If industrial policy has a potential, it has to be demonstrated by some successful experiences. This section presents such examples as best practices. Successful experiences are naturally concentrated in a small number of countries in East Asia and Europe.
13.1 The Nuclear Power Programme: How South Korea Developed Its Indigenous Capabilities in Nuclear Power Generation and Converted It into an Export Industry
South Korea’s nuclear programme was kicked off in 1956 with two objectives. The first objective was a simple one encountered in many countries: introducing atomic energy as an energy source in a country which still needs to import over 95% of its energy. But the second objective was unique to South Korea: to localize foreign technology in order to develop local technological and manufacturing capabilities and to ultimately form an export-oriented nuclear energy sector.
South Korea succeeded in not only the first but also the second objective. It firmly placed nuclear energy in its power generation; by 2016 South Korea was ranked as the world’s number 6 in terms of nuclear energy generation capacity of 22.5 GWe from 24 nuclear plants. This capacity represented 36% of the country’s total installed energy generation capacity. The country targeted raising that share to above 60% by 2030. In terms of nuclear plants’ availability factor (93%) and capacity factor (91%) between 2001 and 2006, South Korea ranked top in the world.1
In terms of the second objective; from nowhere, in five decades, South Korea became one of the very few countries which not only designed and built its own nuclear power plants and manufactured plant equipment but also exported them. In 2009, a South Korean consortium (led by the government-owned Korea Electric Power Corporation and including KOPEC, Hyundai Engineering and Construction, Samsung, and Doosan Heavy Industries, along with two subcontractors from the USA and Japan) won a $20 billion contract for the design and construction of a nuclear power generation facility in the United Arab Emirates (UAE). The contract was considered one of the largest globally and the South Korean consortium beat big and established groups—a French (Areva, Total, and GDF Suez) and a Japanese-US (General Electric and Hitachi) consortium.
Leveraging public procurement decisions involving acquisition of new products or services from state or privately owned domestic companies—rather than importing—and developing the latter’s technical capabilities,
enabling domestic companies and institutions to benefit from LbD through public procurement,
training manpower in the public research agencies over the years and letting these centres absorb and then improve upon foreign-sourced technology, and
forcing and coordinating technology transfer from public research agencies and foreign firms to domestic companies.
How South Korea localized nuclear energy technology
1955 | 1956 | 1957 | 1958 | 1959 | 1960 | 1961 | 1962 | 1963 | 1964 | 1965 | 1966 | 1967 | 1968 | 1969 | 1970 | 1971 | 1972 | 1973 | 1974 | 1975 | 1976 | 1977 | 1978 | 1979 | 1980 | 1981 | 1982 | 1983 | 1984 | 1985 | 1986 | 1987 | 1988 | 1989 | 1990 | 1991 | 1992 | 1993 | 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | ||||||||||||||||||||||||||||||||||
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Stage I. The beginning | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Some main institutions established | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
TRIGA Mark II research reactor acquired from the USA | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Training of manpower in the public research agencies | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stage II. Turnkey nuclear plants | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Feasibility studies and authorization of KEPCO to build to nuclear power plants | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Training of personnel | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stage III. Localization of engineering services and equipment | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
KABAR (KOPEC) established | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
MLP | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
KOPEC’s design capabilities enhanced | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
KAERI’s program of localization starts | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Local firms acquiring capabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
KHIC established and and starts manufacturing parts for plants | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
KAERI’s program of localization starts | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Training of personnel | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stage IV. Learning-by-doing: Furthering the localization by the acquisition of core technologies | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Promotion Law of Technical and Engineering Services amended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Master Plan for Technological Localization of Nuclear Plants | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Korean firms selected as prime contractors for the first time (10th and 11th plants) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Selection of Sargent and Lundy to provide technology transfer to KOPEC in basic design | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
KOPEC acquires basic design know how and skills | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
KAERI starts receiving NSSS technology transfer from Combustion Engineering Inc. basic design know how and skills | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
KNSP and KNSP+ developed | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stage V. Learning by Exporting (2009 onwards) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Rebranding KNSP and KNSP+ as OPR-1000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Signing of first export contract (UAE) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Completion of first of four units in UAE |
Stage I: The Beginning: Introduction of Nuclear Energy Research and Building Up Manpower and Infrastructure (1956–mid-1960s)
South Korea set out to develop nuclear energy plants and localize its technology in 1956. Before that year, it did not possess any technological knowledge or educated manpower in the field. In 1957 the country became a member of the International Atomic Energy Commission.
During the first stage, South Korean authorities made the necessary decisions and set first targets (i) to start educating nuclear experts, (ii) to enact a dedicated law, and (iii) to start early nuclear research in agriculture and medicine. Between 1956 and 1964, 240 students were trained in the field of nuclear technology. They later played key roles in the development of nuclear technology in the country. After joining the International Atomic Energy Agency (IAEA) in 1957 a law was enacted to build the sector and to establish important bodies, forming the institutional basis for nuclear energy research.2
The Atomic Energy Agency (AEA) was established to take charge of the atomic energy development task. The Korean Atomic Energy Research Institute (KAERI, 1959) was formed to carry out research on nuclear energy and equipment, and the Korea Atomic Energy Commission (KAEC) was established to advise on policy, budget, and regulation related to atomic energy. KAERI later became Korea’s main actor tasked to learn advanced nuclear power technologies . Its activities were initially restricted to the application of radiation and radioisotopes for agricultural and medical purposes.
