Incorporated: 1968 as Pohang Iron and Steel Company Ltd.
Sales: $12.10 billion (2002)
Stock Exchanges: New York
Ticker Symbol: PKX
NAIC: 331221 Rolled Steel Shape Manufacturing (pt);331210 Iron and Steel Pipe and Tube Manufacturing;331111 Iron and Steel Mills (pt)
POSCO, formerly Pohang Iron and Steel Company Ltd., is among the world’s leading steel producers. The company manufactures annually roughly 26 million tons of hot- and cold-rolled steel products, including steel coil, plate, wire rod, electrical sheets, and stainless steel. Approximately 72 percent of POSCO’s steel remains in Korea, for use in that country’s shipbuilding, automotive, and home appliance industries, while the rest is exported to some 60 countries. POSCO also operates numerous subsidiaries and joint ventures across the globe. Like other steel producers, POSCO struggled during the Asian economic crisis of the late 1990s. Since then, the company has focused on building partnerships with other international steel companies (including its once arch-nemesis Nippon Steel Corporation), increased its offerings of value-added steel products, and backed out of nonperforming operations and joint ventures. POSCO is also rapidly expanding in China.
Forging a Steel Industry
In the aftermath of the Korean War, it was in the interests of South Korea, as well as of the United States and its supporters in that conflict, that the country’s economy recover and develop as rapidly as possible. As the First Development Plan was elaborated, measures were included for protecting new industries with tariffs, quotas, and, in some cases, prohibition of imports of competitive products.
Steel was a crucial industry for the Koreans, domestic production capacity having been damaged severely during the war. An integrated steel mill with an annual capacity of 300,000 tons was discussed at a very early stage, and there were some hopes of including it in the First Plan. The World Bank and other international agencies considered the plan too ambitious and inappropriate because, they argued, Koreans could not master the technology, and the plant would not be large enough to operate efficiently, while anticipated domestic demand would be insufficient to justify construction of a larger mill. Ultimately they were to be proven wrong.
In place of the larger scheme, a number of small-scale steel plants based on electric furnaces and domestic scrap were built. One of the first and most important of these was the Inchon Heavy Industrial Corporation financed by the Korean government. Inchon had a 50-ton open-hearth furnace and a medium rolling mill capable of producing 10,000 tons of sheet steel per year. Further development on a similar scale led, particularly after 1963, to the establishment of some 15 firms involved in producing steel of various kinds. Initially employing old-fashioned techniques, non-continuous rolling mills produced sheet steel, bars and rods, wire, and pipe of uneven quality in quantities insufficient to meet demand. These facilities were gradually updated, though.
Birth of POSCO
With the strong support of Korean President Chung Park, the chairman of Korean Tungsten Mining Company, former Major General Tae Chun Park, spearheaded a second attempt to assemble an international financial package to build an integrated steel mill. This scheme, to build a plant capable of producing 600,000 tons of crude steel per year, was elaborated by a consortium of seven Western steelmakers, known as Korea International Steel Associates (KISA). In October 1967, a contract between KISA and the Korean government stipulated that KISA would raise an international loan by 1969, and complete the integrated mill by 1972. Costs were estimated at $100 million. The operating company, Pohang Iron and Steel, was incorporated in 1968. For most of its history, however, Pohang was commonly referred to as POSCO. Reflecting this reality, the company formally adopted that name in 2002.
Fulfillment of the plan, however, had to be postponed, in part because the consortium’s structure was extremely cumbersome, making it difficult to reach rapid decisions. Koppers, the leading consultant in the group, was unable to raise the necessary capital, and the KISA was dissolved in 1969.
Advice given to the Korean government continued to oppose the building of an integrated steel capacity, primarily on the grounds of the domestic market’s inability to support an efficient plant. The government remained convinced of the steel mill’s importance, however, and decided to raise foreign loans to finance it rather than continuing to attempt to secure private capital.
Japanese steelmakers and the Japanese government felt they could derive worthwhile economic and political advantages from assisting the Koreans in this plan. During the annual conference between Korean and Japanese ministers in August 1969, preliminary agreement was reached for resurrecting the KISA plan. Discussions through the rest of the year led to a contract whereby Japan would arrange loans covering most of the capital required. Japan’s Export-Import Bank provided $52.5 million, its Economic Cooperation Fund $46.43 million, and Japanese commercial loans $28.58 million. The remainder, some $24 million, came from other sources.
Detailed planning was carried out with the help of Mitsubishi Heavy Industries. Care at this stage was a major factor in enabling POSCO to save the large amounts of capital that would have been required to cover any delays. Construction was planned and implemented in such a way as to facilitate future expansion.
