Creating another success story posco


A. Introduction

1. Korean Steel Industry

Before the 1960s, South Korea was primarily an agrarian economy. After the Korean War the South Korean economy has grown notably and became a major player in the global economy by the 1990s. In 2009, the value of South Korean exports and imports totaled US$363,5 billion and US$323 billion respectively. South Korean ascendancy in the global economy has been the point of interest for a number of policies of export-oriented industrialization, labor control, and state-business relationships. The government of Korea has efficiently undertaken the strategies in shifting development policies from light industry to heavy and high value-added industries such as automobiles and electronics. Thus the economy was enabled with a high capacity to adopt timely strategies and mobilize new technologies in response to the dynamically changing global market.

In an attempt to industrialize the country, the South Korean government decided to build a steel manufacturing facility at par with the best in the world. In the late 1960s the Korean government established Pohang Iron and Steel Company, more broadly known as POSCO, and extensively supported it from the very first days. In particular, the company was launched with a $296 million investment by the South Korean government and technical and financial assistance from Japan ($73.7 million). Pohang was chosen as the ideal location for the steelworks. Pohang had a deep-water harbor, which would enable fully loaded ships to unload raw materials directly at the plant to deposit rich sources from across the world.

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The plant was constructed in four phases and POSCO began production in 1972. Initially, the objective was to improve self-sufficiency in steel within South Korea and strengthen international competitiveness. Therefore, the company made special efforts to supply high quality iron and steel to domestic companies at a price that was lower than the export price.

Initially, construction of mills for the factory was excessively opposed, due to huge capital requirements. Overcoming such opposition, POSCO continually expanded its capacity and proved to be successful. Later, the Korean steel industry played the role of the catalyst and basis for a number of successful industries, such as automobiles, shipbuilding, containers, railroads, construction, and appliances, which complemented each other in a virtuous cycle of economic growth over the several decades. The steel industry of Korea, as a generative sector, has contributed enormously to the whole economy. Korean steel production expanded from 2.55 million tons in 1975 to 36.8 million tons in 1995, to 43.1 million tons in 2000, and to 48.5 million tons in 2006, making it one of the world's largest steel producers. The contribution of the steel industry to the Korean economy is evident from the interdependence between POSCO and the main industries of automobiles, appliances, construction, and shipbuilding.


Despite being a late entrant into the industry, POSCO has proven to become a global contender. POSCO was able to expand its geographical coverage over 21 countries with controlling rights on 41 foreign subsidiaries. Regardless of global recession & production cuts in 1Q of 2009, POSCO still stands at No. 3 in terms of steel production. Although Baosteel took the 2nd place in terms of production capacity, POSCO's far advanced production technology has enabled the company to achieve superior financial result in FY 2009. Though the sales and net profit decreased, POSCO was able to obtain an 11.7 percent operating profit margin by producing 31.1 million tons of crude steel and selling 31.2 million tons of finished commodities. Due to several economic factors and slow recovery from the economic recession in 2008, POSCO's sales were decreased by roughly 10 percent. Though the economic crisis affected both POSCO and its competitors, the overall performance of POSCO was significantly better compared to its competitors.

In line with its mission statement “Creating Another Success Story - Beyond Here, Beyond Now”, POSCO has announced Vision 2018 which strives to achieve sales of KRW 100 trillion through standardization & specialization. Its international business strategy has been derived & modified to fit with its mission statement & business target for 2018. POSCO has laid down the foundation for continuous global growth by expanding internationally. It was able to persuade the Indian government to lift the forest zone restrictions for the integrated steel mill project located in Paradip, Orissa state. As one of the BRICs nation, India is considered a high potential country for development and has abundant natural resources. POSCO has secured the supply of 600 million tons of iron ore for 30 years from the Indian Government. POSCO has also completed the necessary negotiations to build a joint-venture integrated steel mill with Indonesia's Krakatau Steel. This facility will be able to produce 6 million tons of crude steel.

