,

tI

POHANG STEEL COMPANY: A CASE ON GLOBAL DIVERSIFICATION STRATEGY*

22 lune. 2005 was an important date for the resource-rich

but otherwise economically

underdeveloped state of Orissa. The government of Orissa signed a Memorandum of Understanding with the Pohang Steel Company (PaSCO) of Korea for a 12 million ton per annum green-field integrated steel project. This project is estimated to bring in Foreign Direct Investment (FDI) to the tune of $12 billion to India. For benchmarking. this figure can be compared to an annual FDI flow of $ 3-4 billion to India as a whole in the recent past.

POSCO
pasco. the South Korean steel giant. is also a global scale player. being the fifth largest producer of steel. However, pasco is reputedly the most profitable steel company in the world. Unaudited data for 2004 showed pasco's profits rose by 80% to reach $ 1.66 billion. Daewoo securities, a firm which closely monitors pasco. has forecasted a profit of $2.7 billion on an estimated sales revenue of $15.6 billion in 2005, which indicates a rise of 61% in profits. Financial data on pasco for 1999-2003 are presented in Annexure I.

II
11

11 I!

I
j~ ii

The key to pasco's profitabili!)' lies in its product mix. It has four strategic product categories: Automotive steel. pipeline steel. terrific stainless steel and highgrade electrical steel. Even though higher raw materials and logistical costs pushed up the aggregate costs by 14.1%in 2003. this was more than offset by increased sales of higher margin products and gains from other sources of efficiency. The other key factor is the organizational efficiency arising out of huge investments in R&D and information technology. pasco has invested $ 179 million recently to network its 80 Korean plants so that it can take orders on-line and coordinate production and deliveries. This enables the company to press each molten steel slabs. as these come out, to a specific weight and width, depending on a particular customer's needs. This mill-level customization reduces the movement time of steel out of the factory and has enabled pasco to reduce the delivery time by 50% and slash inventories by 60%. Park Kyung Min, CEO of Hanagram Investment

B. Bhattacha'Y.Ya

,
142
C

THEORY AND PRACTICE OF CASE METHOD OF INSTRUCTION

Management Co.. which has invested 8% of its $300 million fund in POSCO shares. "This compa!"!)'has a track record of consistent!>, improving productiviry."

says.

POSCO has been successful in developing a new technology. called FINEX. which will push up productiviry still higher. The mainstream technology uses high!>' polluting ovens to turn coal and iron ore into coke and sinter which are melted with superheated air to make iron. The finex process. joint!>, developed by Austrian Voest Alpine and POSCO. uses iron ore and coal in the form of powder without passing them through blast furnaces. According to POSCO. "Finex is a more environment-friend!>, and cost-effective route. While the blast furnace route adopts iron ore lumps and metallurgical coal. fines and coking coal are used in Finex." POSCO is investing $1.1billion in setting up a plant by using Finex technology in Korea. This will help cut costs by about 20% and reduce harmful emissions by almost 90%. After this plant becomes operational. POSCO plans to rollout the technology in other mills as well. Organizational efficiency has also a component arising out of global procurement. In 2003. POSCO purchased 73.773.000 tons of raw materials. including 41.290.000 tons of iron ore and 19.81.000 tone of coal. Ensuring access to overseas critical raw materials. and logistics to Korea. as well as hedging fluctuations in commodiry market are key to profitabiliry. POSCO has according!>, invested in coalmines in Australia and Canada since the ear~, 1980s. It has also joint ventures in Brazil and South Africa to produce iron ore and ferrochrome since 1998. "As expanding mill capaciry ..... continues to tighten supp!>'.we are aggressive!>'moving to ensure that our materials procurement needs are met through long-term contracts " said Mr. Kang. Chairman and CEO of POSCO. In 2004. POSCO could secure iron ore and pellets supp!>' to the extent of 25 million tons annual!>,for the next 10years through the existing joint ventures in Australia and Brazil and long-term supp!>' contracts with other suppliers in these countries. In addition. POSCO maintains a fleet of 37 bulk carriers to transport the global~' procured raw materials. This fleet accounts for about 75% of the total cargo. Remaining 25% is covered through short and long-term charter contracts.

POSCO's Corporate Strategies and Objectives

POSCO has emerged as an international player but it is not a multinational company. as its operations are still large!>,located in Korea. Short-term production and sales projections are in Table I:

Table I: Production and Sales of POSCO

Crude Steel I Sales I Sales Revenue 2 Investment 2 Notes: I. Billion KRW 2. Million tons

2004 30.2 29.2 19.792 2,277

200S (P) 31.1 30.1 23,010

4,081

i
I
pasco

POHANG STEEL COMPANY

143

has drawn up its medium-term strategies as given in Figure I.

We, as a global player, sustain healthy growth with our competence steel business

in

Growth Construct global steel production system. Reinforce global marketing strategies. Secure stable supply of resources. Ensure high valueadded products and establish new business

Innovation Concentrate on strategic products. Establish global leadership in technology. Achieve lower initial prices. Implement the Six-Sigma company culture. Achieve global business capacity. Establish new paradigm for labourmanagement relationship.

Source:

pasco Annual

Report 2004

Figure I: Strategies
A more detailed five-year business strategy to consolidate pasco's global leadership position as well as to scale up annual crude steel production capaciry to 42 million tons per year in 2008 has been developed as shown in Figure 2.

POSCO forging a Sustainable Advantage

ECOO<:lrt1lc Value added of Achieve a 25% operating margin through value management

Achieve SIx Sigma peJfotmance In all core competencies through conbiUJous Innovation Exempli!)' corporate excellence through ethical business practices

Strategyl . Strengthen Competitiveness tntensi!Y cuslomer-onented marketing Active!!' culli\'ate SlrnIegiC products Secure toduslry ternnkal leadership Expand tndustry cost leadership Enhance the value of invested
fl!l1lS

Strategy II $e<;ure Growth Engll1eS Boost producllon capacity thrQugh facUity optimlt3tiOn Expand overSeas Investtnent Leverage COre competenclesl<l foster ne\.v buSinesses

strategy In
Cqntinue 8USiness trmovation

Internalize Six Sigma management and Innovallon CuI\jvale a world-dass workforce Fosler an ethical and Innovallve corporale culture lrn;n:ase brand power