Research was not initiated until 1962 with the introduction of TRIGA Mark-II, a 100 KWe research reactor (later increased to 250 KWe) designed and built by American firms General Atomics and General Dynamics. This reactor assisted in the first studies of nuclear power and served until 1995.
Stage II: Introduction of Turnkey Power Plants (mid-1960s–mid-1970s)
In the mid-1960s, with the start of Korean industrialization, the need for energy became more obvious in a country with a very poor endowment of energy and natural resources. In 1968, the government drew up a master plan that authorized the national utility firm, Korea Electric Power Corporation (KEPCO ), to construct two nuclear power plants. The decision was based on a feasibility study compiled by foreign consulting firms and IAEA. KEPCO was to subsequently play a very important role in developing the local nuclear energy and converting it into an export industry.
KAERI’s previously trained nuclear scientists and engineers made a comparative study of the then available nuclear generation technologies (pressurized water reactor, PWR ; boiling water reactor, BWR; and advanced gas reactor, AGR) and concluded that PWR and BWR were superior to AGR in terms of safety, reliability, and large-scale operation.
The bidding was made one turnkey basis, as Korea possessed no experience and capabilities to design and construct nuclear plants. The participating companies were from the USA and the UK —Combustion Engineering (PWR), Westinghouse (PWR), General Electric (BWR), and British Nuclear Export Executive (AGR). Although the latter proposed a better offer for commercial loans, KEPCO selected Westinghouse based on KAERI’s study.
The first plant (Kori 1) was successfully completed in 1978 and the second one (Kori 2) was delayed due to financing problems, thus completing in 1983. A third plant (Wolsong 1), also on a turnkey basis, was commissioned to Atomic Energy Canada Ltd and was completed also in 1983.
During this turnkey stage, nuclear personnel were nevertheless educated and they acquired operational skills with the objective of making Korea self-sufficient in operating nuclear power plants. This included overseas training of operators and engineers for quality control and preoperational testing. Meanwhile, KAERI sharpened its capacity in reviewing technical proposals and the preparation of contract agreements.
Stage III: Localization of Engineering Services and Equipment (mid-1970s–1985)
In the 1970s, as the construction of the first plant proceeded, localization measures began to be carried out. In 1975, the government established, for the first time, a joint venture nuclear energy engineering company Korea Atomic Burns and Roe (KABAR) with the British company Burn and Roe. The firm was to participate in the design of the second plant. However, Bechtel, the prime contractor (under Westinghouse), objected. KABAR could only supply manpower for simple work, denying the company the opportunity to build up any major expertise, and Burns and Roe withdrew from the partnership after only one year. Participation of other local firms was also very limited in the design and construction of the first three nuclear plants. For example, Hyundai only provided some construction material to the first plant, but it undertook a lot of site drawing and installation work on the second plant.
This did not deter the government from further attempts. In the 1970s, the Korean government undertook large physical investments under the Heavy and Chemical Industries (HCI) Drive. In order to leverage this to develop local technological capabilities, in 1976, it introduced the Machinery Localization Policy (MLP) aimed at increasing the local content ratio of plants and equipment instead of having new turnkey plants built by foreign firms. In line with the MLP , KEPCO adopted a non-turnkey approach so that local firms could participate in the development and construction of nuclear plants. This led to a significant build-up of domestic capabilities in nuclear technologies .
Engineering Capabilities
In the engineering field, Bechtel had to accept a technology transfer clause in the contract for the 4th and 5th plants. Under that clause, 28 engineers of KOPEC, the successor to KABAR, were trained by Bechtel and participated in the detailed design process. That enabled KOPEC engineers to build up the detailed design capabilities between 1981 and 1985. More KOPEC engineers were trained subsequently and participated in the design of the 6th and 7th plants. This initiated an LbD process, which helped the engineers master their skills and confidence in designing nuclear plants; knowhow was transferred to the organization level.3 The participation ratio of domestic manpower increased from 16% for the 3rd nuclear plant (1983) to 46% for the 8th and 9th nuclear plants completed by 1990.4
Manufacturing Capabilities
Under the MLP , KEPCO identified possible equipment that could be locally manufactured for the 4th and 5th plants. This equipment was procured from domestic manufacturers, helping them to develop their technological and productive capabilities. In 1978, KAERI launched a project in which it selected certain items and collected and analysed the related technical documents. Local firms then assimilated the knowhow of the foreign equipment through reverse engineering.
In 1980, “in order to acquire and localize the foreign technology intensively within the shortest possible time,”5 Korea Heavy Industry and Construction company (KHIC), a government-owned manufacturing firm, was granted monopoly rights to manufacture power generation equipment and to participate as a subcontractor of a foreign supplier for the 6th and 7th nuclear projects. KHIC participated in welding and assembling some minor equipment such as heat exchangers and refuelling equipment in the 6th and 7th nuclear projects. For the 8th and 9th nuclear projects, it participated in assembling the major equipment—reactor vessel, steam generator, and pressuring equipment—by introducing the imported half-finished products. At that time, KHIC lacked the prior knowledge base related to equipment manufacturing, so it could assimilate only the assembly capacity. Meanwhile, the local content ratio of equipments increased from 13% for the 2nd nuclear plant to 40% for the 8th and 9th nuclear plants in terms of total cost of plant to Korea.