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Its huge global network coverage over 21 countries with over 120 oversea post & subsidiaries has proven to contribute in POSCO's success regarding terms of financial, volume growth & innovative product development. Starting from investment in China during the early 1990s, POSCO's international expansion has begun its road to Asia & stretched to other regions such as Central & Latin America in the late 1990s & early 2000s.

B. Current International Strategy

1. Reason for international expansion

As stated in the overview, POSCO was ranked 3rd for crude steel production in 2009. In order for POSCO to continue ranking as one of the top steel producers, they must maintain and expand internationally. POSCO started its international expansion in the 1980's as the demand within Korea did not fulfill the capacity of POSCO and Korea did not contain the necessary iron ore and coal that POSCO needed to produce the steel. Therefore POSCO looked outward to foreign suppliers for raw material and additional markets. POSCO continued its international expansion in the 1990's and 2000's where now POSCO has 41 foreign subsidiaries.

POSCO's decision to go international has many different justifications. First, the steel business requires large amount of raw materials. The transportation of raw materials is very expensive as generally three tons of raw materials are required to produce one ton of steel. Acquiring the raw materials for steel production became a top priority for steel manufacturers.  In an article by Daniel Magnowski at Reuters, the following quote was made by Jay Hambro the Chief Executive of Aricom Tio.L. “The iron ore cost isn't just a function of mining cost, but also of transport cost.” Secondly the demand for steel has changed greatly in the past several years. End users of the final steel products such as automobile manufacturers, ship builders, and construction / machinery industries are expanding internationally. The demand for steel domestically has shifted to demands in foreign locations. In order for POSCO to continue its success as a top steel producer, they would also have to expand to where the demand is required. Large demands for steel are coming from developing countries as they are building up their industry base. “Steel usage in the developed world will still be at 14% below the level of 2007 whereas in the emerging and developing economies, it will be above 38%. In 2012, the emerging and developing economies will account for 72% of world's total steel demand in contrast to 61% in 2007.”

Graph 2. POSCO's Current International Business Coverage

POSCO in China

The rapid development for China has brought a greater demand for steel. As one of the BRICs nation, China has been the focal point of investment and foreign direct investment. POSCO exported 200,000 tons of steel to China in 1991; and in 1992 the export amount to China increased significantly to over 1 million tons. The steel demand in China has grown from 191.3 million tons in 2002 to 425.7 million tons in 2008. POSCO was the first international company to establish an integrated stainless steel production plant in China. With its production capacity of 600,000 tons of stainless steel and hot rolled products per year this facility will greatly reduce transportation costs and help support the growing demand in China.

POSCO has also recently signed a cooperation agreement with the Guangdong provincial committee to set up a new production plant for zinc-coated steel sheets. The plant is to be completed in 2012 and the annual production capacity will be 450,000 tons. This facility will not only increase the market share for POSCO, but will help the Guangdong province become the core location for automotive and components industry in China. POSCO was able to complete negotiations with the provincial committee to collaborate areas such as steel production, electric vehicles and green city construction. Through these investments, POSCO has positioned itself to become one of the leading steel manufacturers in China. POSCO currently controls ten subsidiaries in China.

POSCO in India

POSCO's entry method for India was through green field operation. POSCO has been in negotiations with the Indian Government since 2005 for the establishment of an integrated steel facility in the state of Orissa. The POSCO India project has three key elements, consisting of an integrated steel plant, exploitation of mines (duration for 30 years and 600 million tons of iron ore) and development of relating infrastructure such as railway lines, roads, ports, and power plants. This project's investment is estimated to be roughly $12 billion. POSCO signed the MoU back in June 2005, and recently received final approval and broke ground for the plant. This is a great opportunity for not only POSCO but also for the local and Indian Government. The construction phase will create 467,000 man years of employment for local hire along with 48,000 direct and indirect job opportunities.

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By entering into the Indian market, POSCO gains access to a market with high potential while securing raw materials and enjoying low labor costs. The Indian steel production is estimated to rise from 40 million tons in 2006 to 110 million tons by 2020.