Figure 2: Sustainable Competitive Advantage in Steel

144

1:1

THEORY AND PRACTICE OF CASE METHOD OF INSTRUCTION

ti

POSCO'S CHINA STRATEGY

Though in terms of size. pasco is a global player. it sells 75% of its total production domesticallY; onlY 25% is exported. During 2003. China accounted for 36.7% of pasco's exports. followed by lapan at 21.4%. Southeast Asia at 16.7%. and USA at 7.9%. China has played and is expected to pi'!)' a very important role in pasco's growth. China has emerged as the world's biggest steel producer as well as the consumer. China's steel consumption stood at 266 million tons in 2003. Most projections show China to be the principal force in the global steel industry in the coming years. Growing demand from China has provided a new source of growth to pasco. especiallY when domestic demand has become sluggish. Per capita steel consumption in South Korea is shown in Table 2. Table 2: Per Capita Steel Consumption in South Korea and China
(Unit: Kgs)

Year
2000 2001 2002 2003
Source:

South Korea 846

Chirlll 124 154

158

840 958 1022

228

pasco

Annual Report

With South Korean per capita consumption crossing the 1,000 kg mark. prospects for further growth is limited. On the other hand. China's per capita consumption level is fairlY low which indicates much higher growth prospects. pasco's exports to China has grown massivelYover the years as shown in Table 3: Table 3: POSCO's Sales to China
(Unit: thousand tons)

Year

2000 2001 2002 2003 1735 1673 2512

Note: looking at the huge Chinese market potential.

pasco

decided Quite ear!}' to enter China so as to be close at

home. It has invested in local projects a total of $838 million to date. It has committed to invest another $1.41 billion

by 2006.

pasco'S business in China dates back to 1991when it established the first office in Beijing. Over the past years. it has pursued a comprehensive business strategy. directlY investing in

POHANG STEEL COMPANY

145

facilities to produce value-added products in key industrial centres across the country as well as sourcing coal and other raw materials locallY. pasco has adopted a joint venture strategy to address the Chinese market. Zhangjiagang pasco Stainless Steel Co., Ltd., a 82.5:17.5 joint venture with /iangsu Shagang

Group in /iangsu Province, produces upto 120,000 tons of galvanized sheet and 280,000 tons of cold-rolled stainless steel annuallY. Dalian POSCO-CFM Coated Steel Co., Ltd., a 55:30:15 joint venture with China National Ferrous Metal Material Corporation and SK Networks in Liaoning Province, produces upto

100,000 tons of galvanized sheet and 150,000 tons of repainted sheet annuallY.
Shunde Pohang Coated Steel Co., Ltd., a 93.7:6.3 joint venture with Beijiao Investment in Guangdong Province, produces up to 100,000 tons of galvanized sheet and 150,000 tons of electrical and prepainted sheet annuallY. Qingdao Pohang Stainless Steel Co. Ltd., a 80:20 joint venture established in December 2002 with Qingdao Steel in Shandong Province, will produce up to 150,000 tons of cold-rolled

stainless steel annuallY. Ground was broken in April 20m, and the project was slated for a December 2005 completion. pasco Suzhou Automotive Steel Processing Center Co., Ltd., a whollY owned subsidiary

established in August 2003 in Jiangsu Province near Shanghai, was slated to produce upto

200,000 tons of automotive sheet steel annuallY.

pasco launched another major local project in the second-half of 2003 that would increase the total value of projects from US$ 838 million in 2003 to nearlY US$ 2.25 billion through

2006. On August 19, 20m, it signed an agreement with Benxi Iron & Steel forming a US$ 664 million 10:90 joint venture to produce 1.8 million tons of cold-rolled steel coil and
galvanized sheet annuallY. Located in Liaoning Province, BX Steel pasco May 2006. The launch of pasco China Holding Corporation on November 7, 2003 marked the first step China is expected to significantlY boost the Coid Rolled Sheet Co., Ltd. will be formallY incorporated in April 2004 with completion scheduled in

of a integrated growth strategy for China. pasco the local ventures. According to industry experts, pasco's

competitiveness of the present and future investments in China, streamlining management of

strategy of joint ventures with local Chinese producers

was the key to its successful penetration of the Chinese market. Further, its focus on high-end products, such as galvanized steel. colour-coated steel and stainless steel. reduced the face to face competition from giant rivals, such as Nippon Steel of lapan and Taian Baashan Iron and Steel.

146

THEORY AND PRACTICE OF CASE METHOD OF INSTRUCTION

Box I: Beyond China

Second on!y to China in both population and economic growth, India figures prominent!y in our global production strategy. Pushing ahead with an ear!y advance into this emerging market, we aim to gain investment experience by building a local presencewith small-scale processing centres that will allow us to gauge local market trends in the near-term. gradual!y expanding as demand grows. In Asia. Vietnam is challenging China's leading growth rate with high-single-digit rates of its own. We intend to aggressive!y compete for major upcoming national projects. leveraging the long-standing relationships we've forged with the government and local steel-makers. In the short-term, we'll be following Hanoi's lead by setting up joint -venture processing centers, gradual!y expanding to include the entire steelmaking process. In recentyears, Southeast Asia has experienced skyrocketing demand for stainless steel. making it the world's second-largest market for imported cold-rolled stainless coil. We are now in the process of aCQuiring production facilities across the region. as we aim to establish ourselves as the undisputed leader in this product category.
Source:

pasco

Annual

Report 2003

WORLD STEEL INDUSTRY

The global steel market has traditional!y been cyclical. Global crude steel production rose to a record high of 1056MT in 2004. as against 969 MT in 2003 and 902 MT in 2002. The growth was primarilY due to the explosive growth in Chinese output, from 182.2 MT in 2002 to 272.5 MT in 2004. After a stagnant growth in 1995-96, global consumption of finished steel recorded a high growth rate of 7.2% in 1997. However. consumption again declined in 1998and 1999,principal!y due to the Southeast Asian crises. There was a slight rise in 2000, stagnant growth in 2001, followed by a 7% rise in 2002 and 2003, (Table 4). The world steel industry is going through a massive process of aCQuisition and mergers. In contrast to many other capital intensive industry. the concentration level in the steel industry is fairlY low. The top 10 firms accounted for onlY 27% of global production in 2001. There are onlY 20 firms having more than 10 MT capaciry annual!y (Annexure 2) National!y. major steel producing countries are China, lapan and United States (Annexure 3). Details of iron ore production and trade are in Annexures 4 and 5. In steel industry, competitiveness is partlY a matter of scale. This is resulting in major M & A deals. M&A deals in 2004 accounted for $31.4 billion. In the biggest deal of that year, Ispat International merged with LNM Holdings in a $ 13.3billion transaction and the resulting entiry, Mittal Steel. aCQuiredthe International Steel group for $4.5 billion, making Mittal the world's largest steel company. L.N. Mittal, the head of this firm. said: "What will the global steel industry look like in tenyears time? It will be different to the industry of today. Some differences we can predict with a relative!y high degree of confidence. China will be the world's leading producer and consumer and it will be a significant exporter. The leading steel companies will

,
POHANG STEEL COMPANY 147

be larger and more global than today. There will be more integration along the value chain. Cross-national alliances will be more common." Another feature has been noted by a recent Pricewater-House study. It suggests that the steel industry will see more vertical integration as companies buy their own iron ore and coalmines to hedge against commodity price volatility.

