Asian Steeel Watch Vol.7 (August 2019)

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ON THE COVER

The Corporate Citizenship Challenge Katherine Smith, Executive Director of BCCCC

Tata Steel: A Benchmark in Corporate Citizenship Sourav Roy, Chief of CSR, Tata Steel FEATURED ARTICLES

Shifting Needs for Steel Materials with the Rise of 5G Telecommunications and Smart Cities SPECIAL REPORT

Restructuring of the Chinese Steel Industry: Challenges and Prospects MARKET TREND AND ANALYSIS

P E O L E

S O C I E T Y

P

BU SI NE SS

Vietnam's Steel Industry: Characteristics and Steel Demand Forecast

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ASIAN STEEL WATCH

07 AUGUST

2019

ASIAN STEEL WATCH Bi-annual

C O N T E N T S Publisher

Yoon Jong Jang Published by

POSCO Research lnstitute Editor-in-chief

Chung, Cheol-Ho

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On the Cover

Being a Good Corporate Citizen

Editing Advisor

Jun H. Goh Managing Editor

Sojin Yoon Editorial Board

Moon-Kee Kong Dong-Cheol Sa Ji-mi Chu Chang-do Kim Jisun Kim Kiyong Jeon Designed by

www.thegraph.co.kr Park, Hyunil / Lee, Seunghyun Han, Jungyoun Printed by

Gaeul Planning Date of lssue

August 20, 2019 Copyright 2019 POSCO Research Institute All rights reserved. Production in whole or in part without written permission is strictly prohibited. Registration number

Gangnam, Ba00170 Registration date

September 7, 2015 Contact

asiansteel.w@ posri.re.kr

06 The Corporate Citizenship Challenge 16 Tata Steel: A Benchmark in Corporate Citizenship 26 POSCO’s Corporate Citizenship: Its Meaning and Application 40 Five Social Issues Facing the Korean Steel Industry: A Corporate Citizenship Perspective

52 60

Special Report

Restructuring of the Chinese Steel Industry: Challenges and Prospects

80

Market Trend and Analysis 82 Vietnam's Steel Industry: Characteristics and Steel Demand Forecast

Featured Articles

62 The Evolution of Smart Cities and Opportunities for the Steel Industry 72 Shifting Needs for Steel Materials with the Rise of 5G Telecommunications and Smart Cities

On the Cover

Being a Good Corporate Citizen

06 The Corporate Citizenship Challenge

Katherine Smith

16 Tata Steel: A Benchmark in Corporate Citizenship

Sourav Roy

26 POSCO’s Corporate Citizenship: Its Meaning and Application 40 Five Social Issues Facing the Korean Steel Industry: A Corporate Citizenship Perspective Sooyoung Kim

Yang Weon-Jun

BEING A GOOD CORPORATE CITIZEN

Katherine Smith Executive Director Boston College Center for Corporate Citizenship Carroll School of Management

The Corporate Citizenship Challenge

What is corporate citizenship? It may be called a variety of names–corporate social responsibility or CSR, corporate sustainability, corporate responsibility—but all address the same thing: building a more ethical, resilient, sustainable, and profitable company. Today when 1 talking about corporate citizenship, Orlitzky, Marc, Frank L. Schmidt, people are talking about how compaand Sara L. Rynes. “Corporate nies exercise their rights, responsibiliOK?E=H =J@ ĹˆJ=J?E=H LANBKNI=J?AÄĽ ties, obligations, and privileges across A meta-analysis.â€? Organization 0PQ@EAO JK Ĥ ÄĽ economic, social, and environmental 2 contexts across the globe as seen in Luo, Xueming, Heli Wang, Sascha Figure 1. Raithel, and Qinqin Zheng. Ĺ€ KNLKN=PA OK?E=H LANBKNI=J?A For decades social scientists have analyst stock recommendations, been examining the links from en=J@ ĹˆNI BQPQNA NAPQNJO ˆ 0PN=PACE? vironmental, social, and governance *=J=CAIAJP 'KQNJ=H JK Ĥ ÄĽ (ESG) performance to financial perfor3 mance, finding a great deal of evidence *=NCKHEO ' ! "HBAJ>AEJ % to support the idea that companies & Walsh, J. P. “Does it pay to >A CKK@ IAP= =J=HUOEO =J@ can do well by doing good. Numerous NA@ENA?PEKJ KB NAOA=N?D KJ PDA empirical studies have indicated that it NAH=PEKJODEL >APSAAJ ?KNLKN=PA never hurts to do the right thing and OK?E=H =J@ ĹˆJ=J?E=H LANBKNI=J?A ˆ JJ N>KN Ĥ

it may, indeed, pay—especially in the

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Asian Steel Watch

long run: t ZFBST PG SFTFBSDI FYBNJOJOH UIF SFMBUJPOship between corporate social performance (CSP) and corporate financial performance (CFP) over 52 studies suggested that CSP and CFP generally go hand in hand, and this effect holds true across a variety of industry and study contexts.1 t " QBQFS TVHHFTUT UIBU BOBMZTU FWBMVations of companies with poor social performance are less likely to carry buy recommendations even if the stock appears to be under-priced based on evaluation of the fundamentals.2 t " NFUB BOBMZTJT3 PG ZFBST PG SFTFBSDI MPPLing at 214 studies concluded that CSP has a positive relationship with CFP—especially if the company is a transparent and proactive reporter of its ESG performance. In fact, the study notes that companies may under-communicate about their good works and could derive even more business and social value from strategic communication.

The Corporate Citizenship Challenge

Figure 1. Spheres of Corporate Citizenship

ES: Codes of Conduct Natural Resource Stewardship

E-Environmental Natural Resource Use Environmental Management Pollution Prevention

ES S-Social S-S Socia Standard Standard of Living Education Educatio Community Communiity Well-being Wel -being

SE S

E : Energy Efficiency Subsidy/Incentive for Use of Alternatives

n E n viro m e nt

E

S o ciety -Economic Profit Savings Growth R&D

S : Worker's Rights Fair Trade Business Ethics The diagram on the left shows spheres of sustainability and their interconnections. The areas of intersection represent varing degrees of sustainability and the indicators of sustainability for each domain area. The greater the area of overlap, the stronger and more resilient the domain of sustainability. Ideally, all three domains overlap to ensure complete sustainability as in the diagram on the right. Soures: EPA Sustainability Concepts in Decision-Making: Tools and Approaches for the US Environmental Protection Agency 2012

Corporate citizenship touches every aspect of business. Companies operating in the global economy have become increasingly responsive to the demands of a range of stakeholders—communities, employees, customers, shareholders and governments across the world. Many factors have contributed to this trend. The democratization of information and digital and social DPNNVOJDBUJPO IBWF CFFO NBKPS GBDUPST "T NPSF people have greater ability to communicate with and about companies across domestic and international borders, companies are held to account

The diagram on the right shows the interdependent relationship of our environmental, social, and economic ecosystem. We must have a healthy environment to have a healthy society. A healthy enviroment is the foundation of all prosperity and social wellbeing

by greater numbers of stakeholders than ever before and as a result, they are proactively managing their impacts. The steel industry is challenged across multiple ESG dimensions. The industry is an upstream supplier to many manufacturing industries that may seek to improve their own ESG profiles by demanding greater environmental efficiency from their steel suppliers. Without policy intervention that promotes life-cycle accounting from design through re-use and recycling, steel suppliers bear a disproportionate share of responsibility for the

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BEING A GOOD CORPORATE CITIZEN

4 SKNH@OPAAH Ĺ€0PAAH‡O KJPNE>QPEKJ PK = )KS =N>KJ #QPQNA =J@ Climate Resilient Societies, SKNH@OPAAH LKOEPEKJ L=LAN ˆ Ĥ &0 +

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Asian Steel Watch

environmental footprint of end products.4 Though demand for steel is predicted to grow over the next decade, it will be at a much slower rate than what it has experienced during the Chinese expansion5, 6 and prices—though recovering—are not predicted to come near the highs of a decade ago.7,8 " SFcent study of the Korean steel industry reveals that though turnover reduced, greenhouse gas (GHG) emissions remained flat suggesting that there is capacity in the system. The researchers suggest that the Korean steel indus-

try can improve its overall industrial efficiency through green investments.9 Energy efficiency has been improved tremenEPVTMZ PWFS UIF QBTU ZFBST XJUI UIF FOFSHZ consumption per tonne of steel produced reduced CZ NPSF UIBO " SFDFOU TUVEZ CZ UIF 8PSME 4UFFM "TTPDJBUJPO TVHHFTUT UIBU UIFSF JT UIF PQportunity to improve efficiency by as much as NPSF BOE OPUFT UIBU UIF QMBOUT XJUI UIF most efficient operations are not necessarily those with the most modern equipment, but rather those that demonstrate optimal operating knowledge and information technology.10 These factors are clearly dependent on attracting and