Stage IV: Learning by Doing: Furthering the Localization by the Acquisition of Core Technologies (1985–2009)
All this effort brought South Korea to a completely new stage in 1987 when Korean firms and institutions were selected as prime contractors and equipment suppliers for the 10th and 11th nuclear plants. The new objective was to standardize the design of nuclear plants and offer domestic players an LbD opportunity. This was made possible by the procurement power of KEPCO , which was the sole decision maker on procuring the plants. Local firms asked foreign firms to transfer their core technology. This was achieved as the domestic firms and research institutions already had a strong base of well-trained manpower and capabilities; foreign firms had to accept partly because the international market was stagnant. The same domestic actors acted as the prime contractors of the 12th, 13th, 17th, and 18th plants, reinforcing their capabilities. The country’s 5th long-term power development plan in the year 2000 foresaw the construction of nine more plants.
In 1994, the Long-term Nuclear Power Promotion Program (LNPP) was launched to cover the period up to 2030. Key objectives of the programme were to ensure self-sufficiency in nuclear power generation and fuel cycle technologies, and to convert nuclear technology into an export industry. In 1995, the Atomic Energy Act was amended and Comprehensive Nuclear Energy Promotion Plan (CNEPP) was introduced. The CNEPP was to be prepared and revised every five years to set long-term nuclear policy objectives and basic directions through sector-based targets and implementation plans.
Coordination of the Localization Process
KEPCO , as the national utility company, was at the helm of not only the process of construction of the 10th and 11th plants but also achieving the localization process of core technology and developing the capabilities of the domestic firms. It supervised and coordinated the process through regular progress reports and meetings. It also bore the responsibility for providing the financing needed by the domestic companies for localization.
In order to accelerate the development of the local engineering firms, in 1981 the government had amended the Promotion Law of Technical Engineering Services. The amendment required that a local engineering services firm be the prime contractor for any engineering services demanded by domestic firms (government approval was needed if a foreign firm had to be the prime contractor for any reason). This was import substitution at its zenith in a sector that no other country had done before. In the nuclear energy area, it was reflected by the introduction in the MPTL, which stipulated that domestic firms should be the prime contractors in the succeeding projects.
Nuclear technology localization in Plants 10 and 11 (1986–1995)
Localization (%) | |||
|---|---|---|---|
Share in total cost (%) | Status in 1986 | Target for 1995 (%) | |
Project management | 15 | 85 | 98 |
Architecture engineering | 21 | 60 | 95 |
NSSS design | 7 | 30 | 95 |
NSSS equipment | 24 | 40 | 87 |
Turbine/generator | 11 | 54 | 98 |
Nuclear fuel design and manufacturing | 5 | 5 | 100 |
Erection/installation | 17 | 95 | 100 |
Total | 100 | 369 | 673 |
Detailed Design Capabilities
The 10-year National Medium-and-Long-term Nuclear R&D Programme was launched in 1992. The programme was funded by both the government and the nuclear industry.13 During the construction of 10th and 11th plants, KOPEC acquired the basic design technological capabilities and acted as the prime contractor for design. Previous to the 10th and 11th plants, KOPEC’s engineers had acquired some experience and capabilities related to AE. For the 10th and 11th plants, a foreign company (Sargent and Lundy) was selected in 1987 to train KOPEC engineers in basic and detailed design and to transfer knowledge and technology to KOPEC. These engineers designed the new plants together with the Sargent and Lundy (S and L) engineers. KOPEC developed a management system of AE, which was combined with S and L’s software, and Bechtel’s work procedures.
Korea’s localization of the nuclear power plant technology
Plant 1 | Plant 2 | Plant 3 | Plant 4, 5 | Plant 6, 7 | Plant 8, 9 | Plant 10 | |
|---|---|---|---|---|---|---|---|
Construction period | 1970–1978 | 1976–1983 | 1975–1983 | 1978–1986 | 1979–1987 | 1981–1990 | 1987–1996 |
Architecture engineeringa | NA | NA | 16% | 37% | 44% | 46% | 75% |
Equipmentb | 8% | 13% | 14% | 29% | 35% | 40% | 74% |
Nuclear steam supply system | 0 | 0 | 0 | 10% | 18% | 26% | 64% |
Turbines and generators | 0 | 0 | 0 | 11% | 28% | 45% | 72% |
Furthering the Capabilities
By the 10th plant, a significant amount of localization was achieved. As the same domestic actors acted as the prime contractors for the 12th, 13th, and then 17th and 18th plants, their capabilities were further enhanced. In the 14th and 15th plants, Atomic Energy Canada Ltd acted as the prime contractor for the 14th and 15th plants, which were designed as the Korean Standard Nuclear Power Plant (KSNPP) based on particular conditions of Korea. KSNPP formed the basis of the 17th and 18th plants with improvements introduced (KSNPP+). Korean engineers also designed the associated equipment, while only a critical process was designed by consulting foreign experts.