Indian Steel Market and Industry

After China. the most happening steel market is India. Regional\}'. Asia represents the future growth market for the steel industry. About two-thirds of the projected global capacity expansion are to come in Asia (Table 5). India's current consumption of finished steel was 30.33 MT in 2003-04, representing 9.5% rise over that in 2002-03. The estimated rise in 2004-05 was around 6%. India's national steel policy has projected the demand for finished steel at 60 MT in 2011-12 and 100 MT in 2020. The estimated annual growth rate for the period projection is 12%.This higher rate as against the preceding year's recorded growth rates, is justified on the ground that if India's GDP has to grow at 8%. the infrastructure development will have to be enormous. Since steel is the key input to infrastructure. its consumption will record a corresponding increase. The composition of market demand in 2011-12is shown in Table 6. Indian steel producers have lined up major investments to cater to the burgeoning demand. Some of the major projects have been shown in Annexure 6. Total investments may cross Rs. 70,000 crore. Most of the Indian steel producers have planned investments upto 2006-07 after which. depending upon the market growth, more capacity maybe decided upon. If all the projects fructify, India's steel-makings capacity may reach 80 MT by 2011-12. Table 4: Global Consumption of Finished Steel: 1994-2003 (MT)
'Jl:;j 1994 1995 1996 1997 1998 1999 2000 2001 2G02 2003 (P) Source: World Bank
,i
Qlr.

41.';2 2.53

635.2 651.3 651.6 698.0 68104 698.6 747.6 754.6 304.8 863.7 ,

0046
7.12 (-) 2.38 2.52 7.01 0.94 6.66 7.32

_.~.----148
II

THEORY AND PRACTICE OF CASE METHOD OF INSTRUCTION

Table 5 :Pro/ected Global Capacio/ Additions

..
Africa Asia Europe Middle East North America South America Total

2004

2005
6 62 13 5
I

2006
3 84 10 4
I

a
35 8
I

2007

2008

a
36 12 2

a
49 2

3 2 49

a
4 54

a a
25 76

5 92

27 129

Source: Business World 9'h May 2005

Table 6: Market Demand of Finished Steel in 2011-11

. long Product Bars & Rods Structural Rly. Materials Total long Product Includes Other Products like FlaVsQ.uare (MT)

16.4 5.1 0.9 23.8

Flat Products Plater HR Coils / Sheets / Skelp CRNo GP/GC/Coated Sheets CRNo Tin Plates Pipes Total Flat Products ** Total does not agree due to roundine. olT.

(MT)

3.6 19.7 0.4 2.6 0.4 0.5 3.6 36.2

The steel industry is high!>' raw material-intensive. The basic raw material reQuired is iron ore. A study by FICCI revealed that demand for iron ore in India was estimated to rise by 28% in

2004-05. by 11%in 2005-06 and 10% in 2006-07. Iron ore production in India is rising on!>'
at 4.5% annual!>,.SAIL and TISCO have captive mines and have initiated steps to raise the production of iron ore. Companies not having captive mines are trying to ensure supplies through imports as well as by signing MOUs with state governments for new projects. Through India has huge reserves of coal. its Qualiry is not suitable for steel-making. India imports a substantial proportion of its reQuirements of coal. enters into joint ventures with overseas supplies and seeks other forms of alliances. Indian's current infrastructure is not adeQuate to support the expansion plans of the steel industry. Massive investments are reQuired to upgrade railways, roadways, ports and power supp!>'. Most of the new steel projects are coming up in Orissa and Iharkhand.

POSCO'S STRATEGIC NEEDS

POSCO's future growth plans have to consider two important issues: First, it has to ensure access to raw materials, especial!>, iron ore, in line with its ever-expanding reQuirements. Second. it hasto strategical!>,plan to address the large and most potential markets in Asia of which India ranks the highest.

POHANG STEEL COMPANY

149

pasco, despite its highest profitabili!)' record is ranked No. 3 in the league of world class steel producers. India's Tata steel is rated as No. I. according to an analYsis made by World Steel Dynamics, the leading resource centre in the steel industry. The rankings for 2004 are shown in Table 7.

Table 7: World Class Steel Makers

ill
Tata Usinor POSCO CSN Baosteel China Steel Gerdau Nucor Car-Tech Nippon Steel Severstal Dofasco

ill

i)

ii!!! ... ijii!ill:

iii!li!l li.l! Illi:')lii!!l i'i!: '..~c[}re.'nn

I 2 3 4 S 6 7 8 9 10 10 II 131 129 127 123 121 119 118 116 112 III III 109

:111

I'll!

-.

Source: World Steel Dynamics

Detailed parameter wise data (Annexure 7) reveals pasco's very low score on one account, eg., ownership of low cost iron and coking coal. It scored 1on a scale of 10, while Tata scored 10. POSCO scored I also on account of proportion of sales in the domestic market. It is obvious that POSCO has to address these two weak spots in its competitive profile. In fact. the concern with the assured supplY of raw materials is not uniQue to paSCo. For most steel companies, faced with a staggering rise in raw material prices, especiallY iron ore, this is the major concern. pasco has set up POSMAC, a joint venture with Mitsui of Japanand BHP Billiton and CI Minerals of Australia. POSMAC has secured supplies of 3 million tons of iron ore annuallY for next 25 years at a price 10% lower than the market prices.

poseo's

INDIA STRATEGY

pasco has already identified India as a priori!)' market for its huge domestic demand. More importantlY, India is also well-endowed with iron ore. India is one of the lowest cost steel producers in the world. It is, therefore, possible to make India a steel manufacturing hub for Southeast Asia. The currentlY favoured model of the steel majors is that crude steel is best made where raw materials are available and finished steel near the major markets.

