Like China Steel, POSCO was incorporated as a joint-stock corporation, largely free from the constraints binding other state-owned enterprises.27
Creation of an integrated mill was incomplete without a foreign partner.
The Americans, the World Bank, and the Europeans soon cooled to the idea of building an integrated steel plant in a country as poor as Korea still was in the mid-1960s, partly because integrated mills in other developing countries were proving to be major disappointments. Desperate to get the company under way, Park used his personal connections to convince Japan to redirect reparations and foreign loans originally slated for agriculture and fisheries into the construction of a steel mill.28 Leaders of the Japanese steel industry believed that peaceful relations in Asia required the development of healthy economies, and that steel, like electric power, was an important building block for their economies. Park was able to enlist the support of Japanese steel executives in a plan to build a one-million-ton plant.
With their help, he succeeded in overcoming concerns about feasibility, timing, and precedents, converting to his cause first Japan’s economic ministries, then the ruling LDP and Prime Minister Sato. Once the Japanese government was on board, it pushed the World Bank to issue a somewhat more supportive report so as to improve POSCO’s image in the international financial community.
In the first stage of construction, engineering and equipment came almost entirely from Japan, but with unusually high rates of participation by the South Korean side. Construction of POSCO shattered industry records for speed and cost containment.29 In later phases, the company steadily de-
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creased its reliance on Japan, taking on increasing portions of the planning and engineering work itself, ordering directly from plant engineering firms rather than from other steelmakers, and diversifying sources of supply.30
As the company matured, it became increasingly independent of the government and capable of financing most of its new construction from retained earnings. It remained a public enterprise throughout the Park period, however, and the government continued to provide myriad direct and indirect subsidies and accepted very low rates of return.31
Shortly before his assassination, President Park personally approved POSCO’s plans to construct a brand-new steel mill in Kwangyang, along the coast southwest of Pohang. As early as 1972, a private group led by Hyundai had sought to build a second mill, but President Park backed Pak T’ae-jun, who had made POSCO such a success. After President Park’s death, Chun Doo-hwan confirmed POSCO’s plans to build a second plant at Kwangyang. Domestic sources provided two-thirds of the funding for the new mill, three-quarters of which came from POSCO itself. For the first time, POSCO looked beyond Japan for procurement of the single largest and most costly piece of equipment in an integrated mill, choosing Britain’s Davy McKee to supply the first blast furnace. Despite political instability, domestic economic crisis, world recession, and the covert opposition of Japanese and Western steelmakers, POSCO succeeded in building a whole new greenfield site ahead of time and under budget. As soon as the blast furnace was blown in, POSCO began further expansion at Kwangyang.
The steel produced at Pohang and Kwangyang went to many of the same markets as did China Steel’s: construction, appliances, autos, and shipbuilding, though the latter two industries were more successful in South Korea than in Taiwan. South Korean steel exports, mostly to Japan and the United States, fluctuated more than at China Steel and hit higher peaks—over 40 percent soon after the completion of the Pohang and Kwangyang plants.32 On balance, though, the two companies followed similar paths to similar destinations.
Contrary to legend, the World Bank and the advanced countries, including Japan, were not uniformly hostile to POSCO (or China Steel or, earlier, the Japanese steelmakers). Rather, their stances varied depending upon the economic and political circumstances and apparent local capacities. They gladly sold expertise and equipment when the projects seemed feasible and unthreatening, but they opposed construction or expansion of capacity when Korea (and Taiwan) seemed either too weak, and thus likely to flounder, or too aggressive, thus posing a strategic threat to a capital-
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intensive industry chronically threatened with overcapacity, riddled with subsidies, and constrained by strong unions. By the time of the construction of the Kwangyang mill in the early 1980s, Western suppliers simply went along with a company that had clearly established itself.
With the construction of the Kwangyang works, POSCO solidified its position as South Korea’s national champion in steel, and long maintained a monopoly on integrated production. Privatization, first mooted in 1975, finally began in 1988, but the government’s share of equity holdings declined only gradually, and little changed in the operation of the company.33
For many years, POSCO and the government blocked the Hyundai group from building a competing integrated plant to supply its auto operations.34 When Hyundai constructed a plant to produce cold-rolled steel coils in the late 1990s, contributing to local overcapacity, POSCO refused to supply Hyundai with hot-rolled steel inputs, even at prices higher than it could obtain by exporting. Hyundai assailed POSCO for attempting to maintain a monopoly by blocking new entrants; POSCO replied that Hyundai’s actions were typical of the mindless, octopus-style diversification of the chaebol, since no other auto assembler in the world made its own steel. In 2006, the Hyundai-Kia automotive group finally broke POSCO’s monopoly on integrated steel production. Hyundai procured governmental permission to build two new blast furnaces at a plant acquired from Hanbo Iron & Steel, which had collapsed in the Asian financial crisis, at the southwestern port of Tangjin. Once the only auto company relying on a single supplier—POSCO—of cold-rolled steel for car bodies, Hyundai-Kia became the only automotive group in the world to produce the full range of steel products needed to produce cars.35
Similar patterns can be observed in one of the steel industry’s key customers: the shipbuilding industry. Japan’s postwar rise to dominance in ships took advantage of cheap steel and inexpensive wages—crucial in a labor-intensive industry—as well as an important prewar and wartime legacy of maritime skills and links to the machinery industry. South Korea’s chaebol combined their experience in another closely related industry, construction, with a massive allocation of government-directed capital to come from nowhere and catch up with Japanese shipbuilders in the late 1970s. Despite technological weaknesses and recurrent crises, South Korea eventually surpassed Japan in total orders. Even more concerned about the defense implications of shipbuilding than Korea, Taiwan created a state-owned enterprise next door to China Steel in Kaoshiung in the late 1970s. However, with less experience in construction, less domestic competition, and less aggressive government support, China Shipbuilding remained a laggard.
