2
POSCO: Building an Institution
INTRODUCTION
Having been a key driving force behind the Republic of Korea’s (ROK) rapid industrialization, Pohang Iron & Steel Co. Ltd. (POSCO) is now the fifth largest steel company in the world, with an annual production capacity of 30 million tons of steel. POSCO has been widely recognized for its accomplishments, particularly as an international leader in productivity and efficiency; its global status stands on its record of achievement. In terms of return on investment, for example, the South Korean government initially spent a total of 220 billion w
n ($863 million 1968) on the construction of POSCO. In October 2000, after POSCO was privatized, it had accumulated a total capital value of 3.9 trillion wn ($3.4 billion).
By the end of 2004, POSCO had contributed nearly 4.8 trillion wn (approximately $4 billion) in taxes. Given the fact that POSCO was founded in 1968, during the early phase of the Park Chung Hee (Pak Chŏnghŭi) era less than four decades ago, POSCO’s phenomenal development represents a model case of South Korea’s rapid industrialization. It sheds light on ROK-style development, which on one hand brought about an economic miracle within the decade of the 1970s and on the other suppressed the South Korean people’s push for democracy by rigidly guiding economic development under the state’s authoritarian Yusin system (1972–80). Park decided to build POSCO as a strategic necessity and initiated POSCO’s institution building strategy. He insisted on this even though the ROK, in that economic context, did not display a significant domestic demand for iron or have a supply of natural resources such as iron ore or coal, not to mention capital, technology, or skilled manpower. In Park’s vision, the Republic of Korea needed a key pulling force for South Korea’s economic development—an integrated steelworks industry. For many developing countries under similar circumstances, where state-led industrialization strategies are almost inevitable and necessary, the study of the POSCO experience provides a rare opportunity to learn about South Korea’s industrial know-how. South Korean political will, government policies for nurturing corporations, and how the management strategies of the POSCO leadership created an effective institution building strategy are especially helpful. In addition, the managerial paradigm of the corporation and how it was altered according to each phase of the institution building process provides immeasurable information. By the term “institution building strategy” I mean a strategy which developing countries may choose in order to build and nurture an organization that can, by mobilizing total available resources and capacity, fulfill a specific national task.1
The purpose of this chapter is to explore POSCO’s institution building strategy, especially through the construction of Pohang Iron and Steel, as the basis for constructing other key industries in the Republic of Korea. This chapter focuses on POSCO’s leadership development, especially in its early stages, from April 1968, when Pohang Iron and Steel was founded, until February 1981, fifteen months after the assassination of President Park Chung Hee. This chapter attempts to answer three main questions: (I) What was the relationship between the President Park administration and POSCO in the implementation of the basic tasks of this institution building strategy? (2) How did the POSCO leadership cultivate the key principle of autonomy while adhering to the government’s “guidance” over the company? (3) How was POSCO affected by political change in South Korea?
First, this chapter will briefly trace the historical background of the South Korean steel industry. It will review the relationship between the President Park Chung Hee government and Pak T’aejun, founder of POSCO, while examining the latter’s leadership during the first thirteen years from 1968 to 1981.2 The chapter will then analyze the characteristics of the early phase of POSCO, especially with regard to the effectiveness of its primary role, required type of leadership, and management paradigm. In conclusion, the chapter will briefly discuss the benefits and costs of a government-driven institution building strategy with respect to the POSCO case.
CONSTRUCTING POSCO: HISTORICAL BACKGROUND
South Korea’s modern steel industry emerged as part of the Japanese munitions industry under Japanese colonialism. By the time Korea regained independence from Japan in 1945, however, the steel industry, like the rest of the peninsula, had been largely destroyed. Private capital did not exist and most of the engineers were Japanese. Most of the peninsula’s steel production facilities had been concentrated in North Korea, and the few remaining steel facilities in South Korea were decimated during the Korean War. In 1958, under the Syngman Rhee administration (1948–60), the South Korean government realized the importance of the steel industry and set up a plan to construct its first integrated steelwork industry. However, the plan to build a plant with an annual pig iron production capacity of 200,000 tons failed due to insufficient capital, lack of cooperation between government ministries, and the difficulty of finding a person to lead the project. When Major General Park Chung Hee took office as chairman of the revolutionary Supreme Council for National Reconstruction in 1961, a plan to build a steel industry again began to take shape. Park’s military-led administration pursued strong economic development policies under the First Five-Year Economic Development Plan (1962–6) and aimed to achieve, what the Park state termed, “economic independence” or a “self-sustaining economy.”
With rapid economic growth the Republic of Korea quickly generated a rapidly increasing demand for steel, the basic material for many industries. However, South Korea’s crude steel industry was producing far below demand at that time. In pursuit of overcoming economic underdevelopment, while promoting balanced economic development in the private sector, the Park state developed the comprehensive First Five-Year Economic Development Plan (1962–6), which included the construction of the steel and petrochemical industries in addition to the Seoul-Pusan expressway. The difficulty the Park state faced, however, was that it lacked the knowledge and expertise required to construct a modern, integrated steel industry. Hence South Korea failed to attract foreign capital, and the construction of a steel industry again fell through. There were other attempts, including a project to build a steel working plant with an annual production capacity of 370,000 tons, a concept promoted by a private investment consortium involving the West Germany based companies: Demag Cranes & Components, Krupp, and Gutehoffnungshütte Gruppe3 in April 1962. Korea Steel and an American investment consortium led another project for a steel plant with an annual production capacity of 310,000 tons; both projects faced the same difficulties in raising capital and ultimately succumbed to failure.