Stage V: Learning by Exporting (2009 Onwards)
Efforts to export reactors began in the early 2000s. In 2005, indigenous KSNPP and KSNPP+ reactors were later rebranded as Optimised Power Reactor “OPR-1000” for export markets, particularly for export markets in Asia , in particular Indonesia and Vietnam. In 2003 Korea completed the indigenous design of the 1400 MWe Advanced Power Reactor (APR1400) and received safety certificate from the Korean Institute of Nuclear Safety. APR1400 was developed over KNSPP and KNSPP+. The first APR1400 was connected to the Korean grid in 2016. Two more were planned to be completed in 2017 and 2018.
In 2007, KHNP did not renew its reactor licence agreement with Westinghouse; instead it entered upon an agreement to jointly market reactors, while replacing licenced components with the components which it designed.14 KHNP thus aimed at benefiting from Westinghouse’s reputation, while reducing its dependence on licenced components. KHNP then kicked off a $200 million programme to develop an exportable advanced APR+ large reactor design by 2015.15
In 2009, South Korea entered the fourth phase, by winning its first international client in nuclear reactors. It was a $20 billion contract in the UAE to build four APR1400 plants. In 2010, it announced its target to export 80 plants by 2030, seeking markets in countries such as India, Vietnam, Poland, Saudi Arabia, and South Africa.16 In the same year, the Korea Atomic Agency and Daewoo won a small ($130 million) contract in Jordan to prepare a feasibility and environmental impact study, to build a research reactor and supply fuel. The reactor was completed in 2010. Korea provided a soft loan to partly finance the project.17 KOPEC is developing an APR1400-EUR for the European market, starting with Finland.
Korean consortium in the UAE bid
Role | Firm/institution (governmental/private) | Subcontractors |
|---|---|---|
Consortium head | KEPCO (governmental) | |
Consortium member (architecture) | KOPEC (governmental) | |
Consortium member (construction) | Hyundai and Samsung (private) | |
Consortium member (main equipment) | Doosan (private) | Westinghouse (USA) |
Consortium member (turbine and generator) | Doosan (private) | Toshiba (Japan) |
Consortium member (maintenance) | KEPCO Plant Service and Engineering Co (KPS; governmental) | |
Consortium member (nuclear fuel) | KEPCO Nuclear Fuel Co (KNF; governmental) | Westinghouse (USA) |
Airbus: Airplane deliveries and order backlog (as of October 2017)
A300/A310 | A320 | A330/A340/A350 | A380 | Total | |
|---|---|---|---|---|---|
Total orders | 816 | 13,308 | 2929 | 317 | 17,370 |
Total deliveries | 816 | 7820 | 1872 | 217 | 10,725 |
Backlog | 0 | 5488 | 1057 | 100 | 6645 |
Aircraft in operation | 331 | 7472 | 1744 | 217 | 9764 |
As the book was being authored, the first of the four plants was about to be put online in 2017 and the remaining three to be completed by 2020. As Korea’s first major nuclear export item, these nuclear plants provide important experience and reference to Korea’s nuclear plant capabilities. In the future there is no doubt that nuclear plants will be a major export good for Korea.
13.2 How South Korea Developed Its Indigenous Automotive Industry
In 1960, South Korea barely had automobiles, let alone any major automobile production. By the 2000s, South Korea became the fifth largest automobile manufacturing country in the world, accounting for 10% of the global output. This ascendance from scratch to top of class owed a lot to the government’s industrial policies in addition to a successful performance by the country’s industrial layer. Korean governments experimented with different policies, yielding mixed results initially. Ultimately, an indigenous and export-oriented automobile industry was established as targeted. How was this achieved? This section presents a brief account of the process.19
Stages of the Development of S. Korea’s Indigenous Automobile Industry: The First Attempts (1960s)
Korean governments played a very important supporting role through industrial policies in the emergence of South Korea as one of the major automobile manufacturers in the world. These policies started during early 1960s. In fact, in the 1950s due to rising oil imports and severe shortage of foreign exchange, the government restricted the usage of automobiles.20
The military government that came to power in 1961 initiated a car assembly plant and expected the emergence of a Korean-made car within five years. Its most important aim was the development of local manufacturing (kuksan-hwa) of automobiles and parts. The “Five-Year Automobile Plan” targeted the production of the automobile with at least 95% local content. Imports of completely built vehicles and their parts and components were banned, as it was assumed that local assemblers could not survive without protection from international competition. However, capital goods and components for assembly could be imported tariff-free until they could be locally produced.
Despite the strong commitment and support from the government the Five-Year Plan was not successful; the only assembler that was licenced (Saenara) ceased operations in less than a year, with only 2773 units manufactured. There were rumours that there was a corrupt deal between the government and Saenara.
The next initiative was the Comprehensive Promotion Plan for the Automobile Industry in 1964. Its strategy was to have a monopolist assembler attain full-scale local content of all types of automobiles through 75 subcontracting manufacturers of 200 auto components. The subcontracting system was taken further in the Basic Promotion Plan, which aimed at attaining full-scale local content within three years. Nevertheless, this attempt also failed just like the first one due to small production scale, high production costs, and weak domestic demand.