The Corporate Citizenship Challenge

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engaging employees with the right talent and skills. The steel industry has many opportunities to bring novel technologies such as the use of hydrogen as a reducing agent, carbon capture and storage (or utilization), or electrolysis to scale in order to reduce emissions11 but these opportunities also cannot be realized without investments in people, effective relationships with regulators, and support from the communities in which plants are located. In order to optimize success in achieving these conditions, corporate citizenship and ESG investments should connect to, and support, the business strategy of companies—taking into account

their priorities, growth plan, location, expertise, environmental impacts and natural resource constraints, and workforce and community needs. Research also suggests that such alignment and integration help companies achieve success with the following aims: t 3FJOGPSDF CSBOE EFFQFO DVTUPNFS12 and employee13 engagement t "EESFTT FOWJSPONFOUBM BOE TPDJBM issues that have the potential to disrupt business14 t $ SFBUF SFQVUBUJPOBM BTTFUT UIBU contribute intangible value to the

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BEING A GOOD CORPORATE CITIZEN

firm 15 while contributing to the common good16 t )BWF QIJMBOUISPQJD BOE PUIFS DJUJ[FOTIJQ JOJtiatives viewed as more credible as a result of logical connections to the purpose of the company17

15

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How to differentiate corporate citizenship programs Maybe POSCO has the best R&D people in the world, or possibly its ability to deliver a particular steel product that is second to none. These are the firm’s core competencies—the things it does exceptionally well as a business and which differentiate itself from its competitors. Its purpose and competencies come together to make up its WBMVF QSPQPTJUJPO "OE KVTU MJLF XJUI the purpose, it now needs to be able to describe its complete value proposition so that anyone in the company would understand what it does in a more unique and compelling way than anyone else.

Related Marketing Partnering as a Means to Aligning Corporate and -DEH=JPDNKLE? $K=HOÄ¥ J "ILENE?=H 0PQ@U ˆ ?=@AIU KB *=NGAPEJC 0PQ@EAO 'KQNJ=H 3KHQIA +QI>AN Ĥ LL

18 "- ŀ0QOP=EJ=>EHEPU KJ?ALPO EJ !A?EOEKJ *=GEJCĥ 1KKHO =J@ LLNK=?DAO BKN PDA 20 "JRENKJIAJP=H -NKPA?PEKJ CAJ?U ˆ

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Asian Steel Watch

Competition " DPNQBOZ NBZ UIJOL PG DPNQFUJUPST as businesses competing in the same product or service sector as its own, but there are many different dimensions of competition. It’s especially important to define competition ac-

cording to the key risks and opportunities in the business. From a business perspective alone, never mind corporate citizenship. If a company wants to recruit the best and brightest employees, it can become better at recruiting by creating an engaging and inspiring workplace because it is competing not only with others in its own industry, but also with any other company that is TFFLJOH FNQMPZFFT XJUI UIF TBNF DBQBCJMJUJFT " company may be seeking investment for R&D or expansion. In this case, it is competing with other technologies, workplaces, and leadership teams for a limited pool of capital. Understanding who various stakeholders view as competitors is an important undertaking.

Stakeholders are the reason corporate ?EPEVAJODEL LNKCN=IO ?=J‡P >A = KJA OEVA ňPO =HH Stakeholders exist in a hierarchy. One of the most well-established sustainability decision-making frameworks recognized this hierarchy, for example, we must have a healthy environment to have B IFBMUIZ TPDJFUZ XF NVTU IBWF B IFBMUIZ TPDJFUZ to have a healthy economy.18 Think of stakeholders as an anchor point, the context for a corporate citizenship program. Everything starts with them—and stakeholders are not only individuals, they include the environment and ecosystem services on which we depend to live, multiple sectors of society, and of course, customers, employees and the myriad others upon whom we depend to maintain a successful business. So who are the stakeholders? They’re groups

The Corporate Citizenship Challenge

such as suppliers, customers, and employees. We can also add external groups such as competitors, members of the communities where a company operate, values-based investors, issues advocates, regulators, activist groups, and policy makers. Most large companies attract a wide range of advocates, activists, and values-based investors (more about the investors below). There’s a widely used acronym which covers most of their areas of interest: ESG (Environmental, Social, and Governance). Historically, the first impulse of business people, at least in the US, has been to dismiss stakeholders with ESG concerns as anti-business, anti-market, anti-progress socialists who don’t understand the power and importance of market forces. This response represents a lost opportunity, because if a company dismisses the chance to hear from its non-financial stakeholders, it can’t learn from them. In today’s world of citizen journalism and social media, thinking of those who call for accountability from institutions as fringe is no longer practical. These stakeholder groups can gain traction and support quickly. Then what issues are most important to each PG UIFTF TUBLFIPMEFST " DPNQBOZ QSPCBCMZ IBT B sense about the most pressing issues in its marketplace already. However, different stakeholders will have different priorities. Many are single-issue focused—organizations we would normally think of as activists, or advocates for a cause. So while a company is trying to manage multiple issues from a corporate citizenship perspective, they’re trying to get it to focus on their one thing. They may have had a relationship with its business based on that single topic for many years,

and while they may sometimes be challenging to work with, they can also be the most helpful in identifying how their issue will impact the business long term. The company will learn this most easily through dialogue. To be a leader in corporate citizenship, it doesn’t just need to manage this process. It needs to leverage this so the company can be the best in its sector—even the world. It needs to create a competitive advantage out of the thing that looks like trouble to other companies. Engaging these groups can also enhance the work the company or industry association is doing to establish norms and standards of practice to address complex social and environmental issues, such as sustainable consumption and climate change. The products and services a steel company sells have an impact on society far wider than their actual usage. This ranges from the actual impact (the environmental, human, or societal impacts of what the company produces) to the perceived or realized impact (views held by its customers and consumers). For decades, the performance regulations companies had to deal with in the corporate citizenship space were all ‘you shall not’—you shall not emit so many pounds of this, you shall not dispose of so many tonnes of that. In recent years, the worlds of regulation and voluntary standards have moved toward a proactive issue-management and disclosure mindset— in other words, to be competitive, businesses are expected to provide customers—and sometimes the general public—with information so that they can make their own purchase or ‘enforce-

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BEING A GOOD CORPORATE CITIZEN

A CEO Perspective ArcelorMittal recognizes the power that clear corporate citizenship goals can have on engaging with stakeholders and meeting business objectives. As a global leader in steel production, ArcelorMittal is also a leader in sustainable operations with a commitment to a long-term strategy. Corporate citizenship issues have a direct impact on businesses, as well as individuals, governments, and civil society. We are expected to be part of the solution and bring value to society more broadly through our products, the way we operate, and our core purpose. While we have made good progress on our sustainability agenda over the eight years since the creation of ArcelorMittal, that agenda continues to evolve. We must respond to evolving social and environmental trends, which is why we’ve created ten sustainable development outcomes we plan on delivering over the long term. We know that being able to adapt is crucial in all aspects of our business. Sustainability has to be a priority because ultimately it is about building a better and stronger future for ArcelorMittal. Whether it is the importance of our people’s safety or the value we bring—not only from our products—but also the social and economic value from our production sites, or it is being trusted by our communities and our customers for the way we use natural capital. All of this is crucial if we want to enjoy the support of our stakeholders. ArcelorMittal Chairman and Chief Executive Officer Lakshmi N. Mittal,

From The Corporate Citizen magazine, Issue 12, 2015, ©The Trustees of Boston College

ment’ decisions. The era of ‘radical transparency’ is here for all companies.

sometimes referred to as pre-competitive ‘collabo-tition’ or the practice of collaboration with competitors to achieve mutually held objectives.

If it is impossible to differentiate, collaborate Sometimes it does not make sense to forge ahead alone to lead the pack due to lack of resources, expertise, or executive buy-in. In those cases, it is often better to collaborate with others in the same industry to address the issue either through tactics including voluntary standards, codes of conduct, supplier training, or others. This is

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Asian Steel Watch

Working with codes and standards of conduct There are many codes of conduct that set rules to define what’s ethical and responsible, and what’s not. This means someone else has done work assessing and prioritizing risks in any given area, which can only be of help to companies. Understanding these helps create an ethical supply

The Corporate Citizenship Challenge

chain approach in business. If a corporation is similar to most, its team will need to work with pre-existing codes of conduct that outline the standards of behavior expected of the company and its procurement team. Codes of conduct are basically rules set up for how a company conducts business and manage its suppliers (including how the suppliers manage their suppliers). The codes of conduct are integral to help businesses manage risks in this area, although they’re also very complex. " DPNQBOZ NBZ IBWF IBE UIF GPSFTJHIU UP assign one person to manage all of the codes of conduct for itself, but it’s more likely there are many codes that the company need to abide by, either because it has written these codes itself, or because third parties have set them for the company. Coordinating them will not only help to make its effort more efficient, but to determine which aspects of its performance should be communicated to stakeholders inside and outside the company.