Despite these circumstances, however, President Park actively promoted the construction of a steel industry as a key project of his administration during the Second Five-Year Economic Development Plan (1967–71). For example, Park, in order to emphasize the Republic of Korea’s need for development loans and technical assistance, met in May 1965, with U.S. President Lyndon B. Johnson and Fred Foy, chairman of Koppers, a U.S.-based company that specialized in steel construction technology. In January 1966, Park again met with Foy and asked him to form an international consortium. The South Korean integrated steel project showed its first concrete sign of progress when, in December 1966, the Korea International Steel Associates (KISA) established an office in Pittsburgh, Pennsylvania. The South Korean government decided to set up, in two construction phases, a steel plant with an annual production capacity of one million tons and used KISA to attract foreign capital for the project. Seven companies from the United States, Britain, West Germany, and Italy participated. A French company joined the consortium later in August 1967.
Despite chronic financial difficulties, especially having very little private capital, President Park single-mindedly pursued economic development and focused his attention on the construction of a heavy and chemical industry. This meant, in practice, fostering a state-planned strategy for capital-intensive basic industries. What was notable about Park’s state-planned strategy was that he placed priority on the building of the Pohang integrated steel mill as the driving force for South Korea’s economic and industrial development. Park’s aim in constructing the Pohang integrated steel mill, in other words, was to utilize it as the basis for South Korean development. Park was convinced that building a steel industry was essential to developing other industries, such as the automotive, shipbuilding, and machinery industries. In fact, Park publicly declared, “Steel is national power.” (Ch’ŏlgang ŭn kungnyŏk)4
The Park state officially launched Pohang Iron & Steel Co. Ltd. on April 1, 1968 with thirty-nine founding members. Pak T’aejun, former president of Korea Tungsten (Taehan Chungsŏk) and lead appointee of the Steelworks Project Promotion Committee, became the first president of POSCO. The Ministry of Finance and Korea Tungsten were the initial investors, with an initial authorized capital of 800 million wn (equivalent to $2.91 million).5 The initial paid-in capital of 400 million wn (equivalent to $1.46 million) came from the Ministry of Finance and Korea Tungsten, each paying 300 million wn and 100 million wn respectively.6
Pohang Iron & Steel Co. Ltd. started off as an incorporated company under the Commercial Act. This decision has been attributed to the fact that a state-owned company supported by a special act would sit under the strict supervision and control of the government and the ROK National Assembly. Although there were many benefits to being a public enterprise, such as financial support, reduced taxes, and freedom from union action, there also was, inter alia, the added risk of insufficient incentive to enhance competitiveness. In addition, as a public enterprise, POSCO had limited its capacity to obtain the necessary freedom of managerial autonomy, which restrained the company’s international competitiveness. Pak T’aejun personally believed that the only way to succeed would be to allow POSCO to have full responsibility for its own management, and thus he insisted that POSCO be incorporated.
In the meantime, KISA initially planned to borrow funds from the International Bank for Reconstruction and Development (IBRD) and the Export-Import Bank of the United States (EXIM) for steelwork construction. However the IBRD, which had originally been supportive of the plan, changed its mind and opposed it. In the IBRD’s critical report on the state of the ROK economy released in March 1969, the IBRD argued that it was too early for South Korea to construct a steel mill, given that the Republic of Korea had a pre-modern industrial structure and an especially poor ability to repay its foreign debts. Consequently, the Park state’s plan to attract investment funds through KISA failed once again.7
In a situation where fundraising through KISA had become seemingly impossible due to IBRD’s negative evaluation of its steelworks project, the only available alternative to raising seed money for POSCO was to secure a portion of Japan’s post war reparations, which had been designated for primary industries such as agriculture and fisheries. Japanese reparations amounted to $500 million, including $300 million in interest-free commercial credit and $200 million in public loans. However, South Korean policymakers, especially Pak T’aejun, lobbied frantically for the adoption of a new strategy to redirect $119.48 million, or 23.9 percent of total reparations, including $30.8 million from the claims fund and $88.68 million in loans, to the steelworks construction project. This was no small sum for the Republic of Korea at that time, considering that, by September 1963, South Korea had been on the verge of bankruptcy, as its foreign reserve holdings in U.S. currency amounted to a mere $93,298,0008 and all exports in 1964 amounted to a mere $100 million. South Korea’s per capita GNP was just $169 in 1968, the year POSCO was formed. Thus the construction of POSCO itself was a bold and risky venture upon which President Park staked not only his own political leadership, but also the future of the South Korean people.
Nevertheless, the Japanese government maintained a passive attitude toward the ROK’s steel plan, largely because Japan remained extremely cautious regarding reparation issues that may entail further demand for war compensation from other countries, including the Philippines. Japan was also cautious about over committing to a financial burden if it were required to pay the remainder of the reparations all at once. Understanding the complexity of these issues, the ROK actively lobbied to change the policy with the Japanese government by dispatching high-ranking officials from the Economic Planning Board (EPB) to Japan. At the same time, President Park Chung Hee played an important role in attaining public consensus, as well as agreement from the National Assembly. Behind the scenes, Pak T’aejun, chairman of POSCO, played an equally active role by visiting Japan’s top three steel companies: Yawata Steel, Fuji Steel, and Nippon Kokon to seek economic and technical support. Pak also lobbied Japanese government officials and other influential people to seek their support. These efforts finally paid off when in August 1969, Japan decided to cooperate with the construction of South Korea’s steel plant. It had been eight years since President Park first sought to build an integrated steel mill in 1961, and a total of five trial and error attempts since Korea’s liberation from Japanese colonization. In December the same year (1969), Japan and South Korea agreed to construct POSCO. Under this agreement, the role of fundraising for the construction shifted from KISA to Japan.