Long-Term Automobile Industry Promotion Plan (1970s): Local Production and Export Starts
The Long-term Automobile Industry Promotion Plan of 1974 is considered as the most successful plan in the development of an indigenous automobile industry in Korea. The Plan was based on the domestic assemblers developing their own brands and technology rather than manufacture under foreign licences. At first, given the negative economic impact of rising oil prices, the government ordered domestic assemblers to develop fuel-efficient, small-sized cars with engine capacity less than 1500cc even though most of the cars at that time had much larger engines. The price level would be around $2000 to increase the domestic car usage and to be able to compete with foreign competitors.
There were three other important targets. The first was the target of 95% local content. The second was an annual production level for every model higher than 50,000. At the time, this was a low level according to the global norm, yet the local demand was no more than 10,000 in 1972. Finally, all the guidelines had to be met within two-and-a-half years. The government offered a compelling incentive as well the assembler satisfying all the requirements of the Long-Term Plan would be guaranteed a dominant market share—say, more than 80%.
Pony: Hyundai’s first car. (Photo credit: Murat Yülek; Seoul Museum of Industry)
Both Hyundai and Kia immediately tapped export markets in addition to the local market with their first locally branded models. The USA was selected among the first markets to export to. Different corporate strategies resulted in different sales and exports performance. From 1976 to 1979, when each assembler’s ‘Korean type’ model was on the market, Hyundai sold 115,955 units of the Pony, while Kia sold 48,861 units of the Brisa. General Motors sold 14,858 units of the Camina and Gemini, which were not locally designed.
Exports to the USA increased over time. Because of automobile trade conflicts between the USA and Japan from the late 1970s, a temporary niche market for subcompacts opened up in the USA. The US carmakers wanted to import cheap subcompacts from developing countries such as Korea and Mexico until they could restore their own competitiveness. In addition, local carmakers benefited from competitiveness due to weak Korean won, cheap oil, and low interest rates.
1980s Onwards: The Global Player
In the 1980s, the sector evolved towards deregulation and maturation. Industrial policy in the automobile sector was gradually replaced by deregulation in the 1980s, which removed the import ban and entry regulations imposed in the early 1960s. After 1997, the bankruptcy of Kia, the second largest carmaker, during the Asian crisis destabilized domestic financial markets. The policy makers dramatically changed their attitude to active intervention. Moreover, the International Monetary Fund (IMF) encouraged structural restructuring as part of its pre-conditions for financial assistance after the 1997 Asian crisis. The government did not appear to have a master plan for sectoral reorganization. It believed that failed companies should be either liquidated or sold off rather than bailed out by the government. Kia was taken over by Hyundai and Daewoo by GM. Renault acquired majority stakes in a smaller manufacturer, Samsung.
By the 2010s, Korea became the sixth largest automobile manufacturing country of the world, accounting for 10% of global production in quantity. Korean firms were among the most technologically advanced in the world. All that was made possible by the industrial policies of the 1960s and 1970s.
13.3 Sweden’s Industrial Policy in the Aviation Sector: Saab as a National Champion
The drivers of Sweden’s aviation industry development
Industrial policy based on defence and public procurement
A demonstration of Swedish industrial policy, Svenska Aeroplan Aktiebolaget (Saab), a Swedish company, is one of today’s most well-known civilian aircraft manufacturers in the world. It is an example of a national champion with roots dating back to the Swedish government’s defence and industrial policy back in the 1930s. Industrial policy acted as some sort of a public-private-partnership framework whereby the government provided a de facto procurement guarantee for locally manufactured warplanes, with a view to developing the country’s manufacturing capacity independent of non-Swedish suppliers of industrial goods and technology. The same strategy was repeated in the 1980s.23
Education system: supply of engineers with entrepreneurial and practical experience
The government played an important role also in providing an educational system which supplied good engineers, industrial workers, and managers. A balance of practical and theoretical aspects was the earmark of the successful Swedish educational system in providing workforce to the industry.
Private sector: enthusiastic industrial firms and entrepreneurs
Industrial entrepreneurship has also been an important determinant of Sweden’s success. A number of industrial firms in defence, transportation, and related industries have been the driver of Sweden’s industrial and thus economic ascendance. Many of these firms survived to our times as large internationalized Swedish firms. The education system has played a role in generating entrepreneurial engineers who created industrial start-ups which later became giant companies.
Creation of institutional capacity
The above important factors point out to a strong institutional structure in the public and private sector; good government and good firms enabled by a good educational system.
Reviewing the case of Saab below reveals these aspects and indicates that the main tenet of the Swedish industrial policy in the aviation sector in 1930s repeated itself in 1990s: top priority accorded to developing domestic industrial capacity.24
The Driving Force: Industrial Policy in the Defence Sector Spurring the Domestic Industrial Capacity in the Aviation Sector
As the Second World War clouded the horizons, security concerns in Sweden mounted. The Swedish Parliament decided in 1936 to strengthen the country’s defences. That required a large proportion of the funding to be allocated to the Swedish Air Force, as it was now deemed critical for the country’s military might. In particular, a total of 257 fighter and 80 trainer aircraft were ordered. These orders were the basis of a fledgling aviation industry in Sweden that later became one of the most successful in the world.
