers had th e know-how, material inputs, and cash reserves. Th e Japanese also had a lar ger stra tegy for th e US market . In th e 19 70s and 1980s, th e US govern ment tri ed to limit imports of steel products through th e Trigger Price M echan ism and Voluntar y Restraint Agreements (see Cha pter 3), forcin g for eign suppliers to ex port higher-valu e items to th e US. Jap an and lat er Kor ea had already found a regional market nich e in th e und erserved west coast. Th e appreciation of th e yen as well as import quotas compelled Japanese ex porters of automobiles to mo ve auto production to th e US. Co nsequently, th e demand for high-qualit y coat ed sheets in th e 128

CHANGE AND INTERNATIONALIZATION

American market increased. As American auto firms themselves demanded better quality steel and US firms lacked the technological expertise, it made perfect sense for American steel firms to collaborate with Japanese and other producers. The partnership was not in steelmaking but rather for finishing steel, sourced either domestically or internationally. The competitiveness of Japan, Korea, and Brazil in various flat products, such as semi-finished slabs, hot and cold coils, and coated sheets, and their eagerness to capture or maintain their US market shares, generated a new division of labor within the US. Certain semi-finished hot-end products, such as slabs and hot-rolled coils were imported and joint ventures with foreign producers were established to process these products into coated sheets (Table 6.3 ).10 Joint ventures have been institutional arrangements aimed at injecting critical technologies and capital for plant modernization and expansion (Florida and Kenney 1992). The bulk of the projects were in finishing, that is either in cold rolling mills or in galvanizing lines. Foreign ownership of these ventures varied from a low of 14 percent in the case of Nippon Steel's stake in Inland Steel to 100 percent in the case of Nisshin's stake in WheelingPittsburgh. In two large projects, belonging to National Steel and Armco, the average cost of revamping basic steelmaking processes was nearly $2 billion. The joint venture between Nippon Kokan of Japan and National Steel provides a good example of how older steelmaking facilities can be modernized with the addition of continuous casters, galvanizing lines, and various improvements in blast furnaces and rolling mills, among others (Mangum et al. 1996:79-82). Through these arrangements National Steel shifted its output from semiprocessed hot-and cold-rolled coils to high-quality galvanized sheets. Nearly a third of its output was destined for the US-based auto industry, both American and Japanese companies (personal interviews, Japan Iron and Steel Federation, Nippon Kokan, Tokyo, December 1991).11 These joint ventures added over 7 mt of galvanized capacity, which represented nearly 40 percent of capacity (Hall 1997:201). Most of the joint ventures supplied to the auto industry. For example, US Steel's 1992 joint venture with Japan's Kobe Steel was reportedly set in motion by Toyota and Honda of America (US International Trade Commission 1990:32). Similarly, Armco's venture with Kawasaki and Inland's with Nippon Steel were designed to supply high-quality coated sheets for the auto market. Notwithstanding the new demand from Japanese auto transplants in the US, these joint ventures also benefited from the general increase in the demand for galvanized products. Strategic collaborations in the American steel industry also resulted from idiosyncratic factors. The positioning of foreign firms on the US west coast is illustrative (Figure 6.1). Two joint ventures-between Kawasaki of Japan and CVRD of Brazil and between US Steel and pasco of Korea-indicate an on-going international and regional division, of labor. Kawasaki already has a joint venture with Armco. It also has an equity stake, along with Finsider 129

Table 6.3 Principal foregin joint ventures in the US integrated steel segm ent US firm

Foreign partner

Operation

Start-up

Employment

Investment ($ million)

National" CSI

NKK (Japan) Kawasaki (Japan) CVRD (Brazil) pasco (Korea) Sumiromo (Japan) Nis shin (Japan) Nis shin (Japan) Nippon Steel (Japan) Kobe (Japan) Kawasaki (Japan) Nippon Steel (Japan) Nippon Steel (Japan) Kawasaki (Japan) Sumiromo (J apan) Kobe (Japan) Nis shin (J apan)

Basic Rolling

1984b 1984b

12,000 725

2,200 275

70 50

Cold rolling Galvanizing Basic & coating Galvaniz ing Basic Basic & pipe Basic Cold rolling Galvanizing Galvanizing Galvanizing Galvaniz ing Galvanizing

1986 1991 1988 1988 1989 1989 1989 1990 1991 1991 1991 1992 1993

990 100 5,500 100 11,500 3,000 9,500 280 250 100 100 100 100

437 180 15 96 186 300 1,600 520 550 150 180 200 120

50 50 10 67 14 50 45 40 50 50 50 50 100e

UPI (USS) LSE I (LTV) Wheeling-Nisshin*" Wheeling-Nisshin* Inland" USS-Kobe" Armco" l iN Tek (Inland) IIN Kote (Inland) Armco LS II (LTV) Protec Coating (USS) Wheeling- Nis shin *

Foreign eqpity (%)

Sources: Ma ngu m et at. (1996:68 -9); Keidanren (1996:86); per sonal interviews, Jap a n Ir on and Steel Federation , Ni ppon Ko kan , Tokyo, Octob er 1987, Novem ber 1991 No tes US firm s in par enth eses ,e US firm in Wheeling -Pitts burgh a Int egrat ed operat ions b Takeover c O nly technical co lla bo ra tio n

CH ANG E AND INTERNATIONALIZATION

KmserSteel BOF (hot-end shutdown)

Geneva,Utah hot-end problems

Steel coils

Renamed to

sold by US Steel

·California

, - - - - - - 1 Steel Industries

US Steel

(cold-end start-up) Equity

Equity Slabs

Hot-rolled coils

pasco Korea

Slabs

Figure 6.1 The changing division of labor on the US west coast Note: Th ere is no hot-end (steelmaking) proc ess left on the west coast

of Ital y and CVRD, in Brazil' s maj or slab producing Tub ar ao Works. Th e stra tegy of Kawasaki and Finsider was to source slabs fro m Brazil for th eir hom e plants. H owever, as overcapa city plagued th e industry in th e 1980 s, new slab markets had to be creat ed. A perfect oppo rtunity arose when Kaiser Steel's integrated Fontan a Works in Ca lifornia, despite modern izat ion , could not survive th e competition . As Kaiser was ind ebted to CVRD for sourcing iro n pellets from Brazil, th e timing could not have been bett er for a joint venture. Design ed to util ize sur plus sla bs fr om Brazil, all steel ma ki ng equipment, such as cok e ovens and BOFs, were sold or scra pped. Kawasak i and CVRD purchased th e plant and renam ed it Ca liforn ia Steel Industr ies. Roughly 60 percent of its slab input which is finished int o cold-rolled and galvanized sheets is from Brazil. Th e second joint venture on th e west coast has been between US Steel and PO SCO of Kor ea. US Steel had rolling mill s in Pittsburg, Ca lifornia. It also ow ne d th e Geneva plant in Ut ah , one of th e wa r-rela ted gove rn ment built inl and mill s. Both facilities over tim e becam e technologically obso lete. Geneva supplied steel coils to Pitt sburg t o be proc essed for th e canning industr y. Geneva was a low-c ost pr oducer but its qu ality was qu esti on abl e. Besides, Geneva was con str ained by plastic substitu tes and envi ro nmenta l regul ati on s. O nly lar ge-scale modernizat ion could mak e th e unit profitabl e. H owever, spending $1.5 billion to revamp th e plant was too daunting even for US Steel , given th at far superior pr oducts were alrea dy being supplied by Eas t Asian pr oducer s in th e west coast m arket. The cost of tr an sporting 131

CHANGE AND INTERNATIONALIZATION

hot-rolled bands from Utah to Pittsburg was also prohibitive. Just prior to the shutdown of the Geneva Works, US Steel negotiated with pasco for the supply of hot bands (a semi-finished product) from Korea for the Pittsburg Works in California, effectively replacing the Geneva plant. pasco and US Steel have each contributed $150 million to get the ageing Pittsburg plant operating again. By 1988, all integrated capacity on the west coast had ceased to exist. The region's finishing mills increasingly relied on imported semi-processed steel, produced by the foreign partners of US-based joint ventures. The changes in the division of labor within the US reflects a long-term restructuring process, involving American and foreign firms. It is evident that problems of technological obsolescence, overcapacity, and strategic investment decisions have in one way or another influenced the restructuring processes. What is not so evident is that joint ventures allowed American firms to bypass the massive outlays necessary for the hot-end of steel production and instead sourced semi-finished steel from Korea and Brazil. Unable to mobilize investment capital from domestic sources, American producers technologically and financially relied on Japanese, Korean, and Brazilian firms. Foreign capital in the US steel industry presents a new form of industrial governance: strategic collaboration between domestic private firms and state-owned or state-inspired foreign ones. It is also noteworthy that the restructuring process has imposed a division of labor in which capitalintensive hot-end is undertaken by debt-ridden Brazil and formerly capitalscarce Korea. The strong positive relationship between steel-producing and steel-using industries and the Japanese involvement in both in the US is an indication of structural changes in the world economy and of new forms of industrial governance. Capitalist regulation in this instance takes on an international dimension without necessarily diluting its national character.

The steel industry in the Asian region As the US industry responded to its technological obsolescence and foreign competition, exporters to the US also realigned their production away from the US market. This was inevitable as manufacturing as a whole, initially labor-intensive and later capital-and high-technology-intensive, shifted toward export-oriented Asian economies. Unilateral imposition of quotas also discouraged exports to the US. The pattern of Japanese exports is illustrative. Between 1965 and 1968, the American market absorbed nearly 50 percent of Japanese exports, exceeding Asia's share as a whole (Figure 6.2). The average export share of the US was under 18 percent and 13 percent during 1971-95 and 1991-5 respectively. Asia's share, on the other hand, rose nearly 57 percent during 1978-95 and 67 percent during 1986-95. Two Asian countries, Korea and China, themselves large producers of steel, absorbed over 25 percent of japan's exports (see Woronoff 1983:160). Korea 132

CHANGE AND INTERNATIONALIZATION 90 •••• ' -----,

80 70

S. Korea China Total Asia US

- - Export(%)

.,l!!

60

..

ii 50

Sc: Gl

!!

40

cf

30

,,

, --, "

"\ ,,

,, ,,

...... '\._-~

...... ,"

/\ ,

"

20 10

......... -

..

O+--.,--...-,..--,r--r--,-----r---.---.---.--,-.,--...-r--r---.--,-----r---.---.----.--,-,..-r-r--r---.--,-----r--,--, 1~1~1~1m1~1m1m1~1~1~1~1~1~1~1~1~

Figure 6.2 Changing pattern of Japanese exports Source :Jap an Iron and Steel Feder ation, Monthly Report of th e Iron and Steel Statistics, various Issues Note: Exports are expressed as a percentage of production

also exported aggressively (USIntern at ional Trade Commission 1989b: tables 10-1, 10-11 ; Auty 1992:24-5), especia lly indi rect exports, such as ships in the 19 80s (World Bank 198 4:67-8; Amsden 1989:269-90). Japan's exports have been also in high-value items, indicating growing intra -Asian trade and specia lization in steel products. The impo rtance of Asia can be gauged from Brazi l's exports. Of the 6 mt of total exports in 1986, over 37 percent went to five Asian economies (Institute Brasi leiro de Sideru rgia 1987). In 1996 tot al exports had increased to over 10 mt and China, Korea, Japan, Taiwan, and Thai land absorbed almost one third. As we have seen, Brazil's exports have been largely in semi-finished products, the bu lk of which was export ed to th e US. H owever, even Japan and Korea have been pur chasing Brazi lian semi-finished steel and ot her lowvalue products. In 1996 Japan imported a to ta l of 41 9,000 tons, 50 percent of which was plates, while 74 percen t of Kor ea's imports of 900,000 tons was semi-finished items. Korea's overa ll impo rts averag ed 683,000 tons in the second half of the 1980s, rising to over 2 mt in th e early 1990s (Korea Iron and Steel Association, Steel Statistics Yearbook, 1995:21 7). The rapid growth of manufacturing in East and South-East Asia-China and Thai land especially- provided a ready ma rk et for Brazi lian semi-process ed items, while Japan and Korea with their modern plant s have been able to take advantage of such impo rts by further value addition. PO SCO 's exports to the Asian 133

CH ANG E AND INTERNATIONALIZATION

region have been significant, nearly 77 percent of its total in th e past decade. Exports to Japan have fallen from 49 percent to 41 percent. Based on thes e broad developments cash-rich POSCO, with its successful joint venture with US Steel in California, has moved rapidly in the SouthEast Asian region to establish numerous steel proj ects (Table 6.4) . POSCO's ex pansion in th e region is also indicative of its technological capability, diversifying into enginee r ing and construction, communications and data management. Asian emerging econ omies such as Vietnam and China have been major recipients of POSCO's know-how in steel manufacturing as well as in engineering and construction. POSCO's strength lies in flat products, both hot- and cold-rolled, and galvanized items . POSCO's Latin American proj ects in Brazil and Venezuela, however, ar e upstream ventures to ensure high-quality raw materials . Kor ean firms, including POSCO, ha ve installed new EAF technologies that use pellets and other scrap substitutes as inputs (see Chapter 7). With long-term industry forecasts pr edicting supply shortages in the ASEAN economies ranging from 6 mt to 13 mt in long and flat products respectively (Doble 1994; see also Crowley and Findlay 1993:2), we can ex pect Asia to be the new global center for steel production and consumption.

Restructuring and new governance structures A new round of steel industry restructuring has been initiated by a number of countries. This restructuring is largely driven by institutional change. Two countries that have sought to introduce new institutional arrangements ar e Brazil and India. Both countries, beginning in the 1980s and accelerating in the early 1990s, launched various economic reform measures to liberalize th e econ om y from state interv ention and transfer state assets to private hands. The Brazilian steel industry privatization has been th e best-known case while th e Indian gov ernment, with its major 1991 reforms package, has op ened up th e erstwhile restricted steel sector to pri vate parties.' ? The privatization of Indian public sector firms, including steel, has been mooted as well. The government of Brazil under President Collor de M ello in th e late 1980s introduced a far-r eaching privatization program." Th e World Bank, which was trying to rescue the heavily indebted state-sector, fully supported this program. In about three years 19-5 mt of crude steel capacity was transferred to non-state sectors, representing over 70 percent of national capacity. N ew owners included financial institutions, with a third of equity, pension funds with 12 perc ent, em ployee s with 16 perc ent, for eign groups 10 percent, industrial groups 8 percent, and th e rest clients, suppliers, and other Brazilian groups (Buhler 1997).14This institutional change yielded a number of benefits; for example, auctions, debt transfers, and so on of state financial assets brought in $10.6 billion and tax revenues incr eased. There was also an increase in 134

Table 6.4 POS CO's overs eas ventu res Steelprojects

Capacity ('000 tons)

Investment cost in $ million, share (%)

Construction period"

Products

US Vietnam (3) China (5)

1,200 50,30,200 100, 100, 100, 110,100 4,000 1,500 910, 120 1,000 100

388 (50) 4 (50), 10 (50), 42 (35) 8 (10), 47 (40),48 (90), 156 (60),29 (80) 220 (50) 335 (40) 708 (3), 10 (18.5) 507 (40) 10 (10)

12/86-4/89 4/92-9/95 2/95-12/98

Cold rolling Galvanized products, bars Coil center, galvanized products, cold rolling

8/96-6/98 5/97-4/99 8/96-1/99 6/97-5 /99 11/97-6/98

Pellets Hot briquetted iron (HBI) Cold rolling, coil center Hot rolling Coil service center

Brazil Venezuela Thailand (2) Indonesia Indiab Vietnam (2) China US

9/95-12/99c

Engineering and construction (international business centers, residential facilities, manufacturing of steel structures)

Indonesia India US

1/96-3/98 c

Communications and data management (production management, system planning/consulting, personnel management)

Sources: POS CO ; PO SCO Bulletin, vario us issues; per son al interviews, POS CO , Seoul, Au gust 1995 No tes a For all project for th at cell b Joint venture betw een POSCO (10%), its affiliate POST EEL (19.5%), and H yund ai (70.5%) c Proj ect durat ion

CHANGE AND INTERNATIONALIZATION

productivity, competitiveness, and administrative autonomy of steel firms (Bruce 1994). Critical to the success of privatization has been greater administrative autonomy. This has meant doing away with the price controls which lay at the heart of the Brazilian state sector's financial deficits and foreign debts. Today Brazilian prices reflect costs of production. The extent of price rises and the inflationary consequences of this on the Brazilian economy remain unclear. However, after privatization the Brazilian industry has also witnessed rising productivity. This has been possible by reducing the number of employees, previously inflated due to featherbedding (Buhler 1997). In the 1990s USIMINAS reduced its workforce by 79 percent, while raising its output per worker by 83 percent-from 300 to 548 tons/year. Similarly, CSN decreased its workforce by 39 percent and increased its productivity by 152 percent. CSN is a much older plant with less automation and is located in a highly politicized environment. As a result, its employment reduction has been lower than that of USIMINAS, while its greater productivity increase is due more to its lower base: 160 tons/worker/year in 1990 compared to 300 for USIMINAS. Institutional change has also yielded profits for the ailing Brazilian sector. From $1.6 billion losses in 1990, the Brazilian industry averaged a cumulative nominal profit of $67 million in 1996. Indian privatization of the steel industry has taken a different route. There has not been a major sell-off of state assets. Instead, the government has gradually opened up the steel sector to private capital, effectively diluting its share of the industry as a whole. This institutional rearrangement evolved gradually. Faced with supply constraints and reduced government savings for investments, the state in a limited way permitted the private sector to enter the steel industry. However, entry was strictly confined to non-integrated, small-scale electric arc furnaces. To overcome lagging investments in an already high-cost industry, the administration relaxed import, foreign exchange, and industrial licensing controls. The government also allowed increased participation of non-resident Indians (NRIs). As integrated production was still the preserve of the state sector, NRI investments were targeted toward EAF-based minimills." However, within the minimill sector there were two categories: the tiny EAFs, which were processors and rerollers of scrap and semi-finished steel, and the more recent mills using modern technologies. Indian minimills have been technologically unsophisticated. They have been overtly dependent on state largesse and characteristically rent-seeking. For example, prime scrap, the principal raw material in EAF production, must be imported. To import scrap, owners of minimills had to obtain foreign exchange or permission from the government. In times of steel shortage these minimills often purchased steel, especially construction items, from the state-owned firms and resold them at a premium. Otherwise they simply rolled the steel, which they obtained from the state sector. 136

CH ANG E AND INTERNATIONALIZATION

A SAIL official depicted th e privatization mood of th e 1980s as follows: In India .. .th e private sector do es not want th e public sector to go away. So any attempt to privatize th ese industries is being opposed by the private sector. Th ey have vested interest in a big and inefficient public sector. They ar e getting a lot of benefits-cheap inputs, market control... But no private sector is willing to invest in steel. They ar e interested only wh en the markets ar e assured. Many minimills earlier bought our steel and sold it at high profits when th ere were pric e controls. They did not produce th e steel. (Personal interview, SAIL, N ew Delhi, Jul y 1987) Technological change in the industry increased onl y after regulations were relaxed. Until recently the privately held EAF mills far ed even worse than th e state-owned integrated sector. In a sellers' market there were no cost or quality considerations. As a result, several pri vate producers alr eady in th e foundr y busin ess introduced tin y EAFs of 5-1 a-ton capacity to produce long products. Some of th em were simply rerollers, using rail scrap produced by the state sector to make rods and bars for th e speculative real estate market. These units were highly profitable despite the high cost of electricity and scrap. Th ere is plenty of evidence of power "stealing" by thes e units, often in connivance with local state-level electricity suppliers. With economic reforms begun in 1991 and th e elimination of public sector reservations for steel production, the Indian privat e sector has once again entered the steel business. However, as th e next chapter shows, this tim e private firms have entered th e industry with an entrepreneur ial zeal not witnessed before in th e Indian industry. They have kept abreast of recent innovations in th e EAF sector and have even ventured to tryout new hybrid technologies. The Indian industry is pois ed to ex pand and th e global industry, by extens ion, to experience renewed restructuring. Conclusion The changing int ernational division of labor in steel production is indicative of th e lar ger tr ends in capitalist production: continued technological change and accomp an ying internationalization. Although the industry has not witnessed an y significant innovations since the commercialization of th e BOF and continuous casting, the associated investment costs have been prohibitive. This has led to a gradual shift in th e int ern ational division of labor. Capitalist regulation has been industry-led in th e US and state-led in late industrializing countries. As production costs and productivity gaps narrowed, latecomers have begun to challenge th e more establishe d producers in th e US and Japan. Th e collaboration of Japanese firms with th eir US counterparts has given a new lease on life to US plants. The technological backwardness and poor 137

CHANGE AND INTERNATIONALIZATION

performance of some of the state-owned steel enterprises has created the pressure to introduce institutional changes, such as privatization. These changes, technological and institutional, are expected to contribute further to the changing division of labor. Technological change and past investment decisions have had a profound effect on the international division of labor. The slow diffusion of modern technologies in the US and their rapid adoption in Japan and Korea produced varying competitive strengths. This was amply demonstrated by the quantitative increase in, as well as the changing structure of, US imports. With limited production on the US west coast, this regional market was particularly vulnerable to East Asian exports. The combination of low wages and high productivity pulled in far-flung steel producers to meet supply gaps that resulted from capacity reduction in the US. Other countries, such as Brazil, afflicted by burgeoning debts, were pushed out to participate in the growing export market. Even among exporters the division of labor was noticeable: Brazil with its inexpensive semi-finished steel, such as slabs, and Japan and Korea with their high value-added flat products. Given our understanding of the magnitude and pattern of past investments in the industry, it is evident that this division has not been accidental. Rapid adoption of modern technologies, backed by institutional capacity, has invariably dictated the structure of global steel production. The changing structure of steel production is also indicative of the internationalization of the industry. As international steel trade increased, the largely insulated US market became part of the global production system. While the industry as a whole has not been subject to foreign ownership, the restructuring of the US industry illustrates the case of substantial foreign involvement. The US industry has found renewed strength through new institutional arrangements, such as joint ventures, to reorganize its industry. Modernization of the American industry has been selective, targeted to enhance the quality of flat products. The severe plant imbalances initially resulting from industry restructuring have been largely resolved by removing obsolete steelmaking capacity. As a result the US industry has regained some of its competitiveness. The internationalization of the industry also has been spearheaded by Korea's expansion in the Asian region. pasco with its technological lead has aggressively sought to create new markets and supply know-how. It is clear that the restructuring of the steel industry resulting from changing competitive strengths has been largely technology-led. Capitalist competition leading to uneven adoption of technologies has also imposed institutional changes. Unable to compete effectively under state-owned firms, the governance of the industry in India and Brazil now rests more on the private sector. Capitalist regulation as witnessed in the industry is no longer driven by Keynesian ideology. Rather, the industry is now increasingly subject to the discipline of international competitive forces. In this environment technological 138

CHANGE AND INTERN ATION ALIZ ATI O N

chan ge becom es even more salient in th e global restructuring pro cess. As we will see in th e next cha pter, new innovatio ns in an increasi ngly liber alized econo mic enviro nment are further altering th e str ucture of steel production . Th e dynamics of th e ca pita list system are reflected even in th e mature steel ind ustr y as it is rife with inn ovat ion-b ased competitio n. Predi ctabl y, new innovatio ns in th e industry have meant new player s and new location s, and thus, like th e lar ger capita list system, th e restructuring of th e steel industry remains an ope n -ended pr ocess.

139

7

INNOVATIONS, ENTREPRENEURIAL BREAKTHROUGHS, AND INDUSTRY RESTRUCTURING

Introduction At th e global level the steel industry witnessed significant reorganizationwith capacity contraction in th e US and expansion by the late industrializes. Obsolete technology was eliminated from the industry, while Japan and Korea added new innovations. At the national level, capitalist regulation, pursued by the industry itself or by the state, determined the choice and speed of technology diffusion in the steel industry. American firms opted for new technologies reluctantly while their Japanese counterparts, and later the Korean state, launched an aggressive investment program to introduce largescale, blast furnace-based steel production. Rapid expansion had its downside of excess capacity, forcing Japanese firms to reorganize th eir steel industry. Brazil and India, despite overcoming initial structural dependence, continued to face stiff institutional difficulties in raising their technological capability. At the firm level different technology strategies led to varying international competitiveness. The resulting international division of labor clearly favored those countries which had aggressively adopted recent innovations. In this chapter we further examine technological change as part of capitalist competition to capture the industry's restructuring process in its totality. Thus far the discussion has been around institutional responses to technological change in large-scale integrated production. In this technology, high capital costs hav e limited industry entry. However, with the advent of new generation minimills using electric arc furnaces, the steel industry is poised for a new round of restructuring. Entry barriers have fallen as the cost and the size of minimills are considerably less than integrated units. Several US firms outside the integrated sector seized the innovations to compete with established producers. In late industrializing countries, the retreat of the state made private sector entry in the minimill segment relatively easy. Th e examination of th e evolution of new innovations brings out the institutional context in which new technologies are being adopted and indicates the direction of steel industry 140

INNOVATIONS, ENTREPRENEURSHIP, RESTRUCTURING

restructuring. In contrast to the technological lethargy exhibited by the US integrated segment, several US minimill firms have embraced new innovations with a pioneering approach. Even in India several entrepreneurial firms have seized the opportunities that have become available with new innovations. This development is especially salient in the US and India where the steel industry in the post-war period has not been innovative. This chapter demonstrates that the diffusion process is heavily influenced by strategy, which in turn is shaped by the institutional setting and the legacy of past actions. These are themes which we have already examined in the case of the integrated segment. What is noteworthy in technology-led recent restructuring is the innovative approach adopted by smaller firms-in both advanced capitalist and developing economies. They have kept abreast of technological change and introduced institutional changes to make effective use of new innovations. New innovations have also opened up the possibility for developing countries to leapfrog the industry, thus contributing to the open-ended nature of industrial restructuring. This chapter is divided into four main parts. The first part describes the emergence of minimills, detailing the diffusion, size of plants, and costs associated with EAF production relative to integrated production. The second part examines new technological breakthroughs in the steel industry, which include new generation minimills and other innovations. The costs of establishing such mills and operating them are discussed. The third part relates the diffusion process of new innovations with restructuring. It brings out the dynamic role new entrepreneurs are playing vis-a-vis the integrated sector and also how they are shaping institutional change. For example, with economic reforms at home and commercial opportunities abroad Indian firms are strategically introducing hybrid modern technologies. It also shows that, at least for US-based minimills, discarding the antagonistic labor-management arrangements found in integrated production units has been highly conducive to competitiveness. Both entrepreneurial initiatives and flexible institutions are in keeping with global trends where capital mobility has created new opportunities and rapid adjustment to changing market conditions has become critical to competitiveness. The final section concludes by revisiting the relationship between technological change and industrial restructuring in the larger capitalist context. The emergence of minimills The distinctive feature of minimill technology is the melting and the purifying of scrap using an electric arc furnace. With heavy dependence on electricity, the initial application of this technology was confined to small volumes of high-value metals, such as aluminum refining and specialty steels. The diffusion of minimills has been limited by superior metallurgical qualities of steel produced with integrated ore-and coal-based blast furnace technology. 141

IN N OVATIONS, ENTREPRENEURSH IP, RESTRU CTURIN G

Consequently, minimills historically ha ve been relegated to producing low value-added long products, mainly bars , wire rods, and small shapes for th e construction market . Only since th e 1980s has EAF technology gained a reputation that borders on th e cutting-edge. Steel industries around th e world ar e now ex ploring and adopting various versions of this technology, and an incr ea sing share of output is now under EAF production (Table 7.1). Virtually all countries have increased th eir EAF share with th e exception of Brazil. The most prominent growth in EAF technology has been in th e US, Japan, and Korea. As th e competitiveness of integrated firms eroded, firms with EAF technology gained market shares. American EAF firms gained momentum mainly because of integrated plant shutdowns as well as th e high capital requirements of new int egrated greenfields. Japanese firms too expanded th eir EAF capacity but less aggressivel y. Korea's EAF share on th e other hand increas ed due to POSCO's technology strategy and private firms' desire to capture a part of th e lucrative domestic market . Until recently, the institutional barriers to EAF development have been th e countervailing market power exe rcised by integrated firms over th e industry and, in late industrializing countries, by th e state's preference for large-scale int egrated production units . The more rec ent expansion of EAF production reveals several ad vantages of small-scale production vis-a-vis integrated production. Small scale has meant locational flexibility, allowing minimill producers to meet local market needs and in the US to source scrap from scattered locations. It has also translated into lower investment requirement and op erating costs. These advantages have been exploited in India as well. Like its US counterpart, the Indian minimill sector, freed from government regulations, has adopted modern EAF production.