SYSTEM DEVELOPMENT STRATEGIES
Relations with President Park and the Government
In the founding phase, while funds and resources needed to be raised and mobilized, POSCO received a wide range of special assistance and privileges through President Park and his government. As a political leader with a strong commitment to economic development, Park single-handedly provided both political and administrative support, as well as his own personal confidence, in the founding of POSCO. Park’s keen interest in POSCO’s construction was evident in his frequent visits to POSCO, a total of thirteen visits over an eleven-year period, from November 1968 when he first visited the construction site, to October 1979 just before his assassination. In addition, Park acted as a “shield,” blocking POSCO from unwarranted political pressure while simultaneously refraining from interfering with POSCO’s management affairs.
Park was particularly committed to introducing special measures as a means to help POSCO build its steelworks within the shortest possible time, as well as facilitating POSCO’s managerial efficiency. In so doing, Park strictly prevented politicians and their connections from seeking political campaign funds or employment from POSCO. In regard to the former, Park’s action to block his party from raising presidential campaign funds from POSCO in April 1971 was the most concrete evidence of this intervention, especially as Park’s popularity at that time had hit rock-bottom following the constitutional amendment enabling a third term election. In regards to using political connections to gain employment in POSCO, Park apparently issued a written memo, widely known as the “Paper Horse Warrant” (chongi map’ae),9 to Pak T’aejun stating that Pak T’aejun alone had authority concerning POSCO’s management. Most notably, Park demonstrated extreme confidence in Pak T’aejun by approving Pak’s authority to tap into the finances made available through Japanese postwar reparations. President Park also gave Pak a free hand in choosing facility suppliers and provided a government guarantee on POSCO’s behalf, which, in turn, helped POSCO win contracts without competition. At the same time, conflict amongst government agencies and policymakers in the course of policy execution during the early stage of POSCO’s construction did not affect POSCO because of President Park’s iron-willed leadership backed by the authoritarian enforcement of legal systems and the administrative apparatus. In this context, the founding phase of POSCO could be viewed as a state agency or a “state within the state,”10 rather than an industry operating according to market principles.
Under his banner, “Steel is National Power,” President Park declared the Steel Industry Promotion Act (SIPA; ch’lgang kongp yuksngbp) in 1970.11 Although Pak T’aejun appears to have had personal reservations in regard to this act, particularly concerning its legal grounds for bureaucratic intervention into POSCO’s management,12 the ROK government nevertheless designed the act to give full support to the construction of an integrated steel mill. It stipulated that eligible steel companies may receive special privileges, such as long-term foreign loans with low interest rates, support for raw material purchases, equipment supplies, discounts on utility charges, as well as the use of infrastructure, including harbors, water, electricity, roads, and railways. The benefits provided by SIPA allowed POSCO to purchase required equipment at a lower cost and reduce construction expenses.
The Heavy and Chemical Industry Promotion Act (HCIPA) in 1973 was another law specifically designed to promote and foster the heavy machinery, shipbuilding, and petrochemical industries by controlling businesses’ entry into the industries covered by the act. The HCIPA essentially controlled entry to the heavy and chemical industry in accordance with the state’s Heavy and Chemical Industrialization Policy (HCIP) officially declared in January 1973.13 What we can appreciate here is the political will to build South Korea’s domestic steel industry as part of a comprehensive heavy and chemical industrialization process. Between 1972 and 1973, for example, the government introduced more than a dozen special laws and decrees, including the Tax Deduction Control Act (1965), the Public Investment Fund Act (1973), and the Introduction of Foreign Capital Law (declared in 1966 and revised in March 1973), as means to effectively implement the HCIP. This legal framework became a fundamental base upon which POSCO was founded from scratch, and readied it for successful operation. This distinctively Park-style development of POSCO reflected not only the rigidity of South Korea’s developmentalism, but also the vast scale of the Heavy and Chemical Industrialization program, which in effect had begun several years earlier when Park publicly promoted the Republic of Korea’s own policy of “independent defense” (chaju kukpang) after the North Korean attack on the Blue House in January 1968. In fact, Park founded the ROK National Homeland Guard, a force of 2.5 million reservists, in April that year, and afterwards relentlessly sought foreign capital in order to construct the “four key factories” to assemble South Korea’s own defense industry. The construction of South Korea’s own iron and steel mill—POSCO—sparked the idea of building the four key factories.14 Deputy Prime Minister Kim Hangnyŏl’s interview, in Tokyo in August 1969, clearly reflected the South Korean perspective of national security at that time, especially President Park’s determination to build POSCO:
Frankly speaking, if [we] cannot agree on the issue of building POSCO, I will leave [Tokyo] without announcing a joint communiqué…. Demand for iron and steel in [South] Korea is increasing because of economic development…thus [South] Korea independently began to construct an integrated iron and steel mill…. [South] Korea approaches economic development while defending against the North Korean [armed] threat. Aren’t the 600,000 armed forces in [South] Korea the strongest in Asia? It’s imperative for the peace and prosperity of the Asia-Pacific region to co-operate between [South] Korea with a strong army, and Japan with strong economic power.15
Thus the efficient construction of POSCO within the quickest possible time frame was more important to President Park than any other project at that time. With such support from the president, POSCO’s construction, in practice, operated like a military institution. Securing a site for the construction of POSCO was one clear example of this Park-style, quasi-military operation.