The Japanese steelmakers involved in the plans, Nippon Kokan (NK) and Nippon Steel Corporation (NSC) benefited considerably from the arrangements made in 1970 for provision of the underlying technology needed. Virtually every detail from scheduling the timing of construction to specifications, supervision, purchasing, and inspection, culminating with onsite support for start-up and operation, was in Japanese hands. The involvement of Korean engineers in this first phase was limited to the inspection of specifications, in conjunction with foreign engineers.
Building Pohang Steel Works: 1970–81
It was part of the Korean development strategy to locate the new plant as far as possible from Seoul, to create industrial centers throughout the country. Tae Chun Park and the government ministry settled on Pohang in the Kyongsangnamdo province as a location. When construction began in 1970, it was closely supervised by Tae Chun Park, who not only insisted that suppliers meet deadlines, but also, in some cases, accelerated deadlines and insisted that they be met. When the first stage of construction was completed in 1973, a month ahead of schedule, the major plant consisted of a blast furnace and two steel converters. These had capacities of 949,000 and one million tons, respectively. The plant had a foundry pig iron furnace, with production capacity of 150,000 tons, as well as a blooming and slabbing mill, billet mill, and a plate and hot rolling mill. This plant reached full production within four months rather than the minimum of 12 months the Japanese steelmakers had anticipated.
While construction of the first phase was going on, Koreans were being trained abroad, particularly in Japan, to take over some of the technological work involved in operating the mill. They labored alongside their Japanese counterparts in construction and operating work, gaining valuable experience. As a result, in subsequent expansion, the amount of operating technology that had to be brought in from outside steadily decreased.
The second phase of construction at Pohang began in 1974, and Korean engineers were still only involved in specification inspection. However, by the time the third phase had begun in 1976, Koreans had taken over material balance and facilities specification and inspection of drawings. When the fourth stage began three years later, Koreans had supplanted foreign engineers from the task of general engineering planning. The shift to domestic technological skills was also evident in the declining levels of royalties paid to outside experts from $6.2 million for the first stage, $5.8 million for the second, $4.8 million for the third, and nothing for the fourth. By the time the last stage of construction had been completed, POSCO’s crude steel production capacity was 8.5 million tons.
Knowledge-Based Advances and International Growth Through the 1980s
In order to avoid some of the problems of erratic quality experienced by existing small-scale producers, POSCO’s emphasis initially was on the production of plain high-carbon steels of even quality that were used for general structural purposes, rather than on the development of a wider range of specialized products. As the company expanded, and engineering skills increased, it was possible to diversify production. The development of high tensile strength steel production in 1975 laid the foundation for the first major expansion of overall production, but domestic demand for special steels remained too low to justify attempts to develop them. Only as domestic demand increased, or was expected to increase, notably as defense industries developed, were facilities to broaden production created, based once again on imported technology.
POSCO strives to contribute to its customers and all individuals by providing products and services that will benefit every aspect of society. Towards this goal, we aspire to lead the industry in the areas of management and product quality. We place extreme importance on innovation and we value core business and ethical principles, with the intention of being a well-respected and pioneering company.
Through the period of construction and operation, machinery came primarily from Japan and Austria. As time went on, however, a larger proportion of needed equipment was produced by Korea’s own heavy industry. Korean engineering skills, too, constituted a major part of the reason for POSCO’s ability to produce high-quality steel at low prices. In the spheres of equipment design and operating procedures, field engineers and technicians brought about major improvements in efficiency and quality along with reductions in waste and costs.
As POSCO developed its capacity in Korea, the company began to look outward for both raw materials and new markets. Korea did not abound with the iron ore and coal that POSCO needed to produce steel, so the company sought foreign suppliers for raw materials—sometimes securing the material by direct purchase, sometimes by establishing joint ventures and partnerships abroad. In addition to early partnerships in Brazil, POSCO opened a coal mine in Pennsylvania as a joint venture with the American firm Barnes & Tucker. The joint venture, Tanoma Coal Co., sold its entire output to POSCO.
While POSCO secured from abroad the materials it needed to keep its furnaces running, the company also continued to ramp up steel manufacturing capacity in Korea. As part of its chairman’s vision of regional dominance in the industry, POSCO began construction on a second integrated steel plant in Kwangyang, in South Korea’s rural Chollanamdo province. Like the Pohang steel works, Kwangyang was built in four phases. By the time the facility was completed in 1992, POSCO could produce 21 million tons of steel a year. With this additional output, POSCO became the world’s second largest steel maker.
Expansion and Contraction in the 1990s
The early 1990s were a period of further international expansion for POSCO. The Kwangyang facility boosted POSCO’s sales, and the company used the additional revenue to fund its growth in new markets. In 1986, POSCO had established a joint venture with the American firm USX Corp. to build a steel mill in California. Although the mill soon became profitable, POSCO fell victim to its own success, as the company encountered increasing protectionism from recession-plagued Europe and the United States.
