During the latter half of the twentieth century, Japanese companies led the technological innovation in the global steel industry which occurred in two big waves. Th e fi rst wave was the establishment of an integrated mass steel production system that comprised three processes: iron mak- ing, steelmaking, and rolling. Th e second wave was the development of high-quality steel products, especially the steel sheets required for the automobile industry.
5.3.1 Construction of Integrated Steelworks Near the Coast
Th e fi rst wave of steel industry innovation can be divided into two sub- waves of innovation. Th e fi rst subwave was the construction of integrated steelworks near the coast, while the second subwave was the adoption of two big process technologies.
By the 1920s, many integrated steelworks in the USA had a blast fur- nace (BF) for iron making, an open-hearth furnace (OHF) for steelmak- ing, and a strip mill for making fl at steel sheets. As a result, the US steel industry developed an overwhelmingly competitive edge in the inter- national market, producing 60 % of all crude steel in the world in the 1940s. In Japan, on the other hand, there were only three steelworks that had both a BF and an OHF in 1945: Yawata Works and Hirohata Works of Japan Steel Inc. and Tsurumi Works of Japan Steel Pipe Inc.
Furthermore, only one steelworks at this time, Hirohata Works, had a strip mill (Kamioka 2005 ).
Th e situation dramatically changed in the 1950s. Chiba Works of Kawasaki Steel Inc., which began construction in 1952 and was fi nished in 1958, was the fi rst integrated steelworks (from BF to hot and cold strip mills) in Japan. Furthermore, Chiba Works had two distinguishing features that would become a model for subsequent steelworks. First, Chiba Works had a compact and reasonable factory layout to reduce both the cost of purchasing land for the site and the transportation costs of materials for the operation. By utilizing a reasonable factory layout, the
total length of railroad for transportation of materials in Chiba Works was 60 km, which was much shorter than the total length of railroad in Yawata Works (500 km). As a result, Chiba Works succeeded in attain- ing much higher productivity: 200 tons per year in an area of 2.5 km 2 compared to 100 tons per year within 12.21 km 2 at Yawata Works (Hashimoto 2001 ). Second, Chiba Works was constructed near the coast at a site that was suitable for importing materials and exporting products.
At that time, Japan was facing a limited domestic supply of raw materials for steel, that is, iron ore and coal. Th us it was necessary for Japanese steel companies to import the materials from abroad and transport the materi- als from port to factory quickly and inexpensively. To build the integrated steelworks, Kawasaki Steel selected the landfi ll of Chiba City for the site and constructed a channel so that large ore and coal carriers could dock alongside the pier (Itami and Itami Laboratory 1997).
From the 1960s through the mid-1970s, taking Chiba Works as a model, 10 integrated steelworks were constructed one after another near the coast in Japan.
5.3.2 Implementation of Two New Process Technologies
In the 1960s and the fi rst half of the 1970s, in addition to constructing a number of green-fi eld integrated steelworks, Japanese steel compa- nies also expanded the facilities of existing steelworks; as a result, the capacity of the Japanese steel industry increased dramatically. Th e new and additional facilities implemented state-of the-art technology in the production process. In particular, they employed basic oxygen furnaces (BOFs) and continuous casting (CC).
Th e BOF was developed in 1949 in Austria. Not only was the BOF less expensive than the OHF in terms of energy and capital costs, it could also produce low-nitrogen high-quality steel because it used oxygen instead of air. Furthermore, it sped up the process of converting iron to steel. While this process took about 100 minutes using the OHF, the same process was reduced to 60 minutes or less when using the BOF (D’Costa 1999 , p. 35). Most of all, many integrated steel mills built in the 1960s and
1970s adopted the BOF. As a result, 81 % of steel production in Japan utilized the BOF in 1974, whereas only 56 % of steel production in the USA utilized the BOF during the same year (Lynn 1982 ).
CC was developed in Europe around 1950. It bypassed the ingot stage and the energy-intensive reheating of ingots for fi nishing. Instead, it allowed the direct pouring of molten steel to produce semi-fi nished products, such as slabs, billets, and blooms. In Japan, Sumitomo Metals adopted CC technology from Concast in Switzerland and established the fi rst Japanese test plant in 1955. In the 1970s, CC was prevalent in almost all steelworks in Japan because it removed the bottleneck between the BOF and the hot rolling process. Th e penetration rate of CC in the USA was 20.3 % in 1980, but during this same year it reached 59.3 % in Japan (Yonekura 1986 ).
Neither the BOF nor the CC were developed in Japan, but were adopted from abroad. When Japanese steel companies adopted these technologies, however, they were still quite basic and practically unproved. Th erefore, Japanese steel companies tried to develop the applied technologies.