For example, the governor of Yŏngil County directly managed the site procurement of about 2,800 acres. The governor also took care of relocating 1,250 households and 2,700 graves from the site, as well as compensating the owners of hundreds of building structures to be demolished. This task was not an easy one to accomplish within a short period when there was strong resistance among residents who were forced to move. Yet the provincial government of North Kyŏngsang established the Pohang Industrial Park construction site headquarters, and the governor as its director actively engaged himself in overseeing the painstaking negotiations with residents. Despite the difficulty of estimating land prices, which had risen rapidly following the announcement of the POSCO construction site, the provincial government launched an unusual campaign under the slogan, “Local Patriotism Movement” (aehyangsim undong) and encouraged residents to sell their land at the price that had been set prior to the announcement of the construction site. Five financial agents in Pohang took joint responsibility for land appraisal.
The essential infrastructure that needed to be constructed for an integrated steel mill included a port, industrial water supply, urban engineering works, and railways. Relevant key ministries, including the Economic Planning Board, the Ministry of Finance, the Ministry of Construction, and the Ministry of Transportation carried out this work in accordance with government policy. With an investment of 715 million wŏn (approx. $2.8 million), the construction of a railway to the steel mill site was completed first. This in turn enabled the smooth transportation of the huge amount of building material required for the first phase of construction. In regard to the building of harbor facilities, which was the next most urgent project, the Ministry of Construction announced the establishment of a waterway 200 meters (656 feet) wide for the construction of inner breakwaters, a bank wall, and an embankment. The Ministry of Construction built a reservoir with a total capacity of 7.65 million cubic meters nearly three kilometers west of the water intake station to hold the 100,000 tons of industrial water the steel mill would require each day.
The Economic Planning Board (EPB) supervised POSCO instead of the Ministry of Commerce and Industry (MCI), which by law was responsible for supervising the steel industry, including POSCO. President Park established this unusual arrangement and thus reduced MCI’s role in the founding stage of POSCO to that of “cooperation,” meaning in effect that the MCI must follow orders from the EPB. It should be noted that this was the period when the EPB, as a “super-ministry”16 empowered by President Park, controlled the Republic of Korea’s economic development with substantial autonomy, and its minister, Kim Hangyŏl (1969–72), dominated the ministers of all agencies related to the economy and directly reported to and was instructed by the president, without reporting to the prime minister, on matters related to the economy.17
With the president’s total trust, Kim Hangyŏl’s EPB provided economic and technical rationality and bureaucratic professionalism, with very little interference from political parties, interest groups, or military factions. This unusual circumstance spurred the formation of a non-political elite group to ensure that important economic and political decision-making processes were protected and isolated from political pressure. Any possible conflict arising from ministries concerning POSCO’s construction was either skillfully negotiated beforehand or dealt with through the intervention of the EPB. As a result POSCO rarely confronted bureaucratic battles in its efforts to produce a speedy construction timeline. This is not to say, however, that POSCO was unconditionally immune from challenges and competitors. To the contrary, whenever POSCO confronted challenges and competitors, including disputes with policymakers, Pak Taejun balked at almost nothing to fight for POSCO’s interests.18
In 1978, for example, when POSCO’s third phase of expansion was near completion, the government’s long awaited plan to construct the “second steel mill” (che-2 chech’l) in addition to POSCO led to intense disputes between government policymakers and private big business (chaebŏl), including Hyundai. Needless to say, POSCO’s Pak T’aejun fiercely campaigned for the right to construct the second steel mill. A team of influential policymakers led by President Park’s Senior Economic Secretary O Wŏnch’ŏl, the chief of the Heavy and Chemical Industry Promotion Committee Planning Corps (HCI Planning Corps; Chunghwahak Ch’ujin Wiwŏnhoe Kyehwoektan) opposed Pak’s campaign. As architect of South Korea’s Heavy and Chemical Industrialization Policy, O insisted that Hyundai should construct the second steel mill on the basis that Hyundai had submitted a written proposal to finance the entire construction of the second steel mill, thus reducing the government’s financial burden while simultaneously activating private business.19
O’s argument essentially reflected HCI policy, which stated: “The early phase of an induced industry must be formed in a private-public cooperative system, and those industries with international competitiveness must be led by the private sector.”20 In October 1978, the final decision was made in a meeting involving Pak T’aejun and President Park’s three most senior staff, Chief of Staff Kim Chŏngnyŏm, Senior Economic Secretary O Wŏnchŏl, and First Senior Economic Secretary Yi Hŭiil; all agreed that the second steel mill would be constructed by Hyundai. Several days later, however, Pak sought President Park’s intervention directly, in a private meeting with him, and successfully persuaded the president to change the earlier decision, such that POSCO received the assignment to construct the Second Steel Mill.21 This was how POSCO came to build the second, larger steel mill in Kwangyang Bay in South Chŏlla Province (in 1987).