How corporate citizenship programs can affect stakeholders "MXBZT MPPL GPS PQQPSUVOJUJFT OPU POMZ UP SFDFJWF good from stakeholders, but to do good for them as well. There are many ways to implement projects that may not bring short term benefits, but provide natural opportunities to do good in the course of the regular operation of the business. In the long run, they’ll add to the company’s reputation and relationship with customers and other interested stakeholders.

Beyond operations: why engage with the community? There are many ways to describe corporate giving: community involvement, shared value, impact-investing, collective impact, strategic philanthropy—just to name a few. Don’t worry about what the program is called. Pick the terms that resonate with the corporate culture and values. Corporate gifts managed in a strategic way add value to society and improve a company’s operating context. The most effective corporate giving programs invest in causes and issues that are important to the company’s community, employees, customers, and others in the sphere of operation. There should be an obvious, logical connection between the corporate giving strategy and business strategy. Stakeholders should be able to discern why their companies are investing in one particular purpose and not another. If there’s a strategic fit, a company will be able to describe its giving program in a clear and understandable way whether it’s communicating to a local non-profit or its board of directors. What is the company trying to accomplish? For whom, and through whom? We see the following trends emerging among those companies that report the best outcomes from their programs.

Provide engagement opportunities for varying employee segments Employees at different stages and levels are moti-

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Table 1. How Engaging Stakeholder in Coporate Citizenship Increases Business Value Stakeholder

Employees

Effective activities

Impact on group

Sustainability

New Skills & Training

Labor practices

Recruitment & Retention

Philanthropy

Increased engagement

Employee volunteering, sustainability

Customers

Cause branding

Higher loyalty

Philanthropy

Favorable reputation

Sustainability

Higher satisfaction

Innovation & Design

Higher purchase intent

Cause marketing

Investors

Sustainability

Improved reputation

Innovation & Design

Decreased long-term risk profile

Supply chain management

Expanded product portfolio

Disclosure, governance Training programs Suppliers

Government

Environment

Reduce waste

Extend ESG standards to suppliers

Lower risk

Disclosure requirements

Secure materials and labor predictably

Codes of conduct/standards

New supplier capability

Environmental

Develop connections to decision-makers

Community involvement

Shape policies and regulatory environment

Voluntary standards

License to operate, develop consensus standard of operation

Pollution reductions

Reduce waste

Natural resource conservation

Lower risk

Sustainable alternatives

Secure materials predictably

Codes of conduct/standards

Supply resilience

Note: Adapted with permission from “Managing Stakeholders with Corporate Social Responsibility, Course Overview� by Christopher Marquis, Laura Velez Villa. Copyright 2012 by the President and Fellows of Harvard College

vated to give and participate in corporate philanthropy and volunteer programs differently. Recognizing this, companies are offering more choice in their programs. Employees on a leadership track, for example, may be motivated to participate in a company’s philanthropic strategy for the recognition, the exposure to executives, and the leadership opportunities. More junior employees may be more inclined to give time and participate in employee-directed activities.

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Asian Steel Watch

Leverage technology to drive engagement The introduction of giving platforms that allow more choice certainly brings opportunity for companies and their employees to express shared corporate and personal values. Similar to volunteer programs, workplace giving can have a positive impact on employee attitudes toward their DPNQBOJFT " TUVEZ TIPX UIBU QBSUJDJQBUJPO in giving programs can help employees identify

The Corporate Citizenship Challenge

Stakeholder

Employees

Outcomes

Value to company

Contingencies

Eased recruitment and lower turnover

Decreased costs

Industry

Better teamwork and higher productivity, improved performance

Increased revenue

Employee tenure/experience

Company size, perceived authenticity Repurchase and higher share of category spending

Increased market value

Substitutes

Referrals and willingness to pay premium

Increased revenue

Industry

Customers

Quality of product or service Perception of CSR premium View of authenticity, substitutes

Investors

Suppliers

Government

Environment

Lower cost of capital

Decreased costs

Increased stock valuations

Increased revenue

New supplier capability

Reduced cost of production

Volume of institutional or SRI investors

Scale

Share risk across industry where a company cannot differentiate Increase revenue

Competition for resource

Develop product premium (e.g., fair trade product)

Improved forecast ability

Differentiation of resource

Reduced lobbying cost

Decreased cost

Maturity of government

Access to government purchasing

Increased revenue

Degree of bureaucracy

Alternative materials

Reduced cost of production

Cost of alternatives

Share risk across industry where a company cannot differentiate Increase revenue

Competition for resource

Develop product premium (e.g., fair trade product)

Differentiation of resource

with their organizations more as a whole, which in turn can improve commitment and loyalty.19

Build on Success Strategic corporate citizenship has the potential to transform a company at every level. Once it has made a commitment to implementing a comprehensive corporate citizenship program, the next step is to ensure those strategies systemati-

Improved forecast ability

cally evolve and improve performance over time, which means developing management systems and reporting structures capable of integration and adaption as a business evolves. This is important because if it’s done 19 Grant, A. M., Dutton, J. correctly, the business can rely on the " /KOOK ! Ĺ€$EREJC systems to improve and others will use ?KIIEPIAJPÄĽ "ILHKUAA OQLLKNP its reporting not only to communicate programs and the prosocial sensemaking process,â€? Academy the results it has achieved, but also to KB *=J=CAIAJP 'KQNJ=H Ĥ manage future performance. Ĥ

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BEING A GOOD CORPORATE CITIZEN

Sourav Roy Chief of CSR, Tata Steel

Tata Steel: A Benchmark in Corporate Citizenship

In the age of rapid global disruptions and transformations towards a more sustainable future, successful businesses maintain a dynamic business model. While the onus may be on every business to strive towards adopting sustainability as a driver of growth and longevity, core sectors like steel are often considered pivotal in achieving global growth in a more sustainable world. However, the question of ‘how’ remains a difficult one for the sector. 1 DPPLOĥ SSS =AE KNC LQ>HE?=PEKJ Tata Steel has deconstructed and BKNPQJA ňNIO R addressed this question in the 112 KJHU NAI=EJ PD=JGO PK PDA years of its existence. Part of the ?NA=PERA@AOPNQ?PEKJ PD=P BQAHO A?KJKIE? LNKOLANEPU =??AOOA@ ZFBS PME 5BUB (SPVQ 5BUB 4UFFM LNEH has brought to reality the vision of its 2 founder, Jamsetji Nusserwanji Tata— DPPLOĥ SSS P=P=OPAAH ?KI EJRAOPKNO EJPACN=PA@ providing positive value to society NALKNP ?KJOKHE@=PA@ while exceeding the expectations of LNKňP =J@ HKOO DPIH =??AOOA@ stakeholders. The longevity of the LNEH 3 company provides an effective counter DPPLOĥ SSS P=P=OPAAH perspective to the declining lifespan ?KI EJRAOPKNO EJPACN=PA@ of businesses worldwide—for context, NALKNP LAKLHA DPIH =??AOOA@ LNEH OJOF PG FWFSZ UFO 'PSUVOF DPNQB-

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Asian Steel Watch

nies from 1955 had gone, merged, or contracted CZ 1 5BUB 4UFFM JT UIF XPSME T UI MBSHFTU steel manufacturer with annual production capacity of 27.5 million tonnes, revenue over $19 billion2 BOE FNQMPZFFT 3 Tata Steel’s story has been the hallmark of sustained growth, value creation, corporate citizenship and business ethics. While J.N. Tata is remembered as the ‘father of Indian industry,’ it was his belief that ‘the community is not just another stakeholder in business, but is in fact the very purpose of its existence.’ This provides the unique genetic code of the group, and resonates in a rich legacy of Tata Steel emphasizing social and employee welfare much before any regulatory requirement (provisions like 8-hour working day, leave with-pay and profit-sharing bonus were introduced at Tata Steel two or three decades CFGPSF JU CFDBNF MBX JO *OEJB 5BUB 4UFFM IBT CFFO doing corporate social responsibility (CSR) for PWFS B DFOUVSZ XIJMF JU CFDBNF MBX POMZ JO and aligning business and philanthropy with national development (Tata Steel was as much a

Tata Steel: A Benchmark in Corporate Citizenship

Figure 1. Tata Steel at West Bokaro Organizes ‘Kisaan Vaarta’ to Educate Farmers on New Farming Techniques

Source: Tata Steel website

nation-building project as a business).4 "U 5BUB 4UFFM ASFTQPOTJCMF DBQJUBMJTN JT OPU just straightforward philanthropy stemming GSPN CVTJOFTT TVDDFTT JU JT UIF NBOOFS JO XIJDI the company applies the tenets of social responsibility in conducting its business, balancing social commitment with business expertise, and developing a cogent philosophy in which the company’s long-term success is reviewed through the dual lens of sustainability and financial benchmarks. This article postulates that a responsible business (a) ingrains corporate responsibility into its genes (b) creates efficient processes to develop innovative value-delivering products for customers and communities (c) offers intellectual and other resources to solve larger societal problems and (d) approaches CSR not just as philanthropy but as a mode of co-creating growth opportunities.