Table 7.1 The diffusion of electric arc furnace (EAF) technology

US Japan Brazil Korea India EEC

Percentage of output

Percentage of outputin 1995

15.3 in 18.6 in 24.9 in 18.0 in 25.1 in 25.2 in

39.4 32.3 17.6 37.8 29.7 34.9

1970 1976 1986 1983 1986 1986

Sou rces: Barnett and Cra nda ll (19 86:7); Int ern ati on al Iron and Steel Institute (various years ); Instituto Brasileiro de Siderurgia (various years );]a pan Iron and Steel Federa tion (various years) No te a 15 member s

142

INNOVATIONS, ENTREPRENEURSHIP, RESTRUCTURING

Scale of operations The American steel industry has been reorganized not only because of global developments in the integrated segment but also because of the rapid expansion of EAF units. The inflexibility of the integrated segment to adjust to changing competitive conditions made smaller EAF units attractive, especially for serving inland localized markets for construction items. In the US, the availability of cheap scrap and electric power made EAF expansion feasible. Unlike the integrated segment where the large scale of operations determined operating efficiency, minimills have not been subject to such economy of scale requirements. For example, plant size in the US has ranged from 60,000 tons/year to 1.8 mt (Barnett and Crandall 1986:8-9). In the mid-1980s there were only two plants exceeding 1 mt; most others were considerably smaller (Table 7.2). Most EAF units in the US have been predictably small. Coincidentally, both US and Japan had an absolute total EAF capacity of over 21 mt, The top 50 percent of the US plants had an average capacity of 0.5 mt, with another 40 percent averaging roughly 0.25 mt. In Japan, where EAF diffusion has been slower, the structure of plant size on the whole has been similar. About 40 percent of the top plants in Japan had an average plant size of 600,000 tons a year. In both cases over 50 percent of the plants had production capacity under 350,000 tons. Other countries also had even smaller scales of operations. For example, Korea in 1979 had an average firm size of 180,000 tons (Kang 1994:69). Brazilian average output per EAF unit in 1986 was 189,000 tons. Indian EAF units have been even smaller. Nearly 100 percent of the EAFs were under 10-ton capacity (Basu et al. 1987). In 1989-90 there were 179 units that produced an average of only 17,500 tons per year (Etienne et al. 1992:77). Only one unit at that time had a capacity of 250,000 tons. With rising scrap prices in India, low capacity utilization was routine. Contrary to the experience of other countries, India's EAF share actually fell from 24.5 percent in 1981-2 to 15 percent in 1994-5 (Narayan 1995). The industry at the time had an inefficient furnace size of 5-10 tons only, consuming inordinate amounts of electric power. Unscrupulous EAF units "stole" power from the grid, paid no taxes, and engaged in price gouging in the highly price-controlled market. Far from being innovative, the overall Indian minimill segment has been significantly rent-seeking. Notwithstanding the small size of EAF plants, EAF units, like their integrated counterparts, have been also increasing in size. The consolidation of assets by competing firms and scale economies of new technologies cumulatively contributed to larger minimill firms and plants. Thus the initial fragmentation of the Japanese minimill segment over time has been reduced to fewer firms, while the average EAF size increased rapidly (Figure 7.1). In 1960 the average EAF in japan produced 124,000 143

Table 7.2 Average size of minimill plant s in th e US and Japan

Number 1)1firms

Number 0lpJtlJ1ts

(million tons)

US

US

1.0-2.5 0.5-0.999 0.4-0.499 0 .2-0.299 0.1-0 .199

:; 9

<0.100

B 11 7 2

jajMl'I

3 11 11 14

.., t

2

Japatl

Average firm sizeby group [million tons) US

Japan 1.90 0.63 0.35 0.25 0.15 0 .09

16

7

1.82

11 11 11 7 2

14

0.67

II

0.40 0.23 0.14 0.07

Source : Adapted from Barnett and Cranda ll (1986:8-9) and Uriu (1989:7) No tes: US capacity is for 1986 (in net to ns) . Ja pan 's dat a are fo r 19 80

u

7 2

A;,-eragt pkm size by group (million tons)

-

US

Japan

057

0.8 1 0.49 0.35 0.25 0. 15 0.09

0.55 0.29 0.23 0.14 0.07

IN NOVATIONS , ENTREPRENEURSHIP, RESTRU CTURING 120,000

100,000

80,000 LL

i3-.:: I

~ c

60,000

e

40,000 ----. EAF - - UnearlEAF)

20,000

Figure 7.1 Rising trend in Japan's electric arc furnace (EAF) size Sou rce: Ministry of International Trade and Indu str y, Yearbook of Iron and Steel Statistics, various years No te: Th e linear trend is estim ated as follow s: y=2125 .1x+72 7.16 ; R2=O.86 38

tons. In twenty years, the average capacity had nearly quadrupled to 460,000 tons. The most noticeab le increase in size occurred between 1990 and 1995, when average EAF capacity nearly doubled from 0.591 mt to 1.097 mt. Simi larly, in 1990 Korea's average annual EAF capacity was 274,000 tons, which ex perienced roughly 50 percent growth since 1979 (Kang 1994:69). In the early 1990s, Korea had ten minimill companies producing an average of 1.13 mt. Two firms had over 2.5 mt capacity, and three others over 1.0 mt each (Hogan 1994:42) . Un like the Japanes e, Kor ean minimills were less fragmented as 50 percent of Korean minimills had over 85 percent of minimill capacity.

Minimill costs The different process underlying EAF production permits small-scale operations, making minimill output less capital-intensi ve. Consequently, small size has meant smaller total outlays than for integrated production. Notwithstanding th e convergence of minimill capacity with integrated production today, roughly 2.0 mt, the inherently different production proc ess makes minimills cheaper in terms of capital investm ent. For example, in the US th e capital requirement for integrated production was $ 1,421/ton in 1985 145

INNOVATIONS, ENTREPRENEURSHIP, RESTRUCTURING

whereas electric furnace-based mills were built for an average of $250-300/ ton (Barnett and Crandall 1986:53 ). Assuming a minimum efficient scale of 3.0 mt for an integrated plant and 0.5 mt for a minimill, the respective capital investment translates to over $4 billion for integrated and only $150 million for a minimill. 1 More recent estimates show an investment cost of $340 million for a state-of-the-art minimill producing 1.0 mt compared to $3.6 billion for a 3.0 mt integrated plant (Hall 1997:253 ). While minimill output is limited to a few products and hence calls for lower investments, EAF units have clear advantage in lower operating costs in products that both minimills and integrated plants produce, such as wire rods. Higher capital outlays with longer pay-back periods contribute to a higher financial burden for integrated production. The principal input for EAF steel production is scrap. The availability of scrap is a direct function of the level of industrialization. Not surprisingly, the US economy as the largest generator of scrap has gone the farthest in establishing minimills. Scrap-scarce economies, including Japan, have been slow to adopt minimill technology. It may be recalled that the rapid diffusion of BOF technology in Japan in the 1950s and 1960s took place partly because of its dependence on imported scrap used in EAF and OHF processes. Japanese and Korean scrap prices have been considerably higher than US prices (Paine Webber 1987: table 24). However, as scrap availability increased and the relative price of electricity fell, minimill production in the US became commercially attractive. Where integrated production has been weak, for example in the west coast and the south-east, minimill production became competitive. Just as the small scale of EAF operations gave minimills their geographical flexibility, the decentralized scrap collection system in the US reinforced the dispersion of minimills throughout the US. There are two kinds of scrap: one is obtained from recycled materials (purchased scrap) and the other is generated by steel plants themselves (home scrap). Home scrap is of higher quality than purchased scrap. However, as integrated production adopted continuous casting, increasing their yields, the availability of home scrap fell (see Figure 7.2).2 Purchased scrap is both the "prompt" industrial variety obtained from stamping plants and the "obsolete" variety, namely recycled metal products. Except for the recessionary period of the early 1980s, the US scrap supply has steadily increased due to increased recycling and recovery methods. With industrial restructuring and increased operating efficiencies in the US, the decline in home scrap generation has been compensated for by the increase in purchased scrap. Scrap prices have fluctuated with the business cycles and have risen since the 1970s-from the 1974 peak of $107.83Iton to the 1995 peak of $133.70Iton (American Metal Market in Korea Iron and Steel Association, Steel Statistical Yearbook, 1997:278-9).3However, scrap prices have been consistently less than the superior BF-based hot metal prices, a substitute for scrap. In 1975, scrap was valued at 63 percent of the hot 146

INNOVATIONS, ENTREPRENEURSHIP, RESTRUCTURING Purchased Home Total scrap Net exports TotalUS supply Unear (total US supply)

120

100 Ul

c:

s

80

Gi e

'0 60 Ul e

~

~ 40

-_ ......

20

o 1960

1962 1964 1966 1968 1970

1972 1974 1976 1978 1980 1982 1984

Figure 7.2 US scrap supp ly, 1960-84 Sources: American Iron and Steel Institute, Annual Statistical Report, various years ; Barnett and Crandall (1986) Note: Linear (tota l US supp ly) is a linearized trend

metal price and in 1985 on ly 38 percent (Barnett and Crandall 1986:31). Increasing supply and falling relative prices of scrap have had a favorable effect on US minimill competitiveness. In the 1980s, when integrated producers in the US began to retrench obso lete capacity, minimi lls producing long products became highly competitive. American minimills had a cost advantage of about $100 per ton. In 1985 a representative US minimill had an operating cost of $244/ton of wire rod (Barnett and Crandall 1986:21 ). This cost excluded depreciation, interest, and taxes. The price of scrap was assumed to be $85 per ton and 1.12 tons of scrap was used for every ton of wire rod. Labor costs for this product were considerably lower: between 35 and 50 percent of integrated costs. Lower wage rates as well as higher productivity in the minimill sector contributed to its cost competitiveness. The location of minimills in semiurban areas and away from the unionized, industrial heartland kept wage rates low. In 1995 the to ta l minimill steel capacity stood at 4 1 million net tons, of which 57 percent fell unde r non-unionized mills (computed from New Steel May 1995:27-9); 39 percent of the minimills' 34,823 employees are non-unionized. Lower entry barriers, such as flexibility, reduced capital requirements, and lower operating costs, have encouraged minimills to locate in underserved ma rkets near sources of scrap. More importantly, the ease of entry has also 147

INNOVATIONS, ENTREPRENEURSHIP, RESTRUCTURING

injected an entrepreneurial style that has been receptive to new technologies, a phenomenon rarely witnessed in the post-war American steel industry (Barnett and Schorsch 1983; Acs 1984:98-104; Barnett and Crandall 1986). As minimills diffused through the US market, innovation continued to improve the technical parameters of minimill performance and effectively encroached upon flat products markets controlled by the integrated segment. Technological breakthroughs in the non-integrated steelmaking process With incremental and radical innovations in minimill technology, US integrated producers continued to face new competitive challenges. Following the generalized technological trajectory, minimill operations increased in size but remained smaller than integrated operations. Most improvements have been directed toward the flat products market, a segment that has been the monopoly of integrated producers. The inherent limitations of scrap-based production in producing flat products encouraged the development of alternative inputs and at the same time lowered production costs by doing away with expensive BF output but retaining the hot metal quality. Ironically, the rapid expansion of minimill capacity in the US and elsewhere put pressure on scrap prices, thus encouraging the development of scrap substitutes, such as directly reduced iron (DRI) and hot briquetted iron (HBI).4 Some of the more important technological breakthroughs in minimill operations are presented in Table 7.3. The developments in EAF technology reflect their cost-reducing properties.' With increases in the size of EAFs, progressively from 50 tons to over 200 tons, operating costs have fallen . Because they are smaller than most integrated production units, the benefits of flexibility have been retained. However, there is a convergence of minimum efficient scales between modern EAF units and the smaller integrated units. For example, Gallatin, a US-based EAF producer, is expected to have a plant capacity of 2.0 mt, a size that matches some BF-BOF integrated plants. In this sense "minimills" is a misnomer for modern EAF units. Technological breakthroughs have also reduced energy costs. The two most critical innovations in EAF production have been substitutes for scrap and thinslab casting. Both of these product and process innovations have made quality flat sheet production by minimills realizable. The development of scrap substitutes, such as DRI and HBI, has made scrap dependency a thing of the past. " Production of DRI is made possible with natural gas, while coal is used for HBU Normally some scrap is combined with DRI as charge for the EAF. The minimum efficient size for a DRI module is anywhere between 0.5 mt and 0.9 mt. Several iron producing modules can be used to expand DRI capacity. Steel Dynamics is planning a 0.5 mt HBI plant in the US, while BHP of Australia is constructing a 2 mt HBI plant. The 148

INNOVATIONS, ENTREPRENEURSHIP, RESTRUCTURING Table 7.3 Recent techn ological breakthroughs in alternative steelma king proc esses

Equipment/process

Benefits

Size ofEAFs

Larger vessels for melting scrap: from 50 to 230 tons . Greater output, efficiency.

TypeofEAFs

AC and DC furnaces. New DC furnace reduces electrode consumption from 10-12 lb/ton by 3 lb/ton.

General EAF improvements

Reduced consumption of electricity, electrodes, refractories.

Use of oxygen in EAFs

Similar to BOF, oxygen lance systems, less energy needed, reduced nitrogen, power consumption, tap-to-tap time, increased throughput.

Twin-shell EAFs

Two EAFs used simultaneously: one to reduce scrap with oxygen and the other to melt and superheat scrap . Increased productivity, flexibility, progressive reduction in tap-to-tap time from 5 hrs to 45-60 minutes.

Width of electrodes

24 inches for AC furnaces, 30 inches for DC furnaces.

Alternative irons (DRI)

Substituting scrap with DRI, HBI made with iron ore and charged into EAF. DRI takes less time to melt than scrap and has less impurities.

Thin-slab casting

Slab thickness to 50 mm or less, rolled down to 1.0-1.5 mm. Reduced energy consumption, capital costs, less yield loss. Liquid core reduction (LCR) to improve the slab's internal and external surface quality. Also known as compact-strip-production (CSP) and inline-stripproduction (ISP).

Faster rolling mills

Less energy consumption, increased throughput.

COREX

Bypasses coke ovens and BFs, produces hot metal that can be charged int o EAF or BOF, uses non-coking coal, less polluting than coke ovens, lower capital costs, can recycle off-gas for electricity.

Alternatives to COREX but all pilot projects:" AISI, mas, HISMELT

Smelting processes with off-gas but more efficient than COREX.

Computerization

Better process controls for oxygen injection, power and electrode consumption. Continuous process.

Sour ces: Ne w Steel, various issues, and other industry documents Notes

a America Iron and Steel Institute project with US government (Department of Energy) participation. Direct Iron Ore Smelting (DIOS) project under several Japanese firms and Japanese government participation, and HISMELT pioneered by CRA of Australia and Klockner of Germany (replaced by Midrex of US) EAF=electric arc furnace

149

INNOVATIONS, ENTREPRENEURSHIP, RESTRUCTURING

bulk of D RI production is in developing countries where ore and natural gas are plentiful. Globally, DRI production is gaining momentum. In 1983, twenty-one countries with total DRI capacity of 19 mt utilized only 40 percent of capacity (Judet 1985:47). In 1995, a total of 30.67 mt of DRI production was in place, concentrated in regions endowed with cheap iron ore and/or natural gas, such as Mexico, Venezuela, the Caribbean, the Middle East, and India. the past, shipping costs as well as the price of natural gas have unfavorably affected DRI use. However, with various innovations DRI units are rapidly diffusing in scrap-scarce economies, such as India. Even in the US where scrap supply is not a problem, DRI production has been initiated mainly to feed the new generation EAF-thin-slab casting plants. With few global supply constraints on iron ore and the Korean government's de facto limits on private sector entry in large-scale blast furnace-based mills, Hanbo of Korea has adopted the DRI process for its EAF plant. Recent US prices for DRI have hovered around $ 125Iton, compared to $13 Olton for scrap (Hall 1997:245). The availability of DRI relative to scrap is making EAF production commercially attractive. Thin-slab casting has boosted modern EAF production by permitting the casting of slabs that are close to the desired shape (near net shape). SMS Schloeman of Germany pioneered the thin-slab caster or the compact strip production (CSP) process, while NUCOR of the US introduced it commercially. Mannesman Demag, also of Germany, has developed the inline strip production-its version of the thin-slab caster. Unlike conventional continuous casting where slabs must be thick and wide, the thin-slab caster is designed to handle the small outputs of EAFs to produce 50 mm slabs that can be quickly and efficiently rolled down to sheets a couple of millimeters thick. Not only is there significant cost savings but the high quality of iron charged in the EAF permits the production of exposed-body sheets for autos and appliances. Cost savings with thin-slab casting relative to conventional casting are considerable: for Indian conditions it was estimated to be 19 percent from casting alone and 42 percent in overall operating cost (Sengupta 1995:42). Although thin-slab casting has been designed for EAF output, traditional integrated mills can also retrofit this equipment with their existing operations. ACME Steel of the US introduced a thin-slab caster to replace ingot casting, hoping to save 20 percent of its manufacturing costs through labor and energy cost reductions (Ritt 1997:72). This is a stand-alone caster relying on steel produced by its BF-BOF process at mills in nearby locations. Some minimills have adopted an intermediate medium-slab caster that is more flexible than conventional ones but is not limited to the narrow product range of the thinslab caster. One other innovation that has the potential to alter the steel industry radically is the COREX process. It is strategically similar to DRI in that it 150

IN N OVATI O N S, ENTREPRENEU RSH IP, RESTR UCTURIN G

byp asses ex pens ive BF-based hot met al. H owever, it also has th e adva ntage of sma ll size and ch oice of down str eam pr ocess. For exa mple, th e hot met al pr oduced by CO REX can be char ged either int o an EAF as in a minimill or into th e BOF of an integ ra ted mill. The fir st pr oject was comm erc iall y introduced by ISCOR of South Africa with a C-1000 module (1,000 ton s of hot met al a day). Th e pr ocess, develop ed by Voest-Alp ine of Au str ia, uses nonc oking coal to produce m olt en iron . Iron ore in vario us forms is reduced in a sha ft by gas, melted , and t apped just like a tr ad ition al blast furn ace. Th e adva ntages here are significa nt. Th e pr ocess does not rely on cok ing coal and henc e does away with th e expensive cok e ovens used in int egr at ed pr oduction; nor does it require lar ge-scale blast furn aces. For exa mple, H anb o of Kor ea is integ ra ti ng DRI pr oduction wi th C-2000 CO REX modules to mak e hot met al for its EAF ch ar ge, while Jindal of India is ins ta lling two C-2 000 modules for hot iron to be comb ined for BOF pro cessing. Like th e CO REX, which does away with th e cok e-m aking stage, th ere are closely relat ed dir ect steel ma king pr ocesses, such as th e American AISI, th e Japan ese DI O S, and th e Austra lia n-Germa n HI SMELT (see Ritt 1996 for det ails). H owever, th ese pro ject s are still at th e pilot stage and are not expecte d to be commerci ally via ble for severa l years. Two immediate benefit s are reduced t ot al inves tment costs and envi ro nmenta lly less dam agin g opera tions. Ano ther benefit of CO REX technology is th e recycling of off-gases pr oduced by th e pr ocess, which can be used as an energy sour ce either as electricity, heat , or a reductant.

Costs of new technologies The new genera tion of steel technologies has overcome th e barrier of high cap ital requ irements. Previou sly th e main bottleneck was th e econo mies of scale asso ciated with integrat ed production . Whereas a 3 mt plant is routine for an integra ted facility, a thin-slab EAF plant can be eas ily designed with half as much cap acit y. Thus cost per ton of hot roll ing cap acit y wo rks out to $200- 250/to n for integra ted process and less th an $1001ton for a (thin-slab) CSP (Scho rsch 1996 :47 ). Th e difference in tot al investment costs between th e two types of plants is also significant (Table 7.4). For a 3.4 mt integrat ed plant, tot al investm ent has been estima ted to be $2.70 billion or $793 lto n of cap acity, while a new genera tio n mill requires only $450 mill ion or $450/ ton . Int egrat ed mills also have very high maintenanc e costs. For exa mple, a blast furn ace reline, which is necessar y every few years, costs abo ut $300 million-a sum th at is close to th e total investment needed for a new minimill. Recent actua l expenditures for new minimills have been even lower (Hall 1997:25 3 ). Declining investment cost has been one ma jor reason for th e continu ed gro wth of minimills. Th e other is th e low er ope ra ting costs. It was earlier shown th at wire rods produced by a tr ad ition al minimill are cost competitive 151

Table 7.4 Greenfiield investment costs; minimill and integrated in the US

Process

Electricfurnace/thin-slab route

Blast furnace/BOF route

Tons needed

Tons , needed

DR IIHBI facility DRI HBI Coke ovens

Cap. cost! ton

Cap. cost ($ mill)

500,000

Comments

Cap.

Cap. cost/ ton

cost

-

-

-

1,100 ,000

300

330

($ mill)

100 20

-

200 40 -

PCI facilit ies

-

-

-

280, 000

80

22

Blast furn ace

-

-

-

2,800 ,000

200

560

1,000 ,000

150

150 3,400,000

200

680

Steelmaking EF BOF

Assumes EF/TS route uses DRIIHBI for 50 % of met allics charge . Yield in steel furnaces only 85 % on DRIIHBI material. Assumes coke rate of only 0.4 ton per ton of pig iron due to use of pulverized coal in jection. Each ton of pulverized coal injection replaces one ton of coke. Hot metal (i.e., molten pig iron ) assumed to be 80% of the metallics charge. Includes sinter plant. This figure includes the cost of land, infrastructure, and all supporting facilit ies.

Continuous caster Th in-slab Convent ional Hot strip mill Stands

Includes heating furnaces. 40

1,000 ,000

40

-

-

-

1,000,00 0

140

140

3,400,000

255 Assumes a 5 or 6 stand finishing train. For BF/BOF route" includes a reversing primary stand and Stelco coil box.

3,400,000

Total

75

250

850 Nucor plant at Crawfordsville built at bargain price . Also only four stands hot strip mill.

Totals With DRI W it h HBI Without DR IIHBI Infrastructure costs included above

1,000 ,000 1,000 ,000 1,000 ,000 1,000 ,000

43 0 450 330 120

430 450 330 120

Polluti on control costs included in infrastructure

1,000,000

35

35

Source: Paine Webb er (1990)

-

-

-

3,400,000 3,400,000

793 294

2,697 1,000

3,400,000

75

255

Includes maintenance shops, in-plant railroad, roads, emplo yee facilit ies, adm inistration office, etc. These come to about 11% of capital cost for EF/TS route and 10 % for BFIBOF route .

IN N OVATI O N S, ENTREPRENEU RSH IP, RESTR UCTURIN G

relative to int egrat ed production . Similarly, for hot-rolled coil und er thinslab casting, opera ting cost per ton is less th an integrat ed output. For exa mple, tot al opera ting cost was $3091ton vers us $468 /to n (Paine Webb er 1992 :62 ). Casting and roll ing costs for thin-slab casting was $30 to $52 for integrat ed mill (Schorsch 1996 :47). Wh en capit al charges are includ ed in operating costs, minimill s had a financ ial burden of only $36/to n compared to $ 170lton for integrat ed production (Hall 1997:254 ). The major pl ayer s in th e diffu sion o f new min im ill s are both the inn ovat or s as well as th e adopters. In th e US severa l for eign firms have joint ventures in minimill opera tio ns (Table 7.5) . H owever, th ese are not th e cutting-edge minimill techn ologies depl oyed for producing flat products. Jap an ese EAF firm s have a stro ng pr esenc e in th is segme nt of th e American steel industr y. Virtuall y all of th e recent minimill innovati on s have been from th e adva nced cap ital ist countries. Germa n firms have been at th e for efr ont of thin-slab casting. SMS Schloe ma n pion eered th e CSP pr ocess, soon followed by M annesman Demag with its ISP process. There are sixteen SMS Table 7.5 Fore ign players in US minimills

USfirm Auburn Steel

Foreign partners

Sum itomo" Kyoei' Arkansas Steel Yamato Kogyo" Auburn Steel Sumitomo" New CF&I Steel Oregon Steel Nippon Steel' Florida Steele Kyoei' NUCOR-Yamato Yamato Kogyo" NUCOR Tamco Tokyo Steel' Ausreel Lemont Kyoei' Sumitomo" Citisteel GTIC, China Copperweld" Daido' Georgetown Kuwait Tuscaloosa British Steel Trico Steel (LTV) Sumiromo' British Steel LTV

Equity (%)

Markets

Start-up

90 10 50 25 25 85.6 9.52 100 49 51 100

Billets, merchant bars Tinplate, flat bars, billets

1975

Combined

100 100 33 n.k.

100 25 25 50

n.k.

Billets, bars, rail, OCTG Bars, rods Sections

1994

Rebars, rods Tinplate

n.k.

n.k. n.k. n.k. Plate rolling mill Hot rolled sheets

1988 1989 1986 1981 1994

1992 1987 1994

Sources: Fu jitani (19 95); Keid anren (19 96 :86); H all (1 997 :2 03) Notes a Ja pan ese partn er b Cha pter 11 in 1993 c takeover n.k .enor known by t he a uthor at the time o f wr it ing . Some of these pla nt s have cha nge d ownersh ip an d equit y 154

INNOVATIONS, ENTREPRENEURSHIP, RESTRUCTURING

thin-slab projects around the world, of which 50 percent are in the US. Other contenders, such as Davy International of the UK and Danieli of Ital y, claimed similar technological expertise (personal interviews, Mannesman Demag, Davy International, Samsung, Tippin-Samsung, and SMS, Pittsburgh, March 1995). Tippin-Samsung, an engineering joint venture between America's Tippin and Korea's Samsung, and Sumitomo of Japan also claimed nonconventional (medium-slab) casting process. Voest-Alpine, the pioneer of the BOF, is also the developer of the COREX process. The diffusion of new technologies and restructuring Predictably, new innovations have been generated in the advanced capitalist countries. Their diffusion has been also spearheaded by a few firms, such as the US-based NUCOR. However, on closer inspection we find that some developing countries are playing a vital role in the diffusion process. For example, firms from Korea and India are also involved with thin-slab casting and COREX processes. The adoption of new minimills has been also facilitated by the diffusion of DRI production in developing countries. Although the technology for making DRI was pioneered by Midrex, an American firm now owned by Kobe Steel of Japan, Mexico's Hylsa has also developed a similar process for ironmaking. The adoption of the Midrex process has been led by India's Ispat and Essar Groups. Of the 18 mt of global DRI production in 1990, Ispat's share alone was 4 percent (Schriefer 1996:42). In 1995, Ispat had 15 percent of 30.7 mt, which is expected to grow to 25 percent of 40 mt of global production. The diffusion of new technologies has been also accompanied by significant institutional changes. In contrast to the conservative approach of the integrated segment, the new minimill industry exhibits tremendous entrepreneurial energy. Another important change is the cooperative industrial relations found in minimills. With the weakening of overall entry barriers to steel production, entrepreneurs have seized opportunities to use new innovations in creative ways. For example, firms have integrated DRI charge with the COREX process for EAF production, while the COREX charge has been directly fed into the integrated BOF process. Conversely, hot metal from the blast furnace is being fed into an EAF thin-slab mill as well. 8 This hybridization of technologies, opening up new avenues for private sector investments, has altered the very nature of capitalist regulation. From large oligopolistic, often state-dominated steel firms, the entrepreneurial units are more flexible, competitive, and highly receptive to technological change and commercial opportunities. The institutional shift has been also accompanied by new forms of labor arrangements. Minimill workers in the US are less unionized than their integrated counterparts. Two reasons for this are the location of minimills in less industrialized semi-rural areas and

155

INNOVATIONS , ENTREPRENEURSHIP, RESTRU CTURING

management's desire to avoid antagonistic labor-management relations, which are typical of integrated mills.