In summary, the buildup of POSCO as the basis for the Republic of Korea’s rapid industrialization under President Park cannot be fully explained without considering the extraordinary roles of President Park and Pak T’aejun who, as Park’s handpicked confidant, led the POSCO development just as Park Chung Hee had envisioned. The extraordinary relationship between these two key figures in the founding stages of POSCO construction reflected the core character of President Park’s leadership style. On the one hand Park demanded and received unbridled loyalty from his agents such as Pak T’aejun. On the other, Park communicated through action rather than words. In this context, Pak T’aejun’s loyalty towards President Park could be seen as the driving factor behind his widely known “performance-oriented style of leadership.” Like President Park, Pak T’aejun also equated the importance of steelmaking with national power. In fact, his management strategy for POSCO was built entirely on his personal belief in what he termed, “Make steel, serve the nation” (chech’l poguk).22
As J. Schumpeter noted, the innovative leadership of the founder is critical in the initial stage of building an institution, especially in terms of the leadership’s impact on the national economy. In the course of managing the connection between an institution and its environment, the founder of an institution must be able to identify this connection accurately and deal with it immediately even without the benefit of any previous examples. The founder must also activate the internal organization by linking environmental elements with the internal relations of the organization. In this context, Pak T’aejun showed model leadership in building the POSCO institution. Often referred to as the “King of Steel” (Ch’ŏl ŭi Wang), Pak’s leadership was critical to the development of what became known as the “POSCO Spirit”; the official representation of POSCO’s institutional culture built on Pak’s four personal principles. To understand POSCO growth, especially in its founding stages, therefore, it is important to consider the personal background of Pak as well as his four principles.
LEADERSHIP: PAK T’AEJUN AND HIS FOUR ADMINISTRATION PRINCIPLES
Pak T’aejun was born in late September 1929 in Imnang-ni, a coastal village in Tongnae County in South Kyŏngsang Province, at a time when Japanese colonial rule in Korea was at its peak.23 He was the eldest of six children. Like many Korean villagers at that time, Pak’s family, as a result of economic hardship, abandoned their hometown and left for Japan where young Pak entered Iyama Secondary School located in Nagano Prefecture in 1940. From a very early stage, Pak is known to have shown academic excellence, especially in algebra and mathematics, which led him to enter Waseda University in 1945 as a student of the Department of Science and Engineering. Following Korean liberation from Japan in August 1945, Pak returned to Korea and in 1948 was admitted as a cadet to the sixth class of the Korean Constabulary Officers’ Training School (which later became the Korean Military Academy). It was here where, for the first time, Pak met Captain Park Chung Hee who, as cadet commander, taught ballistics. Pak was then twenty-one years old. In 1960 at the age of thirty-three, Pak again met the then Major General Park Chung Hee as Park’s newly appointed chief of staff at the Army Logistics Base Command in Pusan.
However, despite their close relationship, or perhaps because of it, Park Chung Hee deliberately omitted Pak T’aejun from his list of military coup plotters until the morning of the coup on May 16, 1961. From that morning on, however, Pak played a key role in a variety of capacities, including chief of staff to Major General Park Chung Hee, who was then the chairman of the Supreme Council for National Reconstruction (SCNR). In August 1963, when Park Chung Hee officially declared his intention to retire from the military to run for the presidency, Pak T’aejun, who opposed Park’s entry into politics, resigned from his position as member of the SCNR’s Committee of Commerce and Industry, as well from his position as major general in the army. Contrary to his plans to study at Washington University in the US, however, Pak was assigned in early 1964 to a special mission to support the normalization talks between the Republic of Korea and Japan, through personal contact with Japanese political and economic elites. Pak’s role in President Park’s plans rapidly increased when, in December the same year, he was appointed president of Korea Tungsten, one of the key industries in South Korea, accounting for about 30 percent of the ROK’s total exports. Korea Tungsten, however, just like most government-owned companies at that time, had been suffering chronic losses.
In September 1967, while he was in London to negotiate the sale of Korea Tungsten, Pak received a telegram from Deputy Prime Minister Chang Kiyŏng, who was also the minister of the Economic Planning Board, stating that Pak should immediately return because Korea Tungsten had been chosen to lead the construction of South Korea’s integrated steel mill. This was about two months before Pak’s unofficial appointment as chairman of the Integrated Steel Mill Construction Committee. Seven months later on April 1, 1968 Pak, in his inauguration speech at the POSCO opening ceremony, publicly pledged his “steel-making mission” with a handpicked founding staff of thirty-eight.24 Pak was just forty years old, with a burning ambition and commitment to achieve his “mission” to construct a world-class, high capacity steel mill at minimum cost.
The Four Principles
Steel-Making Patriotism
Pak T’aejun established his management strategies on his confidence in “Make steel, serve the nation” (chech’l poguk). He recognized steel as the “rice of industry” as it provides the most basic resource for all industry, just like rice is a fundamental source of life and sustenance. For him, as for President Park, this phrase referred to the mass production of quality iron and steel at a lower cost for the South Korean industry, especially the defense industry, and for economic development as a means to strengthen national capacity against North Korean threats. Steel-making patriotism imbibed the long cherished goal of the South Korean government and its people to achieve modernization. Pak emphasized the value of every employee’s personal contribution and devotion to the company. He actively encouraged employees on the basis of their loyalty and commitment to the company to perform to the best of their ability by exerting themselves with a sense of mission, or what he termed “spirit of turning to the right” (uhyang ŭi chŏngsin). This meant that if the construction of POSCO were to fail everyone should turn to the East Sea, namely Yŏngil Bay, located to the east of the construction site, and drown themselves to redeem their historical sin for such a failure. In openly promoting patriotism as the core of POSCO’s code of conduct and institutional culture, Pak also drew attention to the history of Japanese postwar reparation in the form of blood money, which had financed the construction of POSCO.
Underpinning Pak’s message was nationalistic imagery that the sacrifice and suffering of his own and other Korean people’s ancestors under Japanese colonial rule symbolized the construction of POSCO itself. Thus every member of POSCO owed it to the nation to serve the nation to the extent of their own lives. This extraordinarily nationalistic approach unquestionably led to the shaping of a military-like self-discipline, an exceptional esprit de corps, and a spirit of solidarity among POSCO employees. In October 1970, for example, when the first phase construction project—a hot-rolling plant with an annual production capacity of 1.03 million tons, costing three times the cost (120.4 billion wn or approx. $742 million) of building the Seoul-Pusan highway25— was delayed, Pak declared a state of emergency.