Creating total value through products and processes " CVTJOFTT NPEFM QJWPUT PO UIF QSPEVDUT HPPET and services) that the company develops. Not only do successful businesses strive to make products at optimal cost, they keep the value proposition of their products relevant for customers. Responsible businesses are no different JO UIFJS QVSTVJU PG WBMVF DSFBUJPO "MM UIFZ BEE BSF efforts to identify options to create a larger societal value while trying to tread lightly on the planet—they focus on total 4 value.5 They have explicit social impact 3AJG=PAOS=N=J =J@ /KU Ĺ€1DA /AOLKJOE>HA QOEJAOO *K@AHÄĽ goals synced with their purpose, and -ANOLA?PERAO BNKI PDA 1=P= can lucidly communicate with their ho- $NKQLˆ 0/ 0QOP=EJ=>EHEPU "PDE?O $KRANJ=J?A 0LNEJCAN listic performance stakeholders. =??AOOA@ LNEH Tata Steel is among few steel 5 companies that have fully integrated &>E@

Vol.07 August 2019

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BEING A GOOD CORPORATE CITIZEN

Figure 2. Tata Steel’s Strategic Objectives, Enablers,and Goals

Strategic Objectives SO1

SO2

SO3

SO4

Industy leadership in steel: Meet the growth aspirations of customers

Consolidate position as a global cost leader

Insulate revenues from steel cyclicity

Industry leader in CSR and SHE* *Safety, Health, Environment

SE1

Employer of choice

Capability for global steel technology leadership

SE2

Industry leading capability in agility and innovation

SE4

Strategic Enablers SE3

Leverage digital technologies, Steel industry leader

Sustainability Goals SG1

SG2

SG3

SG4

Benchmark in CO2 emissions <2 TCO2/TCS by 2025

Zero effluent discharge by 2025

Safety leadership—committed to zero

Create a lasting impact on the communities in our operating areas— impacting 2 million lives by 2025

operations. It leverages research and technical capabilities to focus on manufacturing innovative products with lower environmental footprint along the entire supply chain. For example, it is one of the first major steel manufacturers to deploy energy-efficient and environment-friendly vessels for ocean transportation. Tata Steel has been innovating and delivering products that go beyond meeting certification and legislative requirements to improve the sustainability performance of the operations and products of its customers across the globe.6 For 6 &>E@ instance, EzyNest Toilets made by Tata

18

Asian Steel Watch

Steel helped improve attendance in schools, especially that of girls, and contributed to the Government’s ‘Clean India, Clean Schools’ programme. The Tata Code of Conduct and several policies provide direction on sustainability at Tata Steel. Besides other things, Tata Steel’s CSR policy states that ‘the primary purpose of business is to improve the quality of life of people’ and emphasizes that it must volunteer its resources for this purpose. In its quest to set benchmarks in value creation and corporate citizenship, Tata Steel has constructed its business model around seven sustainability pillars—environmental excellence,

Tata Steel: A Benchmark in Corporate Citizenship

community care, health & safety, HR practices, sustainable mining, innovation, and sports. It uses stakeholders’ inputs plus those taken from select UN SDGs7 in its strategic planning process where its strategic objectives, enablers and goals are balanced across all stakeholders, resulting in long-term sustainability.

Sustainability efforts across the spectrum The history of CSR at Tata Steel has passed through different phases which ran parallel to historical development in India and resulted in EJêFSFOU BQQSPBDIFT "GUFS EFDBEFT PG DPNCJOFE community initiatives for rural and urban areas, the fundamental difference between the imperatives of both regions prompted the company to reclassify its initiatives. In 1979, it established Tata Steel Rural Development Society (TSRDS) to focus on the rural community living around Tata Steel’s operational units. TSRDS, which is also an NGO, is the main driver of CSR at Tata Steel. *O HJWFO UIBU UIF DPNQBOZ T PQFSBUJPOBM areas were predominantly tribal, Tata Steel set up the Tribal Cultural Society (TCS). The Tata Steel Family Initiative Foundation (TSFIF) was set up JO UP FOTVSF EFMJWFSZ PG DPNQSFIFOTJWF SFQSPEVDUJWF TFSWJDFT BU BO BêPSEBCMF DPTU *O Tata Steel Skill Development Society (TSSDS) was established for focused work on skill develPQNFOU ɼF 5BUB 4UFFM $43 UFBN DPNQSJTFT employees across 12 locations with varying levels of professional experience, educational qualifications, regional affiliations, and development perspectives.

Tata Steel’s CSR themes got built out of the intent to maintain deep and meaningful relationships with all stakeholders. The present CSR system is guided by principles which provide a general framework for selecting and evaluating the developmental work undertaken. Tata Steel does not only measure the lives touched by an intervention, but it also examines the extent of the impact, and it gets insights into problems from the beneficiaries’ perspectives—critical for identifying and designing the right interventions. CSR at Tata Steel has moved from a philanthropy mode to one where a joint effort by the corporate, the state, and the community facilitates deeper-rooted socio-economic development. While there is a dedicated CSR team, Tata Steel gives volunteering opportunities to every FNQMPZFF *O .BSDI BT QBSU PG UIF 5BUB Volunteering Week, 2,462 Tata Steel employees clocked 4,575 volunteering hours. The company runs a unique programme where business managers get exposure to life in rural communities and concepts of social development. Understanding the importance of communicating its work, the company uses various mediums to help stakeholders and communities understand how Tata Steel improves their lives. With a continuous increase in spending as a percentage of net profit (despite falling profits over the last three years), 7 0!$ ļ $KK@ %A=HPD 4AHH AEJC Tata Steel is among the top ten CSR 0!$ ļ HA=J 4=PAN 0=JEP=PEKJ spenders in India. It’s CSR spending in 0!$ ļ !A?AJP 4KNG =J@ ': XBT PG OFU QSPGJU "?KJKIE? $NKSPD 0!$ ļ /AOLKJOE>HA in FY’15 (first year after enactment of Consumption & Production $PNQBOJFT "DU XIJDI NBOEBUFE 0!$ ļ HEI=PA ?PEKJ

Vol.07 August 2019

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BEING A GOOD CORPORATE CITIZEN

Figure 3. New TMH Clinic Inaugurated at ADMH Complex, Baridih

Source: Tata Steel website

$43 TQFOE PG PG MBTU UISFF ZFBST OFU QSPÍU BOE JO ': "U 3FMJBODF *OEVTUSJFT IJHIest spender on CSR in absolute terms), the spend XBT JO ': JO ': BOE in FY’18. With the mandating of CSR, opinions on corporate involvement in society’s betterment have changed. Many stakeholders consider CSR a natural obligation of the company to share profits generated through use of society’s assets with society. Compulsion to engage in CSR has led to a multitude of activities by multiple agencies. This has raised stakeholder expectations, and they often draw comparisons between CSR activities of different companies. However, many companies don’t dive deep with their CSR because the law has remained silent on matters like the depth to which companies should understand the communities they work with, the under-served challenges that CSR initiatives can address, the principles of collaboration in the CSR space, the influence

20

Asian Steel Watch

that CSR should have within an organization, and the composition of a company’s CSR team. Tata Steel has gone a long way in addressing these gaps with its three-pronged CSR approach.