From passivity to entrepreneurial breakthroughs Technological breakthroughs in a changing institutional context have also introduced a new round of steel industry restructuring. It is easy to see why minimills became a new force in the American steel industry. The costly technology and financial crisis of US integrated production, combined with poor location and import competition, made small-scale EAF production attractive. Also, initial production was confined to low value-added long products where quality requirements were less stringent. However, minimills have also had their share of difficulties, especially older mills producing simple billets for wire rods. Until recently EAF production in the US, Japan, and India has been peripheral to integrated production. However, unlike the independent role played by US producers, minimills in India and Japan have been less autonomous from other producers. For example, numerous small mills in India relied on the state sector for semi-finished steel for rerolling, while in Japan a number of minimills are controlled by integrated firms. The staunchest supporters of modern EAF mills are independent American minimill firms (Table 7.6). The Japanese, despite their enthusiasm for new innovations, such as the BOF and continuous casting, are far behind US firms in modern minimill technology. " The Japanese industry's lag in minimill technology has been due to the strength of the integrated segment as well as stringent customer demands, making thinslab casting output less acceptable (personal interview, Japan Iron and Steel Federation, Tokyo, December 1996). Globally, the industry leader in the minimill segment has been US-based NUCOR. Led by an entrepreneurial Kenneth Iverson, NUCOR in 1989 established the world's first thin-slab casting plant in Crawfordsville, Indiana (see Preston 1991) . NUCOR has expanded its capacity with two new mills, one at Hickman, Arkansas, and the other at Berkeley, South Carolina. Gallatin Steel, a 5050 joint venture with Canadian Dofasco, has also introduced this technology at its Kentucky plant. In the mid-1990s, of the fifty-two thinslab minimill projects in the world that were either in operation or under consideration, sixteen projects, or nearly a third of total capacity, was slated to be in the US (Hogan 1994:82-3). In the last ten years nearly 20 mt of flat-rolled minimill capacity in the US has been added. Outside the US the diffusion of modern EAF thin-slab technology, though limited, has been picking up. Korea has two projects in place that have introduced hybrid technologies, such as the DRI with the COREX and BFbased thin-slab casting. Diffusion of these technologies is conspicuously absent in Brazil and Japan, even if Japanese firms, such as Nippon Steel and Nippon 156

IN N OVATI O N S, ENTREPRENEU RSH IP, RESTR UCTURIN G

Table 7.6 Diffu sion of new minimill techn ology in the US

Year

Firm!location

1. 1989 1994 2. 1992 1994 3. 1995 (1998)" 4 . 1996 5. 1996 6. 1995 (1999)" 7. 1997

NUCOR, Crawfordsville, Ind iana NUCOR, Hickman, Arkansas Gallatin, Kentucky

8. 1997

Hotrolling capacity (mil/ion tons)

Slabcaster supplier

1.8

1.8

2.2

2.2

SMS SMS SMS

2.0

SMS

1.0 1.5 2.0

Mannesman Dernag Sumitomo SMS

1.8

SMS

2.2

Sumitomo

Steelmaking capacity (million tons)

1.2 (2.0) Ipsco, Iowa 1.0 Northsrar, BHP, Ohio 1.5 Steel Dynamics , Indiana 0.9 (2.0) NUCOR, Charleston, South 1.8 Carolina Trico Steel, Alabama 2.2

1992-7 Expansion by 7 Brownfield Projecrs

3.6

Sources: New Stee l (April 1996:41 a nd Decem ber 1 994 :3 7 ); Hall (1 99 7:2 36-7) Notes a Target year for exp anded cap acity (figures in parentheses ) Tota l of 8 greenfield proj ects-1 2 .6 rnt capacity (d uring 19 89-9 7 )

Kok an , are major supp liers of EAF units. The strength of Japanese integra ted producers and th e hu ge ca pacity alrea dy in place have imp eded th e ado ptio n of new EAF technology in Japan . Tokyo Steel, an independent firm, has introduced new EAF ca paci ty but with conventiona l casting. Similarly, in Brazil the availability of high-quality ore and the need to consolidate integrated production after priva tizatio n have damp ened th e need to create new EAF cap acity. Like NUCOR, severa l enterp rising firm s fro m th e US, Ind ia, and Korea have exhibited an entrep rene uria l strea k bent on comp eting with integra ted firms in th e flat sheet markets. Th ey have been aggress ive in ado pting th e sma ll-scale innova tive techn ologies. For examp le, Ispat Gro up's Indian branch and H anb o of Kor ea have launched new inn ovati ve production facilities. Dubbed th e NUCO Rs of Asia, Tokyo Steel and H anb o are seen as maverick firm s (Berry 1996 ). Rather th an tow th e line of large integrat ed firm s in restr aining capacity growth, th ese two independent firm s invested heavily in recent inn ovati on s to cap ture part of th e flat pr odu cts mar ket. H anb o opted for a new minim ill (it alrea dy had one) using sta te-of-the-art techn ologies after an earlier requ est to set up an integrat ed mill to capture th e growing Korean steel ma rket was rejected by th e govern ment. In th e course of two 157

INNOVATIONS, ENTREPRENEURSHIP, RESTRUCTURING

and a half years, Hanbo planned for five EAFs, two SMS thinslab casting machines, two Sumitomo conventional casters, two COREX plants, and one DRI plant.'? Similarly, the Mittal family of Ispat Group overcame domestic restrictions by setting up a mill outside India and over time purchased several foreign steel operations to become one of the largest steel companies in the world. The company has also combined minimill innovations with the traditional blast furnace in a recent greenfield project. Such entrepreneurial behavior, best illustrated by NUCOR, is also exhibited by minimill producer Tokyo Steel, the first Japanese EAF firm to produce hot coil, hitherto a monopoly of the integrated segment. The earlier innovative behavior of the Japanese integrated firms has not been replicated by the minimill sector because of the peculiar interfirm institutional arrangements. A sizable number of minimills is owned by the integrated firms. This atypical industry structure is reflective of the kereitsu relationships typical among large Japanese enterprises. For example, minimills such as Toa Steel, Godo Steel, and Kyoei Steel are part of NKK, NSC, and Kobe integrated companies respectively (personal interview, Japan Iron and Steel Federation, Tokyo, December 1996). In many cases integrated steel producers manufacture the electric furnaces which they supply to their affiliated minimill firms. Thus it is not surprising that even though the Japanese EAF segment is the world's largest-absolutely and relatively-the sector has not exhibited the same kind of dynamism as American firms. 11 This group strategy is illustrated by transferring NKK's H-beam production to a new plant operated by Toa Steel, an affiliate of NKK (personal interview, NKK, Tokyo, December 1996). The implication of such an institutional arrangement is an orderly expansion of capacity and adjustment to excess capacity by large firms and, by default, by their affiliates. Ironically, it has had a dampening effect on innovative behavior. Notwithstanding the cartel-like arrangements among integrated and minimill firms, excess capacity, as we saw in Chapter 4, has been unavoidable. Prior to the major round of restructuring by the big enterprises in the 1980s, the Japanese minimill segment had already undergone painful adjustments in the 1970s. Expansion of both the integrated and minimill segments during the high-growth era, followed by the energy crisis, resulted in overcapacity in the Japanese steel industry. New capacity added by independent EAF operators, such as Tokyo Steel, posed a whole new threat to the stability of the steel market in japan (see Uriu 1989). Competition was severe in the long products market, and older, smaller minimills had to absorb the brunt of industrial restructuring. By 1978 nearly a third of EAF capacity was over fifteen years old, in 1987 over half (Uriu 1989:93). The appreciation of the yen eroded the profitability of Japanese firms as a whole but minimills were particularly hard hit. The restructuring of this segment was inevitable (see Table 7.7). Minimill firms were consolidated and almost half the furnaces were scrapped or decommissioned. Overall EAF capacity, however, increased, 158

IN N OVATI O N S, ENTREPRENEU RSH IP, RESTR UCTURIN G

Table 7.7 Restructuring of the Japanese minimill sector

1978 1983 1987

No.offirms

No. offurnaces

Total capacity (million tons)

Employment

69 58 56

146 115 93

20.79 25.98 27.50

36,400 30,600 19,300

Source: Uriu (1989:90)

as new furn aces with lar ger ca pa cities were insta lled and inde pendent firm s like Tokyo Steel entered th e mark et in a big way. Such persistent excess capacity in th e Jap an ese in dustry in jecte d additio na l restruct uring pr essures. Tok yo Steel's refu sal to restrain ca pa city an d outp ut as dictat ed by th e integ ra ted secto r created m ajor ind ustry regul at ion problems. Tokyo Steel does n ot belon g to any ke reitsu gro up nor is it a member of th e influential Jap an Iron and Steel Federat ion .P Not heeding th e indus try's counsel, Tok yo Steel in 1991 entere d th e flat steel m arket . Co nse q uently, it ex pa nded its m arket sha re by comp eting aggressive ly with th e Jap an ese integra ted segment as well as with imp orts, albeit init ially at th e low- valu e end. Tok yo Steel 's threat was serio us enough to m ak e Ni ppo n Steel exercise its market clout. Indu stry so urces rep orted th at in the past N ippo n Steel had in structed influentia l Jap an ese tr ad ing compan ies (integra l to th e kereitsu system) not to sell Tok yo Steel's o utput (see Berr y 19 96 ). Stra tegi c ex po rting of scra p by Ni ppo n Steel raised domest ic scra p pric es, thus p utting Tok yo Steel, a major user of scra p for its o pera tions , in an unc ompetitive position. Similarly, NSC's selling of pig iro n to its minimill affiliates but not to Tokyo Steel is n ot only a good ind icat or of th e fierce compet ition bet ween integ ra ted compan ies and inde pen dent minimill s but is also indicative of th e threat posed by Tok yo Steel. In 19 95 , Tok yo Steel paid h igh pric es: $145 /to n for scra p and $165/to n for pig iro n. This has been th e price paid by th e ind ependent compan y for not submitt ing to th e industr yim pose d regul at or y measures to coor din ate output and pr ices. The ado ption of new minimill technologies is intrinsically linked to business strategy. For example, the Japanese steel indu stry, dominated by a technologically efficient int egr at ed segme nt, has been slow to introduce sta te -of-the -art minimills. Even maverick firms like Tok yo Steel have not introduced th e full ensemble of new minimill techn ology, fearin g possible pro duct qu ality problems in a highly demanding Japanese market (perso na l interview, Japan Iron and Steel Federati on, Tokyo, December 1996 ). Similarly, PO SCO's big presence has limited th e diffusion of second-genera tio n minimill technologies in Korea. Amo ng th e private secto r firm s, only H anb o has ado pted new technologies. Other firms such as Inchon Steel, an EAF affiliate of th e gia nt H yundai 159

INNOVATIONS, ENTREPRENEURSHIP, RESTRUCTURING

conglomerate, have been more cautious. They have not been confident about Hanbo's minimill expansion nor the COREX process (personal interview,Inchon Iron and Steel Co., Inchon, August 1995).13 Paradoxically, POSCO, as the handmaiden of national industrial development, has proceeded to install new innovations, its monopoly and global competitiveness notwithstanding. At its Pohang plant, POSCO has installed a COREX unit and in its Kwangyang site two thin-slab casting EAF units . POSCO's technology strategy has been to satisfy immediate domestic shortages of hot-rolled coil, which these processes can quickly meet in a less expensive way than integrated production. More importantly, experimenting with new technologies at this time is expected to prepare it well for the next decade when several of POSCO's blast furnaces and coke ovens will be retired. This far-sighted approach to innovation reveals that a state-owned integrated firm can be equally entrepreneurial. Entrepreneurial investments in the Indian steel industry grew out of the inability of state-owned integrated units to meet domestic demand. The government promoted EAF units; however, initial capacity was limited to 0.25 mt. With economic reforms, India's Ispat Group broke through the entrepreneurial inertia to orchestrate a global firm with 12.5 mt of steel capacity. Already the Group has 18 percent of global DRI production. Like its entrepreneurial counterparts in the US, Korea, and Japan, the Ispat Group is engaged in new minimill technology. Today Ispat is far more internationalized than most steel firms. Its recent acquisitions include steelmaking and DRI plants in Trinidad and Tobago, Mexico, Canada, and Germany. It has steel operations in Indonesia, its first overseas venture, and several facilities in India (Figure 7.3). In systemic terms, this innovative behavior signals the growing maturity of Indian capitalists and the increasing technological capability of the steel industry. Other Indian firms have also been innovative. For example, the Mittal family's Indian operation Nippon Demo Ispat Ltd (NDIL) began with a galvanizing line in 1984 and today produces over 3 mt of cold rolling with nearly 40 percent of galvanizing. It also launched some color coating, India's first, as unmet demand for consumer durables took off with economic reforms which have been gradually introduced since the 1980s (personal interview, NDIL, Calcutta, June 1996). With its new 1.6 mt DRI project, NDIL has begun the process of backward integration. Unlike other modern minimills, NDIL will be also using a blast furnace, a strategy similar to Korea's POSCO, to produce 1.5 mt of iron and complement DRI and scrap for its two twin-shell EAFs. Output is expected to be 3 mt of steel which will be fed into two SMS thin-slab casters. The adoption of new minimill technology combined with the traditional blast furnace indicates an innovative approach to steelmaking. Blast furnace iron is of higher quality and hence its products are likely to meet stringent market requirements for flat products. To ensure success, NDIL has reproduced NUCOR's Hickman plant layout and Crawfordsville's product quality (Berry 160

IN N OVATIO N S, EN T RE PRENEU RSH IP, RESTRUCT URI N G India Operations Nagpur(1984)galv. plant Dolv! DRI plant Sidbec-Dosco Montreal, Canada bar, sheet, rod 2 Midrex(1994)

PTlspat Surabaya. Indonesia wire rodslbillets

IspatHamburger Stahlwerke, Hamburg wire rod, 1 Midrex (1994)°

Caribbean Ispat Trinidad 2 x Midrex (1988)

IspatMexicana Mexico(slabs 4 hyL modules) 1 Midrex (1992-3)

IspatIrish, Ireland blooms, medium structurals (1995)

Others Collaboration withKobe for MidrexDRI lspat Shipping (4 ships)

Ispat Karmet, Kazakhstan sheet, 5 BFs 3 BOFs, 2 OHFs (1996)

Figure 7.3 Ispat 's ex pand ing steel bu siness Sources: New Steel, various issues; Narayan (1996); person al interview, Nippon Dem o Ispat, Calcutta, July 1996 Note: a Its most recent acqu isition was Inland Steel of the US in 1998. Sale not finalized.

1995 ). NDIL's DRI plant ha s exceeded the designed capacity of 1.0 mt, makin g it a reference plant for Midrex, th e DRI technology supplier. Thi s approach to imitating th e best-practice standa rds is revolution ary in th e Indi an context , wh ere shortages have always favor ed sellers and quality of pro duct rarel y ha s been an imp ortant issue. Severa l technological development s reveal a new kind of entrep reneurship in India that is inn ovati on-based: combining existing techn ologies with new ones and emulating best-pract ice sta ndards. For exa mple, Essar link s DRI with EAFs. Th e Essar Gro up also boa sts th e world's largest gas-based HBI plant with do wn str eam op erations of 2 mt of hot-rolled coils. It has also begun backward integrati on by undert aking th e pr oduction of iron oxide pellets used for making HB!. Its steel op eration has Level II auto ma tio n, indicating a computerized system for pr ocess and product controls. Ano ther 161

INNOVATIONS, ENTREPRENEURSHIP, RESTRUCTURING

Indian firm-Jindal Vijaynagar-has adopted the COREX process to feed hot metal into basic oxygen furnaces. As a first user of COREX in the Indian market, Jindal is well positioned to exploit commercial benefits that the new innovation offers. Thus it went in for a large plant with two COREX modules. Combining new and established processes is a sign of technological confidence and commercial acumen. 14 With new innovations and the entrepreneurial bent of some of the Indian firms the global industry has entered another round of reorganization. For example, the Indian industry is poised for a new round of capacity expansion with a variety of steel technologies (see Figure 7.4). Of the nine projects, with a total slated capacity of 13 .625 mt and with average investment cost of $757/ton, virtually all of them will be adopting the traditional BF-BOF route (personal interview, M .N.Dastur and Co., Calcutta, June 1996). Five of the nine projects, with a combined capacity of 11.6 mt, are designed to produce hot-rolled coils, a typical integrated mill's output. With higher prices for power and risky large-scale plants, most firms are going the BFBOF route but in several cases using considerably smaller blast furnaces, with designs imported from China (see D'Costa 1998a). Comparative cost analysis shows that smaller blast furnaces are competitive with the traditional large ones (Sengupta 1995:50). For example, capital cost for a blast furnace with 157 m! was Rs 5,2701ton while a blast furnace with 2,000 rn ! cost Rs 5,282/ton. However, total investment would be Rs 1.24 billion versus Rs 6.55 billion, making smaller furnaces an attractive technological option." The recent restructuring of the Indian steel industry is a good illustration of different responses to new innovations in a path-dependent fashion. It is also an outcome that stems in large measure from the changing institutional environment. Different institutional environments spawned different minimill trajectories in the US, Japan, Korea, and India . While past government policies in Japan, Korea, Brazil, and India favored the development of the integrated segment, minimills in the US could exploit the opportunities that arose from the inflexibility of US integrated producers. Unlike other industries in other countries, American minimill producers emerged as the industry trendsetters, taking advantage of technological breakthroughs in entrepreneurial fashion. This is in stark contrast to the technological conservatism exhibited by US integrated producers. Similarly, with the dismantling of state controls, new entrepreneurs in India are leading the industry with new technologies. This too is a significant deviation from the rent-seeking private EAF operators of the 1970s and 1980s in India. In Japan the dominance of the integrated sector and the curious relationship between it and its EAF affiliates have impeded the diffusion of new generation technologies. Only autonomous action by renegade firms has slightly altered the technological make-up of the Japanese industry. The Korean industry has also been innovative, but paradoxically, apart from 162

IN NOVATIONS , ENTREPRENEURSHIP, RESTRU CTURING (

Gas

4

5

DRI (

Coal

3

To casting etc.

Figure 7.4 Planned new plants and new technologies in India Sources: Sengupta (19 95); personal int erviews, Calcutta, M umb ai, June-July 19 96 No tes: 1 1.02mt(Daitari ) 2 0.5 rnt (severa l) 3 0.97 rnt (Hazira) 4 0.4 75 rnt (Haz ira) 5 0.4 75 rnt (Bilaspur) 6 0.55 rnt (Da ita ri) Dkledirectly reduced iron ; EAF=electric arc furn ace; BF=blast furn ace; BOF=b asic oxygen furn ace

on e private firm, the state firm has taken th e lead in introducing almost all of the small-scale innovations in the steel industry.

Minimills and new institutional arrangements An und erstanding of the steel industry restructuring process would be incomplete without accounting for som e of the institutional changes accompanying new innovations. We have already witnessed a reduced role of the state in the larger economy and in the integrated steel sector. Brazil first spearheaded a major reorganization of the state-owned industry by privatizing it. We also find that, in addition to flexibility and entrepreneurship based on smaller size of operations, minimills have instituted a fundamentally different kind of industrial relations. Both the reduced role of the state and cooperative industrial relations mirror 163

INNOVATIONS, ENTREPRENEURSHIP, RESTRUCTURING

the trends in the larger capitalist order. Many authors suggest that new industrial relations characterizing the US minimill segment have contributed to the success of minimill performance (Smith 1995). In many ways these institutional arrangements reflect the cooperative relations found between Japanese management and labor (Florida and Kenney 1992; see D'Costa 1998b, 1998c). More specifically, the smaller scale of EAF units and therefore the smaller workforce is amenable to non-Tayloristic industrial relations. The production process is relatively simple and the plants are highly automated. Consequently, the need for detailed division of labor has become technically superfluous and from the workers' point of view politically redundant. The new minimills offer lower hourly wages than their integrated counterparts, but when bonuses are added workers' earnings are considerably higher. In the 1980s, minim ill workers earned between 77 and 92 percent of the wages of integrated producers (Barnett and Crandall 1986:22; US International Trade Commission 1987a:59). Greater responsiveness and participation characterize industrial relations. The small scale of operations is conducive to cooperative worker-management relations and has evoked trust-based institutional arrangements. For example, in the US, NUCOR's Hickman plant and Steel Dynamics' plant have only 325 and 260 employees respectively. The management in turn has decentralized decision-making in favor of shop-floor operators, making the entire minimill organizational set-up less hierarchical. The net contribution of a leaner production system has been very high productivity and greater worker morale." In the US context, the legacy of adversariallabor-management relations found in the traditional integrated segment is noticeably absent in the new generation minimills. Their small size and their dependence on scattered scrap sources has made their location independent of the traditional industrial heartland. American minimills, not surprisingly like the Japanese auto transplants, have tended to locate in semi-urban areas. Their greenfield status has also enabled minimill owners to locate away from unionized areas. More than half of minimill workers are not unionized. Their age structure is also different from integrated units: they are young, generally recruited locally, with little industrial background, and possess no bargaining experience. Notwithstanding contract workers in many areas of production, minimill employees work within more egalitarian structures than those in the traditional integrated segment. 17 With the rapid expansion of minimill output, earnings differences arising from different wage rates in minimill and integrated sectors are generally made up by bonus payments. For example, recent base pay in minimills was $7.5 3/hour compared to the integrated rate of $l1.13/hour. However, with bonus payments a typical minimill worker could earn around $50,000 per year. Since bonus payments depend on total output and the bonus is the same for everyone, it is always in the interest of workers to cooperate to ensure uninterrupted production. 18

164

INNOVATIONS, ENTREPRENEURSHIP, RESTRUCTURING

Cooperation between labor and management and among workers, made possible by flatter management, has contributed to rising productivity. Gallatin Steel, a new generation minimill, has only three layers of workers, comprising senior management, operations, and hourly employees. Supervision is nominal in most minimills. Of the 204 total Gallatin employees, only ten are in senior management and twenty-four under operations, while nearly half of the hourly workforce is comprised of engineers or those who have two years of engineering training. With more employees sharing a similar technical background, teamwork is relatively common. Even non-minimills are beginning to accept the work culture of EAF units. ACME Steel, an integrated steel company in the US, has introduced greater worker autonomy in its thinslab plant (Ritt 1997). Of the 150 total workers, 132 are hourly employees, sharing team-based work. ACME has only four job classes. With less hierarchy, decision-making has been quicker as well. With flexible industrial relations, the economic and technological performance of minimills, not surprisingly, has been spectacular (Barnett and Crandall 1986; Smith 1995). For example, US minimill productivity was roughly twice that of integrated production. In 1985 it took 2.4 workerhours in a minimill to produce a ton of wire rod compared to five workerhours in an integrated facility (Barnett and Crandall 1986:21 ). More recent estimates put the new generation of minimill productivity at 0.5 or fewer worker-hours per ton of hot-rolled coil (Ritt 1995b). Productivity at the NUCOR's Hickman plant has steadily increased from 0.8 worker-hours per ton to 0.4 in 1995; it is expected that this will be matched by Steel Dynamics. The ability to produce flat products with low labor inputs is a technical achievement that was not expected by US and Japanese integrated producers. The entrepreneurial breakthrough of thin-slab casting combined with new forms of industrial relations have contributed to the commercial success of minimills. Consequently, the pressure on US integrated producers to increase their productivity has also mounted. With new technologies breaking down entry barriers and reducing operating costs, minimills are poised to contribute significantly to the reorganization of the global steel industry. Conclusion: new technologies and industrial restructuring The emergence of new steel technologies demonstrates the difficulty of maintaining a monopoly over the market. Minimills around the world have become serious contenders in steel production. This development fits the Marxian and Schumpeterian dynamics of capitalist competition in which technology is a powerful tool to enter existing and new markets. EAF innovations have contributed to the competitiveness of minimills. With expanding EAF capacity, the integrated segment in the US and Japan is 165

INNOVATIONS , ENTREPRENEURSHIP, RESTRU CTURING

management's desire to avoid antagonistic labor-management relations, which are typical of integrated mills.

From passivity to entrepreneurial breakthroughs Technological breakthroughs in a changing institutional context have also introduced a new round of steel industry restructuring. It is easy to see why minimills became a new force in the American steel industry. The costly technology and financial crisis of US integrated production, combined with poor location and import competition, made small-scale EAF production attractive. Also, initial production was confined to low value-added long products where quality requirements were less stringent. However, minimills have also had their share of difficulties, especially older mills producing simple billets for wire rods. Until recently EAF production in the US, Japan, and India has been peripheral to integrated production. However, unlike the independent role played by US producers, minimills in India and Japan have been less autonomous from other producers. For example, numerous small mills in India relied on the state sector for semi-finished steel for rerolling, while in Japan a number of minimills are controlled by integrated firms. The staunchest supporters of modern EAF mills are independent American minimill firms (Table 7.6). The Japanese, despite their enthusiasm for new innovations, such as the BOF and continuous casting, are far behind US firms in modern minimill technology. " The Japanese industry's lag in minimill technology has been due to the strength of the integrated segment as well as stringent customer demands, making thinslab casting output less acceptable (personal interview, Japan Iron and Steel Federation, Tokyo, December 1996). Globally, the industry leader in the minimill segment has been US-based NUCOR. Led by an entrepreneurial Kenneth Iverson, NUCOR in 1989 established the world's first thin-slab casting plant in Crawfordsville, Indiana (see Preston 1991) . NUCOR has expanded its capacity with two new mills, one at Hickman, Arkansas, and the other at Berkeley, South Carolina. Gallatin Steel, a 5050 joint venture with Canadian Dofasco, has also introduced this technology at its Kentucky plant. In the mid-1990s, of the fifty-two thinslab minimill projects in the world that were either in operation or under consideration, sixteen projects, or nearly a third of total capacity, was slated to be in the US (Hogan 1994:82-3). In the last ten years nearly 20 mt of flat-rolled minimill capacity in the US has been added. Outside the US the diffusion of modern EAF thin-slab technology, though limited, has been picking up. Korea has two projects in place that have introduced hybrid technologies, such as the DRI with the COREX and BFbased thin-slab casting. Diffusion of these technologies is conspicuously absent in Brazil and Japan, even if Japanese firms, such as Nippon Steel and Nippon 156

IN N OVATI O N S, ENTREPRENEU RSH IP, RESTR UCTURIN G

Table 7.6 Diffu sion of new minimill techn ology in the US

Year

Firm!location

1. 1989 1994 2. 1992 1994 3. 1995 (1998)" 4 . 1996 5. 1996 6. 1995 (1999)" 7. 1997

NUCOR, Crawfordsville, Ind iana NUCOR, Hickman, Arkansas Gallatin, Kentucky

8. 1997

Hotrolling capacity (mil/ion tons)

Slabcaster supplier

1.8

1.8

2.2

2.2

SMS SMS SMS

2.0

SMS

1.0 1.5 2.0

Mannesman Dernag Sumitomo SMS

1.8

SMS

2.2

Sumitomo

Steelmaking capacity (million tons)

1.2 (2.0) Ipsco, Iowa 1.0 Northsrar, BHP, Ohio 1.5 Steel Dynamics , Indiana 0.9 (2.0) NUCOR, Charleston, South 1.8 Carolina Trico Steel, Alabama 2.2

1992-7 Expansion by 7 Brownfield Projecrs

3.6

Sources: New Stee l (April 1996:41 a nd Decem ber 1 994 :3 7 ); Hall (1 99 7:2 36-7) Notes a Target year for exp anded cap acity (figures in parentheses ) Tota l of 8 greenfield proj ects-1 2 .6 rnt capacity (d uring 19 89-9 7 )

Kok an , are major supp liers of EAF units. The strength of Japanese integra ted producers and th e hu ge ca pacity alrea dy in place have imp eded th e ado ptio n of new EAF technology in Japan . Tokyo Steel, an independent firm, has introduced new EAF ca paci ty but with conventiona l casting. Similarly, in Brazil the availability of high-quality ore and the need to consolidate integrated production after priva tizatio n have damp ened th e need to create new EAF cap acity. Like NUCOR, severa l enterp rising firm s fro m th e US, Ind ia, and Korea have exhibited an entrep rene uria l strea k bent on comp eting with integra ted firms in th e flat sheet markets. Th ey have been aggress ive in ado pting th e sma ll-scale innova tive techn ologies. For examp le, Ispat Gro up's Indian branch and H anb o of Kor ea have launched new inn ovati ve production facilities. Dubbed th e NUCO Rs of Asia, Tokyo Steel and H anb o are seen as maverick firm s (Berry 1996 ). Rather th an tow th e line of large integrat ed firm s in restr aining capacity growth, th ese two independent firm s invested heavily in recent inn ovati on s to cap ture part of th e flat pr odu cts mar ket. H anb o opted for a new minim ill (it alrea dy had one) using sta te-of-the-art techn ologies after an earlier requ est to set up an integrat ed mill to capture th e growing Korean steel ma rket was rejected by th e govern ment. In th e course of two 157