The Swedish government could have attempted to meet its demand for aircraft by importing from outside; from a budgetary point of view that was the attractive solution. However, the government’s priority was to develop local industrial and technological capacity that would prevent dependence on suppliers from other countries. It is apparent that the decision makers of the time understood that technological independence was a prerequisite for sustained military capacity that could ensure the country’s neutrality.
The same priority was upheld in 1980s when a decision had to be made whether to invest in developing a new-generation fighter airplane platform. Instead of purchasing foreign warplanes (or importing foreign platforms and developing upon them), Sweden’s government preferred a seemingly much costlier alternative for its budget; Saab was to develop a brand-new warplane platform: the Gripen.25 The project was successfully backed by the de facto procurement guarantee of the Swedish Air Force. The establishment of domestic production capabilities would reduce long-term budgetary impact (to lower-than-the-import values) and generate societal returns significantly higher than importing. Gripen later achieved exports also. Professor Gunnar Eliasson (2011) calculated that the project’s overall economic return to the Swedish economy was 2.6 kronas for every krona spent by the Swedish treasury.
Founders of Saab: The Second Driver of Swedish Indigenous Aviation Industry
In Sweden, in the second part of the nineteenth century, engineering and manufacturing industries witnessed rapid development, although agriculture remained the prevalent economic activity. By the end of the nineteenth century, the share of manufacturing in the GDP reached that of agriculture, and manufacturing employment surpassed that of agriculture in 1930s. In the 1880s, several ground-breaking innovations were introduced and industrialization took off, driven by technological innovations and domestic capabilities. Between only 1880 and 1889 the number of industrial workers increased by a stunning 66%. This period also witnessed the establishment of today’s important Swedish firms (such as Ericsson, Alfa Laval, ASEA, AGA, Nobel, and SKF). These firms were the flag bearers of Swedish industrialization. The development of institutions for science, technology, and education laid down the foundation for this kind of success. Flourishing educational institutions such as the Technological Institute in Stockholm (1826) and the Chalmers Technical School (1829), and Universities of Uppsala and Lund were established and helped in the industrialization process.26
Swedish defence policy of the time amounted to a form of industrial policy. The Swedish army’s procurement of supplies and equipment (cloth, uniforms, weapons, utensils, tobacco, and alcohol) were traditionally produced from local ‘manufaktur’ companies that were relatively large27 and the towns where these firms were located had an advantage over other locations after the advent of the Industrial Revolution.28 On the other hand, in the nineteenth century, engineering/industrial entrepreneurs formed another wave of new industrial firms in the country.
As the Swedish government looked for domestic industrial firms to manufacture fighters for its air force in the 1930s, some Swedish firms, in particular, the Bofors Group and AB Svenska Järnvägsverkstäderna (Swedish Railway Workshops, ASJ) became interested in manufacturing these planes. Their interest was the demonstration of possible spillovers to the aviation sector of industrial experience gained in other manufacturing sectors (weapons in the case of Bofors and railway equipment in the case of ASJ ).
Bofors, one of the manufaktur companies, was a weapon manufacturer established by the Swedish Crown in 1694. Acquired by Alfred Nobel at some point, it developed into a modern industrial company during the early decades of the twentieth century. In Trollhättan, Bofors had also acquired a subsidiary company, Nohab, which manufactured aircraft engines. Bofors therefore argued that the technical expertise was already available there and it decided to establish an aircraft manufacturing company, which was named Svenska Aeroplan Aktiebolaget (Saab) on 2 April 1937 in Trollhättan.29
The initial share capital in Saab came from Bofors/Nohab (SEK 1.5 million) and from Sweden’s Electrolux Group Axel Wenner-Gren (SEK 2.5 million). Wenner-Gren was also appointed as Saab’s first chairman of the board of directors, while the head of Nohab, engineer Gunnar Dellner, was appointed CEO. Saab’s facilities were constructed in 1937 in Trollhättan and a new hangar was added in 1939. Production started with the twin-engine bomber Junkers Ju 86k under licence (designated B3 in the Swedish Air Force). Over the years, Bofors continued to be an important shareholder in the overall Saab business.
A large number of skilled people were hired. Several key people joined the company. They were engineers who would steer the development of Saab in the future. Thus, the educational system helped the process. Saab also resorted to foreign manpower. Alfred Gassner, an Austrian national, was employed as chief designer. He had a background at the German Junkers and Dutch Fokker companies. Gassner operated from the AB Förenade Flygverkstäder (AFF) office in Stockholm and had a well-known aeronautical technician on his staff: Gunnar Ljungström—the subsequent creator of the Saab car. Before the Second World War there were also American engineers at Saab.