Japanese companies succeeded in putting the BOF into practical use and developed improvements, including the Oxygen Converter Gas Recovery System and the Multihole Lance Nozzle, which they began to export in the 1970s. When CC was fi rst adopted, Japanese steel companies had poor productivity and produced low-quality products. Th ey overcame these problems, however, by continuously and persistently improving the process. Furthermore, they developed the applied technology of high- speed CC, which could attain an operation rate of 100 % (Itami and Itami Laboratory 1997).
By combining these two revolutionary process technologies with BF and the hot and cold strip mill, and integrating and controlling them with a computing system, Japanese steel companies succeeded in estab- lishing a high-effi ciency mass production system for steel. As a result, the Japanese steel industry gained a highly competitive edge in the world market in the 1970s.
In the 1980s, however, Japanese steel companies were suff ering from overcapacity resulting from the fi erce capital investment competition of the 1970s that had been triggered by the fi rst wave of innovation.
On the other hand, developing countries constructed integrated steel
mills in various coastal locations, following the example of Japan, thereby expanding their capacities to deal with the strong demand accompanying their high economic growth. Adopting technologies established in Japan, the steel companies in developing countries began to have a competitive edge as a result of low labor costs and state-of-the-art facilities. POSCO in South Korea was a typical example of such a company in the 1980s.
5.3.3 Pohang Works as the Preliminary Step in Korea’s Catch-Up Growth
POSCO was established in 1968 as a state enterprise. In order to construct POSCO’s Pohang Works, the fi rst integrated steel mill in Korea, the Korean government secured an agreement with the Japanese government guaranteeing its full support. POSCO raised the initial capital by using a large portion of the reparations paid by the Japanese government and by obtaining loans from the Japan Export–Import Bank. Moreover, POSCO received technical assistance from several major Japanese steel companies at that time, including Yawata Steel, Fuji Steel, and Nippon Steel Pipes.
POSCO started the fi rst phase of the construction of Pohang Works in 1970 and began operations in 1973. In 1981, the fourth phase was fi n- ished, which meant that the construction of Pohang Works was com- plete. Th e factory layout was modeled after Kimitsu Works of Nippon Steel (formed by the consolidation of Yawata Steel and Fuji Steel in 1970), which was a state-of-the-art steelworks at that time. Furthermore, the capacity of the No. 3 and No. 4 BF in Pohang Works was then world class (3795 m 3 ).
However, there were some diff erences between state-of-the-art works at that time and Pohang Works. First, CC was not introduced in the fi rst construction phase of Pohang Works because the operational technologies had not been established and the defect rate was still high, even in Japan (Song 2002 , p. 91). Th ough Pohang Works partially adopted CC in the second phase, it continued to operate CC alongside conventional ingot casting and slabbing/blooming for a while. Second, POSCO adopted the conventional bell-type top charging equipment for all BFs in Pohang Works. Th e technological trend of BFs at that time was shifting from the
bell-type charging equipment to the Paul Wurth bell-less type. However, Japanese technicians who were dispatched from Japanese steel compa- nies to assist the construction of Pohang Works insisted that POSCO should adopt conventional bell-type facilities fi rst in order for the opera- tors to learn the basic BF operation skills from scratch (Nakagawa 1997 , p. 122). Th ird, while the entire production process of Kimitsu Steelworks was controlled by computer, Pohang steelworks only introduced a par- tially computer-controlled system in the No. 3 hot-rolling mill (Inoue 1994 ; Inagaki 1997 ).
It was diffi cult for newcomers like POSCO to adopt 100 % of the technology of the fi rst wave of innovation at their steelworks at that time because the innovation was still in the fl uid or transitional phases. Th e gradual adoption of conventional technologies in Pohang Steelworks enabled POSCO to assimilate the technologies quickly and to gain an international competitive edge later when it established its next steel- works Gwangyang Works.
5.3.4 Gwangyang Works as a Sophisticated Integrated Steel-Making System
In the 1980s, the fi rst wave of innovation entered the specifi c phase that Abertnathy and Utterback had identifi ed, although some applied tech- nologies were developed in the aftermath. In the late 1980s, POSCO constructed Gwangyang Works next to Pohang. Gwangyang featured a sophisticated system that incorporated the fi rst wave of innovation and sought to attain high-effi ciency production in several respects. First, whereas Pohang had produced not only hot and cold rolled sheets but also plates and wire rods in order to meet the various kinds of domestic demand, Gwangyang concentrated on sheet products and sought high effi ciency through mass production. Second, Gwangyang had a more effi cient factory layout than Pohang and built state-of-the-art facili- ties within this layout. Pohang laid out the BF, the BOF, the hot strip mill, and the cold strip mill in a U-shaped line. On the other hand, Gwangyang laid out these facilities in a straight line on a newly reclaimed quadrangular landfi ll, which shortened the process distance to 1.5 km.