Rural outreach Tata Steel has taken up the mantle of creating sustainable livelihoods in Jharkhand and Odisha (its main operational areas) where agriculture is the mainstay of the population. This approach considers that while economic growth should reduce poverty, there is no direct correlation between the two. It depends on the capabilities of beneficiaries to gain from expanding economic opportunities. Poverty is not only about low income, it also includes dimensions like bad health, illiteracy, and lack of social services. Since beneficiaries understand their plight best, they must partake in the design of policies and projects intended to improve their lives. Understanding that farmers’ lack of know-how of scientific agrarian

Tata Steel: A Benchmark in Corporate Citizenship

In most cases, gain to communities from industrialization does not proportionately compensate them for the social, economic, cultural and environmental costs borne by them. This puts a responsibility on industries towards society. The key takeaway from Tata Steel’s sustainability strategy is that corporate citizenship efforts should always align with company goals while delivering value to both society and the company.

practices and institutional financial support hampers opportunities for year-round income, TSRDS developed platforms to connect them with agricultural scientists and financial institutions. TSRDS offers a mix of preventive, promotive and curative door-to-door healthcare services across Tata Steel’s operational areas through Mobile Medical Units. The high number of neonatal deaths occurring in India are preventable if correct antenatal and postnatal care is provided, along with awareness during pregnancy and institutional support for deliveries. Tata Steel MBVODIFE 1SPKFDU ."/4* .BUFSOBM "OE /FXCPSO 4VSWJWBM *OJUJBUJWF JO UP BEESFTT UIJT OFFE ."/4* FOIBODFT UIF DBQBDJUZ PG FYJTUJOH government voluntary health workers in the Home Based Newborn Care (HBNC) system. The QSPKFDU SFBDIFT PVU UP IPVTFIPMET DPWFSJOH WJMMBHFT *U IBT SFTVMUFE JO B SFEVDUJPO JO OFPOBUBM NPSUBMJUZ BOE SFEVDUJPO JO JOGBOU NPSUBMJUZ 4JODF +VOF UIF GJFME

TUBê PG ."/4* IBT CFFO VTJOH UBCMFUT XJUI QSPKect-relevant applications along with a dashboard called ‘Operation Sunshine.’ This has changed ."/4* T JOUFSOBM NBOBHFNFOU BOE IBT GBDJMJUBUed in time-saving in terms of the trigger for highSJTL DBTFT "OPUIFS ìBHTIJQ QSPKFDU SVO CZ 543%4 JT 3*4)5" 3FHJPOBM *OJUJBUJWF GPS 4BGF 4FYVBM )FBMUI CZ 5PEBZ "EPMFTDFOUT XIFSF JU FNQPXers adolescents to make informed choices about their sexual and reproductive health and overall wellbeing besides providing coaching on life skills, self-development, and increasing awareness on ills of early marriage. The team links adolescents with education, vocational skill training, and livelihood opportunities. In FY’18, it has empowered BEPMFTDFOUT BOE EFWFMPQFE PWFS QFFS educators in villages. With programs like Thousand Schools, ResJEFOUJBM #SJEHJOH 4DIPPMT .PEFM 4DIPPMT *5 and English Learning Centres, Tata Steel has executed its belief that addressing the three aspects

Vol.07 August 2019

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BEING A GOOD CORPORATE CITIZEN

Figure 4. Tata Steel Limited Recognized as 2018 Steel Sustainability Champion

Source: Tata Steel website

of schooling—access, learning & governance—simultaneously and at scale will bring momentum and sustainability to work to universalize access, address learning deficits of children and equip government teachers with skills.

Tribal identity 5BUB 4UFFM IBT B TIBSFE DPOUFYU PG PWFS ZFBST with tribal communities. Tribal Cultural Society (TCS) has been the company’s primary delivery arm in its efforts towards the sustainable development of tribal communities in a manner which respects their traditional wisdom, skills

22

Asian Steel Watch

and diversity. TCS works on multiple aspects of heritage—language, music & culture, indigenous sports, ethnicity, education, and employability—to create a holistic way of supporting the preservation of the indigenous ways of life, thus enabling a closer link between Tata Steel and the tribes. For instance, in the last five years, Samvaad—a platform created by Tata Steel for dialogue on tribal identity and an alternative perspective on development—has become a critical meeting ground that allows tribal communities in India and overseas connect and exchange ideas PO JTTVFT SFMFWBOU UP UIFN ɼVT GBS PWFS

Tata Steel: A Benchmark in Corporate Citizenship

QFPQMF GSPN USJCBM DPNNVOJUJFT BDSPTT Indian states and 21 countries have taken part in Samvaad. Other than Tata Steel, no company in the country works on preserving tribal ethnicity.

Urban ‘eye’ In its effort to develop a well-planned town out of the industrial town of Jamshedpur (where Tata Steel’s main set up is), the company carved out JUSCO (Jamshedpur Utilities and Services ComQBOZ GSPN JUT 5PXO 4FSWJDFT %JWJTJPO JO JUSCO is India’s only comprehensive urban infrastructure service provider, which manages key urban amenities and resources efficiently and responsibly to make them available and affordable for the last mile consumer. It is at the front end of driving Jamshedpur towards becoming a smart city. Further, keeping in line with the founding fathers’ steadfast goal of employee welfare, Tata Steel established Tata Main Hospital (TMH) in UP QSPWJEF GSFF NFEJDBM TFSWJDF UP JUT FNployees, their families, and the citizenry of Jamshedpur and peripheral locations. Today, it is a 914-bedded, secondary care multi-speciality hospital equipped with modern facilities. It also doubles as a teaching institute in several specialties BOE BT B DPMMFHF PG OVSTJOH "CPVU PG JUT JOterns have been hand-picked from naxal-infected [POFT PG +IBSLIBOE PG XIJDI IBWF SFDFJWFE placements at reputed hospitals and nursing homes across India. Tata Steel’s community centric interventions at the urban level include ‘Masti Ki Pathshala’—a bridge schooling programme for underprivileged

children from urban and semi-urban areas to empower them into becoming responsible citizens. However, it faced unanticipated difficulties in establishing the school with regard to abusive behaviour inherent in the lifestyle of the children. Therefore, admissions into mainstream schools SFNBJOT B DIBMMFOHF %FTQJUF UIFTF IVSEMFT children study at Masti Ki Pathshala and 42 children have already been admitted to mainstream English medium schools. Recently, Tata Steel added three more centres for boys and one for girls. However, the company does not exalt the effort as it is mindful of the real-time number of street children who still need to be mainstreamed. 5BUB 4UFFM T ĂŹFEHMJOH XPSL XJUI UIF DPNNVOJty of convicts and under-trials in prisons in Jamshedpur focuses on inner conflict management and basic skill development. It works closely with prison authorities and hopes to use learnings from this phase to create a model for a just and fair restoration and reintegration. The soft skills BOE DPOĂŹJDU NBOBHFNFOU NPEVMFT IBWF SFBDIFE PWFS QSJTPO JONBUFT BOE SFTJEFOUT PG UXP prisons have undergone specific vocational training.

Forward-looking strategy *O DPOGSPOUFE XJUI MPPNJOH IJHIFS MFWFM societal problems like lack of good education, oppressive poverty, and climate change, Tata Steel changed its current CSR strategy from merely meeting societal need in its operating locations to going beyond the boundary to address or advocate for larger problems at the state and national

Vol.07 August 2019

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BEING A GOOD CORPORATE CITIZEN

Figure 5. Tata Steel Felicitates Women Health Volunteers for Project MANSI

Source: Tata Steel website

level. This need for social innovation led Tata Steel to deploy more digital technology to expedite the impact of its development work. Going forward, while Tata Steel plans to remain steadfast in carrying out its PCD (Proximate Community Development) work for communities proximate to its operations, a shift in focus will be towards more sustainable solutions which can come about by addressing larger and core issues while continuing to provide services for meeting immediate needs. Tata Steel has identified education, the doubling of income of marginalized households, and water and sanitation as the key PCD focus areas (apart from routine services provided). It hopes that in time, the PCD work done on a scale with well thought-out models will become an instrument of socio-economic change across the broader region. "DDPSEJOH UP 5BUB 4UFFM NPSF GPDVT JT OFFE-

24

Asian Steel Watch

ed on change models which showcase effective and efficient deployment, systems changes and research approaches, and are replicable at scale across a wide region. Referring to them as Signature Programmes (SP), Tata Steel believes that these will enable it to advocate a structure to government and other organizations working for positive change and consolidate diverse resource pools to multiply the potential for impact on citizens’ lives. The thrust of CSR at Tata Steel is primarily on depth and extent of impact on the lives of communities. The solutions that emerge from this thinking process have resulted in unique projects like the Development Corridor which is attempting holistic and long-term sustainable development across a region (not just a few blocks). Community participation in development planning (micro planning) forms the most important

Tata Steel: A Benchmark in Corporate Citizenship

aspect of bottom-up planning. With the aim to bring about effects of participatory development based on local diversity and learning processes, Tata Steel aims to work on micro-planning. Since Tata Steel’s CSR efforts have gone way deeper than just the surface, a new company dedicated to just CSR—Tata Steel Foundation (TSF) ‰XBT JOTUJUVUFE JO 0ODF GVODUJPOBM 54' will be the single CSR strategy and delivery arm for Tata Steel.

Key takeaway from Tata Steel’s CSR strategy It is true that a vast majority of the marginalized communities in India reside closely around regions which are noted for industrial development, and are impacted by movements in the industrial set-up. In most cases, gain to communities from industrialization does not proportionately com-

pensate them for the social, economic, cultural and environmental costs borne by them. This puts a responsibility on industries towards society. The moral aspects of competitive free markets and the globalized economy call out for more attention than ever before. For many, there may be no clear synchronicity in the words ‘responsible’ and ‘capitalism’ but successful businesses have decoded the contradiction. They have run profitable businesses with greater responsibility and regard for the ethical dimension. The above examples show how a company has over the years remained profitable, grown and continued to do so over a century while signifi cantly providing value to all its stakeholders. The key takeaway from Tata Steel’s sustainability strategy is that corporate citizenship efforts should always align with company goals while delivering value to both society and the company.