ASJ was a private company manufacturing rolling stock which was founded in 1907 in Linköping, very close to the Malmen airbase. The establishment of ASJ was a result of the growth of the railway sector in Sweden. The likes of ASJ were born during the railway boom in Sweden that started in the late eighteenth century when the railway network rapidly expanded. New towns formed around stations and firms were established to manufacture rolling stock to meet the growing demand. The operations of ASJ grew rapidly and were diversified to different product ranges such as heating boilers, hot water heaters, and heat exchangers.30
Furthering its diversification into other manufacturing areas, in 1930, ASJ established an aviation manufacturing subsidiary, ASJA, in Linköping and started manufacturing aircraft mostly under licence. In 1932 ASJA acquired Svenska Aero AB, a manufacturer of airplanes with facilities in Lidingö. A German entrepreneur, Carl Clemens Bücker had established Svenska in 1921 originally under the licence of the German firm Caspar-Werke, as the manufacture of aircraft in Germany was not allowed after the First World War. Svenska manufactured 58 airplanes under licence or as its own design. They were sold to the Swedish Air Force and private clients, and some were exported.31
In 1933, ASJA had less than a hundred employees. Wood was still one of the most important aircraft construction components. ASJA built a small series of aircraft. Some were ASJA’s own design, such as Viking I and II, but most were built under licence. ASJ was requested by the government to expand its Linköping facilities so that its aircraft division, ASJA, would be able to accommodate future orders. ASJA started to manufacture the American Northrop 8 (known in Sweden as the B5), a single-engine, light fighter bomber in 1938.
Between 1937 and 1939, ASJA and Saab established a jointly owned company AFF to design and manufacture aircraft with an equal split of shares. Ultimately, Nohab, another Swedish industrial group, also entered the shareholding. Meanwhile, ASJA secretly continued its own designs of a single-engine reconnaissance plane, L10 (later evolved to the B17 and S17 and became Saab’s first airplane) in Linköping. While the plane was a success and received orders from the air force, the cooperation in the AFF could not continue with ASJA’s activities hidden from its partners in AFF.
Ultimately, AFF could not be maintained and Saab took over ASJA and its facilities in Linköping in 1939. Saab would be responsible for the development and design of the aircraft, which the Swedish Air Force ordered. The production was split to plants in Trollhättan and Linköping with some restructuring of activities. Nohab’s aircraft engine manufacturing was split off from Saab and formed a separate company, which later became Svenska Flygmotor.
The role of the government was not limited to procurement. The Governor of Stockholm, Torsten Nothin, a former chairman of AFF, became Saab’s chairman of the board of directors and Wallenberg was also on the board.
Earlier Aircraft Manufactured by Saab
Saab’s first aircraft was named the Saab 17, which was originally designed and produced by ASJA as L10 in 1938. The bomber version was given the designation B 17 and the reconnaissance version S 17. As the Second World War began, airplane production in Sweden intensified. A total of 324 Saab 17 were sold to the Swedish Air Force and exported to Ethiopia and Denmark between 1942 and 1944. A new bomber was developed—Saab 18, which was based on ASJA designs. Between the years 1942 and 1944, 242 of them were manufactured. The reconnaissance version made history as the first aircraft of its type in Sweden and was equipped with radar. Production of the Saab 21R got started in 1947. It was one of the first aircraft in the world with a standard pilot ejector seat. A total of 60 planes were manufactured in two different versions. Subsequently, 300 Saab 21A aircraft were produced, including three test flight planes, and these were on active service in the air force until 1953. Fitted with a jet engine imported from the USA, Saab 21 became Sweden’s first jet-propelled airplane.
Developing and manufacturing planes was not easy and eventless. The process was dotted with failures such as the test flight on 18 May 1940. However, these failures and risks, nevertheless, did not prevent the rise of Saab.
Venturing into Other Areas: Civilian Aviation, Automotive Sector, and Rifles
With the end of the Second World War, Saab had to venture into civilian aviation . By 1944 Saab had embarked on two civil aircraft projects—the Saab 90 Scandia, a twin-engine airliner, and the Saab 91 Safir, a single-engine trainer and private tourer. The Safir became a real success story and, in all, 323 aircraft were built for delivery to 21 countries. Other Saab civilian planes included Saab 340 (1983) and Saab 2000 (1992), which are still airborne. Saab also became a supplier to larger global aircraft companies of systems such as avionic management systems and flight control systems.
Saab’s diversification continued. In 1946, another civilian project emerged—the Saab 92, front-wheel driven, 25 hp, two-cylinder automobile. Designed by Gunnar Ljungström, an aircraft designer, it was one of the aerodynamically most advanced cars ever in the world, with a drag efficiency of 0.30. That spill over from Saab’s aviation roots explains the aerodynamic silhouette of the subsequent Saab cars. In time, Saab became one of the most well-known automobile manufacturers in the world, introducing many new models such as 96 (1960), 97 (1966), 99 (1968), 900 (1978), 600 (1980), 900-2 (1994), 9-5 (1997), and 9-7 (2005). In the 1980s however, it could not compete with global manufacturers and was sold to the USA’s GM in 1989. In 2010 GM sold its stakes in Saab to Holland’s Spiker cars, which in turn sold its share to China’s Nevs, after filing bankruptcy in 2011.
Saab later ventured into other areas also: armaments aviation components and flight systems. By 2000s it was a diversified manufacturer-cum-designer of different products.