Th ird, Gwangyang adopted all the standardized technologies of the fi rst wave of innovation, including non-bell-type BFs and CC, and also featured computer control of all processes, which enabled it to produce hot rolled coil in 8.5 hours. Th is was much shorter than the 4 or 5 days this process required at the average steelworks and the 12 hours required at Pohang (Pohang Iron and Steel 1993, pp. 418–20, 447). 1
Moreover, Gwangyang Works aggressively adopted new technologies that were developed in the 1980s. For example, the coupled and syn- chronized operation of CC and the hot strip mill, or ‘hot charged rolling’
(HCR), was used from the beginning. Furthermore, in order to ensure the maximum benefi t of HCR, the schedule free rolling operation system was adopted, freeing the CC operation from various restrictions imposed by the downstream hot rolling operation. More specifi cally, a pair cross mill (PCM) and an online roll grinder (ORG) were installed at the hot rolling mill, which made it possible to control the strip shape precisely. Although the PCM with ORG technique was developed by Japanese manufactur- ing machine maker, Mitsubishi Heavy Industries, Gwangyang Works was the fi rst in the world to actually install it (Yoshimura 2005 ).
In constructing Gwangyang Works, in conjunction with the installa- tion of state-of-the-art facilities as stated above, POSCO succeeded in reducing the purchasing cost of its facilities. In the early and mid-1980s, Japanese steel companies had fi nished nearly all of the construction of facilities related to the technologies of the fi rst wave of innovation. At the same time, steel companies around the world were facing an economic downturn after the second oil crisis. Th erefore, steel facility makers lost many sales destinations and strengthened marketing strategies to sell their products to the few steel companies, like POSCO, that planned to con- struct a new steel mill. As a result, POSCO could purchase the facilities inexpensively. Whereas the investment cost of general steelworks with a capacity of 3.4 tons was about USD 1100 per ton at that time, the cost of the fi rst phase of Gwangyang Works with the capacity of 2.7 tons was USD 605 per ton (D’Costa 1999 , p. 047).
1 Tanaka also has regarded Gwangyang Work as a sophisticated version of the mass production system developed by Japanese companies, which focuses on the factory layout (Tanaka 2008 ).
POSCO also reduced the operating costs of Gwangyang Works by using the same specifi cations for the BF and the BOF in each of the four construction phases. Th at made it possible for POSCO to reduce the cost of production control by using the same repair parts at each facility. It also simplifi ed the operational skills required for operators, which allowed POSCO to reduce the training costs for these operators (Song 2002 , p. 185).
Adopting the more sophisticated mass production system at Gwangyang and taking advantage of lower labor costs than in Japan, POSCO attained a competitive edge in fl at sheet commodities and started exporting to the growing Southeast Asian market in the late 1980s. As a result, the exports of Korean hot rolled coil surpassed Japan’s exports after 1990.
Furthermore, POSCO’s product began to penetrate into the Japanese market and had an impact on steel prices in Japan.
5.3.5 Monopoly of a State-Owned Firm
As mentioned above, the technological catch-up of Korea during the fi rst wave of innovation was attained by a state-owned monopoly fi rm, POSCO. In the early stage of industrialization with scarce capital and tech- nology, the establishment of a state-owned fi rm for the construction of integrated steelworks was inevitable. As Shin pointed out, a state- owned fi rm, Yawata Steel, also had a great role in developing the modern steel industry in prewar Japan (Shin 1996 ). We can see construction of inte- grated steelworks by a state-owned monopoly fi rm not only in Korea and Japan but also in Taiwan, India, and Brazil, among others.
However, the monopoly of a state-owned fi rm can also result in managerial ineffi ciency. POSCO was able to avoid this for two reasons.
First, POSCO had a potential competitor. When the Korean govern- ment planned to construct a second integrated steelwork, the govern- ment sought competitive bids for the brief plan. At that time, POSCO and the Hyundai Group tendered the bid. While POSCO highlighted its constructing and operating experience with Pohang Works, Hyundai emphasized that it had steel-consuming fi rms in its group, including construction, automobile production, and shipbuilding fi rms. Even after
POSCO was selected as the contractor for the second integrated steelworks, the chairman of the Hyundai Group, Jeong Ju-Young, did not give up the dream of entering the steel industry. At the beginning of the 1990s, after the removal of entry regulation on strategic industries, including the steel industry, Hyundai again planned to construct an integrated steelworks.
Th e existence of a potential competitor gave POSCO an incentive to pur- sue business growth. Second, the process for the privatization of POSCO had begun at the end of the 1980s. POSCO sold a portion of government shares to general investors and was listed on the Korean Stock Exchange in June 1988. After that, the government’s share of POSCO continued to decrease. Th at is, when all stages of the construction of the Gwangyang Steelworks had been completed at the beginning of the 1990s, POSCO was already a listed company and had no choice but to maximize its profi t for general investors, although the government still had some shares and had a certain amount of infl uence on the management of POSCO.