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THEORY AND PRACTICE OF CASE METHOD OF INSTRUCTION

Box 2: Tata Steel's Expansion Strategy TataSteelbought NatSteelof Singaporefor $ 486.4 billion in 2004. NatSteeimakesconstruction grade steel products for residentialand commercialbuildings, bridges, roadsandother infrastructureprojects. It hasa presencein China, Thailand, Vietnam, Malaysia,Philippines andAustralia. TataSteel's strategy is to makesemi-finished steel and ship it to plants near large consuming markets for value-addition. Semi-finished steel in the form of billets are current!>,shipped from India to NatSteel where these are further value-added into customized products for final consumption.
Source: The Economic Times, 6 October. 2005

In the steel industry, the trend in the recent years has been global expansion through aCQuisition. Mittal Steel's global empire has been built sole!>, through aCQuisitions. Green field ventures in basic steel-making abroad is rather rare. There are greater risks in going for such projects that include strong environmental concerns in some countries, costs escalation due to the inadeQua<y of reQuired infrastructure, a long gestation period during which the political scenario in the host country may change adverse!>,. . India is one of those countries which allow 100% FDI in the mining sector. It has considerable reserves of good Qualiry iron ore. Political!>,. India is stable but FDI has been a divisive issue, as some of the parties supporting the coalition government at the Centre have been critical of FDI in certain sectors. India has also its share of civil sociery groups which raise environmental concerns relating to large projects which almost invariab!>, cause some damage. There are also NGOs that support the cause of those whose livelihood may be affected by the takeover of land for such projects. POSCO has. so far, invested on!>' as joint venture partners in secondary steel-making abroad. It has no experience in setting up an integrated steel plant of a major capaciry in a foreign country. locating a plant close to raw materials source is a cost-reducing strategy, especial!>, when freight costs are on the rise. Shipping rates from Brazil and Australia. the two major sources for iron ore and coal. went up substantial!>, during 2003-04. When demand for steel is primari!>' in Southeast Asia, it makes sense to obtain production capaciry in India. POSCO has a global vision of producing SO MT annual!>,. Of this, Korean operations would contribute 34 MT while overseas production sites would have a capaciry of 16 MT. For Indian operations, POSCO has in mind two possible options: First. it may produce slabs in India and ship them to Korea. Second. it may part!>, sell in India's domestic market. In a presentation to Asia-Pacific Fund managers, POSCO stated that its objectives are to secure raw materials and penetrate the Indian steel market, if it goes for an integrated steel plant in India. POSCO current!>' sells around 30,000 tons of steel in India, to clients such as Tata Motors and Maruti.

POSCO's Market Entry Strategy for India

POSCO selected the state of Orissa which has abundant iron ore resources. apart from other minerals. Its infrastructure, including the Paradeep port which has to be used for bulk

POHANG STEEL COMPANY

151

transportation. is inadeQuate. Orissa has in fact been approached by many steel producers. basical!)' with the objective of o/ing up iron ore supplies. On August 17, 2004, a POSCO delegation headed by Vice President C.H. Chu made its first presentation to the Government of Orissa. The delegation also had representatives from BHP Billiton, the Australian mining giant and POSCO's long term mining partner. POSCO made the following propositions: o o o o A 12 MTPA steel plant, in two phases Cost sharing for related infrastructure development Assured iron ore supp!)' of one billion tons over a thiro/ year period. Part of the iron ore will be exported to Korea.

In a later presentation in September 2004, POSCO reiterated the demand for one billion of iron ore-all at captive prices.

THE GOVERNMENT OF ORISSA'S POSITION

For the Government of Orissa. Posco's proposal was important. because of the scale of investment and its impact on the poor state economy. It was however. concerned with the possible fallout of adverse public perception that the state's non renewable resources were given away at concessional terms. The state government calculated that based on the standard ratio of 1:6 ton of iron ore to make I ton of steel. an integrated plant of 12 MTPA will reQUire600 MT of iron ore over 30 period. Therefore, POSCO was real!)' asking for an export component of 400 MT out of the 1,000 MT allocation. This immediate!)' caused a problem for the government, because export of iron ore without any value addition and that too at captive prices was bound to raise objections. These would come from the opposition parties in the state as well as the Indian steel producers who would view it as a reduction in their access to local iron ore. In addition. the government itself was not certain as to why such export concessions were to be given to POSCO. While there was no immediate response from the government. POSCO sent out market signals which might push the government to take a view. It met the Central Minister for steel. Ram Vilas Paswan, for discussing the Orissa project. A senior POSCO official told the media, "We are seeking a long-term lease to ensure steady supp!)' of iron ore. A 10 million steel plant would reQuire 70 million tons of iron ore. We believe the region has the potential to provide this Quantio/ of iron ore. We are considering making investments in Brazil and China. In China. we do not need to invest in infrastructure like we may have to in India". But despite the infrastructural deficiencies and their considerable presence in Brazil and more so in China, a POSCO representative said: "we are considering making investments in Brazil and China but we prefer India over them." In December 2004. POSCO invited a high level delegation from the Government of Orissa to visit their Pohang Steel Works. The delegation came back impressed and the second phase of negotiations began.

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THEORY AND PRACTICE OF CASE METHOD OF INSTRUCTION

The Government of Orissa affirmed that (a) it would ensure supp!)' of 600 MT for internjal consumption of the proposed plant; (b) In case. POSCO has any unused ore, that could oe exported as provided under the Iron and Steel Control Order 1956. The government might have thought that since POSCO has a high level of operational efficiency. it" may be able to reduce the ore consumption from the 1:6 to I ratio. The surplus on th:at account might be allowed to be exported under the existing rules. The government's insistence on not allowing free export ore of 400 MT had a casualry. BHP. the mining partner of POSCO was essential!)' interested in developing mines and export. The Government of Orissa had insisted that it would allocate iron ore and captive mining rights on!)' to eQuiry partners in the Orissa project. BHP had decided not to hold eQuiry in the project and therefore. got itself out of the project. While POSCO said that the position was still op~n. it also said that "without more favourable terms on the export of iron ore, BHP m<!)'not be interested to come back." To keep BHP as a partner. POSCO tried to sell the idea of exporti~g iron ore and bringing in metcoke. an input for steel-making. but failed. POSCO found it hard to work alone in this project but had to accept the situation.

pasco's

COUNTER OFFER

POSCO initial!)' agreed to the revised offer of 600 MT. It was mutual!)' decided that an MOU would be signed on April 14, 2005. On April II. POSCO came up with a reQuest to include a clause in the MOU, allowing POSCO the right to export the surplus out of the 600 MT allocation. POSCO pointed out that it would use on!)' the fines and will not have any use ~or the 'lumps'. A mine in Orissa produces lumps and fines in the ratio of 3:2. POSCO was therefore. seeking blanket permission for the export of lumps. rather than taking specific approvals under the Iron and Steel control order. as had been proposed by the Government lof Orissa. POSCO also raised the issue of high alumina content of Orissa iron ore. POSCO proposed a swap-it would export high alumina iron ore and import eQuivalent amount of low alumifla iron ore from Australia, at a cap of 15%.
I

POSCO raised another important issue-whether it could be given an additional 400 MT iof iron ore, outside the MOU. This could be done through the MMTC, with the approval of the Central Government. These new issues could not be settled before the target date of April ~4.