Vol.07 August 2019

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BEING A GOOD CORPORATE CITIZEN

Yang Weon-Jun "TA?QPERA 3E?A -NAOE@AJP KNLKN=PA EPEVAJODEL ,BĹˆ?A -,0 ,

POSCO’s Corporate Citizenship: Its Meaning and Application

What is the role of business enterprises in a modern society? For centuries, companies have been thinking hard about who they are and why they exist. They have come to the realization that the most certain way to ensure their continued existence is to actively respond to anticipated changes and satisfy the needs of each and every member of society. Today, companies are no longer able to grow or even survive if they only pursue economic value. With 51 years of operation as of 104$0 IBT CFFO DPOTJEFSJOH UIJT GPS TPNF time. The five decades of POSCO’s history have been in line with South Korea’s period of economic development. The company was founded with great anticipation and lofty aspirations on the part of both the government and the public during the ESJWF UP QSPTQFSJUZ JO UIF T *O B DPVOUSZ lacking much of the capital and technology to make steel, POSCO fueled national economic development and led industrial modernization under an ideal known as ‘steel patriotism.’ The spirit of steel patriotism, which was conceived

26

Asian Steel Watch

as making quality steel to contribute to national economic development, has been at the core of the company’s mission and the values it has ESBXO VQPO GPS UIF MBTU ZFBST 8IJMF QVSTVJOH this mission, POSCO has also strengthened global competitiveness. POSCO is now poised to transform itself into a company that will last for more than a century. "U UIJT DSJUJDBM KVODUVSF JU NVTU SFEFÍOF JUT SPMF to meet the shifting needs of the times and create new value. The first task for POSCO to become B ZFBS DPNQBOZ JT UP CVJME B OFX NJTTJPO UP motivate and inspire its employees. "GUFS DBSFGVM DPOTJEFSBUJPO BOE MPBET PG EJTcussions with employees and stakeholders, POSCO announced a new management philosophy for its pursuit of corporate citizenship in July A$PSQPSBUF $JUJ[FOTIJQ #VJMEJOH B #FUUFS Future Together,’ which supports prosperity shared with its people, business, and society. This article explores the meaning and value of its vision for corporate citizenship and how the company is working to connect this idea to its

POSCO’s Corporate Citizenship: Its Meaning and Application

Figure 1. POSCO’s Commitment to Corporate Citizenship

Source: POSCO

business, strategies, and corporate culture.

Why POSCO is committed to corporate citizenship Why corporate citizenship? Many of today’s social issues may seem too complex and diverse to tackle: there are no readily apparent one-size-fits-all solutions and governNFOUT BMPOF DBOOPU UBLF PO TVDI TPDJBM JTTVFT " consensus is being reached that fundamental social issues cannot be addressed without corporate participation. "NPOH TFWFSBM QSFTTJOH EPNFTUJD JTTVFT EFscribed by the Korea Institute of S&T Evaluation BOE 1MBOOJOH ,*45&1 JO OPOF DBO CF managed by governments alone:1 ▲ low fertility

rate and super-aged society â–˛ social instability aggravated by the widening income gap â–˛ low growth and subsequent shifts of growth strategies â–˛ shifting inter-Korean relations â–˛ job insecurity â–˛ failure to adapt to climate change â–˛ manufacturing innovation â–˛ growing healthy life expectancy and â–˛ severe natural disasters. In a complex and interdependent society, companies are increasingly being asked to apply their resources and capabilities to the resolution of social issues. 1 In a rapidly changing society with &J LNEH PDA *EJEOPNU KB widely ranging needs, companies con- 0?EAJ?A =J@ & 1 Ĥ*0&1 =J@ (&01"- NAHA=OA@ = NALKNP PEPHA@ sider concepts like corporate social Ĺ€(KNA= #QPQNA &OOQAO ˆ responsibility (CSR) and corporate SDE?D @NAS QLKJ = OQNRAU KB philanthropy to be not a matter of CKRANJIAJP EJ@QOPNE=H =J@ academic experts to select ten choice, but a necessity, and they con- EILKNP=JP EOOQAO >=OA@ KJ PDAEN sequently conduct a variety of CSR ac- likelihood and impact.

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BEING A GOOD CORPORATE CITIZEN

Figure 2. Future Issues Impacting Korean Society over the Next Decade Low fertility rate and super-aged society

Social instability aggravated by the widening income gap

Elderly population to be supported by 100 working-age people

Low growth and subsequent shifts of growth strategies

Number of top 10% earners compared to that of bottom 10% of earners

88.6

GDP growth rate

7.14

58.2

4.6

6.79 2.7

17.5

6.59

1.0

(Unit: person)

‘15

‘65

‘40

(Unit: Times)

‘03

Source: Statistics Korea

‘10

‘16

Source: Household survey

Job insecurity

2030-2060

Failure to adapt to climate change

Perception on necessity for unification

88 72

2011-2030

Source: OECD, Looking to 2060

Shifting inter-Korean relations

Negative perception on employment since 2000

70

(Unit: %)

1995-2011

Increased average temperature of the Korean peninsula (Based on RCP 8.5 Scenario)

59.8

66 54

+5.7 +3.4

55.8 +1.5 51.5 (Unit: %)

‘00

‘04

‘08

‘11

‘16

Source: Gallup

(Unit: %)

2008

2018

2014

0KQN?Aĥ &JOPEPQPA BKN -A=?A =J@ 2JEň?=PEKJ 0PQ@EAO Seoul National University (IPUS)

Manufacturing innovation

(Unit: ℃)

Early 21stcentury Mid 21stcentury Late 21stcentury Source: Korea Meteorological Administration

Growing life expectancy

Severe natural disasters

Number of smart factories

Growing life expectancy

10,000

82.3

Incidence of earthquake on the Korean peninsula 223

79.6 42

2,800 277

76.0

29

(Unit: number)

‘14

‘16

‘20

Source: Ministry of Trade, Industry and Energy

(Unit: Year)

‘00

‘08

Source: Statistics Korea

‘16

(Unit: Cases)

‘00

‘07

‘17

Source: Korea Meteorological Administration

Source: MSIT and KISTEP

UJWJUJFT "DDPSEJOH UP B TVSWFZ CZ UIF 'FEFSBUJPO PG ,PSFBO *OEVTUSJFT ',* NPSF UIBO PG UIF UPQ 4PVUI ,PSFBO DPNQBOJFT CZ SFWFOVF maintained exclusive teams for CSR. 2 É¥FTF UPQ DPNQBOJFT $43 TQFOE#A@AN=PEKJ KB (KNA=J &J@QOPNEAO JOH SFBDIFE ,38 USJMMJPO JO 2 Ĥ#(& Å€ KNLKN=PA 0K?E=H These active CSR activities are /AOLKJOE>EHEPU /ALKNP ˆ +KRAI>AN based on the public perception that

28

Asian Steel Watch

since they make their money from society, companies must return to it a portion of their profits. People believe that as one of the sources of social problems, companies must expend resources to live up to their social responsibility. In many cases, companies bolster their CSR activities in the wake of a breaking scandal or during a severe crisis. Such CSR activities are regarded as a quick

POSCO’s Corporate Citizenship: Its Meaning and Application

Corporate citizenship is a new identity for the company as it shows a strong aspiration for change. It also represents POSCO’s willingness to CK PDA ATPN= IEHA EJ PDA SKNGLH=?A =J@ OK?EAPU &P EO JKP ?KJĹˆJA@ PK OK?E=H contribution, but encompasses business, society, and people. POSCO believes that a virtuous cycle of social and economic value can be built when these three pillars can strike a balance.

fix and far from a genuine effort. POSCO wishes to alter this approach. Rather than being reactive, companies should transform themselves into actors that address social issues JO B NPSF XJMMGVM BOE QSPBDUJWF NBOOFS "T B member of their communities, companies must become responsible citizens who take the lead in solving social problems and improving society. This is the gist of POSCO’s corporate citizenship.

bers. With this in mind, POSCO defines corporate citizenship as follows:

What POSCO’s corporate citizenship implies

What does corporate citizenship mean to POSCO? Corporate citizenship is more than simply enhanced CSR activities. It is a management philosophy to guide the company over the next ZFBST *U JT UIF BOTXFS UP UIF POUPMPHJDBM RVFTtion of ‘why do we exist?’ rather than the functional question ‘what do we do?’ Corporate citizenship is a new identity for the company as it shows a strong aspiration for change. It also represents POSCO’s willingness to go the extra mile in the workplace and society. It is not confined to social contribution, but encom-

The concept of corporate citizenship remains relatively unfamiliar in Korean society. The term ‘citizen’ has been widely applied in such ideas as ‘citizen society,’ ‘citizens movement,’ and ‘citizenship.’ Companies have been regarded as simply an actor that accepts or reacts to events in civil society. However, ‘corporate citizenship’ means that companies should become citizens themselves and seek not only conventional economic value, but also social value as one of the society’s mem-

Today, corporate citizenship means that companies must fulfill their responsibility as one of the members of society to enhance corporate value and take part in addressing social issues voluntarily by building a virtuous cycle of growing economic and social value.