INNOVATIONS, ENTREPRENEURSHIP, RESTRUCTURING

and a half years, Hanbo planned for five EAFs, two SMS thinslab casting machines, two Sumitomo conventional casters, two COREX plants, and one DRI plant.'? Similarly, the Mittal family of Ispat Group overcame domestic restrictions by setting up a mill outside India and over time purchased several foreign steel operations to become one of the largest steel companies in the world. The company has also combined minimill innovations with the traditional blast furnace in a recent greenfield project. Such entrepreneurial behavior, best illustrated by NUCOR, is also exhibited by minimill producer Tokyo Steel, the first Japanese EAF firm to produce hot coil, hitherto a monopoly of the integrated segment. The earlier innovative behavior of the Japanese integrated firms has not been replicated by the minimill sector because of the peculiar interfirm institutional arrangements. A sizable number of minimills is owned by the integrated firms. This atypical industry structure is reflective of the kereitsu relationships typical among large Japanese enterprises. For example, minimills such as Toa Steel, Godo Steel, and Kyoei Steel are part of NKK, NSC, and Kobe integrated companies respectively (personal interview, Japan Iron and Steel Federation, Tokyo, December 1996). In many cases integrated steel producers manufacture the electric furnaces which they supply to their affiliated minimill firms. Thus it is not surprising that even though the Japanese EAF segment is the world's largest-absolutely and relatively-the sector has not exhibited the same kind of dynamism as American firms. 11 This group strategy is illustrated by transferring NKK's H-beam production to a new plant operated by Toa Steel, an affiliate of NKK (personal interview, NKK, Tokyo, December 1996). The implication of such an institutional arrangement is an orderly expansion of capacity and adjustment to excess capacity by large firms and, by default, by their affiliates. Ironically, it has had a dampening effect on innovative behavior. Notwithstanding the cartel-like arrangements among integrated and minimill firms, excess capacity, as we saw in Chapter 4, has been unavoidable. Prior to the major round of restructuring by the big enterprises in the 1980s, the Japanese minimill segment had already undergone painful adjustments in the 1970s. Expansion of both the integrated and minimill segments during the high-growth era, followed by the energy crisis, resulted in overcapacity in the Japanese steel industry. New capacity added by independent EAF operators, such as Tokyo Steel, posed a whole new threat to the stability of the steel market in japan (see Uriu 1989). Competition was severe in the long products market, and older, smaller minimills had to absorb the brunt of industrial restructuring. By 1978 nearly a third of EAF capacity was over fifteen years old, in 1987 over half (Uriu 1989:93). The appreciation of the yen eroded the profitability of Japanese firms as a whole but minimills were particularly hard hit. The restructuring of this segment was inevitable (see Table 7.7). Minimill firms were consolidated and almost half the furnaces were scrapped or decommissioned. Overall EAF capacity, however, increased, 158

IN N OVATI O N S, ENTREPRENEU RSH IP, RESTR UCTURIN G

Table 7.7 Restructuring of the Japanese minimill sector

1978 1983 1987

No.offirms

No. offurnaces

Total capacity (million tons)

Employment

69 58 56

146 115 93

20.79 25.98 27.50

36,400 30,600 19,300

Source: Uriu (1989:90)

as new furn aces with lar ger ca pa cities were insta lled and inde pendent firm s like Tokyo Steel entered th e mark et in a big way. Such persistent excess capacity in th e Jap an ese in dustry in jecte d additio na l restruct uring pr essures. Tok yo Steel's refu sal to restrain ca pa city an d outp ut as dictat ed by th e integ ra ted secto r created m ajor ind ustry regul at ion problems. Tokyo Steel does n ot belon g to any ke reitsu gro up nor is it a member of th e influential Jap an Iron and Steel Federat ion .P Not heeding th e indus try's counsel, Tok yo Steel in 1991 entere d th e flat steel m arket . Co nse q uently, it ex pa nded its m arket sha re by comp eting aggressive ly with th e Jap an ese integra ted segment as well as with imp orts, albeit init ially at th e low- valu e end. Tok yo Steel 's threat was serio us enough to m ak e Ni ppo n Steel exercise its market clout. Indu stry so urces rep orted th at in the past N ippo n Steel had in structed influentia l Jap an ese tr ad ing compan ies (integra l to th e kereitsu system) not to sell Tok yo Steel's o utput (see Berr y 19 96 ). Stra tegi c ex po rting of scra p by Ni ppo n Steel raised domest ic scra p pric es, thus p utting Tok yo Steel, a major user of scra p for its o pera tions , in an unc ompetitive position. Similarly, NSC's selling of pig iro n to its minimill affiliates but not to Tokyo Steel is n ot only a good ind icat or of th e fierce compet ition bet ween integ ra ted compan ies and inde pen dent minimill s but is also indicative of th e threat posed by Tok yo Steel. In 19 95 , Tok yo Steel paid h igh pric es: $145 /to n for scra p and $165/to n for pig iro n. This has been th e price paid by th e ind ependent compan y for not submitt ing to th e industr yim pose d regul at or y measures to coor din ate output and pr ices. The ado ption of new minimill technologies is intrinsically linked to business strategy. For example, the Japanese steel indu stry, dominated by a technologically efficient int egr at ed segme nt, has been slow to introduce sta te -of-the -art minimills. Even maverick firms like Tok yo Steel have not introduced th e full ensemble of new minimill techn ology, fearin g possible pro duct qu ality problems in a highly demanding Japanese market (perso na l interview, Japan Iron and Steel Federati on, Tokyo, December 1996 ). Similarly, PO SCO's big presence has limited th e diffusion of second-genera tio n minimill technologies in Korea. Amo ng th e private secto r firm s, only H anb o has ado pted new technologies. Other firms such as Inchon Steel, an EAF affiliate of th e gia nt H yundai 159

INNOVATIONS, ENTREPRENEURSHIP, RESTRUCTURING

conglomerate, have been more cautious. They have not been confident about Hanbo's minimill expansion nor the COREX process (personal interview,Inchon Iron and Steel Co., Inchon, August 1995).13 Paradoxically, POSCO, as the handmaiden of national industrial development, has proceeded to install new innovations, its monopoly and global competitiveness notwithstanding. At its Pohang plant, POSCO has installed a COREX unit and in its Kwangyang site two thin-slab casting EAF units . POSCO's technology strategy has been to satisfy immediate domestic shortages of hot-rolled coil, which these processes can quickly meet in a less expensive way than integrated production. More importantly, experimenting with new technologies at this time is expected to prepare it well for the next decade when several of POSCO's blast furnaces and coke ovens will be retired. This far-sighted approach to innovation reveals that a state-owned integrated firm can be equally entrepreneurial. Entrepreneurial investments in the Indian steel industry grew out of the inability of state-owned integrated units to meet domestic demand. The government promoted EAF units; however, initial capacity was limited to 0.25 mt. With economic reforms, India's Ispat Group broke through the entrepreneurial inertia to orchestrate a global firm with 12.5 mt of steel capacity. Already the Group has 18 percent of global DRI production. Like its entrepreneurial counterparts in the US, Korea, and Japan, the Ispat Group is engaged in new minimill technology. Today Ispat is far more internationalized than most steel firms. Its recent acquisitions include steelmaking and DRI plants in Trinidad and Tobago, Mexico, Canada, and Germany. It has steel operations in Indonesia, its first overseas venture, and several facilities in India (Figure 7.3). In systemic terms, this innovative behavior signals the growing maturity of Indian capitalists and the increasing technological capability of the steel industry. Other Indian firms have also been innovative. For example, the Mittal family's Indian operation Nippon Demo Ispat Ltd (NDIL) began with a galvanizing line in 1984 and today produces over 3 mt of cold rolling with nearly 40 percent of galvanizing. It also launched some color coating, India's first, as unmet demand for consumer durables took off with economic reforms which have been gradually introduced since the 1980s (personal interview, NDIL, Calcutta, June 1996). With its new 1.6 mt DRI project, NDIL has begun the process of backward integration. Unlike other modern minimills, NDIL will be also using a blast furnace, a strategy similar to Korea's POSCO, to produce 1.5 mt of iron and complement DRI and scrap for its two twin-shell EAFs. Output is expected to be 3 mt of steel which will be fed into two SMS thin-slab casters. The adoption of new minimill technology combined with the traditional blast furnace indicates an innovative approach to steelmaking. Blast furnace iron is of higher quality and hence its products are likely to meet stringent market requirements for flat products. To ensure success, NDIL has reproduced NUCOR's Hickman plant layout and Crawfordsville's product quality (Berry 160

IN N OVATIO N S, EN T RE PRENEU RSH IP, RESTRUCT URI N G India Operations Nagpur(1984)galv. plant Dolv! DRI plant Sidbec-Dosco Montreal, Canada bar, sheet, rod 2 Midrex(1994)

PTlspat Surabaya. Indonesia wire rodslbillets

IspatHamburger Stahlwerke, Hamburg wire rod, 1 Midrex (1994)°

Caribbean Ispat Trinidad 2 x Midrex (1988)

IspatMexicana Mexico(slabs 4 hyL modules) 1 Midrex (1992-3)

IspatIrish, Ireland blooms, medium structurals (1995)

Others Collaboration withKobe for MidrexDRI lspat Shipping (4 ships)

Ispat Karmet, Kazakhstan sheet, 5 BFs 3 BOFs, 2 OHFs (1996)

Figure 7.3 Ispat 's ex pand ing steel bu siness Sources: New Steel, various issues; Narayan (1996); person al interview, Nippon Dem o Ispat, Calcutta, July 1996 Note: a Its most recent acqu isition was Inland Steel of the US in 1998. Sale not finalized.

1995 ). NDIL's DRI plant ha s exceeded the designed capacity of 1.0 mt, makin g it a reference plant for Midrex, th e DRI technology supplier. Thi s approach to imitating th e best-practice standa rds is revolution ary in th e Indi an context , wh ere shortages have always favor ed sellers and quality of pro duct rarel y ha s been an imp ortant issue. Severa l technological development s reveal a new kind of entrep reneurship in India that is inn ovati on-based: combining existing techn ologies with new ones and emulating best-pract ice sta ndards. For exa mple, Essar link s DRI with EAFs. Th e Essar Gro up also boa sts th e world's largest gas-based HBI plant with do wn str eam op erations of 2 mt of hot-rolled coils. It has also begun backward integrati on by undert aking th e pr oduction of iron oxide pellets used for making HB!. Its steel op eration has Level II auto ma tio n, indicating a computerized system for pr ocess and product controls. Ano ther 161

INNOVATIONS, ENTREPRENEURSHIP, RESTRUCTURING

Indian firm-Jindal Vijaynagar-has adopted the COREX process to feed hot metal into basic oxygen furnaces. As a first user of COREX in the Indian market, Jindal is well positioned to exploit commercial benefits that the new innovation offers. Thus it went in for a large plant with two COREX modules. Combining new and established processes is a sign of technological confidence and commercial acumen. 14 With new innovations and the entrepreneurial bent of some of the Indian firms the global industry has entered another round of reorganization. For example, the Indian industry is poised for a new round of capacity expansion with a variety of steel technologies (see Figure 7.4). Of the nine projects, with a total slated capacity of 13 .625 mt and with average investment cost of $757/ton, virtually all of them will be adopting the traditional BF-BOF route (personal interview, M .N.Dastur and Co., Calcutta, June 1996). Five of the nine projects, with a combined capacity of 11.6 mt, are designed to produce hot-rolled coils, a typical integrated mill's output. With higher prices for power and risky large-scale plants, most firms are going the BFBOF route but in several cases using considerably smaller blast furnaces, with designs imported from China (see D'Costa 1998a). Comparative cost analysis shows that smaller blast furnaces are competitive with the traditional large ones (Sengupta 1995:50). For example, capital cost for a blast furnace with 157 m! was Rs 5,2701ton while a blast furnace with 2,000 rn ! cost Rs 5,282/ton. However, total investment would be Rs 1.24 billion versus Rs 6.55 billion, making smaller furnaces an attractive technological option." The recent restructuring of the Indian steel industry is a good illustration of different responses to new innovations in a path-dependent fashion. It is also an outcome that stems in large measure from the changing institutional environment. Different institutional environments spawned different minimill trajectories in the US, Japan, Korea, and India . While past government policies in Japan, Korea, Brazil, and India favored the development of the integrated segment, minimills in the US could exploit the opportunities that arose from the inflexibility of US integrated producers. Unlike other industries in other countries, American minimill producers emerged as the industry trendsetters, taking advantage of technological breakthroughs in entrepreneurial fashion. This is in stark contrast to the technological conservatism exhibited by US integrated producers. Similarly, with the dismantling of state controls, new entrepreneurs in India are leading the industry with new technologies. This too is a significant deviation from the rent-seeking private EAF operators of the 1970s and 1980s in India. In Japan the dominance of the integrated sector and the curious relationship between it and its EAF affiliates have impeded the diffusion of new generation technologies. Only autonomous action by renegade firms has slightly altered the technological make-up of the Japanese industry. The Korean industry has also been innovative, but paradoxically, apart from 162

IN NOVATIONS , ENTREPRENEURSHIP, RESTRU CTURING (

Gas

4

5

DRI (

Coal

3

To casting etc.

Figure 7.4 Planned new plants and new technologies in India Sources: Sengupta (19 95); personal int erviews, Calcutta, M umb ai, June-July 19 96 No tes: 1 1.02mt(Daitari ) 2 0.5 rnt (severa l) 3 0.97 rnt (Hazira) 4 0.4 75 rnt (Haz ira) 5 0.4 75 rnt (Bilaspur) 6 0.55 rnt (Da ita ri) Dkledirectly reduced iron ; EAF=electric arc furn ace; BF=blast furn ace; BOF=b asic oxygen furn ace

on e private firm, the state firm has taken th e lead in introducing almost all of the small-scale innovations in the steel industry.

Minimills and new institutional arrangements An und erstanding of the steel industry restructuring process would be incomplete without accounting for som e of the institutional changes accompanying new innovations. We have already witnessed a reduced role of the state in the larger economy and in the integrated steel sector. Brazil first spearheaded a major reorganization of the state-owned industry by privatizing it. We also find that, in addition to flexibility and entrepreneurship based on smaller size of operations, minimills have instituted a fundamentally different kind of industrial relations. Both the reduced role of the state and cooperative industrial relations mirror 163

INNOVATIONS, ENTREPRENEURSHIP, RESTRUCTURING

the trends in the larger capitalist order. Many authors suggest that new industrial relations characterizing the US minimill segment have contributed to the success of minimill performance (Smith 1995). In many ways these institutional arrangements reflect the cooperative relations found between Japanese management and labor (Florida and Kenney 1992; see D'Costa 1998b, 1998c). More specifically, the smaller scale of EAF units and therefore the smaller workforce is amenable to non-Tayloristic industrial relations. The production process is relatively simple and the plants are highly automated. Consequently, the need for detailed division of labor has become technically superfluous and from the workers' point of view politically redundant. The new minimills offer lower hourly wages than their integrated counterparts, but when bonuses are added workers' earnings are considerably higher. In the 1980s, minim ill workers earned between 77 and 92 percent of the wages of integrated producers (Barnett and Crandall 1986:22; US International Trade Commission 1987a:59). Greater responsiveness and participation characterize industrial relations. The small scale of operations is conducive to cooperative worker-management relations and has evoked trust-based institutional arrangements. For example, in the US, NUCOR's Hickman plant and Steel Dynamics' plant have only 325 and 260 employees respectively. The management in turn has decentralized decision-making in favor of shop-floor operators, making the entire minimill organizational set-up less hierarchical. The net contribution of a leaner production system has been very high productivity and greater worker morale." In the US context, the legacy of adversariallabor-management relations found in the traditional integrated segment is noticeably absent in the new generation minimills. Their small size and their dependence on scattered scrap sources has made their location independent of the traditional industrial heartland. American minimills, not surprisingly like the Japanese auto transplants, have tended to locate in semi-urban areas. Their greenfield status has also enabled minimill owners to locate away from unionized areas. More than half of minimill workers are not unionized. Their age structure is also different from integrated units: they are young, generally recruited locally, with little industrial background, and possess no bargaining experience. Notwithstanding contract workers in many areas of production, minimill employees work within more egalitarian structures than those in the traditional integrated segment. 17 With the rapid expansion of minimill output, earnings differences arising from different wage rates in minimill and integrated sectors are generally made up by bonus payments. For example, recent base pay in minimills was $7.5 3/hour compared to the integrated rate of $l1.13/hour. However, with bonus payments a typical minimill worker could earn around $50,000 per year. Since bonus payments depend on total output and the bonus is the same for everyone, it is always in the interest of workers to cooperate to ensure uninterrupted production. 18

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Cooperation between labor and management and among workers, made possible by flatter management, has contributed to rising productivity. Gallatin Steel, a new generation minimill, has only three layers of workers, comprising senior management, operations, and hourly employees. Supervision is nominal in most minimills. Of the 204 total Gallatin employees, only ten are in senior management and twenty-four under operations, while nearly half of the hourly workforce is comprised of engineers or those who have two years of engineering training. With more employees sharing a similar technical background, teamwork is relatively common. Even non-minimills are beginning to accept the work culture of EAF units. ACME Steel, an integrated steel company in the US, has introduced greater worker autonomy in its thinslab plant (Ritt 1997). Of the 150 total workers, 132 are hourly employees, sharing team-based work. ACME has only four job classes. With less hierarchy, decision-making has been quicker as well. With flexible industrial relations, the economic and technological performance of minimills, not surprisingly, has been spectacular (Barnett and Crandall 1986; Smith 1995). For example, US minimill productivity was roughly twice that of integrated production. In 1985 it took 2.4 workerhours in a minimill to produce a ton of wire rod compared to five workerhours in an integrated facility (Barnett and Crandall 1986:21 ). More recent estimates put the new generation of minimill productivity at 0.5 or fewer worker-hours per ton of hot-rolled coil (Ritt 1995b). Productivity at the NUCOR's Hickman plant has steadily increased from 0.8 worker-hours per ton to 0.4 in 1995; it is expected that this will be matched by Steel Dynamics. The ability to produce flat products with low labor inputs is a technical achievement that was not expected by US and Japanese integrated producers. The entrepreneurial breakthrough of thin-slab casting combined with new forms of industrial relations have contributed to the commercial success of minimills. Consequently, the pressure on US integrated producers to increase their productivity has also mounted. With new technologies breaking down entry barriers and reducing operating costs, minimills are poised to contribute significantly to the reorganization of the global steel industry. Conclusion: new technologies and industrial restructuring The emergence of new steel technologies demonstrates the difficulty of maintaining a monopoly over the market. Minimills around the world have become serious contenders in steel production. This development fits the Marxian and Schumpeterian dynamics of capitalist competition in which technology is a powerful tool to enter existing and new markets. EAF innovations have contributed to the competitiveness of minimills. With expanding EAF capacity, the integrated segment in the US and Japan is 165

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gradually moving out of long products and accommodating minimill production of low-end flat products. The development and diffusion of the thin-slab caster has been a major factor in the reorganization of the American industry. Technological breakthroughs have been also associated with entrepreneurial dynamism. In the US, India, and Korea, firms outside of the established integrated segment have been receptive to new technologies. The dominance of integrated production combined with state-led development in late industrialization was broken with technological and commercial initiatives by NUCOR, Ispat, and Hanbo. Their pioneering efforts in introducing new technologies, whether in the adoption of thin-slab casting, DRI manufacturing, or combining new processes such as DRI and COREX with thin-slab casting, have fundamentally altered the restructuring equation. Far from capacity contraction, as experienced in the US in the 1970s and early 1980s, global restructuring recently has entailed capacity expansion in new processes in both early and late industrializing economies. In line with global trends, the industry is also witnessing a reduced role for the state. Thus institutional incapacity in India is now less of an impediment as new generation minimill technology is flexible enough to warrant private sector production. The restructuring of the steel industry based on new technologies is multifaceted. The emergence of innovations and their diffusion dictate the direction of industrial reorganization at the global level. The players in the process tend to change as well. For example, although the industrialized countries, specifically in Western Europe, continue to control steel technology, the bankruptcy of innovative capability among US steel firms is virtually complete. While the diffusion of new technology has been spearheaded by US firms, especially in the early stages, these firms are outside the integrated segment's orbit. With their adoption of new technologies coming much later, the entrepreneurial dynamism of Indian and Korean firms is probably overstated. With NUCOR pioneering thin-slab adoption, Hanbo, POSCO, and Nippon Demo Ispat of India could easily rectify any initial teething problems. Similarly, the adoption of COREX by Jindal of India following POSCO's footsteps was also well timed. Late entry-but not too far behind the pioneers-does have its advantages for innovative behavior. However, firms from developing countries are also contributing technologically to the innovative process. The entrepreneurial breakthroughs in DRI production and the systematic capture of the benefits of industrial integration by smaller firms from the developing world have had an impact on the restructuring process. Almost by default, the maturity of steel markets in the industrialized world, followed by large-scale restructuring, introduced an opportunistic momentum which entrepreneurs have seized upon. In that sense structural barriers to new technologies are not as daunting as they might appear to be. New technologies have also coincided with changing institutional 166

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arrangements for capitalist regulation. From the self-regulating system of the large US integrated firms to the state-sponsored industrial coordination in Japan, India, Brazil, and Korea, the industry has witnessed both an increased and a reduced role for the state. In the US protectionist policies were set in motion when imports became a major problem. In other countries, the industry has been partially freed from restrictive state controls, with some countries, such as Brazil, privatizing the state-owned industry. The net result of the long process of restructuring has been the industry's rejuvenation with new innovations and institutional change. The competitive strengths of private capital in the minimill segment have shaken the complacency of the oligopolistic integrated segment. Capitalist regulation has become more market-determined, even if state ownership in Korea and India and the dominance of the integrated sector in Japan and Brazil continue to wield economic clout. Smaller firms have been aided by technological changes in the EAF segment. Today minimill firms exhibit a versatility in adjusting to competitive pressures that integrated firms could only dream of. No longer are steel operations dictated by particular locational advantages. They can be established close to scrap sources, which is virtually any major urbanindustrial center. Where scrap is scarce the use of DRI can be substituted. More importantly, minimill flexibility has been possible because of cooperative industrial relations. A smaller but highly trained workforce, with significant decentralization of decision-making, has given minimills a competitive edge. Capitalist regulation in the broader sense is no longer based on entrepreneurial initiatives and joint action by firms. It is also based on the partnerships forged between management and workers. The development of new technologies and the ensuing restructuring of the steel industry indicates the on-going nature of the process. It underscores the importance of strategic investment in technology in capitalist competition. More importantly, the global reorganization of steel production demonstrates the institutional bearing on the process. The large-scale technological paradigm associated with integrated production is also a hallmark of capitalist regulation based on vertically organized enterprises, big governments, and antagonistic labor relations. The emergence of minimills and other related smaller technologies is indicative of a more flexible production system, regulated more by the competitive conditions in the capitalist marketplace and less by sheer market power. For all the structural impediments present in the world economy, faced mostly by developing countries and compounded by institutional incapacity, the diffusion of new generation steel technologies in late industrializing countries promises to provide a window of opportunity for capitalist industrialization. It introduces an element of uncertainty in the larger restructuring process as smaller, versatile technologies with reduced entry barriers provide a fertile ground for potential leap-frogging even in countries not endowed with capital resources and institutional capacity. 167

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The responses of firms operating under the capitalist imperative have been different over time. For example, while the Japanese enthusiastically embraced the BOF in the 1950s and 1970s, restructuring of the industry was ultimately led by the conservative US industry. In the 1980s and 1990s, while the Japanese were slow to introduce new minimill technology, American firms have been quite aggressive in technology strategy. This reversal of strategies, with entrepreneurial energies unleashed by Indian firms in an environment of institutional incapacity and international insularity, marks a new turning point in the restructuring process. The continuing shift in steel production capability from the industrialized to developing countries is definitive if not unidirectional. It is also modulated by the specifics of technological change, filtering the diffusion process with new institutional arrangements and entrepreneurial responses to technological change in a path-dependent fashion.