Reaction To

pasco

Proposal

The Government of Orissa had also to contend with the rising decibel level of protests from the domestic steel producers and the political parties. RatanTata had told the Central Governm~nt that while POSCO should be allowed to produce steel in India, it could not be given any right to export iron ore. Domestic steel producers are not happy with POSCO's proposals on export of iron ore in any form, including the swap. A leading domestic producer pointed out that if the Finex technology is used by POSCO. the reQuirement of the swapped iron ore would drastical!)' come down, as
I

POHANG STEEL COMPANY

153

it can also utilize low-grade iron ore fines. In contrast. the blast furnace route uses metallurgical coke and iron ore lumps while corex technology uses non-coking coal. Indian steel producers debunk the whole notion of swap as they don't need to import. however. countered it by pointing out that Finex is onlY a more environment-friendlY and cost-effective route. While the blast furnace route uses iron ore lumps and met coal. fines and coking coals are used in Finex. Iron ore. whether in fines or lumps. would contain alumina and therefore. there is a need for swap. The government has to take a view on the need for swap. and if agreed to. on its Quantum. Iron ore production in India is a public sector monopolY of NMDC. except for some captive mines and the mines in Goa. an arrangement which predates its integration with India. MMTC. a public sector agenry. is the agenry for export of iron ore. There is a substantial volume of iron ore exports from India. In 2004-05 export of iron ore from India stood at $ 2.630 million compared to $ 1,126million in 2003-04. MMTC has signed up long term export contracts on iron ore with several japanese and Korean steel majors. Export of raw materials without any value addition is a touchy issue in India. Whether iron ore should be allowed for export has been debated in India during the last three decades. RecentlY. the debate has aCQuired an edge because of the expansion plans of several domestic steel majors. who are worried about the impact of iron ore exports on domestic supplies. The domestic steel industry's case has been articulated by the Managing Director. Tata Steel. B. Muthuraman. He observed that export of iron ore is normallY allowed by countries which do not have a domestic steel industry or have limited potential: For example. Ukraine which has the world's largest deposit of 70 billion tons. needs about 7 million tons annuallY for its domestic steel industry-enough to last for 1.000 years. Another example is Australia whose iron ore deposits of 62 billion tons are sufficient to last 500 years. In contrast. India has about 18 billion tons of resources. With the projected rise in domestic demand. this will be sufficient onlY for 55 years. Muthuraman also noted that no country in the world allowed foreign firms to own iron ore mines. In fact. FDI in the steel sector itself is not allowed. He said. international steel and mining companies were rushing to India because they could not aCQuiremines anywhere else. These companies were making export of iron ore to their plants abroad a precondition to investment for steel making. This should not be accepted. Asked why Indian steel majors were voicing these concerns onlY now when India had been exporting iron ore for decades. he said that until recentlY India was exporting onlY about 10 million tons annuallY.which has now reached 55 MT and are expected to reach 100 MT. Besides. in the past. exports were mostlY of fines. which otherwise could go waste (unless these are palletized) . The Government of Orissa has signed a large number of MoUs in the steel sector recentlY. Some important ones are shown in Table 8.

pasco

---------------l
154 [] THEORY AND PRACTICE OF CASE METHOD OF INSTRUCTION Table 8: Important Steel MOUs In Orissa lindal Steel & Power TlSCO ESSARSteei POSCO Tube Investment of India Jindal Stainless Others Total 2 million tons 6 million tons 4 million tons I 2 million tons 1.2 million tons 1.6 million tons 17.5 I million tons 44..3 I inillion tons

Domestic

steel makers fear that with POSCO getting assured supp!>'. there to mine. The

may

not be mines and the The

left in Orissa for domestic steel makers, as reserves are limited or they might get mines located in deep forests which would be difficult private steel-makers they

views

of the Orissa government

differ with regard to are availabiliry. said, "We parties.

According

to the state government. tons a/!ready Mining

have
to

enough

free iron are reserves for all the MOUs

signed with 36 companies, tons and 2.8 billion the state-owned Orissa

Orissa Steel Minister, pledged

have

free reserve of 2 billion portion is with industries."

various

A substantial

Corporation According

which can supp!>' ore to different to domestic industry. the situation

is somewhat different reQuire

"If all the proposed

steel

plants materialise.

they will produce

4S MT and that would

over 30 years. But the state has reserves of on!>' of are."

1.8

B1. So,

over 2.1 BT obvious!>'. some will

of iron are be deprived

Box 3: Iron ore Reserves: Ali-India o India has 6.9 billion tons of possible reserves.

Perspective

proven reserves, 3.4

billion of probable reserves. 3.2 billionton~ of

o o

Current steel production is 35 MT, and expected to rise to 100 MT

by 2020

and 200 MT

by 2030.

India's export of iron ore has gone up from 25% of total production in 2000-01 to 52% in

2003-04.
o With 100 MT of steel production and no export of iron ore, high and medium grades reserveswill last 25 years. With exports being allowed at that level. reserveswill last onlY 12.5years. With 200 MT of steel production and no exports. reserveswill suffice for 12.5years.

The

Government

of Orissa also has to consider the stand of the political

parties. Apart

from

the CPM and CPI, which have found some of the demands of POSCO unacceptable, dissentions within the ruling parry itself.

there are

,
POHANG STEEL COMPANY
1:1

155

While the government has to grapple with these concerns, it also has to consider the economic and financial benefits that the pasco o project would bring t~ Orissa. These are: In addition to the steel plant, other large infrastructure projects within the overall ambit of pasco project include a deep water port, captive power plant and a township. It will create about 13,000 direct and 35,000 indirect jobs. Increased business activities arIsing out of the project would generate additional revenues of Rs. 89,000 crore and Rs. 22,500 crores to the Central and the State governments respectivelY.