POSCO in Vietnam

Vietnam was one of the first overseas ventures for POSCO, establishing a joint venture with Vietnam's Southern Steel Corp in 1992. This joint venture was named POSVINA which produces 45,000 tons of colored and zink-coated steel plates. POSCO's expansion into Vietnam has played a vital role to meet the business strategy of POSCO which is “Global Big 3 & Global Top 3.” Vietnam's demand for steel is estimated to rise around 8.7 percent per year until 2020. Though the growth demand for Vietnam is a positive outlook, most of the demand is met by imports.

In order to increase its presence in Vietnam, POSCO has started a new project to develop two steel mills in the Ba Ria-Vung Tau province in southeastern Vietnam. The project is separated into two different phases, where the first phase would include establishing a cold rolling plant and the second phase would complete the second factory of POSCO Vietnam Ho Chi Minh Processing Center.  These facilities in Vietnam would give POSCO the advantage towards expanding the Vietnamese market and also entering the Southeast Asian markets.

POSCO in Brazil

Based on strong supplies & production capacity in Asia, POSCO is considered as a well-established vertical integration business model in Asia. However, it still lacks market coverage without having strong presence in North & Latin America. Thus penetration to Latin America was an inevitable choice for POSCO to secure & expand its business operations. Given POSCO has existing production for automobile steel products -Zinc coated steel sheet, next step would be a solicitation of iron ore with the closest site.

In 2007, Dongkuk & Vale has signed MoU to establish an integrated steel plant in Brazil where Vale would be responsible for natural resource supplies and while Dongkuk would provide necessary production technology to fully exploit Vales natural resources. In order for both Dongkuk & POSCO to secure future raw material supplies, it was inevitable to have direct control over its operational management. Hence, POSCO will invest approximately USD 1.2 billion to gain hold on operational control. Not only it would enable POSCO to serve the regional market demand in Latin America, but also would be able to increase production capacity & profitability in Mexico site via cost reduced raw material for automobile steel products. Consequently, POSCO recently announced its expansion plan for Mexico site to serve additional market demand arising from automobile producers.

Hence it was a truly win-win strategy for all participants in the joint venture 1) Vale is able to increase its revenue portfolio via strategic partnership with one of the finest steel maker, 2) POSCO & Dongkuk successfully secured its supplies for its vertical business integration.

C. Competitor's Strategy

1. Overview

In late 2009, 5 Chinese Steel makers had put their names on the top 10 steel makers list in the world. While Arcelor Mittal remains on top of the list Hubei Steel group and Baoshan Steel group came second and third. POSCO ranked 4th on the list then, but has given place to the Ahnbon Steel group which was ranked 6th in 2009 after another Chinese company, the Muhan Steel group.

The Chinese crude steel production accounted for only 13.5% of the world's total in 1996, but steadily rose to account for more than half of the world's crude steel production with 700 million tons per annum in 2011(E). The ever growing steel demand derived from China's development, and built up over capacity should keep the Chinese within their country for the next few years, but their increasing demand for resources will not be restrained by the nation's border. 13

2. Chinese Steel Makers

As iron ore became a seller's market product due to the dominating bargaining power of the 3 major mining companies (Vale, BHP, Rio Tinto), Chinese steel makers and state enterprises started to aggressively invest in African and Russian mining companies to obtain stable supply of Iron Ore and Coal. The investments ranged widely from MOUs for joint mine exploitation, acquiring major shares of mining companies, and Joint Investment for mine exploitation. Only in 2010 the Chinese have invested in numerous deals which are shown in Table 2.

Table 2.