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8

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Introduction I have interpreted th e on-going restructuring of th e steel industry as a result of institutional responses to changing circumstances. Rather than view th e process as an outcome of market forc es, I have tried to demonstrate that at the heart of industrial reorganization ar e innovations. My interpretation neither disputes th e centrality of economic forces in the restructuring process nor does it reject the logic of the market. After all, commercial motives driv e a significant portion of innovative activity. However, as I have shown, the process of innovation, which includes diffusion, has been driv en by noneconomic as well as non-market mechanisms. Under capitalist competition firms and states intervene strategically-for commercial ends and to transform national economies. Once this institutional dimension is introduced into the explanation of the restructuring process (both firms and states are institutions), a number of questions follow. For example: How does technological change take place? Why ar e changes introduced? What is the nature of the diffusion process? What kind of intervention has been carried out and by whom? and How successful have they been? All ar e issues that ar e intimately linked to the restructuring process. By addressing these questions at the system and industry levels we obtain not only a rich understanding of the restructuring process but also push the intellectual enterprise beyond narrow disciplinary boundaries. The intricate connection between "animal spirits" on th e part of capitalists and the larger political setting justifiably makes an institutional interpretation highly rewarding. Th ere are, however, a number of interrelated issues pertaining to the restructuring process that deserve further elaboration. I discuss three of them briefly, at the macro-systemic and the micro-industry levels. The purpose is less to elucidate and more to underscore the open-endedn ess of th e capitalist system, its resilience, despite periodic crisis, and the heterogeneity of the industrialization ex perience. Based on the em pirical materials presented in this study, I first examine the relation between capitalist industrialization in the post-war period and its implications for the future. Second, I look at 169

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institutional change as it has unfolded with the industry's restructuring. Finally, I examine possible innovations and industry strategy that may continue to shape the international division of labor. Restructuring and capitalist industrialization At the core of my interpretation of the restructuring of the steel industry lies the link between institutions and their responses to technological change. Innovations and their uneven diffusion have been viewed as central to the process of capitalist development and industrial transformation. The decision to adopt new technologies is based on firm and state strategy, which in turn is dependent on the institutional setting and the legacy of past decisions. We have seen that the strategic delay in the introduction of new technologies by US firms was influenced by past investments, the oligopolistic structure of the market, and the relative insulation of the market from international competition. In late industrializing countries the decision to adopt innovations was also based on strategy, but one which was significantly determined by institutional capability. For most developing countries acquiring modern technologies has been difficult either because their markets could not support them or because the suppliers from the advanced capitalist countries have shied away from such markets. As we have seen, the cumulative outcome of uneven diffusion of technology is varying competitive strength and consequently the global reorganization of steelmaking capacity. There were two sources of the uneven diffusion of technology: the crisis that plagued the US industry and the rapid expansion of the industry in Japan and other late industrializing countries. Akin to the rise and fall of nations, the industry simultaneously witnessed its decline and development in spatially distinct locations. The crisis was multifaceted, as exemplified by declining profits, overcapacity, technological obsolescence, and rising import penetration in the US. The industry's response was equally varied: it included but was not limited to shutting down plants, undertaking partial modernization, diversifying into non-steel businesses, and seeking state assistance. The obvious question that arises from this development is whether such crisis is imminent in the industrialization process. Based on the experience of Japan, the answer is yes. The persistent excess capacity, arising from the herd-like behavior of Japanese firms despite state attempts to modulate excessive competition, underscores the problems of rapid industrial development. The best case for testing this proposition is Korea. The Korean industry is also on the threshold of maturity. Based on recent estimates, Korean steel consumption is already slowing down (Table 8.1) from about 4 percent annual growth of steel consumption for the rest of the decade to -0.4 percent for 2011-20. Its exports are also estimated to fall, while its production is expected to increase before tapering off. Given the recent banking and 170

Table 8.1 Forecasts of Korean steel ind ustry ('000 to ns of crude steel) Average growth rate (%)

--

Domestic consumption (A) Exports Total Production (B) Imports AlB (%) Export share (%)

1995

2000

2010

2020

1996-2000

2001-2010

37,306 9,556 46,862 36,772 10,090 98.6 26.0

45,129 12,097 57,226" 49,226 8,000 109.1 24.6

50,348 12,600 62,946 53,446 9,500 105.1 22.6

48,848 13,000 61,848 51,848 10,000 106.1 25.1

3.9 4.8 4.1 6.0 -4.5

-0.4 1.0 0.8

Source : Korea Insti tu te of Ind ustri al Eco nomics a nd Trade (KIET) (19 97) Note a pasco 's est ima te wa s 58 .9 mt (pe rso na l communication, pasco , November 1997)

1.1

1.7

2011-2020 -0.4 -0.3 -0.3 -0.3 0.5

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currency crisis in the East and South-East Asian region, consumption in the short term may fall faster than predicted while aggressive exporting may have to be adopted to keep up operating rates. In the event of a prolonged recession, the Korean economy as a whole might be pressed to reorganize its industry drastically. Rapid industrialization and thus industrial maturity comes also at a price, such as rising labor costs, due to productivity-led wage increases, and an ageing workforce. In Korea the weakening of authoritarian forces has also set the basis for greater wage demands. If the Japanese experience is any indicator (and Korea has been a good emulator of the Japanese approach to rapid industrialization), we can expect business diversification and cost reduction through a reduced workforce in the Korean steel industry.' Both of these measures are already in evidence at POSCO. Between 1992 and 1995, POSCO reduced its workforce from 24,000 to 20,400 (personal communication, POSCO, October 1996). Like its Japanese counterparts, POSCO is also saddled with an ageing workforce, which has contributed to the rising share of labor costs.' As of 1996, roughly two-thirds of the employees were between 31 and 50 years of age, while the rest fell in the 18-30 age group. Korean wages on the whole have been rising rapidly, with steel wages considerably higher than manufacturing wages. Between 1989 and 1995, the ratio of labor cost to total steel production cost increased from 9 to 12 percent (personal communication, POSCO, October 1996). The challenges to the Korean industry, though not in the same league as the crisis in the US, or for that matter in Japan, do represent the paradox of rapid industrialization. Obvious as it may seem, successful capitalist industrialization does sow the seeds of industrial maturity sooner rather than later. However, from a systemic point of view, industrial maturity does not mean that the crisis is fatal. In fact, it may very well be the basis for capitalist renewal. The conception behind long waves leads us to expect that a cyclical downturn will be followed by an upswing. Perhaps more importantly, it is worth noting that a different sort of crisis besets those countries which are characterized by weak institutional capability. While the first type of crisis is an outcome of succ essful industrialization, the second is not. Here the crisis results from too little industrialization. At the systemic level, capitalism is a resilient system with crisis acting as a catalyst to regenerate the system. The American steel industry captures this dynamic rather well. From a position of dominance the US industry reached a nadir, compounded by the diffusion of capitalist industrialization elsewhere. In the wake of restructuring, the industry rejuvenated itself with new innovations and institutional arrangements. The modern minimill segment with its attendant entrepreneurial drive and flexible industrial relations has been the reincarnation of a declining American steel industry. The strength of the capitalist system is its ability to generate innovations and in this case to reinvent itself. Capitalist competition, which is a structural requirement for 172

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innovation, is also its weakness, if the earlier response of American integrated firms to new innovations is any indication. This contradictory dynamic between crisis and regeneration makes the capitalist system resilient and its outcomes relatively indeterminate. The crisis confronting most countries is not the maturity of their economies. On the contrary, their problems are due to too little economic activity. The institutional weakness, resulting from colonial legacy, political fragmentation, and limited resources have constrained the acquisition and assimilation of imported technology. All three late industrializing countries-Brazil, India, and Korea-did overcome the initial barriers to foreign finance and technology. However, only Korea was able to continue its investment momentum and build local technological capability by using effectively the imported stateof-the-art technology and mastering it. The other two countries also expanded capacity but have been technologically behind Korea and financially in a less envious position. Obviously, state-led industrialization has its advantages in establishing industrial capacity. But not every country can exploit the advantages of lateness, one of which is the assimilation of foreign technologies for national development. Institutional incoherence in many developing countries has limited the state's ability to transform the structure of the economy, creating a state of semi-permanent crisis characterized by low industrial productivity, underdeveloped technologies, and poor commercial performance. The resiliency of capitalism at the global level is certainly not a guarantee of national capitalist development. Only some countries are able to align themselves favorably with the global economic system. The rest mostly muddle through the industrialization process. Institutional change and restructuring For the most part, restructuring in this study has been interpreted as an outcome of responses by firms and states to changing technology. However, if cumulative causation is typical of large-scale social change, we cannot assume the constancy of institutions. There are feedback loops in the capitalist system. Assuming at least a modicum of agency in a highly structured capitalist system, institutional change, though slow, does take place. This interpretation is in keeping with the Regulation School, which identifies capitalist crisis as a crisis of institutions and calls for institutional change to overcome the crisis. At the systemic level institutions evolve but they also change due to the intervention of political agency. In carrying out the empirical assessment of the steel industry we have seen institutional changes taking place as part of the restructuring process. For example, when the industry could no longer fend for itself, self-regulation of the US industry was abandoned in favor of more state-business cooperation. The wholesale privatization of the Brazilian industry was another form of institutional change. At the macro level the reasons are not difficult to isolate: the 173

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exha ustio n of th e sta te -led mod el of eco no mic development h as br ou ght pr ivat e cap ital t o th e for efr ont, while cap ital itse lf has tak en th e ini tia tive to reassert its id eological place in the eco no mic syste m. At th e micro level, th e shift fr om sta te interve ntio n to pr ivat e initiatives is n ot a gua ra ntee of dyn amic industrial gro wth. Robust industrial development w ill still be dictat ed by th e institu tio na l setting and market developments. H owever, most pr act iti on er s an d scho lars wo uld agree on the grea te r flexibility of pr ivat e firms in commerci al an d technol ogical decision-mak ing, implyin g reori enting th e rol e of the sta te away from basic pr oduction . Th is shift- fro m th e sta te to th e pr ivat e secto r-also appea rs to be th e new governance stru cture adopted for capitalist regul at ion where th e sta te has been dom inant. It is a reflecti on of th e lar ger systemic development. Thus with th e hypermobil ity of capital resulting from technological chan ge, th e global trend has been to reduc e th e rol e of the government in econo mic affairs. Thi s retr eat of th e sta te is justifiabl e in some cases but in many others it could be pr em ature. If institution al coh erence distin gu ishes th e evo lutio n of th e steel industri es of Jap an an d Kor ea from th ose of th e US and India, it is clear th at sta te support is still necessar y for pr ivat e cap ital to realize expa nsio na ry goa ls. Such support could be in mobili zing resources, acquir ing technology, and develop ing infr astructure. H owever, the shift is not a foregon e conclusion, as th e US industr y reminds us. When th e go ing got ro ugh, th e US industr y beseeched th e gove rn ment for econo mic and policy assista nce. The Trigger Price M ech ani sm and Voluntar y Restr aint Agreement s spa nning a decad e an d a half are sufficient testimon y to a flexible bilat er al relat ion ship between sta tes and priva te cap ital. Th ere have been three other forms of ch an ge in cap italist regul at ion th at are em bedded in th e lar ger institution al shift from th e sta te to priva te capital. Th e first is th e grea ter involvement of for eign cap ital in dom estic ind ustry, a process set in mot ion with industri al restructuring. Th e second is th e rise of entre prene urs in new segments of th e steel industr y. And th e th ird is flexible industri al relati on s cha ra cterizing some of th e new mills. All three reflect th e basic glo ba l trends: hyp ermobil it y of capital , inte rnatio na liza tion of production, an d incr eased capitalist competition . Th e US industry was forced to seek foreign cap ital and technology as a respon se to technological obso lescence. The development of severa l joint ventures, mainly with th e Jap an ese, creat ed a new institutio na l arra ngeme nt for capitali st in dustr ia liza tio n. Joint ven tures are by them selves quite unrem arkabl e but th e case exa mine d in th is study is mor e th an a reflect ion of th e industry' s respon se to th e industr y cri sis. It h as been a systemic respon se to regener at e th e industr y. H ere too innovatio ns played a rol e in altering th e stru cture and institution al arrangements govern ing th e US steel market . No doubt, certain idiosyncr at ic fact or s also played a part in intro ducing foreign player s, such as th e big supply ga p in th e US west coast market and th e esta blishment of Jap an ese auto tr an splants. Neve rtheless, joint ventures in 174

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th e US steel industr y ind icat e th e mobility of capital in an industr y th at has been far less internatio na lized th an other industries du e to its perc eived nati on al imp ortanc e. Thi s is ind eed th e first major instanc e when foreign ow nership of th e ind ustry h as been widely accepte d an d which has been highl y effective in reorgani zing th e US int egrat ed segment. The conc omit ant eme rge nce of new innovatio ns an d entre pre ne urial breakthroughs in a number of countries, especially in India, raises some qu esti on s abo ut th e relat ion ship bet ween lat e industria liza tio n an d th e emergence of th e capitalist class. Wheth er sta te -led capitalist development has been respon sible for nurturing Indian entreprene urs is deb at abl e. An overex ten ded Indi an sta te with limited institution al cap ability could only regul at e rather than pr om ot e rapid cap it al ist in dustria lizatio n . Yet the tr an sformati on of th e Indian priva te secto r steel industr y from one of rentseeking to one th at is mor e technologically dri ven suggests some relati on ship between th e sta te and entreprene uria l outcomes. Elsewh ere an d in ano ther context I have shown (D'Costa 1995b ) th at Indian econo mic reforms have been as mu ch a result of the exha ustion of th e sta te-led mod el of development as th ey have been an outcome of th e mo del's success in creating a lar ge, het er ogen eou s, middle class. By ex te ns ion one can arg ue that sta te -led development also nurtured a new breed of incipient entreprene urs. W ith th e sprea d of capitalist relation s and the hegem on y of econo mics over other social spheres, it was relat ively easy for commerc ial entre prene uria lism to fill th e new spa ces creat ed by a retr eating sta te. W ith out a doubt, th e Jap an ese and Korean sta tes have nurtured a highl y dynamic capitalist class through effective indu strial policies. Alrea dy endowed with highl y networked social arrangeme nts, th e Japanese sta te wo rke d in conjunction with hu ge kereitsus to pursue nat ion al econo mic development and foster capitalist in dustria lizatio n. The Kor ean sta te too propped up gigantic family-owne d chaebo ls through discr imina to ry credit an d other industria l policies. Thus th e nexu s between big bu siness an d th e sta te has been a dominant feature in lat e industri alizat ion . From a lib er al , m arket- or iented per spect ive, such a nexus h as been interpreted as nepoti sm, subject to corruption , an d "crony capitalism ." The recent financ ial deb acle in East and South-Eas t Asia is seen as th e vindicatio n of th e failure of econo mic systems th at deviat e fr om market mech ani sms. While th ere is certainl y plent y of truth in th e allegation th at "per son al " relati on ship s in econo mic man agement have been abused in th ese countries, our mem or y sho uld n ot be so sho rt th at we forget th at both th e Jap an ese and Kor ean econo mies have tak en a H erculean leap in the pos t-wa r peri od . Intellectu ally, it wo uld be also prudent to sepa ra te th e whea t from th e ch aff: th ese tw o econo mies are str uctura lly and technologically very different fr om th ose of South-Eas t Asia. With out belittling th e gravi ty of th e Asia n cr isis, both Japan and Korea are on a higher industri al and technological terrain . Person al relat ion ship s in th eir industria l achieve ments have been imp ortant. 175

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Thus the judgment on this issue, that is whether economic development and efficiency must necessarily follow liberal market dictates, must await further research. What is incontrovertible is that institutional capability is a necessary condition to create a capitalist class. The standardization of steel technologies and the maturity of private capital in many developing economies have automatically reduced state support. However, it would be simply irresponsible to abandon the provisioning of public goods. Even the World Bank, highly critical of state-led development in the neo-liberal era, has admitted the importance of the institutional capability of the state (World Bank 1997). Thus it makes little sense to privatize POSCO, even as political pressure mounts in Korea to do so, except perhaps to keep up with the ideological trend and appease private capital. One can parenthetically add that the chaebols themselves have mismanaged their financial affairs. Hence handing over cash-rich POSCO to private capital might not be economically rational but politically justifiable. From the standpoint of expansionary industrial restructuring, our empirical investigation suggests not the banishment of the state from economic affairs but a more limited and focused approach to innovation. States can continue to play that role, even if a diminished one, at a time when the durability of institutions are at stake. There is also the question of the mode of financing industrial expansion. It has been shown that the short-term profit horizon of US steel firms had undermined long-term investments in plant and equipment. Conversely, the debt-based financing in Japan and Korea was conducive to an investment momentum that could keep abreast of industry innovations. As long as market growth prevailed, using cheap loans was an easy way to increase industry capacity in East Asia. That there could be inefficiency in the use of subsidized capital and that it could have contributed to excess capacity in Japan is generally accepted. However, without targeted investments neither the Japanese nor Korean industries would be where they are today. Even where debt-based financing of industry has backfired seriously, as in the case of Hanbo Steel of Korea, the $6 billion corruption-tainted loan was invested in state-of-the-art technology. The plant is expected to operate competitively. The point here is neither to settle which form of financing is better for capitalist industrialization nor to argue against transparency in financial activities but rather to suggest that an investment momentum is necessary to keep up with technological change. With weak capital markets, states wishing to transform their economies industrially find debt-based financing, even at the risk of inefficiency, the best avenue for such transformation. As long as capital is directed toward core sectors and their technological upgrading, the industrial and technological spinoffs will be perceived to outweigh the costs. The last institutional change has been a transformation of industrial relations. The Japanese corporate sector since the 1950s successfully 176

INTERPRETING CHANGE AND RESTRUCTURING

established enterprise unions that virtually eliminated labor militancy and introduced significant flexibility in industrial production. In the US, newer minimills have followed this model by maintaining union-free, cordial industrial relations. This is in stark contrast to the highly unionized integrated segment. The US minimills, for example, have adopted the production-driven, Japanese bonus system that rewards workers for maintaining high throughput. Minimills have introduced a lean workforce by relying on automation. Other firms in other countries have also attempted to create a stoppage-free work environment. The evolution of the Japanese and Korean steel industries exemplifies the importance of labor peace for capitalist industrialization. The pressure to change industrial relations is reflective of the broader developments in capital mobility and increased demands by employers for worker stability. The subordination of labor by capital is complete when the interest of both capital and labor converge. While this in itself is not a bad thing if workers are also able to secure a greater share of their labor, the nature of politics becomes fundamentally altered. For the more class-conscious, this would be tantamount to the end of politics as we know it and a serious blow to workerbased activism. Technology, strategy, and the international division of labor Over the last one hundred years the steel industry has witnessed several radical technological innovations and numerous incremental ones. They have been progressively designed to reduce costs, increase quality of output, and provide cheaper raw materials. The shift from Bessemer to open hearth to basic oxygen furnace in association with increasing scale of production represents this technological evolution. Large-sized blast furnaces, continuous casting, and the wider application of computer and process controls fundamentally altered the technological status of the industry worldwide. The more recent developments in the minimill segment using a variety of inputs and thin-slab casting further added to the technological repertoire of the industry. However, technological change cannot be assumed to be given. The process of diffusion is necessary for an innovation to become the industry standard. As we have seen, the adoption of new technologies is dependent on the institutional response to innovations and their ability to introduce them for production. Future restructuring of the industry would thus depend not only on new innovations that might emerge but also on the strategy of firms to adopt them. In the 1980s the global steel industry was not positioned for any major technological breakthroughs, even though new generation minimills in the US were becoming commercially competitive. Most technological efforts had been directed toward cost reductions in integrated production (Kawata 1986:47-9).3Modest expenditures on steel research and attempts to develop 177

INTERPRETI N G CHANGE AND RESTRUCT URI N G

dir ect steel ma king in th e US, eliminating th e need for cok e ovens and blast furn aces, did not seem pr om ising (perso na l interview, Vice President of Co mmunications, American Ir on and Steel In stitute, Washingt on , D .C., August 198 8 ). A decade lat er th e Amer ican Ir on and Steel In stitute's dir ect steel ma king pro ject is still gra ppling with funding pr obl em s. After severa l years, th e Japanese DIOS pr oject is st ill at th e pilot stage. Alte rnative technologies, such as nuclear-p owered steel ma king, could be introduced sometime in th e twenty-first century (Ro binso n 1988: 30 ). At th is t ime th e restructuring of th e industr y is being dri ven by con vention al BF-BOF technology and by scrap-substitu te-base d EAF pr oduction. On a sma ller scale, th e diffu sion of th e CO REX process in conjunction with conventi on al BOF and EAF technology is also mak ing inr oad s into th e steel industry (Pa ine Webb er 1996 ).4 If no major innovatio ns are expected in th e near future, thus rul ing out leap-frogging possibiliti es, wha t kind of industri al reorgani zation can we expect ? By identifying existing cap acit y, th e current technological sta tus of th e industr y, and th e genera l econo mic climat e we sho uld obta in a bro ad picture of an eme rg ing inte rnationa l division o f lab or. First , cap acity adjustment in th e industri alized countries, such as th e US and Jap an, will continu e. Second, as we have shown, Korea 's ex pansio n is ex pected to slow down , while potenti ally both Brazil and Indi a could becom e major steel markets and thu s experience rapid capac ity growth. M assive infr astructure needs in th ese two near-c ontinent al econo mies could be th e dri ving forc e beh ind th e industry's ex pansion. The rem oval of vario us unnecessar y regul at ory measures in Brazil and India could lead to increased dem and. For exa mple, th e future ava ilability of steel pr oducts in Ind ia in 2001-2 has been estima ted to be 39 mt , with dom estic demand touching 31 mt (Table 8.2 ). Th is is an upward revision of th e Working Group Estimat es made in 19 86 Table 8.2 India' s supply and demand position in 2001-2 ('000 tons)

Supply

Long products Flat products Plates HR coils/sheets CR coils/sheets Other sheets Grand total

Total demand

Existingplants

Projects under implementation

10.92

0.85

1.25 5.32 1.92 0.66 20.20

4.35 0.70 5.90

Proposed projects

11.43 0.80 0.40 12.63

Total 11.77

16.70

1.25 21.10 2.72 1.76 38.60

3.00 5.50 3.40 1.90 31.00

Source: Intern al documents, M .N .D astu r and Co ., Ca lcutta, June 1 99 6 No te: Total di scr epan cies are d ue

to

rou nd ing 178

INT ERPR ETIN G CH ANGE AND RESTR UCT URIN G

th at proj ected Indi a's demand to be 25 mt of steel products in 1999-2000. Total demand for finished steel in 2004-5 is estimated to be 42 mt , 48 percent of which will be for flat products. To meet this growing demand a numb er o f gree n fiel ds are under con struction and severa l others are in th e pipeline. Th e difficulty for Indi an entreprene urs in mobil izing cap ital and th eir inclination to tap th e market for simple products, such as wire rods, have made sma ll-scale units attra ctive in Ind ia. H ow ever, India's relianc e on EAFs and mini bla st furnace-b ased integrat ed production is ex pected to be inadequate to meet growing demand. Already some new stru ctura l barriers have emerged, such as th e availability of scra p. Minimill cap acit y ex pa nsion in th e US has reduced th e globa l availabil ity of prime scra p. Other countries, such as Korea, are also increasing th e con sumption of scra p (Figure 8.1 ). Notwithstanding th e introduction of new inn ovati on s, Ind ian firm s overa ll are still cautiou s. For exa mple, Jindal Vijaynagar introduced India's first CO REX pro cess partl y because of problems of scra p supply and insufficient gas for DR!. Also tariffs on pow er are very high . Similarly, th e Essar Gro up, with th e largest gas-base d DRI unit , is going for a tr aditional blast furnace to overcome cost inefficiencies associated with EAFs (Econom ic Times, M arch 2, 1998:11 ). Such investment strategies reflect, on th e one hand, an expansiona ry form of restructuring and new constraints to th at ex pa nsion, on th e other, EAFs, despite th eir favorabl e size and flexibility, cannot be India 's answer to incr easing steel output. 20,000 Domestic consumption Domestic production Imports

18,000 16,000 14,000 _ 12,000 III

t::

o

;

10,000

8

~

8,000

6,000

.,- -----

4,000 2,000

----,'--------~--- -, /

, -------

- _,'

O+----.-.------,--,----,-,---r-----,r----r--r----r---,-.,----r--..----..------,

1980

1982

1984

1986

1988

1990

Figure 8.1 Demand and supply of steel scra p in Kor ea Source : Person al communicati on ,

pa sco

(1997) 179

1992

1994

1996

INTERPRETING CHANGE AND RESTRUCTURING

The expansion of the Indian steel industry will depend on the extent to which the private sector can fulfill its investment plans. A number of existing firms are strategically integrating backward, that is, adding steelmaking facilities to their finishing mills. Finishing steel is generally more profitable but, as markets expand, vertical integration allows firms to capture more value from the entire production chain. The recent bullish trend in investment in the Indian steel industry could easily be reversed as coalition governments fail to agree on a national industrial strategy and overcome the severe infrastructural bottlenecks that the economy as a whole confronts. Already TISCO has expressed second thoughts about its mega steel project for want of adequate infrastructural support. The implication for industrial restructuring is that if projected supply does materialize India will have to find export markets. India still has the advantage of low wages, roughly $1.5 per person-hour, less than one-tenth the US and Japanese rates. India's export market traditionally has been small and only recently, with the erosion of the Indian rupee, has the industry become somewhat export competitive. With a sizable share of exports destined for the South-East Asian markets, the currency turmoil in the Asian region is likely to dampen India's export market in the near future. More importantly, increased international competition is expected in the region as Japan and Korea, with their massive steelmaking capacity, are unlikely to remain passive in the region. Already a number of companies from Japan and Korea have begun several projects in the South-East Asian region. For example, both Korea and Japan have large steel projects in the offing in Vietnam. The restructuring of the Japanese steel industry is unlikely to witness significant capacity reduction. The overall Japanese annual output in the next few years is expected to hover around the 95-100 mt range. As long as coke ovens continue to function at acceptable levels, large-scale integrated production will remain dominant in Japan. Coke ovens in Japan are past their prime and constructing new ones is prohibitively expensive, environmentally undesirable, and makes little commercial sense in a world with excess steelmaking capacity. The industry is also unlikely to witness radical technological changes in the medium term. The industry-sponsored direct steelmaking project is still at the pilot stage. With constant upgrading and maintenance of plant and equipment, the Japanese integrated segment is technologically sound and hence investment in smaller scrap-based thin-slab casting is not attractive. The problem is not of scrap supply-Japan has become a net exporter of scrap-but rather the high cost of electricity that provides few cost advantages over technologically well-established integrated mills. Also, existing EAFs are highly competitive and have captive markets in the Japanese construction industry. Minimills that are affiliated with integrated firms have some cost advantages as they have rationalized their production in conjunction with their group partners. Thus constructing new blast furnaces in Japan is virtually ruled out and for 180

INTERPRETING CHANGE AND RESTRUCTURING

at least another decade or two the Japanese industry will be led by integrated producers and not by minimills. Bythis time new technological breakthroughs, such as large-scale direct steelmaking, may be commercially profitable. The Japanese industry will therefore continue to rely mostly on their blast furnaces for making high-quality steel and they will try to extend the life-time of BFs for as long as they can. Older blast furnaces will be retired should the decline in productivity be significant. But there is reason to believe that blast furnaces in Japan will be deployed to supply pig iron, which is superior to scrap, for new minimills in the Asian region. The restructuring of the Korean steel industry is following a different path. Given a declining growth rate, it is unlikely to attempt another integrated greenfield project. Instead, pasco has been adding incremental capacity at its existing sites. For example, at its Kwangyang plant, pasco added a fifth blast furnace to produce another 3 mt of crude steel. About 40 percent of pig iron from this blast furnace will be used by two minimills with the rest of it going to existing BOFs, whose working capacity will be increased to handle larger charges. Kwangyang already has a 1.8 mt minimill. Another minimill with a 2 mt capacity is under construction. Using pig iron is expected to relieve some of the pressures arising from limited scrap supplies, especially with Hanbo Steel's large new minimill coming on stream. The US industry, particularly the integrated segment, after a decade and a half of reorganizing has once again become internationally competitive. Thanks to the Japanese, capital and technology infusions have rejuvenated several American plants, especially finishing mills that produce hot-and coldrolled sheets and galvanized products. The US is not expected to be a major exporter because of its own domestic requirements and its relative uncompetitiveness due to its currency appreciation. With another 10-20 mt of new generation minimill capacity in the US, the American industry as a whole is unlikely to yield any significant chunk of its domestic market to imports. The US industry, however, still has some problems and will have to continue adjusting obsolete capacity and to consolidate its operations. About 10 mt of integrated capacity, typically the smaller mills, could be shut down due to ageing facilities, unviable location, and inappropriate product markets (see Hall 1997:280-1). With the elimination of older blastfurnaces, the US industry has excess capacity in hot strip mills, leading to the industry's dependence on imported slabs. Heavily indebted countries like Brazil and increasingly some of the Commonwealth of Independent States, which are very short on hard currencies, have found market niches in the US. Similar to Japan, the US industry is not expected to add any blast furnace-based steelmaking capacity. Instead, the industry will continue to profit from low-cost suppliers of semifinished products and enhance its competitiveness on value-added products. The durability of this advantage will depend on the industry's continuing ability to meet the foreign challenge with new innovations and institutional 181

INTERPRETING CHANGE AND RESTRUCTURING

arrangements. It will also have to ensure unrestricted supplies of imported semi-finished products, a prospect made relatively easy with excess capacity worldwide. Conclusion An institutional interpretation of steel industry restructuring provides a highly nuanced insight into the process of capitalist industrialization. The central dynamic is technological change with its attendant institutional responses, by firms and industrializing states. The resulting uneven diffusion of technology, accompanied by changes in scale economies, has contributed to the overall reorganization of the industry. As the industry becomes more internationalized, steel production like other manufacturing becomes subject to greater competitive pressure. Under pressure, firms attempt to specialize in some segment of the production chain, such as the production of pig iron, semi-finished steel, hot-rolled coil, and so on. The implication of this on restructuring is reduced entry barriers, reflecting the continuous competition inherent in the capitalist industrial system. This interpretation also underscores the ideological role of the state in modernizing the economy but whose success rests heavily on institutional capability. As competition increases with internationalization we can expect an imposition of certain kinds of institutional changes. We have already witnessed the real and ideological pressure on the state to abandon its entrepreneurial and regulatory roles. We have also witnessed the rise of private capital and, insofar as the industry is concerned, we can expect private industry to meet the rising consumption in Asia. Steel demand in Asia is projected to increase by 25 percent (excluding Japan and China) or more than double the global growth during 1996-2001 (Fish 1997). Consistent with these global developments we can also predict the growing importance of flexible industrial relations to meet increasing demand. But in keeping with the structural requirement of capitalist competition we can also expect the specter of excess capacity. Driven by the competitive imperatives, the surge in new generation minimill growth in the US and the focus on flat products in virtually all major steel producing countries is likely to result in lower capacity utilization and cutthroat competition. We can only speculate who will be hit, with what severity, and how they will respond at this time. What we do know is that the capitalist crisis is impermanent. If the past is any predictor, we can expect the industry to continue to renew itself. However, questions pertaining to future restructuring still remain. Will the late industrializing countries, by then with significant capacity, readily adjust to changing circumstances? Does this mean that the logic of the market will have taken deeper roots than before and technology strategy be relegated to the background? And in the absence of state-led capitalist regulation, will 182

INTERPRETING CHANGE AND RESTRUCTURING

self-regulation in an internationalizing environment be viable for institutionally weak governance structures? My interpretation of the restructuring process provides some answers to these questions by demonstrating that politics and institutions matter in industrial change. The institutional framework, which combines both macro and micro aspects of capitalist industrialization, can contribute to our deeper awareness of capitalism as a "system" of production on the one hand, and its increasing internationalization on the other. The analytical framework is also useful for its heuristic value: it enables us to grapple better with questions surrounding industrial and technological evolution in a national context. By appreciating the relationship between institutions and economic change we have been able to explain the persistent heterogeneity of the industrialization process in an otherwise unifying international economic and industrial system. By recognizing institutional change accompanying industrial change we are also prepared to understand the on-going restructuring process in the twentyfirst century.