o o

FINAL OUTCOME AND MOU

The Government of Orissa concluded that any concession on the export of iron ore might create backlash, resulting in the scrapping of the whole project. On the other hand, there has to be some concessions which would make the project attractive from pasco's perspective. The Government of Orissa was fortunate in that the Central Government appeared to be favourablY inclined to the pasco project. It was therefore, possible for the state government to think of concessions that could be given with the assistance of the Centre. The state government made the following revised offer: o o o 600 MT of iron ore would be assured. For any iron-ore exports, the concept of net-nil export will be followed. Based on this concept, pasco may be allowed to export high alumina content iron-ore and import an eQuivalent amount of low alumina content iron ore, if reQuired, subject to a cap of 15% iron ore use.din the Orissa plant. o The state government will assist pasco in interfacing with the Government of India for securing an additional 400 I\1T of iron ore for its existing plants in Korea under the relevant export-import policy of the country. o The state government will recommend to the Central Economic Zone' (SEZ) status to the project. pasco, on its own, had also realized that its original demand of 400 I\1T of iron ore for export at captive prices out of the mines allocated to the project was a non-starter. Based on the ground realities, pasco found that the terms being offered were the best it could get. Some negotiations on the details were carried out between April 14 and lune 21. pasco president, Chang-oh Kang personallY came down to find out the extent of support the state government was committed to, despite opposition from other Quarters.
Box 4: The Last Leg of Negotiations

Government for granting 'Special

"The Orissa government, too, had a lot at stake. It needed to be assured that pasco was tru!y interested. The government too wiII haveto face the agitation that pasco wasworried about. If pasco itself backed out, the government would be left holding apolitical hot potato. So the conditions were laid. Would pasco bring in $200 million before the first mining leasewill be given? pasco agreed. Contd...

156

1:1

THEORY AND PRACTICE OF CASE METHOD OF INSTRUCTION

Kang's assurancecamewhen he learnt that the.statewas pursuing a number of infrastructure proje~ts. like the Haridaspur-Banspanirail link to the Paradeepport. '

By this time. the.statewasalso convinced that pasco's demand for iron are swapwas legitimate. dn!>, the amount had to be decided. It felt 15% of the 600 million tones allotted would do. but pasco as~ed for 30%. In the end, the government conceded, but on!>'under the condition that the low-alumina or~ is brought in first. and the high-alumina ore is exported after that. A pasco spokespersonclarifies: "lihis is on!>'if necessary.If the mines we get havethe right kind of ore, then w~ swapand raise our cost4?""
. !

Source: Business World

Jury

II. 2005

Final~ on June 22, 2005. the MOU between the Government signed.

of Orissa and pasco

was

Issues
However. even after the MOU was signed. the pasco project has remained a matter of controversy. pasco has taken calculated risks. It has no way to predict how the political situation would develop as the project proceeds. Any delay would invariablY have serio~s cost and time overruns. pasco has no experience in setting up a greenfield project outside korea. It has lost the services of its longtime mining partner BHP and will therefore, have to wo~k with Indian mining firms. pasco has been successful in China as it has always worked with local joint venture partners. In India. it has to work alone. CulturallY. India is manifestlY different from that of Korea. Posco's management will have to be able to put in place a managemen~t team to deal with the Indian bureaucracy. business partners and civil sociery. Since pasco is just at the beginning of its learning curve for the globalization process, the in-house expertise will be minimal to begin with. However, what can gladden pasco's heart is the recent success of several Korean firms such as Hyundai and lG in India. Whether pasco's global ambitions. the Orissa project. will emerge either as a crown jewel or as a millstone. onlY time will tell.

,
POHANG STEEL COMPANY EI 157

ANNEXURE-I

Summary Financial Data of POSCO

'-Income
Sheet

1999 & Balance in Data

2000

2001

2002

2003

b!lIions of won Sales Operating Income Net Income Total Assets Total liabilities Shareholders' EQuity 10.696 1,820 1.558 17.228 8.141 9,087 11,692 2,099 1.637 17,767 8.337 9,430 11,086 1,429 819 17.616 7,419 10.197 11,729 1,834 1.101 17.245 5,678 11.567 14.359 3.058 1.981 18,407 5,449 12,958

Other Financial Data Operating Margin Return on EQ!Jity Number of Shares Outstanding - --------------E.arnings per Share (Korean won) Year End Stock

17.0% 17.8% 34.2% 96,480,625

18.0% 17.7% 37.6% 96,480,625

12.9% 8.4% 42.4% 93.589,485

15.6% 10.2% 26.8% 90,781,795

21.3% 16.3% 10.1% 88,966,155

--------------

----------------

----------------

----------------

------------

16.242 125,000

19.161 76.500

10.043 122,000

13,442 118.000

24,306 163,000

I'rice (Korean won)

-~--

158

II

THEORY AND PRACTICE OF CASE METHOD OF INSTRUCTION

ANNEXURiE-1I Top steel-producing Companies 2003 and 2004 (Million metric tons crude steel output)
2004 I 2 3 4 5 6 7 8 9 10 II 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
Source:

2003 I 2 3 4 5 6 7 8 9 10
II

Company Arcelor Mittal Steel Nippon Steel IFE POSCO Shanghai Baosteel US Steel Corus Group Nucor ThyssenKrupp Riva Acciao ISG Gerdau Sumitomo EvrazHolding SAil Anshan Magnitogorsk China Steel Severstal Wuhan Novolipetsk Imidro Shougang Salzgitter Maanshan Kobe Steel INI Steel JiangsuShagang Group Krivorozstal Valin Steel Group Tangshan Mariupol Jinan Handan BlueScope laiwu Duferco Group Chelyabink (Mechel) Panzhihua 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80

2004 5.9 5.7 5.6 5.5 5.5 5.5 5.4 5.2 5.2 5.1 5.0 4.9 4.7 4.6 4.5 4.5 4.4 4.2 4.2 4.1 4.0 4.0 3.9 3.9 3.8 3.8 3.7 3.6 3.6 3.5 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.3 3.3 3.3 41 42 43 44 45 46 47 48 49 50 5I 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80

2003 5.8 5.3 5.4 5.3 5.6 4.7 5.3 4.6 5.0 3.7 4.9 4.7 4.6 3.3 4.6 4.4 4.2 4.3 4.1 3.9 3.3 3.9 3.4 3.5 3.9 4.8 3.5 3.8 3.7 3.4 2.9 3.1 3.4 3.1 2.1 2.5 2.6 2.8 2.5 2.6

Company Voestalpine Azovstal AK Steel CSN HKM Benxi Baotou Anyang Techint Celsa Erdemir Group Stelco USIMINAS Nangang Rautaruukki Zaporizstahi Dofasco Tata Iron and Steel Co COSIPA SSAB Tangshan Guofeng Steel Nisshin Steel EZZ SIDOR Hadeed CST Alchevsk lucchini Tokyo Steel Urals Steel Shaoguan Tianjin Tiantie RINl lion Group Commercia Metals Hebei linxi Tangshan ianlong Hylsamex Xuanhua Xinyu