The prospect of trade wars, combined with a global slump in steel demand, prompted POSCO to eye new territory, particularly the nascent Chinese market. The Korean steel maker’s expansion in the world’s most populous country was breathtaking. POSCO had exported only about 200,000 tons of steel to China in 1991. The following year, it shipped over one million tons, the same amount it exported to the United States. In no small part because of this success, POSCO sought to strengthen its position in China, and in 1992, announced it would invest $97 million to build a tin plate plant in Shanghai. The same year, POSCO expanded its operations in Vietnam, signing an agreement with the state-run Vietnam Steel Corp. (VCS) to construct a pipe mill and an electric arc furnace near Hanoi, as well as to expand capacity at POSCO’s existing joint venture with VCS known as Posvina Co. This overseas building enabled POSCO, in the midst of a weak global steel market, to boost its net income 27 percent to W 185.1 billion ($234 million) in 1992. About 45 percent of POSCO’s output was exported.
POSCO underwent internal changes, as well. After partially privatizing the company in 1988, the Korean government began in 1994 to explore the idea of privatizing POSCO completely, possibly even breaking apart the company and selling off its pieces to private investors. POSCO lobbied hard to prevent this outcome, however, and the plan was ultimately scrapped.
POSCO took another great leap forward in 1989, when the company opened itself to foreign ownership. The company began selling overseas convertible bonds the same year to fund the second phase of construction at the Kwangyang works. In 1994 POSCO went even further and made its first public stock offering, becoming the first South Korean company to be listed on the New York Stock Exchange (NYSE).
This period of growth was accompanied by new challenges for POSCO, though. In 1992, company Chairman Park suddenly resigned. A few months later, the government, under the leadership of the new South Korean President Kim Young-Sam (who had campaigned on an anti-corruption platform) launched a full-scale investigation of POSCO and Park. The following year, South Korea’s National Tax Administration levied a penalty of W 79.3 billion ($99.4 million) against POSCO and W 6.3 billion against Park personally. Park left South Korea for Japan and abandoned his post of honorary chairman of the company.
As the 1990s progressed, POSCO began to seek out new markets in which to grow. POSCO launched dozens of joint ventures across the globe, including new plants in China ( 1995 and 1996), Indonesia (1995, 1996, and 1997), Vietnam (1996), Myanmar (1996), and Venezuela (1997). The company continued to perform well in the midst of this rapid growth. POSCO’s profit surged 30 percent in 1994, while its net sales rose 12 percent in 1995. At the same time, POSCO hoped to free itself from exclusive reliance on the cyclical steel industry. To this end, it branched out into telecommunications, taking a stake in Atel Inc., a telecommunications network provider co-owned by Australia’s Telestra Holdings Pty. Ltd.
- Pohang Iron and Steel is founded.
- Company begins construction on first phase of Pohang plant.
- Last phase of Pohang plant is completed.
- Company begins construction on Gwangyang Works.
- Last phase of Gwangyang is completed.
- South Korean government begins privatizing POSCO.
- Privatization is completed.
- Company officially changes name to POSCO.
While POSCO cast about for new paths (which also included electric power generation and the distribution of liquefied natural gas), the company also set a goal of boosting its production of value-added, higher-end steel. Like other Korean businesses, though, POSCO suffered during the country’s massive currency devaluation of 1997 and the aftershocks that plagued the entire region. This Asian economic crisis hammered industries in Korea, Japan, Thailand, and China—the major markets for POSCO’s (and its competitors’) steel. Indeed, Korean steel companies Sammi Steel Co. and Hanbo went bankrupt. Steel prices plummeted worldwide, and as steel manufacturers struggled to make up the price difference in volume, they glutted the market, driving down prices even further. In 1998, POSCO announced it was cutting steel production for the first time in its history, as export prices and domestic demand continued to drop.
The crisis also buffeted the South Korean government, which ratcheted up its schedule to privatize POSCO. In order to raise foreign currency and help satisfy International Monetary Fund-imposed criteria for the release of $57 billion in much needed stabilization loans, the government sold off an additional 3.14 percent stake in POSCO in 1998. The shares were repackaged as American depository receipts and offered on the New York Stock Exchange. The following year, the government sold an additional 13 percent stake. Privatization was fully completed in 2001, when the government divested its final shares.
Despite the difficulties it encountered in its markets at home and abroad, POSCO continued to perform well in the late 1990s. In 1998, the company’s net profit rose 54 percent and its sales grew 15 percent, although demand for steel dropped 35 percent in Korea during the year.
As the millennium closed, though, POSCO stumbled. In 1999 the company publicly admitted to the Asian Wall Street Journal that it had spent $3.83 billion on bad investments (which it defined as non-core businesses and redundant facilities) between 1994 and 1997. Another problem was posed by what had initially appeared to be a triumph. In 1994, POSCO had been selected to play the leading role in the South Korean government’s consortium to build and develop the nation’s second mobile phone network. POSCO had been jockeying for this position in what the Asian Wall Street Journal called “the world’s most lucrative telecommunications project” for four years. POSCO recruited Air Touch—which had recently spun off from the American company, Pacific Telesis Group—as its technology partner in the project.
