Korean Industries Case

This is My Brother’s (Chandra Kusuma) note in his Facebook profile (http://www.facebook.com/profile.php?id=744335580#/profile.php?id=744335580 ) on Wednesday, January 14, 2009 at 12:57pm…sorry bro…I quoted yours…

KDI School (my current Graduate School) has arranged a visit to Korea’s major corporations during the Summer Break called Korea Field Research and Study. Throughout 4 (four) days of the trip, I had the opportunity not only to experience unswervingly the atmosphere of Korea’s leading industrial companies (Hyundai Heavy Industry, Hyundai Motors Company, POSCO Pohang Iron and Steel Company, and LG Electronics), but also to visit key historic and cultural sites in Gyeongju. This note is going to explicate the most appealing remark I found during the trip.

In 1972, Hyundai Heavy Industries Co., Ltd. (HHI) transformed a quiet fishing village into a giant shipbuilding powerhouse with the spirit of creativity and exploration, positive thinking, and sheer determination. It manufactures the largest number of ships in the world, making Korea one of the greatest shipbuilding countries. HHI has a unique record in the history of shipbuilding. It built two 260,000 DWT oil tankers while establishing the shipyard even though it had no factory. For three consecutive years (1992-1994), it was ranked as first in the field of transportation equipment by Fortune Magazine. HHI has become one of the best companies in the world by surpassing the number of Mitsubishi of Japan’s orders for shipbuilding and ships constructed. Such extraordinary achievement is going to continue: “Our order target is USD 17.1 billion in 2008. We expect demand for VLCCs and other tankers to rise as ship-owners accelerate scrapping of their single-hull fleets. We are also prepared for additional large containership orders as well as a surge in the medium containership categories.” (Hyundai Heavy Industries. 2007 Annual Report. Ulsan, South Korea)

Founded back in 1968 with virtually no capital, technology, or experience, POSCO has risen to the top of the global steel industry in just three decades. It produces some 28 million tons of steel products each year. In 2005, POSCO sold 74% (21,149,000 tons) in domestic market and exported 26% (7,510,000 tons) of its total sales throughout the year. Among those domestic sales, mostly were 34.5% Hot Rolled Steel, which is sold as finished products to manufacturers of automobile frames and wheels, shipping containers construction materials, steel pipe, home appliances, and other products as well as being used as a feedstock to make value-added cold-rolled and electrical steel products (7,303,000 tons) and 31.5% Cold Rolled Steel, whic is for the automobile, home appliance, machinery and construction industries as POSCO currently continue to promote value-added steel grades for use in auto bodies, food and beverage packaging, and other applications (6,658,000 tons) by which kind of materials mostly needed in shipbuilding industry, Hyundai Heavy Industry. (POSCO. 2006 Factbook. Seoul, Korea) The trend is also increasing for years following in terms of percentage and amount as both companies stand for world’s leading companies through acquiring each other stakes and strategic partnership.

A strategic partnership is a formal alliance between two commercial enterprises, usually formalized by one or more business contracts but falls short of forming a legal partnership or, agency, or corporate affiliate relationship. A common strategic partnership involves a supplier / manufacturer partnering with a distributor or wholesale consumer. Rather than approach the transactions between the companies as a simple link in the product or service supply chain, the two companies form a closer relationship where they mutually participate in advertising, marketing, branding, product development, and other business functions. (http://en.wikipedia.org/wiki/strategic_partner. Date of Access: December 9, 2008) This is the kind of strategic partnerships recently pursued by POSCO and HHI. It is also reported that the strategic partnership forms not only as basis for joint development, and secured supply and demand of steel, but also subsequent closer affiliation frameworks (e.g.: financial, research and development, etc.). One of the most recent activities is perhaps acquiring each other stocks in order to cooperation and strengthens defenses against hostile bids. Accordingly, POSCO and Hyundai Heavy Industries Co., Ltd. decided to buy in through block trading of stocks applying the closing price of 27 before opening of stock market on 30, Hyundai Mipo Dockyard Co., Ltd, an affiliated company of Hyundai Heavy Industries Co., Ltd bought in 872,000 stocks of POSCO through the money trust for buyback of POSCO and POSCO purchased 1,477,000 stocks of Hyundai Heavy Industries Co., Ltd owned by Hyundai Mipo Dockyard Co., Ltd…. POSCO bought in 1,005,000 stocks corresponding to 9.8% of the total shares of Union Steel Mfg Co, Ltd owned by Dongkuk Steel Mill Co., Ltd based on the closing price of April 26 on 27, 2007 and Dongkuk Steel Mill Co., Ltd acquired 588,000 stocks corresponding to 9.8% of the total shares of Pohang Coated Steel Co., Ltd based on the closing price of April 26 on 27, 2007. Dongkuk Steel Mill Co., Ltd plans to buy in stocks of POSCO in the stock market in the amount corresponding to the balance between purchasing prices of Union Steel Mfg Co., Ltd and Pohang Coated Steel Co., Ltd. (http://www.azom.com/news.asp?NewsID=8501.Date of Access: December 9, 2008)

There is also another fascinating verity on POSCO, especially related to the history and development of the company that previously it was a government-owned corporation which privatized fully into private company in 2000. In 1997, Seoul announced that it was going to transform POSCO into a private company in line with the government’s new policy of privatizing government-owned corporations. The government planned to retain a majority share of the stock; initial reports in the South Korean press in 1998 indicated that the sale of public shares was going slower than anticipated. However, the administration led by Kim Young Sam changed the initial policy direction of privatization of POSCO and decided not to sell government-owned stock to keep it as a government investment enterprise. Yet, the Kim Dae Jung administration following the Kim Young Sam administration listed privatization of public enterprise as a high priority policy in economic policy agenda to implement mainly because of outbreak of the economic crisis. The new administration decided to privatize POSCO and by 1998, the South Korean government had reduced its ownership of shares in POSCO to less than 20%, and more than 50% of the shares in POSCO were in the hands of foreign investors.

The privatization itself is one of the cornerstones for POSCO to go globally making it as one the biggest steel companies in the world nowadays. Subsequent to the privatization, POSCO introduced a professional management and governance system of global standards, and try pursued investment opportunities in other developing countries, such as China, India and Vietnam. Since then, POSCO has been awarded by various awards and achievements, claiming itself as a global leader in the industry. Such practice evidently matches with the policy of Korean government upon privatization of its government-owned companies. It was not an easy road though for Korean government at first to establish POSCO. When the Korean government first wanted to establish a steel mill, foreign economists ridiculed the idea as totally unrealistic, and the World Bank refused the loan required for the project. But Koreans persevered and, with the help of Japan, not only completed construction of POSCO but also made it a highly competitive enterprise in the world. POSCO operated in the black since the completion of the first phase mill and the reserved earnings became a part of the fund used for subsequent expansion. (http://museum.posco.co.kr/museum/docs/eng/creStory. Date of Access: September 9, 2008) As in Microeconomics theory that the government is supposed to protect the infant industry at its initial stage and privatize after matures enough as POSCO has just started its maturity in 2000, yet soon afterwards follow its success.

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