Pak mobilized all employees, including executives and office workers, for an extraordinary work-marathon termed tolgwan kongsa in an all-out effort to complete the construction on time. Referred to as the “hot-rolling emergency,” this project was three months behind schedule and suppliers deliberately attempted to further extend the terms of supply by exploiting POSCO’s inexperience in construction.
Consequently, insufficient material and labor aggravated an already difficult situation. Despite this mix of problems—lack of experience, materials, and engineers—POSCO successfully reclaimed the completion date by completing the concrete pour in two months instead of five, as had been initially planned. This “do-or-die” approach ultimately led to the completion of the first phase of construction within thirty-nine months, one month earlier than scheduled. Given the fact that Japan took forty-two months to construct a similar scale steelworks plant, and Italy completed a steel mill with a production capacity of 2.6 million tons within forty-nine months, it is not difficult to appreciate the intense focus and capability of POSCO’s workforce led by Pak T’aejun. Shortening the construction period was significant in that it reduced not only the interest paid to creditors, but also the cost of raw material inventories which enabled the company to start product sales earlier than expected and eventually generate earlier cash flows. Equally significant, if not more so, was the psychological effect that the successful, early completion had on morale and the individual psyche of every employee.
Responsibility and Perfectionism
Pak based his management strategies on radial responsibility. Despite the estimation of many prominent experts and advanced international steelmakers that the construction of POSCO had been set to begin too early and was unrealistic, Pak was totally driven by the construction of the steel plant. He knew full well that, if he failed, history would consider him the “culprit.” He emphasized that POSCO was an epochal event in South Korea’s history and that the creation of something from nothing could change the fate of the nation. He therefore believed that his undertaking of this responsibility and opportunity had to be treated with personal honor. Pak insisted that all managers be scrupulous in managing the company, more so than they were with their own private assets, and that company employees would be fully accountable for the consequences of their own actions should discrepancies arise.
Pak placed great importance on the social responsibility of the enterprise; entrepreneurs were required to change their management principle from one based on rapid growth and profit, to one that placed priority on the public good. He encouraged everyone to cultivate a strong sense of social justice in their management of POSCO in order to realize the corporate ethic that placed priority on public service. POSCO should be developed, Pak insisted, as an enterprise made by the public and trusted by the public, while at the same time it should cultivate a strong sense of loyalty to and love of the company in order to achieve a level of professionalism akin to one’s own personal faith.
In regards to decision making, Pak made decisions based on his own judgment. Like many charismatic leaders in Korea’s modern history, including President Park, Pak T’aejun’s decision-making style was authoritarian and dogmatic to the extent that all employees were obliged to follow his decisions unconditionally. What was distinctive about Pak’s decision-making style, however, was that he concentrated his decision making only on issues related to the management of the entire company and to extremely important international issues. At this level, decisions were almost entirely concentrated on Pak as the founder of POSCO.
Decisions relating to general business operations were delegated to the professional management team nurtured within POSCO, so that lower level managers could exert their creativity and autonomous decision-making abilities. In particular, Pak encouraged production and maintenance staff to come up with various suggestions aimed at reducing raw material and fuel costs, as well as enhancing work efficiency and product quality. Specifically, Pak insisted on zero tolerance of faulty workmanship, even at great cost. A good example of this occurred in 1977, when during phase three of facility construction, which had encountered many difficulties, Pak found faulty workmanship in the construction of the power generating and ventilating facility. He immediately summoned the contractor and the supervisor and ordered them to “blow up” the entire facility, which was 80 percent complete at the time. He also banned the contractor from ever receiving construction contracts from POSCO.26 The Japanese supervisor responsible for the faulty work was sent back to Japan. This case, among others, set a clear example of POSCO workmanship, which led to the voluntary “zero defect” campaign among employees.
Transparent Information Management
It was general practice in the business world at that time that during the founding stage of a company the founder or their closest staff managed the most important information confidentially. Such a personalized method, however, was often extremely difficult to change when the company matured and required a more structured corporate information management system. From the very beginning, however, POSCO, under the watchful eyes of President Park Chung Hee and a range of politically sensitive institutions, both inside and outside the government, established a policy of transparency in each sector of management—from factory construction and production, to finance, personnel, and sales. This unusual set of circumstances, in many ways, drove POSCO to a high degree of transparency. Through the implementation of a balanced management method and strategy system, POSCO achieved the company’s goals, while it maintained autonomy and transparency in information management. From the very beginning, a number of factors, including the external auditing and a verification system applied to public companies like POSCO by the National Assembly and the government, attributed to such a focus on the transparency of POSCO’s information management system.