POSCO’s competitors, including several American telecommunications firms, cried foul, though, and claimed the steel giant had corrupted the selection process. The allegations only added fuel to the movement to fully privatize POSCO, which its detractors claimed was too enmeshed in nearly every sector of South Korea’s business.
Moreover, although POSCO refused publicly to classify it as such, it was clear to outsiders that its stake in Shinsegi Telecom, as the government cell phone consortium had been named, was a failure. Late in 1999, POSCO announced it would sell its entire stake in Shinsegi, thereby cutting itself loose from the new sector it had so eagerly sought to enter a few years earlier.
POSCO also continued to be plagued by corruption charges. In 1998, a South Korean government watchdog group accused POSCO executives, particularly former chairman Kim Mah Je, of embezzling more than W 7 billion ($5.8 million) in company funds for personal use. In 2003 POSCO Chairman Yoo Sang Boo also resigned, after he was indicted on embezzlement charges in 2002.
Weathering the Storm in the New Millennium
To regroup, POSCO slowed the pace of its expansion and committed to investing only in projects that were in line with its core operations. It canceled some joint ventures and suspended others. It also attempted to cut its expenses by merging subsidiaries. In 1999, for example, it united Pohang Steel Industries and Pohang Coated Steel to create Pohang Steel Co. It also merged three machinery units into one entity, POSCO Machinery Company.
Worldwide, though, steel prices remained low in the new century. According to the Asian Wall Street Journal, “steel companies [could] not price their products any lower without going bankrupt.” Industry analysts predicted that a wave of consolidation would sweep the industry. POSCO sought to stave this off by forming strategic partnerships with former rivals to secure lower prices for raw materials and share the costs of research and joint procurement. In 2001 POSCO joined with Nippon Steel and China’s Baoshan Iron & Steel Works to fulfill this goal.
Despite the challenges it faced, POSCO remained optimistic. In 2003 POSCO set a mid-term goal to attain W 36 trillion ($29.8 billion) in corporate value by 2007. It also planned to redouble its export efforts in China.
Dalian POSCO-CFM Coated Steel Co., Ltd. (59%); Pohang Steel America Corp. (99%); Pohang Steel Australia Pty., Ltd. (95%); POSCO Engineering & Construction Co., Ltd. (97%); POSCO International Osaka Inc. (95%); POSCO Machinery & Engineering Co., POSCO Research Institute (99%); POSCO Venezuela Caompania Anonima (59%); POSDATA Co., Ltd.; POSLILAMA Steel Structure Co., Ltd. (68%); POS-THAI Steel Service Center Co., Ltd. (67%); POS-Tianjin Coil Center Co., Ltd. (39%); Posnesia Stainless Steel industry (70%); VSC-POSCO Steel Corp. (40%); Zhangjiagang Pohang Stainless Steel CO., Ltd. (80%); Zhangjiagang POSCO Coated Steel Co., Ltd. (90%).
Arcelor S.A.; Bechtel Group, Inc.; Corus Group pic; Fluor Corporation; Kawasaki Steel Corporation; Kobe Steel, Ltd.; Nippon Steel Corporation; Shanghai Baosteel Group Corporation; Toyota Tsusho Corporation.
Cho, Namju, “Heard in Seoul: Professionals Post ‘No Fishing’ Signs for Korean Market,” Wall Street Journal Europe, December 11, 1997.
Darlin, Damon, “New Trade Relationship with China Is Changing South Korea’s Economy,” Wall Street Journal, November 17, 1992.
Enos, J. L., and W. H. Park, The Adoption and Diffusion of Imported Technology: The Case of Korea, London: Croom Helm, 1988.
Glain, Steve, “Cliques and Cronies: How Korean Industrialists Carved Up a Phone License,” Asian Wall Street Journal, June 30, 1994.
_____, “Korea’s New President Uses Old-Style Politics to Pressure Steel Magnate,” Asian Wall Street Journal, March 12, 1993.
Glain, Steve, “Steely Nerves: Anxious POSCO Awaits Study on Privatization, Monopoly,” Asian Wall Street Journal, March 20, 1995.
Manguno, Joseph, “Korean Steel Firm Takes on the Japanese,” Wall Street Journal, April 29, 1988.
Mi-Hui, Kim, “Everyday Some Kind of History Is Made, Especially in a Developing Country Like Korea Where Things Change at a Lightning Pace,” Korea Herald, July 4, 2003.
_____, “POSCO Spent $3.83 Billion on Bad Investments,” Asian Wall Street Journal, February 2, 1999.
—update: Rebecca Stanfel