183

NOTES

2 AN IN STI TUTIO N AL IN TERPRETATI O N OF STEEL IN DUST RY RESTRUCTURING 1

2

3

4

5

6

This may violate the norm s of "scient ific" investigation since research questions ought to be posed a prior i witho ut ha ving the da ta determine the ana lytical framework. H owever, moving linearl y from theory to emp irica l validation is int ellectu ally unacceptable when pro cesses are essentially social and institution al, cumu lative and on-going. With feedb ack loops in place it is nearl y impossible to ign ore th e pre -existing dat a. In th e manufactu rin g sector th e average number of hou rs worked per week in Korea and Taiwa n in 1980 was 60 and 51 respec tively (Scitovs ky 1985 ), while in Indi a it is between 35 and 40 hours per week (Cha kravarty 1987:9). This difference in work week generates m ore absolute surp lus value in Taiwa n tha n in Indi a and it is a goo d pre dictor of both East Asian co unt ries' eco no mic developm ent. If Taiwa n is assumed to adopt m ore mod ern technology th an Indi a th en Taiwa n wo uld be generating even greater (relative) sur plus value and econo mica lly growing much faster tha n Ind ia. See also Brenner (1977). A third contra diction ar ises from the resista nce offered by precapita list mod es of produ ction to th e penetratio n of th e cap ita list mod e in under develo ped regions. At th e turn of th e twent y-first century few areas remain im perviou s to cap ita list dominati on . Mos t introdu ctory text s on micro econ omics treat techn ology as some combination of inputs with ou tput levels determined by in put prices . The same level of output is said to be obta ined by vary ing th e input com binations, ign orin g not only the costs assoc iate d wit h substit uting one factor for another bu t also not recog nizing th at factor substituta bility enta ils technological cha nge and th erefore is not costless. The microecon omi c res ult of fallin g unit costs with increasing outp ut im plies aggress ive price competit ion when capacity utilizati on is low. Low utilization mean s higher unit costs hence greater incentives to keep production up . This is qui te different from th e macr oecon omi c relationship between infl ation and capac ity utilizati on (see Corrado and Ma ttey 1997). Besides high utilization rates, lower costs could also res ult fro m other extra neo us factors such as exc ha nge rate fluctu ati on s, cha nges in int erest rates, and energ y costs. The direction of ca usatio n goes both ways: an accu m ulatio n cr isis co uld disco urage techno logy adoption or failure to ado pt co uld res ult in th e crisis. As with most social processes, the direction of causality is less imp ortan t tha n the cumu lat ive aspects of cha nge. The concep t of path-depe ndence is pertinent , since 184

NOTES

7 8

9 10

11

12

13

14

past decisions and institutional legacies in a cumulative way are likely to influence future decisions, that is, crisis could lead to technological obsolescence which in turn could lead to intensified crisis and thus the failure of the firm . Therefore a delay in introducing an innovation could easily lead to obsolescence (see Liicke 1993:1226). Conversely, the operation of a virtuous circle could generate greater opportunities for new investments and therefore sustained accumulation. Structurally, a powerful rural oligarchy and speculative classes could hinder the process of technology diffusion (Bagchi 1987:5-9) . Here competition is used differently from the neoclassical idea of numerous firms in a perfectly competitive situation. Competition encompasses production, exchange in the market (realization), and distribution of profits. It includes competition between capital and labor and among various capitals. It is the mobility of resources underlying surplus generation that denotes the full meaning of competition. Competition is not the starting point but a consequence of capitalist property relations and self-expansion of capital. It exists independently of the number of firms in the market (Jenkins 1987:45; see also Weeks 1981 :151-69). See also North (1990). However, North's focus on "liberal" institutions does not capture the formation of state-engineered capitalism under late industrialization. Curiously both adoption and non-adoption of new technology can have a depressing effect on profits . Forgoing adoption implies increased competition from those firms that have the new technology and adopting it means increased fixed capital costs and forgoing more attractive alternative investment outlets. Technological change can be capital saving as well since firms are interested in reducing total costs (Salter 1960, see also Rosenberg 1984:22-41). Most Marxian anal ysis discusses the organic composition of capital (a value term), which is not quite the same thing as the capital-labor ratio. The use of organic composition of capital here would be misleading because it would imply the tendency for the profit rate to fall with the rise in the organic composition of capital. This relationship at the industry level is dubious because an increase in capital intensity is likely to increase productivity and hence surplus value. In fact this relationship can be turned on its head by showing that the declining profit rate is due to the relative decline in the organic composition of capital. Under new technology the share of wages per unit of output is expected to fall with higher productivity, given the same wage rate . Even with an increase in wage rates (associated with increasing productivity) new technology could still reduce the share of wages per unit of output. Institutional arrangements and the balance of class forces would ultimately determine the final wage costs. The decline in profit rates in industry has transformed industrial capital to finance capital (Miller and Tomaskovic-Devey 1983:22-4; Petras 1984:185-8). The spate of mergers in the US in the 1980s indicates high profitability associated with mergers rather than with productive investments. The high rate of return is obtained immediately after the merger transaction. Mergers are less risky since no new production is involved and firms continue to serve well-established markets . Most mergers were conducted with borrowed funds, and as the interest due on such funds was often tax exempt it became even more profitable. The long cycles of economic activity called "long waves" have re-emerged as a subject of inquiry for understanding capitalist dynamics. There are several theories but all deal with the cyclical nature of capitalism over the long haul. Schumpeter (1975) gave more importance to the innovative activity of large corporations, while Mensch (1979) augmented this view with the bunching (swarming) of 185

NO TES

15

16

17

18

19

20

21

22

techn ological cha nges, th at is, each basic inn ovati on lead s to man y other relate d ones. Forrester (198 1) and his colleagues at M IT's System Dynam ics Gro up reject technological cha nges as necessary or sufficient to long swings of economic activity. Instead, they argue the dynami cs of self-ordering of cap ita l goo ds (that is, one pur chase leading to another) , and give greater importa nce to wage and int erest rates (Sterma n 1985, and person al communication with Sterma n, Decemb er 1985 ). See also Freema n et at. (1982), Van Duijn (1983) and Freema n (1983) for other views on lon g waves . Rhee (199 4) shows how particular in stitution al arrangements in South Korea, mainl y state-business relationships, contributed to over invest ment in th e heavy and chemical ind ustries. The crisis was one of overproduction and not cut backs in capacity. H owever, th e Kaleckian effect on accumulation is similar: eco no mic in stabil ity as a result of over investment in fixed cap ita l und ermines bu siness confidence and pro fita bility. Upswin gs are said to ar ise from th e bunchin g of inn ovati on s. Wh y techn ologies clusterin g around a core techno logy should give rise to an econo mic upswing is not answe red by lon g-wave protagonists. Whi ch technologies become the carr ier techno logy for the upswin g is also uncl ear. See also Markusen (1986). H er pro fit cycle m odel is more institution ally driven compared to th e esta blished pro du ct cycle mod el, which is generally mark etdriven. She introdu ces indu stry structure, state policies, and cap ital-labor conflicts in exp laining th e different pro fit cycle phases . O ugaard (1983) classifies three form s of peripheral ca pita list industrial structure on the basis of their ability to pro duce different types of goo ds and th e link ages thus form ed for production and realization . Th ey are (a) consumer goods, (b) th eir mean s of production, and (c) th e mean s of pro duction for produ cer goo ds. Prod ucti on of pro ducer goods is of th e highest rep roductive imp ort an ce and in latecom er countries it is the state that atte mp ts to und ertak e this. See also Bagchi (198 4b). Even if the technology is imported or the industry is under foreign cap ita l bu t relies substantially on local inputs and ma rk ets, there can be dynamic efficiencies, suc h as the deve lo pme n t of re la te d indu st ri es (Bresser Pereir a 19 84 :24 ; Gunnarsson 1985:198). According to Kla pp (1987), examining th e oil industry, the intervent ion by th e state in adva nced cap ita list countries is limit ed by political op position at home, whereas in developing co untries nati on alistic and publi c welfare fun ction s serve to legitimi ze expa nsion of state corporations. Klapp (1987) makes a pers uasive arg ument th at sta te enter pr ise auto no my is th e embod iment of sta te auto no my. Follow ing the Weberian ideal type, she arg ues th at as the sta te is composed of the bureau cracy and mini stries with certain "na tional" goa ls in th e "public" inte rest th ere is likely to be a stro ng consensus amo ng the vario us institu tion s of the state , and therefore greate r effectiveness in carrying out nati on al goa ls. In a parallel fashion, Rosenb erg and Bird zell (1986) exp lain inn ovati ve behavior in th e West largely as a result of auto no my of th e econo mic secto r from po litical and tra dit iona l authorities. This in stitution al cha nge has been hi stori call y imp ortant as the sprea d of privat e ow nership impli ed a decent ralized, plura l system . At th e same time, given the scale of reso urces needed for inn ovati ve activity, some form of a centralized , bu reaucrati c app roach with a single-minde d purpose increasingly became more suited to generating ra dical techni cal cha nges. The heavily centra lized M eiji sta te in Ja pan was one such case that generated to p-down techno logica l cha nge .

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Rani s an d Mahmo od (1992) argue that lSI is eas ier to implem en t since liberalizati on is not part of th e stra tegy and hence vested int erests continue to earn rents. Yet thi s is a sta tic view of social cha nge . The emerge nce of a mid dle class under lSI can be the basis for econo mic liberalization . On th e other han d, Sachs' (1985 :550) argu ment that the political stre ngth of the indu strial bourgeoisie in Latin Amer ica was respon sible for lSI strategies and converse ly the rural sector in East Asia was respon sible for outward-loo king excha nge ra te and tra de policies has been seriously cha llenged (see Bardha n 1991 :253). 24 This has been a classic preoccupa tion with m ost depend ency and wo rld-syste m scho lars (Fran k 196 7, 19 81 ; Amin 197 6 ; Wall er stein 19 84 a, 19 84b ). Trans natio na l corp oratio ns an d glo ba l pr oducti on netw ork s are seen as undermining th e development prospects for non -metrop olit an econo mies (Ragi n and Delacroix 1979; Rubinson and H oltzman 1981; Bornsc hier and Chase-Du nn 1985; Ne meth and Smith 1985 ). The mu ch more sop histicate d ana lyses of th e "depe ndent" development school (at th e nati on al level see Evans 1979 for Brazil and Lim 1985 for South Korea; at the sectoral level see Gere ffi 1983 for th e pharm aceutical industry) also suffer fro m overstating the dominan ce of foreign cap ita l, despite recog nizing the growth in th e com plexity and differentiati on in th e pro ductive structure of severa l late industrializing co untries. The externa l dominati on is also noted by some non-d epend ency Marxists (Zeitlin 1972; Petr as 1978 , 1984; Week s and Dore 1979; Lowy 1981; Chilcote (ed.) 1982). 25 In distinguishing technical cha nge as supply-driven or demand -induced, Rosenberg (198 4), followin g the Schumpeterian interpretation, asserts the importan ce of supp lier-drive n techni cal cha nge . Diffu sion on the other hand is more demand based. For late industrializing cou ntries both supp ly and demand factors are imp ortant for th e diffu sion process . 26 Even th ough th e newly industrializing co untries have most of th e preco nd itions to accept and use mod ern techno logy their design capacity is still quite limited (Chu dnovs ky et at. 1983). Techno logy for late industrializing co untries has been suggested as being "if not the car rier of social progress, at least in a less mechanistic concep tion its prerequisite" (Emma nuel 1982 :10 5, emp hasis in origina l). The refere nce is to th e benefits of im porting capita l-intensive techno logies (greater surp lus generation) witho ut the cos ts of research and development. 27 Tho ugh techn ological cha nge incorp orates necessary orga nizationa l cha nges, in this stu dy the intern al fun ctioning of steel enterp rises is not exa mined. Brief refere nces will be made to relate any ra dica l shifts in orga nizational cha nges with techno logical cha nge. The large-scale nature of int egrat ed steel pro duction m ak es it difficult to in t r oduce new fo rm s of sho p-floo r a n d co rpora te restructu ring, increasingly found under flexibl e industrial practices, such as in minimills. 28 This is also kn own as "techno logy followin g" (Fransma n 1985:614), referr ing to th ose techno logies that are either stag na nt or earlier vintages that are not being used in th e inn ovating countr ies. Alth ou gh th ere are instan ces of steel mills being purchased, dismantled, and shippe d lock, stock, and barrel by countries lik e China an d Indi a, characterizing stee l technol ogy as stagna nt is n ot appropriate. Th ese countries also possess state-of-the-ar t facilities. 29 Pozn an ski (1983) distin guishes simp le (BOF) fro m comp lex (CC) techno logies to demon strate th e varying rates of diff usion . H e arg ues th at latecomers have less to benefit from simple techn ologies since accumulated experience for simp le techn ologies does not amo unt to mu ch, whereas rap id adoption of comp lex or newer inn ovati on s still undergoing development is expecte d to yield grea ter benefits. 23

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3 TECHNOLOGICAL CHANGE AND CRISIS IN THE AMERICAN STEEL INDUSTRY The crucible process involved heating wrought iron bars with powdered charcoal in closed boxes. After the iron had absorbed carbon the bars were melted in earthenware crucibles and cast into molds . Each batch was about 100 lb, thus limiting mass production (Gold et at. 1984:530). 2 Between the two economic downturns in the last quarter of the nineteenth century, Andrew Carnegie was able to reduce the cost of making steel rails from $100 per ton to $12 (Rosenberg and Birdzell 1986:213) . Carnegie used the Bessemer process, which was much larger and technologically superior to the crucible process. 3 The Japanese had already developed a technology similar to the Bessemer process during the much earlier Tokugawa period (Morris-Suzuki 1994:45). 4 A bloom is a square or rectangular piece, whereas a slab has a similar crosssection except that it is much wider and thinner than a bloom. Billets have a very small cross-section and, like blooms, are used mainl y for producing long products, such as rods. Billets can be obtained by rolling blooms. Slabs are mainly used for producing flat products such as sheets, plates, coils, and so on. 5 In volume terms the stainless steel segment is the smallest. The application of specialty steel is limited to small quantities for very specific purposes. For example, US consumption of stainless and alloy steel in 1986 was 1.16 mt (USInternational Trade Commission 1987b: A-16), representing onl y 1.4 percent of total US steel consumption. Very few firms operating integrated plants and minimills produce stainless steel/high allo y products . Out of the nineteen plants in the US producing high alloy products only two of them were part of integrated firms (USDepartment of Energy and Electric Power Research Institute 1987:3-7) . 6 The blowing of ox ygen into the Bessemer vessel was already in use by the late 1930s. However, it was the lowering of oxygen prices that contributed to the diffusion of BOFs. Several competing "oxidizing" processes emerged but onl y the Linz-Donawitz (LD) process was found to be technically superior. 7 UK's share of 43 percent of world steel output in 1870 dropped to 10 percent by 1913, whereas US share increased from 8 to 42 percent in the same period (Paskoff 1990:78) . 8 Not surprisingly, investigators at Fortune magazine in the 1930s referred to US Steel as a "financial" rather than an "industrial" enterprise. It appears that the desirable rate of return was 20-24 percent annual profit (see Paskoff 1990:100). 9 Given the oligopolistic structure of the industry high profits were ensured by the Pittsburgh Plus System, a freight equalization scheme that imposed the same transportation cost irrespective of the origin of steel supplies . Competition was therefore narrowed to non-price factors. This practice, prevalent since the late nineteenth century, was "ordered" to be stopped in 1924 . It was finall y discontinued in 1938. 10 It was first adopted in the US in 1954 by the small company McLouth, onl y four years after the innovating firm Voest-Alpine of Austria . As late as 1963 several large US firms with over 50 percent of US capacity had not installed a single BOP. 11 Adams and Dirlan (1966) argue that the cost advantage of the BOF was such that any reasonable interest rate would have supported scrapping OHF mills and replacing them with the BOP. On the other hand, Gold et at. (1980:552) point out that the advantages of the BOF were greater in Europe than in the US as American firms had OHF technology that was superior to that of the Europeans. 1

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In th e 1970s, th e BOF had an 85 percent energy saving over th e OHF (Borrus 1983:67). Californ ia did have some steelma king cap acity. In 192 9 US Steel acq uire d a plant in Pit tsbu rg, Ca liforn ia , which it never integrated . It di smantled th e sma ll steelma king capacity and retained only th e ro lling mills. It used the Pitt sbur g plan t to finish slabs shippe d from th e new war-vintage plant it purch ased in Uta h. Bethlehem Steel purchase d land for a greenfield in th e San Fra ncisco area to meet th e booming Ca liforn ia deman d while at th e same tim e it pha sed out steelmaking plants in Los Angeles and San Fra ncisco . Nationa l Steel also had a plant site in Ca liforn ia but never built a plant there . Kai ser was a rel a ti vel y new en tra nt to steelma k ing. It purch ased t he govern mentco nstructed Fonta na , Ca liforn ia, plant . It obta ined a loan fro m th e Reconst ruction Financing Commission and by 1960 had raised the plant's capac ity from 0.75 mt to 3 mt . H owever, becau se it failed to mod erni ze it adeq uate ly th e plant had to be shu t down . These were designed to produ ce plates and structurals for shipbuilding and were located inland so as to avo id aer ial bombing by th e Ja pan ese. The mismatch between production and consump tion in Pittsbu rgh resulted in a surplus exceeding 16.6 mt in 1951 , whereas Michigan had a deficit of 5.3 mt (Warre n 1988:305 ). In M ichigan the For d automo tive company had its own steel plant while Genera l M otors had shares in several steel compa nies in the state. The Geneva plan t in Utah, which cost the US government over $19 1 million to build, was sold to US Steel Corpor ation for und er $5 0 million (H ogan 1971 :14602). Ano ther plan t built by th e US govern ment, the South Chicago Work s, was sold to Republic Steel. In 1920 US Steel contro lled nearly 70 percent of total output (US Gove rn ment Printing O ffice 194 8 :1 5 ). In t he post -wa r peri o d there w as indu strial decon cent ration amo ng th e to p four firm s. The US Census of Ma nufactu res shows relat ive sta bility in concent ra tion ra tios since World War II. In specific products such as sheets , strips, pipes and tub es, co nce ntratio n ratios ac t ua lly in crea sed du ring t he 19 5 8-82 pe rio d (US Department of Co mmerce 1986). In 1986 nearl y 56 percent of strip and sheet shipments was controlled by fou r firm s and over 86 percent by th e top eight firm s (US Intern ati on al Tra de Co mmission 1988:11-12 ). Cap ital shortage was perceived as a major problem for moderniz ation, a view stro ngly endorse d by the Vice President for Comm unications & Administra tion Services, American Iron and Steel Institut e (the US industry representative) (personal interview, August 1988, Washington, D.C. ) Alth ough the indu stry's rate of return has been consistently lower th an th e US man ufacturing average (except for 1974 at 16.9 percent) , it cannot be ta ken as evidence of a capital shortage. The indu stry is considered to be a low-risk one over the cycle and therefore low returns are not unwarranted (National Academy of Engineering 1985:112-14 ). The increasing share of dividend s, 44 perce nt in th e 1960 s to 72 percent in 1990, signa ls th e difficulti es in committing internal fund s for US inn ovati on s (Lazo nick 1994 ). It may be pointed out th at depressed firms often pa yo ut high dividend s to hold on to their shareholders while they exp lore new investment outlets (Shapiro and Volk 1979:14 ). Steel-intensity as a fun ction is derived from produ ct compo sition of income and materi al composition of pro ducts (Tilto n 1990 :25-6). The cost of a cont inuo us caster for a Pitt sburgh-ba sed plant with a capacity of 1.2 mt/year was estimated to be $23 0 million (De par tment of Planning, Co unt y

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26 27

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of Allegheny 1988). US Steel Corporation spent about $260 million for a new caster at its Gary Works. Reorganizing included leasing arrangements, such as Bethlehem's two continuous casters for its Burns Harbor and Sparrows Point plants from the owner and trustee-the Connecticut Bank and Trust Co . Voest-Alpine of Austria was the supplier of the casters. Of the total of $540 million about 65 percent was to be financed by US banks and the rest by Austrian banks, underwritten by the Austrian government. Total interest charges will amount to $40 million. The lease period is 15 years after which Bethlehem has the option of purchasing the casters at about 20 percent of the original value . This is in stark contrast to the japanese state, which attempts to curtail excessive competition by promoting mergers. In 1957 the Ministry of International Trade and Industry (MITI) formulated the electronics industry promotion program that included the formation of a cartel (Nakamura 1985:75). See Chapter 4 for more on japan's deliberate merger policies for steel industry development. The condition on this last merger was to sell off Republic's plant at Gadsden, Alabama, and its stainless steel plant in Massilon, Ohio . Other conditions for the merger included supply of stainless steel bands to the purchaser for ten years. An attempted merger between US Steel and National Steel ultimately fell through. In 1981 National had reduced the capacity of its Great Lakes plant by more than half. In 1984 it sold its Weirton plant to its employees, leaving National short on steel for rolling. In that year US Steel offered $575 million for National and agreed to absorb about $400 million of its long-term debts . The cost of acquiring National would have been under $200/ton of capacity but the conditions laid down for the merger by the justice Department would have required disposing of 6 mt of capacity in order to gain 5.5 mt. This plant along with Pittsburg, California works was part of the war effort. The Utah plant was sited inland principally to reduce the chances of aerial bombing. Geneva produced hot-rolled sheets that were finished in Pittsburg. High freight costs and technological obsolescence of both plants were major problems, although US Steel suggested that work stoppage was the main reason for the plant's disposal. With state help the mill was later purchased by the local community in Utah and reopened in September 1987 (US International Trade Commission 1988:11-101). The TPM was based on the japanese cost of production plus some mark-up for profits and shipping costs. Since no japanese producer would ever divulge its cost of production, most of the anti-dumping suits filed by US firms relied on arbitrary and often complex methods of computing costs. The European exporters, being less cost-efficient than the japanese but more efficient than their US counterparts, could conveniently undersell US producers. The signing of the US-European Community Steel Pact in 1982 (essentially a VRA) was an attempt to resolve this problem . The ineffectiveness and the ad hoc nature of the VRAs is evident in the efforts of US steel companies to circumvent them . For example, Tuscaloosa Steel in Alabama has a supply contract for slabs with British Steel. However, this contract lies outside the purview of the VRAs since including it would exceed the stipulated quotas. In a second example, a US Steel-POSCO collaboration entailed imports of Korean semi-finished steel (hot-rolled coil) which US Steel wanted to import outside of the VRAs. In 1986, for the first time, rank and file members voted on their contracts. Previously this was not the case as only union leaders voted on the contracts.

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L-S Electroga lvanizing Co., own ed by LTV and Sumitom o of Jap an, had a separate lab or agreement resulting in only th ree job classificati on s. Fro m 1980 until 1989 real wages declined by over 10 percent (calculated from US Intern ational Tra de Co mmission 1990 :5). Th e rea l compe nsation cost for produ ction workers as a res ult fell to $23 .49/ho ur in 1989 from $26 .27/ho ur in 1980 . Thi s decline narro wed the ga p between steel wage ra tes and th e average manufactu rin g wage ra te. 4 TECHNOLO GICAL CH ANGE AND RAPID INDUSTRI AL DEVELOPMEN T IN JAPAN AN D SOUTH KOREA

1 2 3 4

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In both Ja pan and Korea th e annual steel pro duction is roughly 1 ton per ca pita . Ho gan (198 4: 124) interprets low-cost loan s to Korea as a res ult of Kor ea's sta tus as a developing co untry. It is evident tha t th e Korean sta te had a negotiating capa bility unm atched by most countr ies (see also Cha pter 5 ). Since th e mid-1 970 s not a single int egrated plant has been constr ucte d in th e adva nced capitalist countries. As a result, equipment suppliers found th eir market dwindling (perso nal interview with N ippon Steel, Tokyo, Octob er 1987). The plant is designed using an "in-line" layout, minimizing tra ns porta tion of materi als and pr oduct s within th e plant. The entire steelm aking process and hot strip mill are hou sed und er a single roo f extending for only 1.5 km, a distance considere d to be th e world' s minimum for a plant of thi s scale. By th e mid-1 980 s certain o pe ra tio na l parame te rs in Kwa ng ya ng h ad alread y ex cee de d the perf orman ce of many mills in leading industri alized cou ntries. In severa l areas , suc h as bl ast furn ace fu el ratio, bl ast furn ace reco ver y rat e, an d ene rgy consumpt ion, Kwan gyan g has performed bett er th an plants in Jap an, th e US, and West Ger ma ny (Paine Webb er 1985 :1-10 ). H owever, in th e recession years of 1965-6 th e ref usal of Sumito mo M etals, one of th e top five produ cers of Japan, to to w MITI's line for forming a produ ction cartel wa s met with swift repri sal. Ultim ately MITI held sway (Upha m 198 6:2815). On the whole MITI practiced, "paterna listic administrative guidance- [striking] a ha ppy balan ce between compe tition at home and govern ment sup port for sales abro ad" (Tsur u 1994 :82 ). It required consulta tion, persuasion, advice, and a reciprocal accepta nce of public-private coo pera tion. In th e domestic mark ets prices were negotiated between trading com panies and firms. Often state representatives presided over such negoti ations. The interlocking network (ke reitsus) am ong Jap anese production firm s, cons uming industri es, an d tr ading ho uses under the umbrella of on e or tw o banks, m aintained competition witho ut allo win g dam aging price wa rs. See also Tsur u (199 4 :99) who describes Japan's ma ssive expansion as " quite or derly." Since the merger of Yawat a and Fuji, th e Japanese steel indu stry concentra tion has increased. H owever, with an indu stry leader now, N ippon Steel Corporation, it also became easier to coo rdina te indu stry investment s and prices. In 1972 th e to p five steelmakers prod uced nearl y 78 percent of total cru de steel. N ippon Steel had doubl e th e capit al and emp loyees of its nearest rival Ni ppo n Kok an (Nipp on Steel Corpora tion 1973:34 ). In 1987 th e top six pro duced 71 percent of output with Nippon Steel controlling 41 percent of the big five's total. In high-value products, such as cold rolled sheet and str ips, the top six prod uced over 90 percent . This of course was strongly denied by the indu stry as a whole (personal interviews, N ippon Steel and N ippon Kok an, Tokyo, Octob er, 1987). The first act is effec tively a bailing ou t system fo r la rge ex por t-oriente d cor pora tions locat ed in depr essed areas by providing low int erest lo an s. The 191

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second act aims to assist firm s in locales th at possess mining, iron and steel, and shipbuilding industries, providing mon ey from th e str uctural adjustment fund to alleviate the adverse impact on local econo mies du e to plant shutdowns. In addition, tax incentives are pr ovided to th ose investing overseas if th ey are judged to be ma king effor ts to address the local econo mic pro blems . For the social imp act of plant shutdowns, see Yoko (1987). In 1973 Jap an produced nearl y 34 mt of vessels whereas in 1986 it had or ders for only 3 mt . The People' s Republic of China is now th e largest m ark et for Jap anese ex por ts. According to N ippo n Steel sta ff, th e company faces a mon opsoni st in China as all purchases are mad e by the state . It ap pears th at selling prices have not mad e for lucrati ve deals. But to maintain a sha re in such a large mark et and there by maintain cap acity utili zati on, N ip po n Steel co uld not renege on such deals (perso na l int erview, Ni ppo n Steel Co rporation, Tokyo, Oc to ber 1987). The existence of enter prise unions and a semi-lifetime emp loyment system have fragmented lab or du e both to th e lack of horizontal trad e uni on m ovement (John son 1984 :13 ) and to th e presence of large and sma ll firm s. Temporary workers found in large firm s typ ically bear the brunt of retrenchment . Because of th e very specific nature of skill development th at canno t be utilized in ot her sectors, in a pro longe d downturn red unda nt lab or from th e in du stry is generally difficult to absorb (Koike 1987:30 7-8). Other areas included com puters, commu nications techno logy, education and man agement programs, security services, construction and engineering, mail ord er business, tr avel agency, and deep sea explora tion. Most of th ese were unsuccessful. N ippo n Kok an had alrea dy esta blished a biot echnology plant in 1987 at its Keihin Works (plant visit, Keihin Work s, Tokyo, Oc to ber 1987). 5 TECHN O LO GICAL CH ANGE AN D IN STITUTI O N AL CHALLENGES IN BRAZI L, INDIA, AN D KOREA