Taifun Group

IMX, Australia

24million AUD(19.9%)

Acquired exploitation rights of IMX including the Cairn Hill Mine

Shandong Steel

HongGyo Group,


Brazil Salinas Mine Co exploitation

6.2billion tons of Iron ore reserves. Mining capa. 25million tons/year


Rio Tinto

Africa Guini mine exploitation rights 1.4billionUSD (47%)

2.3billion tons of Iron ore reserves. Mining capa. 70million tons/year

Muhan Steel

MMX, Brazil

400million USD (21.52%)

600million tons of Iron Ore

Chian-Africa Development fund

Ryberia mine exploitation rights 68million USD (60%)

4billion tons of Iron ore

China Rail & Resource Co.

African Mineral

Sierarion Tonkolili mine exploitation rights 258million USD(12.5%)

20million tons of Iron ore for 20 years

It is unlikely that the Chinese will expand its production to overseas sites in the near future, but their increasing outreach for resources will be a continuous threat for POSCO. Also the cheap prices of the Chinese are threatening POSCO's international market as they are penetrating the market for lower quality steel products.

3. Japanese Steel Makers

The two leading Japanese Steel Makers NSC and JFE (who ranked 2nd and 6th respectively in 2008, but moved down the list to 6th and 9th respectively in late 2009) changed their strategy in foreign expansion. Traditionally the Japanese alliances form was based on technology transfer, but recently changed to stronger alliances forms like joint ventures. Especially in India, Japanese steel makers are trying to tap into the exploding Automobile industry which lead to strong alliances with the Tata Group(NSC) and JSW(JFE). Also the investment in Iron Ore mines have increased as India is the 5th largest Iron ore producing country (exports ranks 3rd). The steel demand in Japan has reached its' peak and is now declining. In order to find markets for its products and to keep generating profit the Japanese will continue to strengthen their presence in the Asian region.

4. Others

1) Arcelor Mittal (AM)

AM has been actively entering foreign markets since the year 2000. Due to the large costs associated with establishing new green field manufacturing facilities, AM focused more on acquiring existing steel manufactures (brown field). Regardless of regional consideration, AM has been acquiring steel companies with potential for growth. With its base in Europe, demand has already been maxed out, AM has been restructuring and streamlining acquired companies to reduce cost by reaching larger scale in economy and increase bargaining power by becoming a dominant player in the market. In India, AM tried to execute a similar strategy to POSCO by starting green field investments. However these projects have been delayed for the past five years, so AM turned back to its' original forms to acquiring shares in existing companies (Uttam Galva). Also AM actively participates in the race for Iron Ore and coal resources.

2) Gerdau

The Brazilian Steel Giant Gerdau is also expanding its presence in the Asian market by acquiring major shares(45%) of the Indian Kalyani Group.

China's resources seeking strategies, Japan's increase in investment for production facilities and other companies rush to the Asian region are over lapping with POSCO's international strategy. In order to win in the international market, POSCO's management is spending busy hours in Africa, Russia, Brazil and Australia. Its newly acquired trading company (Daewoo International) should also add force to gain advantage in the race for resources.

D. Future International Strategy

1. Overview

Steel industry's success heavily relies on procurement of resources, and cutting edge production technology. POSCO is one of the few companies which has far advanced production technology - FINEX, and highly advanced products such as “POSCOTE” & stainless steels. Hence, its international business strategy has started from a point where they could replicate current success story in existing market coverage and simultaneously increase its market coverage around the globe. To do so, POSCO has divided its international business strategy into 2 separate themes in accordance with geographical coverage. Establishment of U Line & I Line strategies which should cover the entire globe divide its production sites into 2 different regions. Each region is in different stage where it requires different treatment & approach for international business strategy in order to maximize its efficiency.

