The Global Restructuring of the Steel Industry: Innovations, Institutions and Industrial Change

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



1,,' ~'

,

,

'"

\ .... '

-, ,'

r

60

t

, --'

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

CHANG E AND DEVELOPMENT: JAPAN AND S.KOREA

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