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The entre preneur M r Jam shed Tata , the found er of Tata Iron and Steel Com pany (TISCO) failed to ra ise cap ita l in London at the tu rn of th e century bu t cou ld do so later in Indi a itself (Etienne et at. 1992 :49 ). The sectoral distribution of uncoated flat products, items pro duce d by th e state ow ned enterprises, shows th at 21.4 perce nt of 1986 outp ut was absor bed by th e tran sportati on sector (Inst itute Brasileiro de Sider urgia 1987:2/4 ). Close to 20 percent of to ta l output of thi s product is dir ectly relate d to vehicle pr oduction (ibid.: 2/6) . In 1995 th e Brazilian auto industry absor bed 14 percent of total domestic sales, representing 23 percent of flat pro ducts (Instit ute Brasileiro de Sider urgia 1996 :2/4-2/5). Th ough privati zed in th e 1990 s, th e supp liers of th ese pro ducts are th e erstw hile sta te-owned firms . The creation of Aut o Lat ina in the 1980 s by Volkswagen, Ford, and GM test ifies to this influ ence. In 1987 th e Brazilian govern ment imp osed price ceilings on automobiles, which VW and oth ers blatantl y defied. The govern ment th reatened to sue th e offending par ties but later withdrew th e charges. Typically in a mon op oly situa tion price go uging is ro utine and th e depend ence of steel users on steel produ cers exceptionally high . Thi s depend ence was echoe d by one m ajor cus to mer of PO SCO (perso na l inter view, Uni on Steel, Pusan, October 198 7). Ho wever, it appears it had less to do with high prices and more to do with supply rationing during boom period s. For exam ple , in Korea, th e co ns tr uc tion indu st ry (itse lf an indicat or of infrastruc tura l development ) comprised over 50 percent of domestic demand, 192

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while auto mo biles, machin ery and th e app liance industries have increasingly absorbed rema ining steel outp ut. With 1980 as th e base, th e ind ex of steel consuming sectors in June 1987 was as follows: tot al manufactu ring 454 .5, metal prod ucts 275.6, machin ery 531.7, electr ical machin ery 602 .1, and tra nsportation equipment 37 4.3 (Korea Iron and Steel Association 1987:55, 57) . Percival Farq uar, a Braz ilian entrepreneu r, attempte d to set up a large-scale, cokebased steel mill prior to World War I. H owever, regional and intern ati on al politics, and th e reluctan ce of foreign fin ance to " distu rb esta blished mark ets," th wa rt ed such a venture (Da hlma n 1978 :35 ). In additio n, US Steel feared nation alization of pro ductive investment s in Brazil as it had recentl y lost its nickel operation in Finland becau se of Russian invasion . As we saw in th e previou s chap ter, Korea also faced a similar hurdle at a later dat e. In th e Indian case, th e World Bank did agree to provide fund s for th e pri vat e sector plant expa nsion on th e condition th at th e Indi an govern ment unde rwrite th ese loans (Krishna M oorth y 1984 :86). In th e mid-1950 s and early 1960 s the World Bank exte nded a loan of $ 127.5 million to the private integrated companies (Liedholm 1972 :20 ). The Soviet Uni on declined to offer BOFs for th e Bhilai plant as the technology in th e Soviet Uni on was still un proven, a res po nse which par ad oxi cally bore significant affinity to US industr y' s techn ology stra tegy. One is reminded of th e difficulti es th e Japanese faced with German kn ow-h ow for th e turn-of-the-century Yawat a Work s: cost overruns were fivefold and the design faulty (see M orris-Suzuki 1994 :80 ). Wh en the state of M inas Gera is learn ed of federal state involvement in the COSIPA plant located in Sao Paul o sta te, it too deman ded one, leading to the crea tion of USIMINA S. The rivalry between the two sta tes is legend ary. The Korean comp any, unlike USIM IN AS, re jected th e initi al Japan ese offer of sma ll blast furn aces. H owever, given Ja pan 's growing ind ustri al might, Korea was not perceived to be an economic th reat . As a res ult the Jap an ese also treate d the Poh an g project as a publi c relations opportunity. Dastu rco, an Indi an cons ulting firm, and US Steel, at th e req uest of US Agency for Internati on al Development, pre pared th e fea sibilit y reports for th e Boka ro plant . There were differences in the engineering details and breakeven points in the two repor ts. The Soviet Union rejected Dasturco's pro ject report and prepared a new Detailed Project Report . The Soviet cost estimates were nearl y twice as high as Dastu rco's. Th e Indi an govern ment accep ted th e report witho ut fur th er scru tiny and th e Soviet Union, as a token gesture, reduced th e estima ted "exces s" cost by 5 percent. H owever, thi s tim e th e Soviet Union offere d BOFs, which were sma ller th an the indu stry sta ndard, but shied awa y from continuo us casters for the plant. This plan t technically does not fall und er SAIL ma nage ment, the holdin g company for sta te-owned plants. As exec ution of a steel pro ject requires large doses of investment cap ita l, according to a SAIL staff, it is preferable to have the pro ject directly und er the contro l of th e Ministry of Steel. Th e multi ple center s for pro ject execution is another sign of institution al incoh erence. Import content based on FOB prices has been estimated to vary from 22.9 percent for th e first stage steel meltin g shop (BOFs and CCs) to 69 .9 percent for the blast furn ace (D' Me llo 1986:183). In th e co urse of an int erview, a N ip pon Steel sta ff memb er lament ed th at as of Octo ber 1987 th ere were no major or ders for eq uipment (perso na l interview with N ippo n Steel, Tok yo, Oc to ber 1987). See also Chapter 4 . Some a uth ors , suc h as Tre bat (1983:96-8) rate d SID ERERAS as hi ghl y

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autonomous. This is doubtful, given the disastrous financial position of the company by the end of the 1980s. Construction cost can be roughly disaggregated into site preparation costs, cost of equipment and associated internal infrastructure, external infrastructural development expenditures, manpower training, and interest payments during the period of construction for borrowed capital. Infrastructure development can be divided into three levels: plant offices, laboratories, maintenance and machine shops, warehouses, and so on; housing, energy supply (not production), water system, road/railways, and so on; and energy production, upstream activities, harbors, and so on (Astier 1985 :5- 9). The final expenditure on a steel plant can escalate significantly if there are dela ys in decision-making, financing and equipment, as well as currency fluctuations . Of the total investment of Wl,649.4 billion for Kwangyang's 2.7 mt capacity, $479 million was obtained as foreign credits (Pohang Iron and Steel Company 1987:3-4). About $200 million was "saved" because of fierce bidding among equipment suppliers (Paine Webber 1985 :1-6) and roughly $38 million was to be paid as compensation to Kwang yang village (Paine Webber 1985:2-6) . POSCO proudly declared that its investment cost of $63 7lton was less than 43 percent of the standard $1,500Iton cost in the world economy (Pohang Iron and Steel Company 1987:6). But infrastructural expenditures on roads and harbors for Kwangyang incurred by several governmental agencies have not been included in POSCO's figures . It is doubtful that the volume of exports of iron ore from the region is equal to the imports of coking coal for the plant. Thus the location of the plant justified on the basis of transportation costs is questionable. The new plate mill in the Bhilai plant was installed at a time when the demand for the product was quite weak. With the recent depreciation of the Korean won, POSCO's asset value is likely to be considerably lower. However, technologically POSCO is solid and hence its market value ma y be understated . SAIL is over 95 percent unionized under 220 unions and officer associations nationwide (Venkata Ratnam et at. 1995 :260) . During expansion of capacity when workers are engaged in construction work for several years the y are likely to demand permanent employment. The wages of regular and contract workers are significantly different with the contract workers entitled to a minimum wage with no benefits . But it is public knowledge that a portion of the minimum wage is pocketed by unscrupulous contractors. In the past the Ministry of Labor firmly controlled all prominent unions of Brazil. All activities of unions were subordinated to the "national" interest through the Consolidated Labor Laws (CLT) of 1943. In the event of a perceived threat to the national interest the Ministry of Labor had jurisdiction to take over the administration of the unions by dismissing elected officers and replacing them by state appointees. Workers annually contributed a day 's worth of wages to the Ministry of Labor, which was redistributed to unions on the basis of membership. Since total workers exceeded the number of union members in a specific industrial branch and as the funds were used for the benefit of union members onl y, there was no incentive to recruit more members (Keck 1984:27) . Under no circumstances could these monies be used as a strike fund . During 1955-60, the average number of work stoppages was 79, during the 1963-71 period the average dropped to 15 (Deyo 1987:186). The 1986-9 average was nearly 1,900 as workers became increasingly aware of their rights and their solid contribution to the Korean economy (see 1m 1992:17) . 194

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33

34

From 1977 to 1986, th e average number of hours worked per week in Korea was consiste ntly over 52 and inc rea sed nearl y 4 perc ent du rin g thi s peri od (Internationa l Labo ur Organi zati on 1987). Wom en wor kers have wor ked even hard er in the manufacturing sector. In th e iron and steel industr y, South Kor ean workers on average have worked nearl y 40 percent mor e tha n th eir Jap an ese counterparts. See also Cha kravarty (19 87) for a discu ssion of th e relationship between number of hours worked and capita l accumulat ion. Poo r countr ies are particularl y vulnera ble to such in stitutional wea knesses. For exa mp le, Bangladesh in 1967 received Ja panese assista nce to set up a steel mill on a turnkey basis. Three 60-to n OHFs were supplied with a capacity of 150,000 ton s. Late r, another OHF was added and th e " designed" capacity raised to 250,000 ton s. The plant never atta ined mor e th an 135 ,000 ton s. It is ludi crou s to imagine how a single 60-to n OHF could pro du ce 100 ,000 tons when th ree of th em were designed to pr oduc e 150,000 to ns (M ujrahid 1997:2 ). Thi s is clearl y an exa mp le of recycling obsolete technology by th e Ja panese, im posing a form of struc tura l depend ence, and th e institution al and techn ological incom petence of th e local autho rities. For th e initi al lo an of $7 00 million, the repayment peri od was six years and int erest at Libo r (Londo n Int erb ank Offer Rate) plu s 1.25-1.375 spre ad (CST 1985:14 ). Alth ou gh loan s from domestic sources carr ied repayment periods of 16-132 months at 5.5- 10.5 percent th ere was littl e cap ita l eq uipment bought from domestic sources . The high cost of th e plant along wit h domestic price controls added to th e finan cial burden, compelling th e Kaw asaki Steel Gro up and th e Finsider Gro up to reduce th eir voti ng stoc k to abou t 5.25 percent (Meta l Bulletin, Janu ary 18, 1988 :27 ). Interestingly, CST initi ally had a leaseback agreement on its coa l yar d and coke batteries, which ultim at ely had to be bou ght for cash with the help of Ja panese banks. It may be recalled th at the Ja pan ese-aided USIMINA S also experience d cost overru ns. In 1982 USIMINA S unsuccess fully tried to sell bond s worth $43 million to th e Japan ese. Th e Jap anese did no t perceive th e rate of return to be adeq ua te. It is not th at In dian planners and engineers were not aware of th e techn ological possibilities. In fact Da stur and Co mpa ny, th e Indian steel cons ulta nts, had reco mmended 200-300-ton BOFs and requested continuo us casters. In stead th e Boka ro plan t ob tained 100-ton BOFs and no CC (Lall 198 7:86). It m ay be mention ed that site selection has been partl y influ enced by a major agita tion in 1966 in Vishaka patnam, dema nding th at a steel plant be located th ere. Another int egrated plant to ha ve been buil t in Parad eep on th e easte rn coas t in volved several negoti ations with suppliers, parti cularl y British and West Germa n, with various terms and conditions that were frequ entl y revised . This was at a tim e when th e adva nced capita list countries were und ergoing a severe recession . N o techni cal stud y was conducted and ultim ately th e site proved to be unsuit able. Of the six integrated plants in th e country, only Bhilai of SAIL and TISCO, th e privately owned plant, have been profita ble. Onl y since 1985-6 has th e Boka ro plant earne d a large eno ugh profit to wipe out its accumulate d losses. The two plants with the worst record have been Durgapur and lISCO in the state of West Bengal. Th e perform ance of th ese two plant s has been so poor th at the accumulated losses no w exceed th e value of capital assets employed. Production could continue only with subsidies. It was politically unfeasible to write off th ese plants. Local content in plant construc tion increased from 34 percent in 1961 for th e first three 1.0 mt plants to 64 percent in 1978 and 90 percent in 1988 for Boka ro's 195

NOTES

35

36

37

38 39

first and second stages respectively (Kojima 1991:6). TISCO's local content achievements were similar to those of Bokaro. POSCO obtained the normal rate of output from its first blast furnace in 107 days, six months earlier than the Japanese had anticipated from their experience (see Kang 1994:184-5). Designed capacity was easily exceeded after the fourth month. Similarly, the time taken to attain normal capacity from start-up became shorter: 80 days for the second blast furnace, 70 for the third, and 29 for the fourth . For Kwangyang's first blast furnace it was only 23 days. Typically, new employees attend high schools to cover technical and steel-related subjects. Technicians and other skilled workers who operate equipment are generally recruited with engineering qualifications and are given a combination of several years of plant-specific experience and training by foreign suppliers. Other more skill-demanding activities such as incremental improvements in technology, purchasing foreign equipment, and designing process and products require additional years of experience (see Enos 1991:81). Since annual Indian vehicle production is still low, the production of high -quality auto sheets may not be feasible due to economies of scale requirements. However, this reasoning does not take into account the possibility of enlarging markets by exporting. TISCO, with a third of SAIL's production, exceeded SAIL's R&D spending of Rs 5.22 billion by Rs 1. 7 billion. Enos and Park (1988 :210-11) show that many employees who quit POSCO subsequently work for Korean firms that are also suppliers to POSCO. In this sense one can speak of diffusion of skills, with POSCO a leading center for human capital development. 6 TECHNOLOGICAL CHANGE AND THE INTERNATIONALIZATION OF THE STEEL INDUSTRY

1

2 3

4 5

US steel consumption peaked in 1973, thereafter declining by over 30 percent. In the European Community and Japan consumption also peaked in 1973 . However, their declines in demand were less sharp, 20 percent and 11 percent respectively. On the consumption side, substitutes such as plastics, aluminum, lighter but stronger steels, and the reduced size of automobiles had a marginal effect on demand for steel in the US. The overall consumption of steel in the US, including indirect trade in steel, remained relatively stable in the 1980s. Barring 1982, a major recession year, total usage averaged 98.5 mt in 1980-5 (Locker! Abrecht Associates, Inc. 1985:51) . In 1986 this figure rose to 113 mt. The breakdown in the Keynesian consensus and fiscal overload has introduced a generalized deregulation trend. However, the magnitude and pace of state withdrawal varies from one country to another. Net indirect imports amounted to -3.0 mt in 1980 and 4 .2 in 1984. By 1986 they had risen to 9.3 mt (Iron Age, January 1988 :28) . Motor vehicles, stampings, and parts and accessories comprised 62 percent of this total. By shifting their strategy from direct exports of steel to indirect exports, overseas products have exposed other industries to import penetration. From 1960 to 1980, Japanese steelmaking capacity increased by 462 percent, while domestic consumption more than tripled. Low domestic prices enabled foreign auto companies to be internationally competitive. For example, the automotive industry consumed about 18 percent of Brazil's uncoated flat products and exported a third of its output (Metal Bulletin, June 15, 1989:22).

196

NO TES

6 7

8 9 10

11

12 13

14 15

In 1988 construc tion and conta inerization absorbed 73 percent of domestic steel shipments to th e western region . Durin g 1959-70, nati onal imp ort s of steel increased by over 200 percent, and th e western region absor bed a disproportionate sha re. Durin g the same period impor t penetrati on (imports as a share of apparent consumption) for the US as a whole increased from 6 percent to over 14 percent . Ho wever, for the western region the increase was far greater- fro m 12 percent to 28 percent (US Intern ati on al Trade Commission 1989a : 4-1 ). Imp ort penetra tion in the western region peaked in 1984. It has since declined but remains ab ove th e nation al average. The data is for M arch 1996 for a ton of cold-ro lled sheet . It was estimated originally by Paine Webb er. See Kor ea Development Bank (1997). US firm s have also lost th eir competitive adva ntage in steel engineer ing services. M est a Machine, a wo rld renowned Amer ican sup plier of steel techno logy, went bankrupt in the 1980 s and was bou ght off by a Chinese firm . There had been for eign investm ent s in th e American steel industry in th e 1960 s and 1970 s (Hall 1997:184). Ho wever, virtually all of th em were in sma ll-scale, non -integrated pr oduction. M ost investors were outsi de th e steel business, whereas foreign investment in the 1980s has been largely in th e integrated segment , mainly in finishin g facilities. All of th e foreign partners are in the steel bu siness in th eir home countries. A N ippo n Steel sta ff memb er op ined th at N ippo n Kok an ' s decision to ow n 50 percent of Nationa l Steel was hasty and unw ise. According to him, Na tiona l's steelma king units were ob solete and therefore were expec te d soo n to requ ire replacement, enta iling lar ge investments. With intern ation al price com petition thi s investment seemed irr ati on al at th e tim e. See Aylen (199 4) for details on th e privati zati on of British Steel-ano ther wellkn own case. The privatization mood in th e 1980 s did not produce goo d results. The state continued to domin ate the secto r and initial efforts at privatization failed dismally. For exa mple, COSIM , a seamless tube unit th at competed with Ger ma n-ow ned M annesman, was first targeted for privati zati on . But, given th e low rates of return and the liabilities involved, few private entrepre neurs were willing to assume ownership. COSIM and thr ee other unit s rema ined unsold in th e 1980s. H owever, th e relative success of the 1990 s privatiza tion, especially of th e steel industry, was no t foreseen by some of th e Brazilian ob server s (pers onal interview, Paulo Singer, CEBRAP, Sao Paul o, Novem ber 1987). Recentl y Singapore -based Na tional Iron and Steel M ills announced plans to invest in Brazil' s Acominas plant (Straits Times , M ar ch 1, 1997), indi cating not only its pr ivatizat ion but also deepenin g int ern ati on alizati on . The Sunflag Iron and Steel Company is one such N RI vent ure (Meta l Bulletin Mo nth ly, Jun e 1988:70 ). H owever, capacity, both old and new, in minimill s is still quite sma ll and such mills face various techni cal constraints in producing flat produ cts. Minimills have ab out 30 percent of the countr y's installed cap acity with 155 units (Meta l Bulletin Mo nthly, Decemb er 1987:2). In some cases th e size of electr ic furn aces is almos t one-tenth that of many furnaces found in th e US. 7 IN NOVATIO N S, EN TR EPREN EURIAL BREAKTH ROUGHS , AN D INDUSTRY RESTRUCT URIN G

1 2

In th e 1960s a minimill with annual capacity of 50,000-60,000 to ns co uld be set up for $5 million (see H ogan 1994 :76). For exa mp le, in Brazil between 1987 and 1996 home scra p genera tion declined. 197

NOTES

It varied from 13.5 to 18.6 percent of crude steel production (Institute Brasileiro de Siderurgia 1996:619). 3 The average price during 1975-87 for US No.1 scrap was $79.16/ton, and $111.33/ton for the 1988-96 period . 4 EAF production is highly vulnerable to scrap prices . For example, in 1985 when scrap was $90Iton, operating cost was $244Iton. With scrap prices around $140, and assuming no technical change, costs would have been $306/ton. In 1988 the price of scrap varied between $90-$140/ton in the US (CRU Metal Monitor: Steel, various issues; Iron Age 1988:36). As scrap usage increases, importers of scrap are liable to pa y higher prices . In 1988 Hyundai of South Korea paid $140/ton for US prime scrap . Prices of scrap in India have been known to touch $200/ton. 5 Improvements in EAF include reduced time for producing liquid steel (from 180 minutes in 1970 to 55 minutes now), consumption of electricity from 600 kwh to 430 kwh, and reduced electrode consumption from 12 lb/ton to 0.4 lb/ton (see Cyert et al. 1996 :32). 6 Both DRI and HBI are made from iron ore. By removing oxygen by a reductant, iron-ore lumps, pellets, and ore fines can be charged into an EAF in lieu of scrap. HBI is similar to DRI, except that it is in the form of briquettes. This makes transportation of HBI safer than DR!. There is also iron carbide made by reducing iron fines with natural gas. Iron carbide is considered superior to DR!. 7 Using DRI, based on coal, cost of steel production has been estimated to be $320.07/ton, while for gas-based DRI the cost was $316.59 (US Department of Energy and Electric Power Research Institute 1987:5-15-5-16). 8 Currently under Indian conditions, the COREX-BOF is the most expensive route, followed by the traditional BF-BOF and DRI-EAF in that order (Sengupta 1995). 9 The percentage of output after ten years of commercialization of new technologies shows that the US has been the slowest in adopting the BOF and CC-15 percent and 8 percent respectively, while japan was the fastest with 40 percent and 16 percent of output. However, in minimill thin-slab casting technology, the adoption rate has been reversed : 32 percent for the US versus only 3 percent for japan (see Schorsch 1996:46). 10 Hanbo relies on 70 percent scrap feed and the rest with DRI and pig iron . However, it aims to obtain 50 percent iron from its two COREX units, 30 percent from its DRI unit, and 20 percent scrap . The total cost of the project was over $5 billion. 11 In 1970 total production by EAFs was roughly 16 mt or 17 percent of total output (Uriu 1989:3). In 1995, the corresponding figures were 32.3 mt or 30 percent (Japan Iron and Steel Federation, Monthly Report, September 1996:3). 12 Tokyo Steel withdrew its membership from the japan Iron and Steel Federation as it felt it was paying more in membership fees than other minimills because of its efficiency (personal interview, Tokyo Steel, Tokyo, December 1996). 13 Several Korean firms have shown interest in either setting up integrated plants or, as in the case of Hyundai, acquiring part of the POSCO's shares if and when privatized. However, no formal proposals have been presented (personal interview, Ministry of Trade, Industry, and Environment, Seoul, August 1995). As POSCO's prices are lower than other producers in certain products and since private producers perceive themselves as more efficient than state-owned POSCO, private Korean producers are confident of making money with a new steel business (personal interviews, Inchon Iron and Steel Co., Inchon and Hanbo Steel, Seoul, August 1995) .

198

NO TES

14 Jin dal opted for the CO REX process and th e tradi tion al BF-BOF route because of supply bottleneck s for scrap and gas-base d DRI (perso nal int erview, Jind al Vijaynagar, Mumbai, June 1996 ). Also, Jind al minimized th e risks by lat e entry, ant icipating tha t Voest Alpine (the technology supp lier from Austria) and PO SCO will ha ve tak en care of any outstanding techni cal problems. 15 Lall (19 87: 83) suggests tha t sma ller blast furn aces are better suited to using poor-qu alit y Indi an coke tha n are large-scale BFs. H owever, th e availability of imp orted coa l and th e need to keep abreas t of global techn ological cha nges mak e smaller BFs less competitive. 16 By Ind ian sta ndards, N DIL's planned workforce of 1,500 for a 3 mt output is rema rka ble (persona l interview, N DIL, Ca lcutta , June 1996). Essar of Indi a also has no uni on with a tot al wo rkforce of 1,400 for a 2 mt hot-rolled capacity. For refere nce : Tokyo Steel as a who le had 1,44 2 wor kers for 3.9 mt (pers ona l int erview, Tokyo Steel, Tokyo , Decemb er 1996). Its new plant at Utsun omi ya ($377 million in vestment) has 150 emp loyees for 800,000 tons of annual output (Tokyo Steel M anufacturing Co. 1996 :6). 17 Contrac t workers are employe d to redu ce overhea d costs and have been used in the industry to stem labor demand s. Ga llatin Steel used contract labor for slag processing, oil handling, and scrap receiving (Ritt 1995a), while security and cafeter ia services were provided by contrac t lab or in N UCO R's Hi ckm an plant. 18 Alth ou gh it is difficult to genera lize such coopera tive relations in other countr ies, th ere is some evidence that new mills elsewhere are attempting to institute a nonuni oni zed workforce through monetar y and other incenti ves. Ispat's Nagp ur plant in Indi a, for exa mple, has not had a wo rk sto ppage in twelve years, reflecting a very different indu strial relations enviro nment comp ared to th e Indi an integrated mills und er th e sta te secto r. 8 INTERPRETIN G TECHNO LOGICAL CH ANGE AND INDUSTRI AL RESTRUCTURIN G 1 2 3

4

In 1995 PO SCO began its voluntary early retirement pr ogram . Only a sma ll number opted for thi s, bu t each volunta ry retir ee enta iled a cost of $ 186, 553 (Pohang Iron and Steel Co. 1996 ), indi cating th e high cost of PO SCO ' s lab or. In th e decad e followin g 1986, th e average age increased by th ree and a half years. While thi s in itself may not amo unt to mu ch, th e average length of service has also increased from 6.5 to 10.6 years, ind icatin g older wo rkers. In particular, comp uterization and increased auto mation, linking CC with rolling processes, and synchro nizing vario us ro lling pr ocesses are being emphas ized to red uce energy and lab or cos ts. Pre-treatment of hot metal, seconda ry refining prior to cha rging in th e BOF, and other incremental changes in th e BOF, CC , and ro lling mills are being attem pte d to obta in new and bett er-qu alit y pro ducts. Technology has been esta blished to exte nd the life of BFs by another ten years and artificial int elligence systems are being increasingly applied for the operation of th e BFs (Japan Iron and Steel Federa tion 198 7:6-7). The pre diction made by th e US Na tiona l Aca demy of Engineerin g regarding th e "inhere nt limits on th e amo unt of steel th at [could] be derived from scrap in th e lon g run " is still valid; th e diffu sion of minimills based on scra p substitutes is of course another m atter (see Na tiona l Acad emy of Engineering 1985:2 8).