Vol.07 August 2019

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BEING A GOOD CORPORATE CITIZEN

Figure 3. The Changing Role of POSCO in the Society The Early Years

The Growth Years

(Foundation-privatization in 2000)

(2000-present)

Leading the Way

Sprit of the time

x 'HVLUH IRU D UDSLG LQGXVWULDOL]DWLRQ x 'HYRWLRQ WR WKH FRXQWU\

x *OREDOL]DWLRQ DQG HPHUJLQJ PDUNHWV x *OREDO VWDQGDUGV DQG VXVWDLQDEOH development goals

x &RH[LVWHQFH ZLWK VRFLHW\ x 3XUVXLW RI ERWK HFRQRPLF DQG VRFLDO YDOXH

Role of POSCO

x 3LRQHHU RI .RUHDQ VWHHO LQGXVWU\ x &RQWULEXWLQJ WR WKH FRPPXQLW\ development

x %RRVWLQJ JOREDO FRUSRUDWH competitiveness x /HDGLQJ LQGXVWU\ LQQRYDWLRQV

Corporate Citizenship as a new identity for POSCO

0KQN?Aĥ -,0 , KNLKN=PA EPEVAJODEL ,Bň?A

passes business, society, and people.3 POSCO believes that a virtuous cycle of social and economic value can be repeated when these three pillars can strike a balance.

How POSCO embraces corporate citizenship /A@AňJEJC PDA I=J=CAIAJP LDEHKOKLDU and setting a new vision *O +VMZ 104$0 EFDMBSFE UIF NBOBHFNFOU philosophy ‘Corporate Citizenship: Building a #FUUFS 'VUVSF 5PHFUIFS XIJDI SFìFDUT UIF SFBTPO for being and the ultimate goal of the company. To realize this philosophy, it also pre3 sented the vision of ‘With POSCO.’ 1DA ľ>QOEJAOO OK?EAPU =J@ LAKLHA‡ Ĥ 0- OQCCAOPA@ >U ‘With POSCO’ indicates company’s de-,0 , EO @ARAHKLA@ BNKI PDA sire to be on the same side with other PNELHA >KPPKI HEJA Ĥ1 ) ?KJ?ALP members of society, accompanied by LNKLKOA@ >U 'KDJ "HGEJCPKJ EJ †A?KJKIE? AJRENKJIAJP=H its determination to become an organi=J@ OK?E=H LANBKNI=J?A 1DEO EO zation worthy of pride and self-esteem. EJ HEJA SEPD PDA - Ĥ-NKňP -H=JAP There are three areas of focus for People) and 3E (Equity, Ecology, Economy). achieving this vision: ‘Business With

30

Asian Steel Watch

POSCO’ in which value is created together with business partners, ‘Society With POSCO,’ involving efforts to establish a better society, and ‘People With POSCO,’ building a corporate culture of trust and creativity. These three thrusts of business, society, and people mean that the company will seek balanced growth among the areas of economic performance, social value, and employee wellbeing. Business With POSCO is the primary sphere for creating economic value. The company is expanding its scope of business from steel into other areas and entering new business fields in an effort to diversify and seek balanced growth over UIF DPNJOH ZFBST ɥF LFZ UP CBMBODFE HSPXUI is how it can foster a sound and sustainable ecosystem in alliance with business partners such as suppliers and customers. Society With POSCO aims to go beyond conventional corporate philanthropy in order to develop empathy for various social issues and take an active part in addressing them. By doing so, it can create social value and drive meaningful change. This is the core sphere

POSCO’s Corporate Citizenship: Its Meaning and Application

Figure 4. POSCO’s Management Philosophy

Corporate Citizenship: Building a Better Future Together

Management Philosophy Management Vision

Management Principles

Codes of conduct

Core Values

Business With POSCO

Societiy With POSCO

People With POSCO

Creating Value together with business partners

Shaping a better tomorrow with the community

Building a culture of trust and creativity

Value Creation managemant

Win-Win managemant

Siljil

Silhaeng

實質 Substance

Safety

Innovation managemant

Silli

實行 Execute

Win-Win

實利 Practical

Ethics

Creativity

0KQN?Aĥ -,0 , KNLKN=PA EPEVAJODEL ,Bň?A

for realizing the management philosophy of corporate citizenship to create a better society. Finally, People With POSCO is the sphere supporting an environment encouraging employees to voluntarily participate in corporate citizenship activities. The gist of this movement is to inspire a corporate culture of mutual trust and understanding among employees and business partners based on respect and consideration. POSCO takes great efforts to practice the values it deems important, such as putting substance first, emphasizing execution, and pursuing benefits. It achieves value management, win-win management, and innovative management by putting substance before formality, emphasizing execution over reporting, and pursuing substance

rather than justification. POSCO’s core values are ‘Safety,’ ‘Win-Win,’ ‘Ethics’ and ‘Creativity.’ ‘Safety’ means that the utmost priority is given to respect for people, and position holders must take the lead in encouraging a routine of safe behavior with a focus on actions. ‘Win-Win’ means practicing consideration for and sharing with others, pursuing mutual prosperity, and continuously growing by creating social value. ‘Ethics’ refers to seeking ethical behavior based on mutual trust between members of society and abiding by the principle of reward and punishment. ‘Creativity’ means taking the lead in solving problems through free and open-minded cooperation. Systemization and setting the direction of

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BEING A GOOD CORPORATE CITIZEN

‘With POSCO’ indicates company’s desire to be on the same side with other members of society, accompanied by its determination to become an organization worthy of pride and self-esteem. There are three areas of focus for achieving this vision: ‘Business With POSCO’ in which value is created together with business partners, ‘Society With POSCO,’ involving efforts to establish a better society and ‘People With POSCO,’ building a corporate culture of trust and creativity.

management philosophy is only the first step in actualizing corporate citizenship. POSCO is working hard to answer questions including ‘what do we have to do to realize our management philosophy?’ and ‘how do we integrate corporate citizenship into the Group and ensure buy-in from employees and stakeholders?”

POSCO’s corporate citizenship governance POSCO’s determination to participate in corporate citizenship is demonstrated by several recent moves: establishing the Corporate Citizenship 0GGJDF VOEFS UIF EJSFDU DPOUSPM PG UIF $&0 DSFating the ‘Corporate Citizenship Committee,’ an BEWJTPSZ BSN GPS UIF #PBSE PG %JSFDUPST BOE JOJtiating our ‘Corporate Citizenship Love Letters,’ an open platform for gathering opinions. "MUIPVHI NBOZ DPNQBOJFT FOHBHJOH JO $43 activities maintain dedicated CSR teams, such teams are limited by their disconnection from

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Asian Steel Watch

key management activities. For this reason, POSCO established a Corporate Citizenship Office JO +BOVBSZ VOEFS UIF EJSFDU PWFSTJHIU PG the CEO, encouraging the management to take a keen interest in the issue and participate fully in the decision-making. The Office has expanded its role from traditional CSR activities to serving as a strategic control tower and communications channel for integrating and coordinating corporate citizenship activities related to business, society, and people. The Corporate Citizenship Committee MBVODIFE JO .BSDI JT BO JOEFQFOEFOU DPOsultancy arm of the POSCO Group that provides advice on the Group’s corporate citizenship strategies and global environmental, social, and governance (ESG) trends. The Committee is comprised of seven members: three external experts, two internal directors, and two outside directors. By appointing three external experts in economics,

POSCO’s Corporate Citizenship: Its Meaning and Application

Figure 5. POSCO’s Corporate Citizenship Governance Open platform for interactive communication with stakeholders

Corporate Citizenship Organizations

Corporate Citizenship Love Letters

Board of Directors

External research institutes and experts POSCO Research Institute, Corporate Citizenship Research Institute, Academic and civic organizations