2. Strategy by Region

Europe & Africa


[POSCO Next target in U-Line]

For the U-Line, it would connect Eastern Europe & Asia where they could secure market & resources simultaneously. Given POSCO has established production line in India & Indonesia with an effort of securing resource leadership within industry, it has enhanced its production capacity & secure potential raw materials from regions. Next step would arise where they could increase its sales & market share via penetrating relatively new market such as Europe & Middle East. Penetration to Eastern Europe & Middle East would create a channel to advanced European countries with lower freight cost. Ultimately it would enable POSCO to be equipped with competitive advantages in terms of price & qualities. Operational post in the Middle East would have POSCO secure its trading post & facilitate needs from infrastructure construction which still has huge market growth potential on back of rich oil money. In addition to serving the European & Middle East demand, POSCO could also secure its business initiation point for African region directly. With its current economies of scales & advanced product capacity, POSCO would easily take up large proportion of market demand. Thus, U line international strategy would leave POSCO to focus on expanding in Middle East & East European countries where they could exploit lower freight cost for the products & easier market access. Consequently it would secure its sales channels in Europe & Middle East (inclusive of Africa).

Since its target region has relatively stabilized political condition & less regulation on steel industry, joint venture or direct ownership via Greenfield investment or M&A to have direct control over regional subsidiaries. According to POSCO annual report, “POSCO will strive for mutual growth of its affiliates by expanding cooperation and joint execution of businesses of related sectors within the POSCO Group, as well as “Package deal” type global businesses in the Middle East, Africa and East Asia. We could interpret that POSCO has intention of formulated package deal under direct control over regional subsidiaries in order to shape consistency in what they are offering to market.”17

Central & Latin America

POSCO Next expansion for I-Line

For I Line, POSCO has secured its business post from Mexico where the market has lower labor cost & huge market demand lies in - over 1,000 automobile assembly lines. Although POSCO only has the capacity of producing just over 300,000 tonnes of Zinc plated steels, it is estimated to quickly increase its capacity to meet its domestic market demands of 1.6 million tonnes per year. Given its production line in Mexico with intention of serving North & Latin America regions (core market of POSCO), POSCO's next international expansion strategy would be focused on securing natural resources in close area in an effort of lowering production cost & resource procurement. Hence next move for POSCO would be setting up a post in Brazil. However, form of entry mode should be carefully chosen by taking numerous factors (political, regulatory & economic conditions). Follow-up to the recent MoU with Vale, POSCO is to complete its value chain to fully utilize business potential within I-Line It is estimated POSCO could facilitate the need of steel which will be used in railway construction in Brazil & any potential social overhead construction. By leveraging its equity investment with Vale, POSCO would implement the same strategic approach they have made for the China expansion case.

As mentioned in both “U-Line” & “I-Line” POSCO's international strategy is at a stage for co-ordination. They have successfully completed configuration by securing production sites in China, Indian, Indonesia & Brazil. Thus, POSCO's primary focus is on increasing its global efficiency rather than increasing local responsiveness & flexibility. Therefore implementing transnational business strategy would make POSCO amplify its business competitiveness edge & fully exploit the synergy from international business strategy.

3. Recommendation

In order to remain in a market leading position by being competitive, POSCO has expanded its operation to many corners of the world. With its I and U line strategy, POSCO is trying to strengthen its presence, especially using the numerous production sites that have been established or are being built at this very moment. The steel business depends heavily on resources, but logistics is a main issue in order to stay competitive. Steel products are heavy compared to volume and size. To achieve both price and quality competitiveness, POSCO should further invest in mining companies for stable resources, and build further integrated steel plants in countries where resources can be brought in. Such countries would be Brazil, Australia, India, Russia and Africa. Also the high-tech FINEX process helps POSCO in selecting sites as the process allows POSCO to produce high quality steel even with lower quality iron ore and coal(The Vietnam Case). The integrated steel plants will do their part as the hub from where semi finished goods can be transported to downstream plants like cold rolling mills and plate mills which should be closer located to the consumers like automobile industries, electronics and shipbuilding. The choice for these countries would be India, Brazil, and Eastern European countries among others. POSCO has only recently started to tap into resource rich Africa, where the Chinese were already busy acquiring mining rights by supporting them with financial loans and other types of aid. However as African countries are also looking for opportunities and chances for developing themselves, they would even more appreciate production sites within their territory. By using such a strategy POSCO can gain more control over quality resources transportation cost and producer - customer relation, and will be ahead of the competition to becoming the world's top steel producer.