premature and lacked economic feasibility (POSCO, 1988). Westphal and Kim (1982) also concluded in their study of the trade regime in Korea in the late 1960s that most of Korea's steel products were 'prominent among the inefficiently produced import competing products'. See Kim 0976) and Chapter 3 of this thesis for the status of the Korean steel industry in the 1960s. See also Appendix 3 for the history of the founding of POSCO, and the difficulties that Korea encountered in the initial stage that stemmed basically from pessimistic views on the project internationally.
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Table 7.1 POSCO's capacity expansion and costs of construction Incremental annual capacity (million tonnes) Completion date (month/year)
Construction costs (million US$)
Domestic
funds" Foreign capital" Total costs Per tonne (US$)
Pohang (total) Stage 1 Stage 2 stages Stage 4: 1st phase 2nd phase Kwangyang (total) Stage 1 Stage 2 stages Stage 4 9.60 1.03 07/1973 123 (41) 178 (59) 301 292 1.57 05/1976 199 (36) 348 (64) 547 348 2.90 12/1978 618 (45) 766 (55) 1,384 477 3.00 02/1981 726 (52) 666 (48) 1,392 0.60 05/1983 219 (56) 173 (44) 392 496 11.40 2.70 05/1987 1,394 (74) 479 (26) 1,873 694 2.70 07/1988 893 (79) 236 (21) 1,130 418 2.70 12/1990 2,362 (77) 725 (23) 3,087 1,143 3.30 10/1992 1,888 (83) 374 (17) 2,263 686
Notes a Per cent of total costs in parentheses.
b When the fourth stage construction of the Pohang works was completed in 1983, POSCO's
total annual capacity was 9.1 million tonnes. Later, there was an incremental expansion by 0.5 million tonnes.
c Average of the two phases. Source Information provided by POSCO.
capital-intensive, but Korea lacked capital in the late 1960s. Production costs are sensitive to plant scale, but Korea's domestic market was small, though rapidly growing. Korea had a scarcity of raw materials, especially iron ore, and was located far from the main sources of supply. Above all, Korea did not have any experience and skill in modern integrated steel-making. Even though the steel-making process is embodied in the machinery and equipment and the technology for ordinary steel- making is well diffused and can be easily imported at arm's length from machinery suppliers and technical consultants, the nature of the process necessitates complex engineering skills and knowledge. This requires not only a substantial amount of investment in labour training but also highly time-consuming efforts to accumulate work experience. Despite all these obstacles, the POSCO project was pushed forward. Japan provided the main source of foreign capital (Table 6.1) and the engineering consultants, designated the 'Japan Group', consisted of Nippon Steel and Nippon Kokkan Steel, which were regarded as the world's most efficient large-scale steel producers.^
2. The effects of the Japanese steel industry on development of the Korean industry were considerable, not only as a technology exporter at the early stage of development of the Korean steel industry but also as a large nearby export market later and as a major competitor for the Korean steel producers. This is a separate research topic, however, and will not be discussed extensively in this thesis.
Initial technology transfer and capacity expansion in the Pohang works'
With neither domestically available capital nor prior knowledge of and experience in large-scale integrated steel-making, POSCO had to rely entirely on foreign sources of finance and technology to set up the Pohang works on a greenfield site.^ Due to POSCO's lack of technological capability to build an integrated steel mill, the initial technology transfer was accomplished on a turnkey basis. The technology package in the turnkey project included technologies related not only to investment capability, covering preinvestment feasibility studies, manpower training, and project execution such as project management and engineering and procurement, but also to production capability, which in general consists of production management, production engineering (including raw material control, production scheduling, quality control, trouble shooting, and adaptations of processes and products), and repair and maintenance of physical capital (Westphal, Kim and Dahlman, 1985; and Amsden,
1989). POSCO was only able to contribute at the beginning by writing the project plan with experience gleaned from earlier failures in project proposals, and by assuming responsibility for the construction work itself.
The Japan Group provided preliminary and master engineering reports based on POSCO's project proposal and expansion plan. All contracts, including 10 plants with 12 facilities for the full range of integrated steel production activities (even the railway system within the plant), were awarded to the Japan Group, except for a plate mill, for which Austria's Voest-Alpine was responsible. Plant exporters, most of which were Japanese suppliers, provided credit, and were responsible not only for basic design and start-up in accordance with the Japan Group's master engineering plan, but also for civil engineering and building construction designs. The Japan Group supervised all construction and instructed POSCO with respect to process engineering for each plant and overall inventory management, production scheduling, and maintenance. POSCO involved Australia's Broken Hill Proprietary Corporation (BHP) in the project to review and evaluate the Japan Group's engineering reports and to advise POSCO on purchasing plant. POSCO also engaged Korean steel specialists living in Japan to review the work of both the Japan Group and BHP.
In the first stage, a blast furnace for iron-making with a capacity of 0.95 million tonnes per annum and two steel-making BOFs (basic oxygen fumaces) with a combined capacity of 1.03 million tonnes were installed (Table 7.2). A foundry pig iron furnace with an inner volume of 330 cubic metres and a production capacity of 150,000 tonnes
3. This sub-section draws largely on Enos and Park (1988), POSCO (1988) and Amsden (1989).