46.9 42.8 32.4 31.6 30.2 21.4 20.8 19.0 17.9 17.6 16.7 16.1 14.6 13.0 12.2 12.1 I 1.3 11.3 10.9 10.4 9.3 9.1 8.7 8.5 8.1 8.0 7.7 7.6 7.6 7.1 7.1 7.1 6.9 6.9 6.8 6.7 6.6 6.5 6.2 6.0

12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40

42.8 35.3 31.3 30.2 28.9 19.9 17.9 19.1 15.8 16.1 15.7 10.6 12.3 12.8 12.1 12.4 10.2 I 1.5 10.8 9.9 8.4 8.9 7.8 8.2 8.0 6.1 7.3 7.2 5.0 7.1 5.2 6.1 6.5 5.1 6.1 6.5 4.2 5.8 4.9 5.3

I. 33.5% of HKM included in Salzgitter World Steel Dynamics

2. 50.0% of HKM included in Thyssenkrupp

POHANG STEEL COMPANY

159

ANNEXURE-III

Major Steel-producing countries 2003 and 2004 (Million metric tons crude steel production)
2004 mmt Rank 272.5 I 112.7 2 98.9 3 4 5 6 7 8 9 10 II 12 13 14 15 16 17 18 19 20 21 65.6 47.5 46.4 38.7 32.9 32.6 28.4 20.8 20.5 19.5 17.7 16.7 16.3 13.8 11.7 10.6 9.5 8.7 2003 Rank mmt 222.4 I 110.5 2 93.7 3 4 5 6 7 8 9 10 II 12 13 14 15 16 17 18 19 20 21 61.5 46.3 44.8 36.9 31.1 31.8 26.8 19.8 18.3 18.8 16.5 15.2 15.9 13.3 I I. I 9.1 9.5 7.9 2004 Rank mmt 7.4 22 23 7.0 24 6.8 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 6.5 6.0 6.0 5.4 5.1 4.8 4.8 4.6 4.5 4.5 4.0 3.9 2.8 2.7 2.4 2,0 2.0 21.4 1056.7 2003 Rank mmt 7.5 22 23 6.8 24 6.6 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41
/

China 1< pan United States Russia S:>uth Korea FR.Germany Ckraine Brazil India Italy F-ance Turkey Taiwan, China Spain Mexico Canada United Kin,l?,dom Belj?,ium Poland South Africa Iran Tolal

Australia Czech Republic Netherlands Austria Romania Sweden Kazakhslan Arj?,entina Finland Ej?,ypt Venezuela Thailand (e) Slovakia MalaySia (e) Saudi Arabia Indonesia (e) Luxembourg Bulj?,aria Greece Hunj?,ary Others

6.3 5.7 5.7 4.9 5.0 4.8 4.4 3.9 3.6 4.6 4.0 3.9 2.0 2.7 2.3 1.7 2.0 19.7 969.3

Source: World Steel Dynamics

160 THEORY AND PRACTICE OF CASE METHOD OF INSTRUCTION

ANNEXURE-IV Iron Ore Production 2003 (Million metric tons actual weight)
Country Austria BelgiumLuxembourg France FR Germany Italy Netherlands Spain Sweden United Kingdom Other EU European Union Czech Republic NOrway Poland Slovakia Other European Countries Europe CIS Canada Mexico United States NAFTA Brazil Chile Peru Venezuela Other Central and South America Central and South America Mauritania South Africa Other Africa Africa Middle East China India Japan South Korea Other Asia Asia Australia New Zealand and other Oceania Oceania World Source: World Steel Dynamics (60) (63) (65) (60) (66) (61) (60) (64) Fecontent (32) Production 2.1 -Exports
-

+ Imports
5.7 I 1.6 19.0 33.9 15.2 14.7 5.7 0.1 16.1 4.2 126.2 8.2 0.2 8.8 5.6 17.6 166.6 18.3 6.6 3.6 12.4 22.7 0.0 0.0 0.0

=Apparent Consumption 7.8 11.5 19.0 33.9 15.2 12.9 5.7 5.6 16.1 4.2 131.8 8.2 0.0 8.8 5.9 21.7 176.5 142.2 12.7 17.8 54.2 84.7 61.3 1.5 0.4 ,14.3 5.8 83.3 0.5 14.9 12.9 28.3 24.1 40 1.4 51.1 131.9 41.5 28.0 654.0 28.1 1.1 29.1 1222.3

0.1 (33) (28) 0.0 0.0 0.0 1.8 21.5 0.0 16.0 0.0 0.0 18.0
-

(48) (63) (27) (15) (65)

23.6 0.4 0.3 4.2 28.5 171.2 33.2 14.8 48.5 96.5 245.6 7.3 5.4 21.7 0.7 280.7

0.5 0.0 0.1 18.6 47.3 27.1 0.6 6.8 34.5 184.3 5.9 5.0 7.4 6.0 208.5 9.6 24.0 0.4 34.0 3.0 0.0 54.8 0.2 0.0 4.5 59.5 186.1 0.8 186.9 592.5

11.2 11.2

(65) (65)

10.1 38.1 5.0 53.2 16.0 253.2 105.5 0.3 2.4 361.4 212.9 1.9 214.8 1222.3

0.9 8.2 9.1 11.1 148.2 0.5 132.1 41.3 30.1 352.1 1.4 0.0 1.4 592.5

(28) (61) (57)

(65)

POHANG STEELCOMPANY 161

ANNEXURE-V World iron are trade by area 2003 (Million metric tons actual weight)

Exporting Region

.~
v:;-

V>

'" .~ ~
E

~
c
0

c: ::l
0
llJ

U c

..<::
c.:::

L.LJ llJ

~ '"
V>

:e :e
'" 'c '" ~
1.8 1.4
0 00

Destination

'c ::l
c

'" 02 ::l

'" 0llJ

L.LJ

::l ...
llJ

Vl Vl

0 Vl -0

:;
c

=a -0

..5

0 0-

~
-0
C

rn c
'Oi)

2 ::l

..<::

E u..

u..