Even more crucial was Pak T’aejun’s personal ability to guard against political interference in POSCO management. The public viewed this as being based on the principle of “zero defect perfectionism” and moral integrity. However, this is not to say that Pak was free from political pressure, including during the founding stage. In fact, in April 1971, while the ruling Democratic Republican Party was frantically fundraising for the presidential election, Pak was under pressure, like most company presidents of both government-owned and private big businesses, to contribute political funds. He was pressured to contribute funds by paying a certain rebate level per ton whenever POSCO purchased raw materials or sold products. Believing that such pressure would frequently occur in the future, Pak sought help in person from President Park with an itemized written request. Pak’s note included: the exclusion of pressure from political circles, the simplification of executive procedures for accessing the “Japanese Repatriation Fund,” the approval of the discretionary power of POSCO to select facility suppliers, and guarantees from the government in the case of private contracts. President Park signed Pak’s note and responded with written instructions that Pak should handle issues relating to POSCO independently and at his own discretion. This note was later known as Park’s “Paper Horse Warrant.”27 This highly unconventional but equally decisive empowerment of Pak T’aejun’s role in POSCO’s management led him to incorporate a set of clear principles and mechanisms for transparent information in all sectors of POSCO from the outset. These included an efficient fund management and budget operation system, open competition for sales and purchasing procedures, as well as the consistent application of the merit system in personnel affairs. These principles have become the fundamental basis upon which POSCO has been able to develop and maintain its robust competitiveness in the global market and establish its respected corporate image up to the present.
The Priority of Staff Welfare
In the spring of 1968, once POSCO had completed purchasing its factory site, the number of staff increased dramatically, resulting in a housing crisis. The housing shortage became an issue because the movement of personnel at that time was extremely fluid. In the case of the small coastal fishing village of Pohang, where a large-scale steel industrial park was under construction, the demand for housing and school facilities was serious. The housing supply in Pohang was less than 60 percent of the total demand and the primary schools could not manage the student numbers even with a double-shift system. Understanding the nature of steel mill construction, especially the long and strenuous day and night work shifts, on the part of workers forced to live away from their families for long periods, Pak T’aejun introduced the POSCO housing system. Such a system, he believed, would improve overall efficiency and that, once accommodation for employees and their families stabilized, workers could apply their full attention to their jobs. The establishment of the company’s housing system, however, was not an easy task because POSCO at that time struggled with a lack of funds, to the extent that it could not even afford to pay employee salaries, let alone for the construction of a housing complex.
Once Pak obtained approval for the construction of company houses, he aggressively sought a bank loan without a mortgage. Against criticism from some political factions as well as some parts of the media, who argued that POSCO was trying to build an employee-housing complex ahead of a steel mill, Pak secured a bank loan of 2 billion wŏn from the Hanbit Bank (formerly Hanil Bank). This was only the beginning of POSCO’s systematic construction of many public facilities, such as schools and recreational amenities, for the welfare of its employees. Almost thirty years later, POSCO’s employee residential complex is still frequently cited as one of the best examples of a corporate valley.28
In many ways, Pak implemented a futuristic vision in which POSCO management actively anticipated the long-term effect of its decisions on employee welfare. POSCO, in other words, built houses for employees first and encouraged them to devote themselves to their work by helping them to establish their family lives, even at a time when POSCO struggled with financial difficulties. Similarly, as mentioned earlier, POSCO built its rail line in advance, which led to wide spread criticism from the political sector and the public. Yet, the construction of the railway enabled POSCO to increase transport capacity from five million to ten million tons. Thus POSCO management’s forward thinking played a critical role in improving cost competitiveness by substantially reducing construction costs and timelines.
CONCLUSION
In the early stages of its economic development, the Republic of Korea tried to nurture the country’s steel industry as the core driver of economic growth and strategically fostered it as an institution so that it could provide stable, high-quality steel supplies at low prices to manufacturing industries such as construction, automotive, shipbuilding, machinery, and electric home appliances. As a result, the South Korean economy enjoyed a surprisingly high rate of growth. The government-led, institution building of POSCO, promoted by President Park Chung Hee, proved to be a very efficient means to accomplish the goals of the Republic of Korea’s development policies, particularly when large-scale investment with a high degree of public interest could not be easily covered by the private sector.29
To this end, POSCO was established to serve as a fundamental tool for the development of the national economy. Hence, the important circumstantial factors in POSCO’s success can be found in the fact that the steel-making industry functioned in accordance with industrial features and policy goals desirable in mobilizing support from all sides, which were needed to realize the institution building strategy of POSCO against the backdrop of South Korean economic conditions at that time. In addition, strong leadership from President Park and Chairman Pak T’aejun was a crucial driving force behind POSCO’s success. With the iron-will to promote the country’s industrialization based on the steel industry, President Park helped POSCO enjoy maximum support from the government without lowering rationality and discretion in its management by protecting the company from political pressure and refraining from interfering in the company’s inner management. Similarly, Pak T’aejun, with an extraordinary sense of mission based on “Steelmaking Patriotism,” recruited and mobilized the most “suitable” human and material resources to establish the company. This was harmonized with other factors and greatly contributed to the success of POSCO, especially in the founding phase of the institution building process.
Another point that should not be neglected in discussion of POSCO’s success is the culture and characteristics of the Korean people. When POSCO began construction, it was able to go far beyond established goals in a manner that could not have been expected at that time. This outstanding performance, despite the absence of the technology or experience required for the construction and operation of an integrated steel plant, was only possible because of excellent, well-educated, mentally resilient human resources. This indicates that fundamental factors such as culture and a people’s characteristics are essential to a strategy’s success and function as the backbone of any strategy for national development. Whether it is a nation or an organization, a system should have the ability to recognize the demands of a changing environment and cope with those demands in order to develop. This ability can only be achieved and developed when the organization’s goals and visions are in accordance with environmental demands and also when the person with the highest authority is able to effectively plan and implement the changes in the system and structure so as to realize the organization’s new goals and vision.
NOTES
1. The term “institution building” refers to a procedure aimed at establishing, nurturing, and protecting new norms and behavioral patterns in order to introduce and spread new values, roles, and changes in engineering and social technologies. It also includes all efforts and procedures needed to set up and operate policy plans to create or revamp official organizations until the intended changes are accepted with the support and cooperation of the surroundings.