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Autos
In contrast to steel, the auto industry in East Asia was only moderately capital intensive and was based on a mixture of imported technology, local adaptations, and incremental innovations. The industry’s structure combined large assembly firms with a host of smaller suppliers of parts and components. The organizational problem was less the creation of an efficient hierarchy and more one of balancing cooperation and competition in a market-based business network. Despite the huge scale and engineering complexity of steelmaking, a modern, up-to-date integrated steel plant could be purchased, installed, and working within a couple of years. The auto industry involved much more complex relations with suppliers. Cars required continuous adaptations and it took much longer to catch up to the mature auto industries of Europe and North America.
In all three of the industrialized powerhouses of Northeast Asia, two private firms led the auto industry with considerable support from the government. Policy toward the auto industry was less dirigiste than in the case of steel. Government procurement constituted only a small
share of demand, and competition among producers was more important. Competitive success in autos depended not on the efficient creation and utilization of capacity to produce relatively standardized products for industrial users, but on the development of high quality products and the marketing and servicing of appealing new models for individual households. During the rapid growth period, lower economies of scale and capital requirements led to a less stable industrial structure as new firms entered despite government preferences for consolidation. Nonetheless, the influence of the government remained pervasive in all three auto industries. Today Japan and South Korea rank among the world’s greatest success stories in automobiles, while Taiwan is at best an also-ran. But through the end of the Park period—and after years of extraordinarily subsidized exports by Hyundai—the Korean auto industry produced little more than that of Taiwan, with only half the population of South Korea. Only a drastic reorganization shortly after the death of President Park turned things around.
Japan
Analysts have often held up automobiles as a crucial example of a Japanese industry that defied government edicts and disproved statism.36 Particularly after the prolonged recession of the 1990s, autos and electronics came to be hailed as the outward-oriented, market-led exceptions to the
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general pattern of statism and politicization dogging Japan. Analysts point in particular to two crucial episodes. In the 1950s, a plan by MITI to foster economies of scale by consolidating the auto industry into two giant groups foundered on opposition by the smaller automakers. Then in the early 1960s MITI failed to prevent the entry of Honda, which eventually became the third-largest auto producer in Japan. Governmental efforts notwithstanding, the rapid expansion of demand in a large economy, plus later opportunities to export, left Japan with far more auto producers than in the United States—nine or ten by some counts (though only five were independent producers of cars).
This story of market triumphalism builds on some important facts, but it is incomplete and deeply misleading. It glosses over the Japanese auto industry’s virtually complete protection against imports and foreign direct investment during the rapid growth period (nor were the multinationals simply uninterested in Japan—before World War II, General Motors and Ford developed significant operations in Japan, just as they invested heavily in Europe, but they were pushed out as Japan mobilized for war).
Market triumphalism also misses the significant government support given the auto industry in the 1950s and even the 1960s. Toyota and particularly Nissan developed on a wartime base and were treated as crucial national companies. They received preferential funding both from public banks and from long-term trust banks heavily influenced by MITI and the Ministry of Finance.37 The Japanese auto industry was not competitive internationally until the early 1970s, more than a decade after Toyota and Nissan first began exporting compact cars, and the Japanese market remained essentially closed to imports until the early 1980s. The government supported the efforts of the largest companies to develop economies of scale by discouraging new entrants.