L.LJ

(5

;:5 Z

'" ~

c:
llJ

'" u '" ~

.~

1.3

'"

0 15.7 1.2 0.3 0.1 0.0

llJ U

13 0
f-

L.LJ

1:: x

European Union (15) Other European countries F'ormer USSR NAFTA Central and ~;outhAmerica Nrica and Middle East China Japan Other Asia Oceania Total exports Extra-regional exports l~et exports

12.0 1.9 0.0 0.1 0.0 2.4 0.1 0.0 1.5 0.0 18.0 6.0
-

0.5
-

4.0 25.1 17.7

-

13.2 1.5
-

63.1 8.0 0.3 5.3 14.4 13.5 47.1 31.3 25.7 0.6 209.2 194.8 194.4

15.9

126.2 40.4 18.3 19.1 14.8 20.2 148.2 132.1 71.8 1.4 592.5 476.1

114.3 40.4 0.6 5.5 0.4 17.2 117.5 113.7 65.1 1.4 476.1

0.0 0.0
-

13.6 0.4 0.7 2.0 0.6 1.1 0.7 33.9 20.3 14.8

0.0 0.0 0.6 30.7 18.3 6.7 0.0 59.5 3.8

-

3.0 9.8 5.6 1.4

-

58.1 76.3 35.4 0.0 187.0 187.0 185.6

0.4
-

0.1
-

0.0
-

0.6 0.6
-

47.3 29.6 29.0

37.0 34.0 16.8

108.2
I. 2.

39.8

12.3

Total exports minus intra-regional trade. Intra-regional trade is highlighted Exports minus imports

Scurce: World Steel Dynamics

162

THEORY AND PRACTICE OF CASE METHOD OF INSTRUCTION

ANNEXURENI

Malor Capaclo/ Additions In India

Company Tata Steel Essar Steel Ispat Industries lindal Iron & Steel SAil Rashtr\)'a Steel & Strip Bnushan Steel & Strip Tube Investment , of India Bhushan Steel Addition* 2.4 6.0 2.2 4.0 0.6 1.3 7.0 1.78 1.8 1.5 1.25 10.0 2.0 location lamshedpur Orissa, Kalinganagar Gujarat, Hazira Orissa Dolvi. Alibaug Ballary, Kamataka Various Visakhapatnam Visakhapatnam Orissa Orissa Orissa Orissa Commencement 2007-08 2008-09 2005-06 2009-10 2005-06 2006-07 2011-12 2007-08 2011-12 2008-09 2007-08 NA 2006-07 Cost** 7,800 15,000 2,000 10,700 158 1,275 25,000 3,000 6,800 3,200 3,400 44,000 4,000

In million tones per annum. In Rs. Crore Source: Crisinfac and BW research, Business World JulY 11th, 2005.

POHANG STEEL COMPANY

163

ANNEXURE-VII

The Positioning of 12 World-Class Steel makers

Bao Steel Faccr Operating Costs (I 0= Best) 8 6 8 10 7 9 6 7 8 10 9 8 CarTech China Steel CSN Dofasco Gerdau Nippon Steel Nucor Poseo SeverStal Tata Usinor

Owr,ership of low cost iron and cokilg coal 3 nmf I 9 6 nmf I nmf I 9 10 6

Favcmable loca':ion for procuring matc:rials Skilkd and procuctive worlforce Price: paid for elect ricity Higt QJJality and nich,: products Low legacy (retired-worker costi) Onping cost8 8 8 8 8 8 8 8 8 8 8 9 cutti ng efforts Cost position of neany comlJetitors Owns downstream steel-using ~!ess Domestic market gro~ing rate at a high 10 6 6 6 4 7 2 3 6 6 9 8 5 8 5 4 5 7 10 8 6 6 5 7 6 8 6 8 8 7 6 8 9 6 7 7 8 4 6 8 4 8 5 5 6 6 6 5 6 5 5 6 6 7 6 8 8 8 7 7 7 8 9 7 8 8 10 10 10 7 7 9 raw 5 6 6 9 6 6 8 7 8 7 10 6

10

10

Proportion of sales in the home market Degree of "pricing buyers Dominant regicn in power" with large steel

10

7 7 10

7 7 6

8 8 9

6 8 6

3 9 6

8 7 7

6 6 8

2 10 10

9 8 9

7 7 2

7 7 8

7 8

Balallce sheet Borrowed funds and ':QJJity on a favourable basis Management expel'ienced is

aggn:ssive. proactivl: Total Average Score

121 7.12

112 7.00

119 7.00

123 7.24

109 6.41

118 7.38

III 6.53

116 7.25

127 7.47

III 6.53

131 7.71

129 7.59

Note: Many of these ratings are subjective. Some are duplicative. rating than others. Source: World Sheet Dynamics

And some factors, it could be submitted.

should have a higher

164 1:1 THEORY AND PRACTICE OF CASE METHOD OF INSTRUCTION

TEACHING MANUAL Scope

The case deals with a number of issues which are normal!>,covered in a course in InternatioJ;lal Business Strategy. Some of these are: o o o How should a firm plan its globalisation strategy? How is political risk assessment carried out? What considerations are to kept in mind while negotiating for accessto natural resourdes when national sensitivities are involved? What rypes of public relations strategy can be thought of to counteract negative propaganda by various interest groups? How should investment planning be made when the industry demand is high!>' cyclical, as is the case in steel? What rypes of ana!>,ses may be carried out to prepare different time and cost large overseas projects on the profitabiliry and credit ratings of a firm? Cross-cultural issues impacting negotiations

overruns of

While these are issues that are firm specific, the case can also be used to discuss some trade policy issues: o o o o o Should FDI be allowed in

strategidextractive

industries?

Should there be a prioriry for domestic industries to access local raw material resources? What are the implications if

every country pursues such a policy?

What is the optimal rate of extraction of non-renewable resources? If there exists a policy of long-term conservation, is there a risk that new technologies may wipe out the economic use of such material, e.g. mica? Can there be insistence on a value-addition norm for all rypes of natural resources for all times? Does India policy?

have a long-term policy covering such issues? If not, what should be ~he

POHANG STEEL COMPANY

165

Background Readings
Participants will need to have a fair amount of knowledge to discuss such issues. Suggested background reading includes: :'\ny good textbook on international marketing: Chapter on Market Entry Strategies. For ~xample, B. Bhattacha'Y.Ya,Going International: Response Strategies for Indian Firms (S. Chand & Co) Chapter? For a background on globalisation strategy, the following is recommended: George S. Yip (1995), Total Global Strategy (Prentice Hall); Barlett and G (2000), Going Global: Lessons from late Movers (March/April), Harvard Business Review. To understand the trade poli<y issues, the following is suggested: Varstney & Bhattacha~: International Marketing Management: An Indian r>erspective Chapter (Sultan Chand) Edition? Government of India, Export Import Poli<y of India, 2005-08 Vol I