2. Pak T’ae-jun became president of POSCO in 1968 and was appointed as its first chairman on March 2, 1981.
3. DKG Group was a joint venture of three companies based in West Germany including Demag, Krupp, and GHH.
4. Widaehan saengae: Pak Chŏnghŭi taet’ongnyŏng hwiho rŭl chungsim ŭro, 198. [Eds.]
5. The exchange rate in 1968 (US $1 = 274.8 Korean wn) is applied.
6. Because Korea Tungsten had available reserve funds for investment as well as a competent management team with experienced skilled workers, the company could offer eligible human resources to lead the steelworks construction project, which, in turn, helped the company to be selected as a contributing member to Pohang Iron & Steel Co. Ltd.
7. Since IBRD’s evaluation reports enjoyed unquestioned high public trust in the world at that time, the opposition to the project exerted great influence on all KISA member countries, such that all became skeptical about South Korea’s steelworks construction plan.
8. Han’guk Ŭnhaeng Chosabu, Kyŏngje t’onggye yŏnbo, 204.
9. In the Chosŏn period, a map’ae was a cast brass disk with a device of running horses. The king gave this disk to those officials that he personally appointed secret inspectors (amhaeng sa) and sent into the provinces under cover to investigate corruption and rapacious governance. The disk, or warrant, authorized the appointee to act in the capacity of inspector. The more horses on the warrant, the higher the rank of the inspector. The king only gave these appointments and associated warrants, to close officials he trusted. When a secret inspector caught corrupt officials in the act of whatever treachery, he could produce the “horse warrant” to show that he had been personally empowered by the king to investigate and arrest as necessary. Park’s memo was called a chongi map’ae, or a paper horse warrant, to recall the trust and special authority kings placed in their close officials. [Eds.]
10. Yu Sangyŏng, “Han’guk sanŏphwa esŏ ŭi kukka wa kiŏp ŭi kwan’gye,” 144.
11. The establishment and enforcement of the Industry Development Act (IDA) abolished the Steel Industry Promotion Act in 1986. The Promotion Act established for the realization of advanced industrial structures annulled the IDA in 1998.
12. In his interview with a researcher in 1995, Pak is said to have stated that only when this act is abolished would POSCO be able to extend its autonomy and the boundary of its activities. Yu Sangyŏng, “Han’guk sanŏphwa esŏ ŭi kukka wa kiŏp ŭi kwan’gye,” 116.
13. For a detailed analysis of the government’s HCI policy, see Hyung-A Kim, Korea’s Development Under Park Chung Hee, Chapter 8.
14. Taniura Yoshio, “Kankoku no kigyōka to kaihatsu taisei,” 47.
15. “Kin Gokuretsu Kankoku daihyō danchō ni kiku.”
16. Byung Kook Kim, “The Leviathan: Economic Bureaucracy under Park Chung Hee,” 3.
17. Kim Hangyŏl, an American-trained macroeconomist, is known to have been President Park’s personal economic tutor as well as a friend. Kim died of cancer in January 1972. For details of Kim’s influence in policy-making at that time, see O W., “Sanŏp chŏllyak kundansa.” [A history of the industrial strategy corps], in Han’guk kyŏnge sinmun [Korean economic daily], May 31, 1993.
18. Pak Taejun has been spelled using the McCune Reishauer Romanization system. To reduce confusion, Park Chung Hee is spelled using the well-known English spelling [Eds.]
19. Yu Sangyŏng, “Han’guk sanŏphwa esŏ ŭi kukka wa kiŏp ŭi kwan’gye,” 129.
20. O Wŏnch’ŏl, “Sanŏp chŏllyak kundansa.”
21. In the making of this final decision, President Park is said have commented to Pak T’aejun: “Chŏng Chuyŏng [the owner of Hyundai] does well, but you are better at steel mill building. You do it [construct the Second Steel Mill].” Yu Sangyong, “Han’guk sanŏphwa esŏ ŭi kukka wa kiŏp ŭi kwan’gye,” 135.
22. For a detailed analysis of Pak’s idea of “Steel-Making Patriotism” see, Yun Sŏngman (Yoon Seokman), “P’ohang chech’ŏl ŭi kigwan hyŏngsŏng chŏllyak e kwanhan yŏn’gu.”
23. Just two years after Pak’s birth, Japan promulgated the Emperor system in 1932.
24. P’ohang Chech’ŏl Kongbosil, Yŏngilman esŏ Kwangyangman kkaji: Pohang chech’ŏl 25-nyŏnsa, 135.
25. The Seoul-Pusan highway cost 42.8 billion wŏn.
26. Seo, K. K., The Steel King, 420–I.
27. Other than those who knew about this Paper Horse Warrant, Pak kept it strictly secret until several days after President Park’s assassination in October 1979, when he handed it over to one of the key members of POSCO to list it as part of POSCO history.
28. In July 1992, President of Moscow University, Victor A. Sadovnichii, visited POSCO and praised the complex by commenting, “It feels as if I am witnessing the realization of ideals which socialism has long been pursuing.”
29. Korea Telecom and Korea Electric Power Corp. (KEPCO) can also be regarded as outcomes of the government-driven institution building strategy in that they also started off as public companies that provide national infrastructures (Korea Telecom was fully privatized in May 2002, whereas the privatization of KEPCO is still in discussion). However, there are differences between POSCO and the two companies: Korea Telecom and KEPCO provide final services aimed only at domestic demand, whereas POSCO produces and sells semi-final materials that can be directly or indirectly exportable.