In the domestic market for regular-sized passenger cars, Toyota and Nissan were completely dominant, and they developed and nurtured the parts infrastructure that supplied the others, including Honda and producers of the minicar segment created by the Japanese tax system; indeed, several of the other assemblers, such as Hino and Daihatsu, were subordinates of the two leaders. While nearly all of the assemblers cultivated suppliers’ associations, most suppliers to Toyota provided parts to all of the assemblers except Nissan and vice versa.38
Honda was genuinely entrepreneurial, to be sure, but when it ventured into auto assembly it was already one of the world’s largest manufacturers of motorcycles. It depended upon the protected domestic supplier base, but never managed to challenge Toyota and Nissan in the domestic market, instead relying primarily on exports. More important, no other firms
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tried to enter the industry after Honda in 1964. After Honda’s entry, MITI had some minor success in encouraging consolidation and rearrangement of the assembly industry, notably the merger of Prince into Nissan. The government also supported the grouping of several different companies into the Toyota and Nissan families. Even more significant was public financing that encouraged the consolidation and rationalization of the parts industry in the 1960s, a move that even critics of MITI concede had considerable impact.39 Parts firms were also beneficiaries of both LDP lar-gesse aimed at small companies and technical assistance from both MITI and local governments.40
Thus, through the mid-1980s, when Japanese auto firms began to make major investments in North American and European assembly operations, the auto industry was a highly protected Japanese oligopoly, albeit considerably more complex and varied than steel. The government provided some financial support to assemblers in the 1950s and to parts firms in the 1960s, and enjoyed some success in encouraging consolidation.41
Taiwan
The pioneer of Taiwan’s auto industry was not a state agency but an off-shoot of a Shanghainese textile group called Yulon (Yulong, formerly spelled Yue-loong), whose founder had studied mechanical engineering at Shanghai’s Tongji University and received an engineering degree in Germany.42 Yulon began assembling Jeeps in 1958 and soon shifted to Nissan passenger cars. Yulon was lucrative, but not surprisingly, given Taiwan’s tiny market and limited industrial capacities, it made little progress in improving quality or expanding local content. Starting in 1967, the government opened the industry to new assemblers, most of them native Taiwanese, who then aligned with Japanese automakers (as well as Ford, but even Ford relied primarily on its Japanese affiliate Mazda to supply the Taiwanese market). The government consistently subordinated auto policy to finance and diplomacy. It sought to build up domestic capabilities without threatening the interests of foreign investors or trade partners, leading to repeated reversals of policy. Protection against imports, in particular, was less extreme and less consistent than in South Korea or even Japan. Not surprisingly, despite Taiwan’s increasing levels of income and industrial sophistication, its auto industry fell into the same rut that afflicted most other developing countries. Production fell far below minimum efficient scale. Local content was low and dependence on outsiders high. The numerous assemblers relied on product differentiation strategies rather than cost reduction based on mass production, making it even more difficult to
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attain economies of scale. Given the tiny volume of orders, suppliers did not form pyramidal keiretsu structures as in Japan, but sold to all assemblers equally; assemblers, in turn, lacked the volume, resources, or incentive to support the technological upgrading of suppliers. Taiwan’s parts firms were unusually successful at exporting, but only of noncritical replacement parts such as wheels and bumpers.43
In the late 1970s and early 1980s the government, stimulated by the manifest failure of existing policies and the growth of South Korean exports, proposed to break through the impasse with a joint venture between China Steel and a major international assembler to produce compact cars for both domestic and foreign sales. The government announced the ambitious plan without even consulting the existing assemblers, most or all of whom would have been wiped out. In the end, this “typically Taiwanese”
approach of bypassing local private business groups in favor of state-owned enterprises and foreign investors fell through. Although Toyota agreed to the broad outlines of Taiwan’s plan, it refused to provide a written guarantee of export performance. Taiwan’s economic policy leadership split over the promotion of auto assembly versus the export of auto parts: those supportive of parts insisted that Toyota abide by the export requirement. With the failure of the international joint venture, the government adopted a slow and cautious policy of tariff reduction and liberalization.44
The number of assemblers increased to over a dozen, including five major fir
ms.
Yet the policy gradually took effect. Local content increased, quality improved, and over the 1990s domestic production gradually displaced many of the imports. Local firms began to invest in significant design capacities, modifying Japanese models for the local market and even developing (in conjunction with the quasi-governmental Industrial Technology Research Institute and foreign advisors) an independent engine for compact cars and small commercial vehicles. Yulon bought the Philippine operations of then-ailing Nissan. Both Yulon and its sister firm China Motors, an affiliate of Mitsubishi Motors, made serious investments in mainland China, eventually producing far more units in China than on Taiwan.45 Exports of auto components, including a minority of more sophisticated parts, continued to increase rapidly.46
South Korea
The great success of South Korean firms at exporting automobiles attracted far more international attention than Taiwan’s experience.47 Early
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Korean policy toward the auto industry, however, looked depressingly like that in Taiwan and other developing countries: attempts to promote a consolidated and internationally competitive local assembly industry were ineffective and often politicized. Soon after the coup, the government passed special legislation to promote import-substituting industrialization for the auto industry.48 The pioneer was Kim Chong-p’il, nephew of President Park, founder of the KCIA, organizational force behind the ruling Democratic Republican Party, and brother of the managing director of Hanil Bank. Kim supported the establishment of Saenara (“new nation”) Auto Company, reportedly to raise funds for the ruling party.49 The government allowed the company to assemble Nissan Bluebirds without paying any duty or tax. Unfortunately for Kim, disputes over monopoly profits and political contributions drove the highly lucrative business into bankruptcy.
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