199

APPENDIX: INSTITUTIONS VISITED AND/OR CONTACTED FOR DATA COLLECTION

Institution

Place, Cou ntry

Year

Acorninas American Iron and Steel In stitu te Business Korea Ca rnegie Me llon University Ca tho lic Uni versity CEBRAP (Center for Braz ilian Research and Policy Ana lysis) Centre for the Stud y of Social Sciences, Ca lcutta Chiba Uni versity of Commerce CONSIDE R (M inerals Division , M inistry of In dustry) CST (Co rnpa hfiia Sidenirgica Tubarao) Dav y-Inte rnationa l Durgapur Steel Plan t Essar Steel Fundacao Getulio Vargas (FGV) H allym University H anb o Steel lISCO (In dia n Iron and Steel Co mpany) Inch on Iron and Steel Co. Institute of Develo pin g Eco no mies Instituto Brasileiro de Siderugia (IBS) Ja pan Iron and Steel Federation j aw ah arl al Ne hru Univers ity Jind al Nagarjuna Jin dal Vijaynagar Join t Plan t Co mmittee Keihin Works Korea Development In stitute Korea In stitu te for Ind ustri al Eco nomics and Trade Library of Co ngress

Belo H orizonte, Braz il Was hington, D .C. , US Seoul, Korea Pittsburgh, US Sao Paulo, Brazil Sao Paul o, Braz il

1987 1988 1987 1995 1987 1987

Calcutta, In dia

1987, 1994

Chiba, Japan Brasilia, Brazil

1996 1987

Tubarao, Brazil

1988

Pit tsbur gh, US Dur ga pur, In dia Mumba i, In dia Sao Paulo, Braz il Chu ncho n, Korea Seoul, Korea Burnpur, In dia

1995 1987 1996 1987 1995 1995 1987

Inch on, Korea Tokyo, Japan Rio de Jan eiro, Brazil Tokyo, Japan New Delhi, In dia Banga lore, Indi a Mumba i, India New Delhi , India Tokyo, Japan Seou l, Korea Seoul, Korea

1995 1987 1996, 1997 1987, 1991, 1996 1987,1991, 1992 1996 1996 1987 1987 1995 1987, 1995

Brasilia , Brazil

1987

200

APPENDIX

Long Term Credit Bank M .N.Dastur & Co. Mannesman-Dem ag Maruti Udyog Ltd Massachusetts In stitu te of Techno logy M inistry of Commerce and Ind ustry M inistry of Co mmerce and Indu stry Mi nistry of Cu lture Mi nistry of Trade, In du stry, and Environme nt Nippon Demo Ispat Ltd Nippon Steel Corporation NK K Corporation Planning Commission Poh an g Coated Steel Co . Poha ng Steel Ind ustry Co. PO SCO (Poha ng Iron and Steel Co mpany) PO SRI (POSCO Research In stitu te) PO ST ECH (POSCO Techno logical University) Ras htri ya Ispat Nigam Ltd RIST (Research In stitu te of In du strial Science and Techno log y) Sammi Steel Samsung H eavy In dustry Samsung H eavy In dustry SIDERERAS SMS Spark Steel & Eco no my Research Centre Steel Authorit y of In dia Ltd Tipp in -Sarnsu ng TISCO (Tata Iron and Steel Co mpany) Tokyo Steel Unio n Steel Univers ity of Pit tsburgh Usim inas US Intern ati on al Trade Co mmission Voest -Alpi ne

Tokyo, ]apan Calc utta, Ind ia Pit tsbur gh , US New De lhi, Gurgaon, In dia Cambr idge , US

1987 1996 1995 1987

Brasi lia, Brazil Seou l, Korea Brasi lia, Brazi l Seou l, Korea

1987 1987 1987 1995

Calcutta, In dia Tok yo, ]apan Tokyo, ]apan New Delhi, In dia Poha ng, Korea Po ha ng, Korea Seou l, Poh an g, Kwa ngya ng, Korea Seou l, Korea Po ha ng, Korea

1996 1987 1987, 1991, 1996 1987, 1991, 1994, 1996 1995 1995 1987, 1995, 1996, 1997 1995 1987, 1995

New De lhi, India Poha ng, Korea

1987 1995

Cha ngwon, Korea Pitts burgh, US Cha ngwon, Korea Brasi lia, Brazil Pittsbur gh , US Calcutta, In dia

1995 1995 1995 1987 1995 1994, 1996

New Delhi, In dia Pitts burgh, US Calcutta, In dia

1987, 1992, 1997 1995 1987, 1996

Tokyo, ]apan Pusan , Korea Pitts burgh, US Ipatin ga, Brazi l Was hington, D .C. , US Seou l, Korea

1996 1987 1995 1987 1988, 1995 1987

201

1985

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221

INDEX

Abramovitz, M . 12, 96 Acs, Z .]. 22, 148 Adams, W. and Mueller, H . 22, 37, 38, 40, 53, 69 Aglietta, M . 6, 17 American Iron and Steel Institute 3, 31, 54,122,147,149,151,178 Amsden, A.H . 5, 15,21,65, 96, 105, 106, 114, 115, 133 Arthur, W.B. 15, 16 automotive industry 14, 33, 35, 61, 82, 87, 100, 115, 121, 125, 128, 129, 150,164,175,189 n15, 192 n2, n5, 196 n3 7, n3; see also Honda, H yundai, shipbuilding industry, steel prices, Suzuki Motors, Toyota Athre ye, S.S. 33, 36 Baer, W. 22, 91, 92, 93 Bagchi, A.K. 12, 185 n7, 186 n18 Balassa, B. 2, 13 Bardhan, P. 19, 187 n23 Barnett, D.E and Crandall, R.W. 22, 35, 40,49,142-144,146-148,164-165 Barnett, D.E and Schorsch, L. 13, 38, 124, 127, 148 BNDE (The National Bank for Economic Development, Brazil) 87, 92,93,114 Borrus, M . 40, 55,188-189 n11 Boyer, R. 12, 17, 20 Brazilian steel industry 2, 7, 13, 22-23, 71,83-8 7,91-94,96-97,98-99, 102,104,105,109,110,111,112, 114,117,120-135,142,178; Acorninas 46-47,89,94,98,100, 105,106-107,114; COSIPA 89, 92, 93; CST 47,89,94,98,99,100,

106,107,121,131; National Steel Company (CSN) 83, 89, 91; USIMINAS 89, 92, 93, 113, 136; see also SIDERBRAS Brenner, R. 16, 184 n2 British Steel, UK steel industry 37,64, 66, 92, 94, 100, 106, 188 n7, 190 n30, 195 n32 brownfields and rounding out 46-47 California 38, 43, 116, 124, 189 n12; see also US west coast Canada 1,124-125,160 capacity utilization 23, 31,48,60, 73, 74,75,97,109,110,111,123,125, 143, 182, 184 n5 capitalism:accumulation (as a system of) 8, 12, 20, 169, 183; cartels (also Pittsburgh Plus system) 16,23, 37, 73, 75, 86, 110, 188 n8, 191 n5; national regulation of 6, 68, 74, 117, 132, 137, 138, 140, 167, 174; selfregulation of 16, 23,30,48,51, 80, 119, 167, 183; state-led regulation of 9,16,28,48,57-59,82,85,167, 183; theory of regulation of 16-20, 173; see also industry structure, long waves, state intervention capitalist crisis and excess capacity 1, 5, 16,27,30,57,72-76,80,120-121, 169, 173, 182; see also industrial maturity capitalist competition 4,5,11-12,17, 26-27,29,48-49,55,57,158-159, 167, 172, 185 n8; profit and debt crisis 18,23,27,43-45,51-52,76, 79,94, 107, 123, 156; see also diffusion of technologies, innovations, 222

INDEX

investment crisis, profitability, state intervention, US steel industry Carnegie Mellon University 1 chaebols 87, 175 Chang, H . 13, 20 China 132-135, 154, 162, 182, 187 n28, 192 n l l China Steel, Taiwan 3, 116, 133 Californ ia Institute of Technology 116 Collor de Mello 2, 134 cost efficiency 35-36, 40, 71, 125, 150, 177,1 79 cost of production 2, 13, 81, 120, 125128, 136-137, 148; exchange rate movements 53, 74, 77, 81, 126-128, 158,180-181,194 n22; operating costs 28, 60, 77, 123, 142, 146147,151,154,165,172,198 n4, n7; see also labor costs Crandall, R.W 22, 23, 40, 42,43, 44, 53, 123 Cumings, B. 64 CVRD, Brazil 93, 129, 130, 131 Dahlman, c.j. 21, 85, 93, 104, 113, 193 n6 Dani eli, Ital y 155 Davy McKeelInternational, UK 98, 112, 114, 155 D'Costa, A.P. 2, 11,23,64,67, 101, 112,116,162,164,175 Deyo, nc. 96, 105, 194 n26 direct reduced iron (DRI ) 27,100,148150,152-158,160-163,166,1 79; see also HBI, scrap East Asia 17, 19,57,60,64, 72, 74, 124,131,133,138,172,1 75 East Europe (also bloc ) 93, 95,113; see also Soviet Union Elster, ]. 20 energy savings 35-36, 40, 148-149, 150, 199 n3 Enos,].L. 15,21, 196 n36 Enos,].L. and Park, W.H. 23, 25, 66, 102, 112, 115, 116, 196 n39 entre preneurship 1, 6, 9, 23, 28-29, 141,148,155-156,160-161,168, 172,174-1 75,1 79; see also minimills, Mittal, NU COR entry barriers 1,9, 15,23,28,48,68, 140,155,167,173,1 79,182;

investment crisis (leading to ) 22, 4547, 137; see also access to technology, capital cost, financing of technology equity, long-term loans 43-44,59,61, 63-66,69,75,91,93,96,107,114, 129,130,154,1 76 Essar Steel, India 155, 161, 179, 199 n16 Europe (Western ) 2, 3, 12, 22, 32, 66, 68, 106, 121, 166 European Community (also EEC) 48, 53,122-123,125,142,190 n29 Evans, P.B. 19, 86, 91, 187 n24 fast-second approach 8, 26 Fransman, M . 21, 187 n28 Froebel, E 2, 18 Germany (West) 1,64, 71, 91, 95, 108, 116, 154, 160, 191 n4, 195 n32 Gersch enkron, A. 15, 19 Gold, B. 30, 31, 37, 69,188 nl, nll Gordon, D.M . 6,1 7,18 greenfields 33, 46-47, 90-95, 97, 98, 99, 100, 102, 106, 114, 124, 128, 142,152-153,157,158,164,179, 181; see also capital costs Hall. e.G. 129, 146, 150-51, 154, 157, 181,197 nl0 Hamilton, e. 12, 96 Heavy & Chemical Industry (HCI) Program, Kor ea 65, 66 Hirschman, A.O. 15, 19 Hogan, W.T. 22, 38, 43, 50, 53, 124, 145,156,189 n16, 191 n2 Honda 129 hot briquetted iron (HBI) 135, 152153, 161; see also ra w materials Howell, T.R . 21, 52, 53, 123 H yundai 135, 159, 198 n4 import competition 30, 41, 43, 119125, 170; see also steel exports, steel prices, US economy Indian steel industry 1,2, 7, 9, 22, 28, 83-84,86,88-90,92,96-97,98, 99, 102, 107, 109, 120, 125-127, 134-137, 141-142, 150, 155, 157, 175,178-180; Bhilai 97,101,103, 108, 109, 110; Bokaro 84, 94, 95,

223

INDEX

108, 109; Durgapur 103, 109, 110; Indian Iron and Steel Co. (lISCO ) 47, 83, 85, 9~ 9~ 102, 103, 109, 110,111; Rourkela 84, 92,108, 109, 110, 112; Tata Iron and Steel Co . (TISCO) 83, 84, 85, 86, 90, 92, 94, 102, 104, 110, 126, 180, 192 n1; Vishakapatnam (Vizag), India 46-47,90,95,98,99,100,102, 103, 106, 108; see also Rashtriya Ispat Nigam Ltd (RINL), SAIL Indonesia 1, 116, 135, 160 industrial maturity 4-7, 13, 16-17,22, 24-27,58,73,81,139,172,196 n1; see also japan, steel intensity use, US, Western Europe industrial relations 9, 31, 40, 55, 103, 105,155,163-165,167,176-177, 182; employment 102-105, 130, 136, 147,159,164; flexible practices 9, 115,155,165,167,172,174,177; labor strikes 41,105-106,194 n26; non-union labor 54,105,147,155, 164, 199 n18; subcontracting 104105,116,199 n17; trade unions, also work force 52, 77-79, 96, 103, 106, 164,172,177,190-191 n31, 192 n12, 194 n23, n25, 199 n16, n1; United SteelWorkers of America (USWA) 53-54; see also innovations (productivity), labor productivity industrial shifts : comparative advantage (leading to) 2, 4, 6, 8, 12-14,37, 64,169,182-183; international division of labor 1, 2, 9, 18,26-27, 29, 74, 119, 121-122, 129, 137, 140, 178; institutional explanations of 28-29; phases of 7-8, 72-73; regional shifts 38-39; see also capitalist competition, US west coast industry structure 2, 26, 39, 58, 68, 69; mergers, concentration 31-32, 48, 51,58,185 n13, 189 n17, n18, 190 n25, n26, n27, 191 n7; oligopoly, monopoly, vertical integration 2, 15, 16,22,28,37,39-40,85,155,167; see also economies of scale, innovations innovations 1,4, 7, 9,27,36,97, 116, 148-149,184 n4, 185 n14, 188 n1, 2, 3,6; access to technology 15, 19,24, 64-65, 68-{i9, 82; bunching of 185-

186 n14, n16; changing competitiveness (through) 8, 9,12,14, 26,60,69,87,123,129,147,165, 197 n9; disinvestment 48,55; economies of scale (from) 2,15,23, 25-26,31,33,40,46,60,69,70,74, 81,83,97,100,109,143,151,182; incremental innovations 24-25,38, 113,115,148-149; leapfrogging with 6,22,141,167,178; productivity (associated with) 12, 16,23,26, 101, 103-104, 110, 113, 115, 123, 125, 136-137, 149, 164-165, 181; radical innovations 148-149, 177; research and development 56,68,116, 128, 177-178, 187 n26, 196 n38; strategic adoption of 41,48,66,69, 73, 80, 126, 170, 177; suppliers of innovation 61,64,65-66,68,91,92,95,98,101, 106-107,114,156-157,170; see also capacity utilization, capitalist crisis, cost efficiency, entry barriers, industrial shifts, institutional capability, labor productivity, path-dependence, steel technologies, strategic industrial policy institutional capability 5,9, 15, 19-20, 26-27,66,82-83,96-97,100-102, 105, 106, 120, 123, 127, 166-167, 172,175-176,186 n21, 193 n14, 195 n28; see also state intervention institutional change 2, 6, 9,48,51-55, 119,134,136,138,155,163-165, 168, 170, 173; see also flexible practices, joint ventures, privatization Institute Brasileiro de Siderurgia (IBS) 84,89,94,102,133,142 interdisciplinary analytical framework 7,8, 12,21-28 International Iron and Steel Institute 3, 71, 111 ISCOR, South Africa 151 Ispat and its affiliated firms 155, 157, 160-161; see also Mittal, Nippon Denro Ispat Italy, also Finsider 64, 94, 106, 131 japan 12, 16,23,43, 57, 64, 94, 134 japan Iron and Steel Federation 41,56, 62, 72, 77, 78-79, 100, 127, 130, 142, 159 japanese government, also MITI 59, 224

IND EX

61-63,65,67,68, 70, 73, 74 , 75, 93, 145, 190 n25, 191 n5 Japanese steel industry 7, 9, 22-23, 3133, 40- 4 1, 45, 4 8, 56, 58- 59 , 65, 68, 70-72, 74-80,81,8 7,91, 94, 97, 100, 102, 106, 111, 116, 120126,128,12913 3,137,142-146, 154-156,159,165,180-181 ; Fuji Steel 33 , 68, 71, 74; Japan Iron and Steel Compa ny 32-33, 68; Kamaishi Works 58, 59, 78; Kaw asaki Steel 40, 77, 79, 94, 100, 106, 129, 130, 131; Kimitsu Works 72 , 77 ; Kob e Steel 79 , 129, 130, 155, 158, 161; Kyoei Steel 154, 158 ; Nippon Kokan (also Keihin Works ) 56, 76 , 77, 78, 100, 129, 130, 156, 158, 192 n13; Nippon Steel Corpora tion (NSC) 3, 56, 58, 59 , 63 , 65, 69, 70, 71, 77,78, 8~ 93, 100, 129 , 130, 154, 156, 158 ; Nisshin Steel 79 , 129; Sumitomo Steel 77 , 79, 130, 154, 155, 157; Tokyo Steel 76, 154, 157-159,1 98 n12, 199 n16 ; Yawat a Works/Group 32- 33, 58, 59,63,68, 70, 72, 74, 75 Jindal, Indi a 151, 162, 166, 179, 199 n14 Johnson, C. 19, 25, 63 joint ventu res 2, 9, 18,27,48,51-52, 77, 119 , 129- 132, 135, 137- 13 8, 154-156, 174-1 75 Kang,J .66,67, 75, 114, 115, 126, 143,145,1 96 n35 Kaw ahito, K. 22, 62, 75 Keidanren 130, 154 kereitsu 158, 175, 191 n6 Korea Iron and Steel Association 41, 42, 72, 89, 102 Korea (South), govern ment 1, 7, 9, 13, 57,63-67, 91, 96, 98 Korean steel industry 22-23, 58- 59, 69, 71,73-74,77, 81, 84, 89,98-99, 100,102,106,109, 110, 111, 112, 114,117,120-133,142-145,157, 170-172,1 79-181; H anbo Steel 85, 150-151, 155, 157-160, 166, 181; Inchon Steel 159-160; Kwangyang Work s 47,65-67,69, 98, 99, 100, 101,106,112,113, 114, 160, 181, 191 n4; Pohan g Works 65-67, 69, 93,

97, 101, 113, 114, 116, 160; Union Steel 115, 192 n4; see also pasco Kor ean War 38, 60, 61, 62, 65 Krishna Moorthy, K. 84, 85, 93, 104, 108, 110, 112, 193 n8 labor costs 17, 77,123-127,147,150, 172; see also wa ges labor productivity 54, 74, 110, 123, 127-128,138,147,1 72 LaII.S. 5, 21, 199 n15 lat e industrializing countries 2, 9, 2122,24,26, 61,82,83, 91, 92, 95, 140,142,167,1 70,1 75,182; see also stat e intervention, Brazil, Indi a, Japan, Kor ea Long Term Credit Bank of Jap an 62-63 lon g waves 17-18, 172, 185-186 n14 M .N .Dastur & Co., Indi a 162, 178, 193 n13, 195 n31 M annesman Demag, Germany 150, 154, 155, 157 manufacturing sector 43-44, 74, 105, 128, 189 n1 9; see also automotive, shipbuilding mark et/economic liberaliz ation 64, 87, 134,137-13 9,160,1 75,1 78,18 7 n23 M arkusen, A. 12, 18,22, 54, 186 n1 7 M arx, K. 14, 19, 165, 184 n2, 185 n11 M assachus etts Institute of Technology 116 Meiji regime 3 1, 58 Mesta Machine 56, 91, 197 n9 Mexico, also H ylsa 1, 155, 160 Midrex 155, 161 Mittal 1, 160 Moreira, M .M . 13, 20 Morris-Suzuki, T. 32, 58, 59, 68, 70, 188 n3 multinationals (transna tional corporations ) 17,29,86,100,121 Nakamura, T. 61, 190 n25 Na tiona l Academy of Engineering 44, 97 , 189 n1 9, 199 n4 Nelson, R.R. and Wright, G. 14, 16, 18 New Steel 149, 157, 161 Nippon Denro Ispat, Indi a 160, 166, 199 n16; see also Ispat, Mittal non-resident Indian (N RI) 136, 197 n15 225

INDEX

NUCOR, also Kenneth Iverson 1 150 153-158,166 " NUCOR plants: Berkeley, SC 156; Charleston, SC 157; Crawfordsville, IN 156-157, 160; Hickman, AR 156-157,160,164-165 Office of Technology Assessment, US Congress 45-46 Ohio 38, 50 Oster, S. 22, 40 overstating 24, 103, 104, 110, 127 Park Tae Joon 65, 69 Park Chung Hee 64-65, 96 Paine Webber 47,73,106,109,115, 125-127,146,153-154,178,191 n4 Paskoff, P.E 31, 188 n8 path-dependence 2,5, 15-16 21 24 25,27,37-38,40,162,184-185' n6; see also industry structure Pittsburgh 1,39,52, 189 n15 Pohang Iron & Steel Co . (POSCO) 1, 2, 3,47,52,58,64-68,69,70,75,83, 87,88-89,97,98,100,101,102, 103, 104, 105, 109, 112, 113, 115, 116, 128-134,138, 159-160, 166, 176,181 PO STECH 116 privatization 2,9,23, 84, 93, 94, 120, 134-136,138,163,167,173,176, 197 n12, 13; see also Brazilian steel industry, British Steel, Collor de Mello, entrepreneurship profitability 75-76, 85, 86, 101, 108109, 110, 116, 128, 136-137, 185 n3 Rashtriya Ispat Nigam Ltd (RINL) 47, 95, 108 raw materials 33-34, 39 92 123-125 150, 159; see also co;t ot' ' production, scrap Rosenberg, N . 14, 18,21,69,185 nll 187 n25 ' Rosenberg, N. and Birdzell, L.E. 31, 186 n22, 188 n2 Sachs, J.D . 20, 187 n3 Sakonji, T. 77, 80 Schorsch, L.L. 151, 154, 198 n9

Schumpeter, J.A . 14, 165, 185 n14, 187 n25 scrap (and home scrap) 33-34 40 68 70, 100, 137, 142-143, 146-149, ' 159,160,163,179,180,198 n3, n4; raw materials 134, 148, 181; see also scrap substitutes Sengupta, R. 101, 104, 115, 116, 125, 150, 162, 163, 198 n8 Shinohara, M . 22, 61 shipbuilding industry 64 75 76 82 87,121,191-192 n9: n10 ' , Shorrok, T. 64, 66 SIDERERAS 3, 85,93, 100, 107 108 Singapore 197 n14 ' SMS Schloeman 150, 154-155, 157158, 160 Soviet Union (also Russia, CIS) 92, 95, 96,101,106,112,121-122,181, 193 n7, n9, n13 state intervention 4 32 58-67 80-87 169,174-175; defi;its and debts ' (resulting from) 6, 8, 123, 136, 138, 170,181; investment (as part of) 9, 59-60,62,90,94,98,100,109,111, 121,138,160,173; logic of 18-19, 21,61; Meiji regime 117, 186 n22; state owned firms (public sector) 2, 3, 26,58,84-86,90,92,93,102-105, 109-110,113,115,117,131-132, 134, 160, 167; subsidies, protection 16,19,25,30,32,48,52,59,61,64, 68,86, 96, 117, 167; trigger price mechanism (TPM) 53, 128, 174, 190 n29; voluntary restraint agreements (VRAs) or quotas 52-53, 128, 132, 174, 190 n30; see also Japan, late industrializing countries, POSCO, SAIL, SIDERERAS, strategic industrial policy Steel Authority of India Limited (SAIL) 3, 84,86,90,102,103,108,126,137 steel exports 27, 77, 89,124,132-134, 171, 180; see also Brazil, Japan, Korea, Western Europe, import competition steel intensity use 46, 189 n22 steel prices 37, 43, 53, 74, 75, 79, 83, 85-88,95,107,108,109,117,123, 134, 138, 143, 196 n5; dumping 52-53, 123; see also capital accumulation, state intervention 226

INDEX

steel products: flat products: 33-35, 77, 84, 87, 99, 100,119,123,129,134,138,148, 154, 157, 158, 16~ 178, 182; galvanized and coated sheets 27,34, 77,100,115,121,128,131,135, 160, 181; hot and cold rolled coils/ sheen 34-35, 115, 121-123, 128135,154,160-165,178,181; plates 76, 78-79, 84, 121, 123, 178; semifinished steel, also ingots and slabs 26,33-34,37,53-54,71,98,99, 100,106,121-123,128-131,133, 136, 138, 156, 181, 190 n30 long products: 35, 84, 100, 134, 142, 147,156,158,166,178; semifinished blooms and billets 33-34, 37, 71, 100, 108, 154, 161, 188 n4; wire rod 34-35, 76, 77, 100, 108, 142,146-147,151,156,161,179 steel technologies: basic oxygen furnaces (BOFs) 22, 25, 26, 28,31-41,45, 50,68,70,71,92,93,98,99,101, 108, 11~ 111-112, 131, 137, 146, 148, 149, 151-153, 155, 156, 162, 163,177-178,181,187-188 n11; Bessemer converter 31-32,35-37, 111, 177; blast furnaces (BFs) 25, 28, 31,33-35,41-42,45,50,69,70, 77,97,98,99,110,111,112,113, 121, 12~ 14~ 148, 151-153, 156, 158,160,163,177,181; capital cost of 31, 46-47, 67, 98, 99, 140, 145146,151-153,162,189 n23, 194 n19; computerization/automation, microelectronics 116, 127, 149, 161, 164, 177, 199 n3; continuous casting (CC) 25, 33-37, 41, 71, 98, 99, 100, 101, 108, 11~ 111-112,116, 129, 137, 146, 150, 153, 158, 163, 177, 179; COREX 27,149-151,154156, 158-163, 166, 178-179; crucible process 31, 36; diffusion of 4,6,7,9,11-12,14-15,20,22,24, 26,29,30-32,38,40-42,54-55, 68-72,81,83, 109, 111-112, 117, 120, 123, 138, 141-143, 146, 155157, 159, 161, 169, 177, 182, 187 n29; electric arc furnaces (EAFs) 22, 27,28,31-34,36,50,75,76,85, 134,136-137,140-148,151-153, 158, 159-161, 163, 165, 178-179;

environmental aspects 151, 153, 180; financing of 22-23, 25,43-44,59, 91-93,106, 114, 176, 189 n20, n21, 195 n29, n30; hot strip mills 45, 50, 66, 153, 181; integrated segment/ process/plant 33-36,53,55-56,69, 71,82,84,92,95,96,98,102,104, 105, 113, 120, 130, 132, 140, 146, 151-154, 159, 164, 175, 180; investment in integrated 44-45, 109, 128, 130, 162; minimills 2,9,33-35, 53, 79, 140-144, 152-154, 156-157, 160, 164, 177, 181; open hearth furnaces (OHFs) 22, 25,26,31-32, 35-41,45,50,68,70,71,101,110, 111,146,177,188 n11; process controls 16, 71-72, 78-79, 80,98, 177; rolling mills 8, 72, 91, 99, 100, 129, 149, 154, 157, 163; suppliers of (technolog y transfer) 5, 18, 21, 24, 27, 67, 88, 191 n3; thin slab, also EAF-based new generation minimills 1,27,34,55,148-150,151-155, 156, 16~ 163, 165, 166, 17~ 18~ see also brownfields, cost efficiency, energy savings, entry barriers, equit y, greenfields, innovations, long-term loans, state interv ention strategic industrial polic y 13-15,20, 23, 25, 64, 83, 117 Suzuki Motors 115 tapping ratio 112, 113 technological capability 20, 80, 83, 95, 116,133,140, 160, 173;bes~ practice, also state-of-the-arttechnology 20,24,44,69,95,97, 104, 105, 157, 159; learning, learning-by-doing 9, 20-21, 24, 26, 109,111-116,127; see also capacity utilization, investment in steel technologies, steel exports, strategic industrial policy Thailand 133, 135 Tiffan y, P.A. 21, 37, 38 Toyota 63, 129 Tsuru, S. 61, 191 n5, n6 uneven capitalist development 4-5,7-8, 11-12,23,28-29,81,117,170,173; see also innovations, steel technologies Uriu, R.M . 75,144,158,198 n11 227

INDEX

Usinor-Sacilor (also France ) 3, 64, 106 US economy 12, 17, 30-31, 77 , 146147 US Export-Import Bank 64, 66, 91 US government 37-38,52,59,64,66, 91 US International Trade Commission 43, 52, 53, 101, 164 US steel industry 2,3, 7, 9, 23, 26, 30, 38-41,43-46, 50,52,56, 71, 75, 76, 81, 94, 111, 113, 116, 118, 120-121,126-129,133,135,137, 140,142-144,150,155-156,166, 172,1 76,181; ACME Steel 150, 165; Armco 49-50, 129, 130; Bethl ehem Steel (Sparrows Point) 39, 49-50,53, 189 n12; California Steel Industry 130, 131; Inland Steel 129, 130,161; Gall atin Steel 148, 156, 157,165,199 n17; Kaiser Steel, Fontana Works 39,131,188 n13; LTV Steel 51-52, 54, 130, 154; National Steel 39, 51-52, 129, 130, 188 n12; Steel Dynamics 148,157, 165; technological obsol escence, plant imbalances 26,3 7-38,45-46, 49-52, 127 US Steel: 1,2, 16,31-32,37, 55, 91, 94, 129-133, 189 n12; Geneva

Works, Utah 39, 52,131-132,189 n16; Pittsburg Works, California 52, 131, 132; Wh eeling-Pitt 54, 129, 130; Youngstown Sheet and Tube 51-52 US west coast 42-43, 53, 124, 128, 129,131-132,138,146,1 74 Venezuela 134, 135 Vestal, J.E . 22, 32, 62, 68, 74 Vietn am 133, 135, 180 Voest-Alpine, Austria 38, 66, 70, 151, 155,188 nl0, 190 n24, 199 n14 wages 2, 13, 15, 19,26,32,40,54, 74-75, 105, 106, 125-127, 138, 147,164,172,180,185 n12, 191 nl2;see also labor costs Wallerstein, I. 187 n24 Warren, K. 43, 124 , 189 n15 West Bengal, India 97, 103 Woo, J. 25, 91 work week 184 n2, 195 n2 7 World Bank 64-65, 86, 92, 133, 134, 176, 193 n8 Woronoff, J. 64, 133 Yamawaki, H . 61, 62, 68, 74 Yonekura,S.40,69, 71

228