13.4 Airbus: Europe’s Industrial Policy Response to the Domination of the Civilian Aircraft Market by America’s Boeing
[T]he German and French governments decided that heir countries had to have direct participation in the technically advanced, highly skilled field of aircraft manufacturing – that simply buying planes from Boeing and Douglas would not provide good jobs or advanced knowledge for their people. So, in 1970, along with Britain and Spain, they started to support Airbus with tax money. (Flanigan 1992)
The drivers of the Airbus project
The rise of Airbus (market share)
Airbus was the result of West European countries’ (France, Germany, England , and Spain) desire to impose their presence in a technology-intensive industry with a significant growth potential. Industrial policies involved in the creation of Airbus included significant direct and indirect subsidies from the founding governments, which received their fair share of criticism from European as well as American quarters. US Department of Commerce, for example, calculated in early 1990s that direct subsidies received by Airbus amounted to $13.5 billion over 20 years.33 Boeing claimed in 2011 that Airbus subsidies reached $18 billion, of which $4 billion was for A380, Airbus’ latest model.34
Supported by public subsidies, the company recorded its first profit only in 1990, more than 20 years after its genesis. However, the gains from the policy were thus apparent: from the amount of future sales and profit (and thus value-added) stream and significant technological spillovers to other industries. Moreover, Air France played a key role by placing the first and only batch orders for A300 and A320, which were the first two Airbus models not well-known in the market then. Lufthansa also supported by placing the first orders of various Airbus aircraft. Both were involved in Airbus’ development.35 Other airlines placed their orders once Airbus carriers proved themselves under Air France.
The Background
Boeing, an American giant, almost monopolized the world’s civilian aircraft market by the 1960s. There were individual European manufacturers, but they were weak to take on Boeing36; a combined European effort was needed to tackle the giant. The market was expected to grow in the decades to come. At this point, as in the case of Saab , European countries had a decision to make: whether to import airplanes from the USA or to develop local capabilities and industry (the industrial policy option). Buying Boeing aircraft rather than developing an industry was the lower-cost option despite the monopoly power of Boeing. The European decision makers, however, had to make a long-term calculation of costs and benefits.
Consequently, the decision was made: Europe’s own civilian plane was to be developed and a local industry was to be created. But there was yet another decision to be made: Would a platform developed in the USA be used as the starting point or would a brand new one be developed? Europe took the second choice. It was the more difficult and costly option, but the deliberate selection of it meant Europe was to go for the development of an indigenous civilian aircraft industry, with all the long-term benefits.
The Genesis and the Rise of Airbus
To implement the second option, an intergovernmental memorandum of understanding was signed by Germany, France, and the UK in 1970 to design and manufacture Airbus A300, a twin-engine wide-body passenger plane. However, the UK dropped out of the partnership just after the foundation of the company, while Spain joined in 1971.
Successfully designed and manufactured, Airbus A300 made its maiden flight in 1972. Initially there were difficulties in receiving orders. That was surmounted Air France’s orders. After proving itself at Air France, Airbus A300 received several orders from other airlines in 1978. Ultimately, in 1990s, it became popular with the world’s major airlines and was produced until 2007. The next Airbus model, A320, first flew in 1987 and was a more visible success. Air France again assisted Airbus by ordering the first batches of A320, a twin-jet narrow-body passenger airplane. Competing with Boeing’s 737, A320 became a fast-selling model, with almost 8000 units delivered until end-2017. Under pressure from Airbus, Boeing merged with ailing McDonnell Douglas in 1997. Airbus A380, a double-deck wide-body airplane, made its first commercial flight in 2007 under the Singapore Airlines flag and became the largest civilian airplane in the world (Fig. 13.4).
The project was successful. Ultimately, Europe has become the house of one of the two largest manufacturers in the world, with market shares of Airbus reaching that of Boeing by the year 2000 from zero in 1970 (Fig. 13.3).
The Tribulations of Multinational Shareholding
Having a multi-country ownership has disadvantages in addition to its advantages.37 The shareholding structure of Airbus has for a long time been fluid. It was only in 2001 that the company’s structure was consolidated under the ownership of the Franco-German group EADS and the British aerospace and defence company BAE Systems. The British sold out in 2006, but the governments of France, Germany, and Spain, which became a full partner in 1971, continue to own stakes, either directly or indirectly.
The easiest way to defuse tensions was to build different bits of the first plane, the A300B, in the different partner countries. The French made the cockpit, the control systems and the lower-centre section of the fuselage; the UK made the wings, and the Germans made the rest of the fuselage and a part of the centre section. The Dutch made the moving parts of the wing, the flaps and the spoilers, while the Spanish made the horizontal tail plane. The wrangles between its parent companies and the French, German and British governments have often been seen to hamper its development, forcing it to retain operations in parts of Europe which it would not necessarily have chosen had it been able to develop in the manner of a typical private sector company.38
Economic Impact of Airbus on Europe
Over the years, a large value of sales and a thus a significant amount of value added were generated through the Airbus project. The monetary market value of all airplanes delivered by Airbus from 1970s to September 2017 was $1.6 trillion at 2017 current prices.39
Thus, while Europe initially took the costlier option, the benefits have dwarfed the costs. An economic impact study in 199540 indicated that the establishment of Airbus “had a large negative impact on world welfare, but a comfortably positive impact on European welfare”; the researchers calculated that Airbus would generate accumulated profits of $ 50 billion in the 50 years from 1970 and cause Boeing profits to go down by $100 billion (in 1970 prices). That is likely an underestimation.
In the EU interest in industrial policies has been returning since the early 2000s. However, in this new incarnation, rather than targeting specific sectors, the Union preferred a “broader horizontal policy that aimed at securing framework conditions favourable to industrial competitiveness.”41