Corporate Citizenship Committee* CEO

Corporate Citizenship Strategy Council Corporate Citizenship Executive Council

Corporate Citizenship Office *CEO Advisaory Council

0KQN?Aĥ -,0 , KNLKN=PA EPEVAJODEL ,Bň?A

management, social science, or law, the Committee can offer specialized and objective monitoring and consulting on corporate citizenship. The outcomes of the Committee’s quarterly meetings are shared with and discussed by the management of affiliates via the Corporate Citizenship Strategy Council and Corporate Citizenship Executive Council. Corporate Citizenship Love Letters is a comNVOJDBUJPO DIBOOFM PQFOFE JO +VMZ UP directly collect opinions and provide an open platform for interactive communication with stakeholders. It has become a key driver and reliable foundation for corporate citizenship activities. Corporate Citizenship Love Letters is open to everyone, including employees, and registered opinions are reviewed and answered by the pertinent teams. Participants can submit opinions anonymously or choose to openly share their thoughts. Responses to anonymous sub-

missions are posted on a board for open answers. This platform is not simply for hearing opinions from stakeholders, but also for giving them a direct opportunity for fundamentally setting and implementing corporate citizenship strategies. In addition, the company is conducting academic and working-level research on corporate citizenship in coordination with various research institutes and is endeavoring to spread the concept of corporate citizenship across society to ensure a sound ecosystem for corporate citizenship. POSCO Research Institute, a think-tank within the POSCO Group, analyzes CSR trends and reviews case studies from other companies in order to set strategies for the POSCO Group. It also seeks to develop innovative solutions to social issues through its networks with various experts. .PSFPWFS JO .BSDI UIF $PSQPSBUF Citizenship Research Institute (CCRI) was established under the Research Institute for Conver-

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BEING A GOOD CORPORATE CITIZEN

The company’s determination to pursue shared growth with suppliers is a win-win strategy that produces economic value for all. It has become = @AĹˆJEPERA ?KNLKN=PA ?EPEVAJODEL =?PEREPU PD=P ?NA=PAO OK?E=H R=HQA >U fostering a sound business ecosystem.

gence Civilization (RICC) at the Pohang University of Science and Technology (POSTECH), with considerable support from POSCO. The CCRI conducts both convergence research and research into corporate citizenship and its value to society. With an emphasis on the realization of common benefits, the CCRI suggests strategies and activities required of companies, areas in which companies need to participate, and how they can conduct corporate citizenship activities.4

4 1DA KNLKN=PA EPEVAJODEL Research Institute (CCRI) LQ>HEODA@ PDA LQ>HE?=PEKJ ŀ1DA /K=@ PK KNLKN=PA EPEVAJODELļ Becoming and Making� in April SDE?D AT=IEJAO PDA ?KJ?ALP =J@ OP=PQO KB ?KNLKN=PA citizenship and introduces POSCO =O = NALNAOAJP=PERA ?KIL=JU BKN realizing corporate citizenship.

5 1DA LNKLKNPEKJ KB IEHHAJJE=H EJ -,0 ,‡O SKNGBKN?A EO ATLA?PA@ PK NEOA BNKI EJ PK OQNL=OO SEPDEJ ĹˆRA UA=NO

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Asian Steel Watch

Engaging employees in corporate citizenship The first step in changing a corporate culture is engaging employees. POSCO is making its best efforts to motivate employees to practice the management philosophy of corporate citizenship. Without a full understanding of the meaning and necessity of corporate citizenship, employees might consider corporate citizenship to be a lofty ideal, but not primary among their key tasks

and goals. In particular, a top-down approach to change is insufficient to engage a millennial workforce, which is a major component of today’s human resources.5 Empathy is important in this regard. The only means for corporate citizenship to succeed as a management philosophy is to engage employees to practice corporate citizenship at work. The company started with ‘building awareness of corporate citizenship’ for the first year of the new management philosophy. POSCO has offered both e-learning and off-line lectures on corporate citizenship to employees from different departments and backgrounds. The company has emphasized that corporate citizenship starts with doing your best at work and going the extra mile to co-exist with local communities. The company collects opinions from employees through the online communication channel ‘Corporate Citizenship Love Letters’ and through meetings, workshops and discussions with relevant departments as it endeavors to instill interest not only among POSCO employees, but also in partners

POSCO’s Corporate Citizenship: Its Meaning and Application

Figure 6. POSCO’s Shared Growth Activities

Enhancing Comptetiveness of Business Ecosystem

SRM

CRM

Supplier

Customer

POSCO’s Shared Growth Activities Open & Fair Give fair opportunities for transaction, establish fair-trade practices

Innovation

Community

Support innovative growth by taking safety and environment into consideration

Advocate in addressing issues in our community through win-win cooperation

0KQN?AÄĽ -,0 , KNLKN=PA EPEVAJODEL ,BĹˆ?AÄŚ -H=JP "MQELIAJP =J@ *=PANE=HO -NK?QNAIAJP ,BĹˆ?A

and suppliers. "T UIF OFYU TUFQ GPMMPXJOH BXBSFOFTT CVJMEJOH POSCO released a ‘POSCO Charter of Corporate $JUJ[FOTIJQ JO +VMZ ÉĽF $IBSUFS EFĂŤOFT how the employees should conduct themselves as company representatives and members of the community. For POSCO, it is a central guide and reference for employees to support day-to-day acUJWJUJFT BOE EFDJTJPO NBLJOH *U VMUJNBUFMZ SFĂŹFDUT the core values and overall company culture.

POSCO’s major corporate citizenship activities Pursuing mutual growth with partners and suppliers to facilitate a robust business ecosystem POSCO’s fundamental competitiveness stems from the capabilities of its business partners. "CPVU XPSLFST PS PG UIF ÍFME workers at the Pohang and Gwangyang Steelworks are dispatched from one of POSCO’s 97 partner companies. This means that in order to

create an innovative ecosystem, cooperation with partners is more important than purely seeking competitiveness. This is also a meaningful effort for addressing a variety of chronic issues at work, such as reducing the gaps between large and small companies and addressing abuses directed at subcontractors by companies in a superior position. The company’s determination to pursue shared growth with suppliers is a win-win strategy that produces economic value for all. It has become a definitive corporate citizenship activity that creates social value by fostering a sound business ecosystem. One informative example JT UIF ACFOFÍU TIBSJOH TDIFNF JOJUJBUFE JO The program aims to reach a consensus between POSCO and partner companies on the goals of cost savings, quality improvement, and more. It provides monetary rewards and guarantees the purchase of improved products if these goals can be fulfilled. Through this scheme, POSCO Group had conducted 4,742 projects with 1,915 small and medium-sized partner companies as

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BEING A GOOD CORPORATE CITIZEN

PG MBUF 'JGUZ QFSDFOU ,38 CJMMJPO of the gains were returned to these companies. Moreover, it has helped small and medium-sized enterprises (SMEs) elevate their technology by offering such incentives as long-term contracts BOE KPJOU QBUFOU PXOFSTIJQ "T BO FYBNQMF 104CO supported Manbo Heavy Industries, an SME based in Gwangyang, in developing absorption technology and eventually replaced obsolete absorption equipment at the POSCO Gwangyang Steelworks with the improved versions. "OPUIFS JMMVTUSBUJPO PG JUT 4.& TVQQPSU program is Quick Six Sigma (QSS), which was JOUSPEVDFE JO UP SFEVDF EFGFDUT BOE JODPOsistencies in manufacturing processes and seek innovation that boosts productivity. QSS includes such activities as cultivating a creative mindset among employees, cleaning workplaces to reduce losses, and ‘My Machine,’ which aims to improve FRVJQNFOU QFSGPSNBODF 4JODF 104$0 IBT applied knowhow from successful QSS projects and expanded the program to help SMEs improve their productivity and pursue innovation. 5ISPVHI JNQSPWFNFOU QSPKFDUT XFSF conducted. The project is regarded as a model case for shared growth between large companies and SMEs. *O MJOF XJUI 244 TJODF UIF DPNQBOZ IBT conducted a smart factory program to help SMEs adopt IT technology in their factories to make production processes more intelligent, optimized, and eventually waste-free. Production lines are made smarter by improving three areas over six months: energy efficiency control, production line automation, and online work management.

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Asian Steel Watch

'SPN JUT MBVODI JO VOUJM +VMZ companies had participated in the program. The company plans to increase the share within the program of companies not actually doing busiOFTT XJUI 104$0 UP OFBSMZ JO BO FGGPSU UP more widely share opportunities. In addition, the company uses its training facilities, human resources, and institutions to operate diverse education and training programs that enhance the work performance and core capabilities of SME employees.

Being at the forefront in addressing social issues and making society better The steel industry is a massive processing industry that dramatically influences the local economies of areas in which steelworks are located. Steelworks in return cannot sustain their operations if they are not provided with a vast range of material and human resources from the local community. This is why local communities in the DPVOUSJFT JO XIJDI 104$0 JT EPJOH CVTJOFTT are its most important stakeholders and partners for shared growth. Pohang and Gwangyang in South Korea are the two definitive examples. The key objective of its corporate citizenship strategy is improving the quality of life of local residents. The company’s corporate citizenship activities are focused on ensuring local communities are inclusive, safe, and resilient, mainly in GPVS BSFBT FEVDBUJPO TVQQPSU GPS UIF WVMOFSBCMF TVQQPSU GPS DVMUVSF BOE SFDSFBUJPO BOE FOWJSPOmental protection. t E ducation is POSCO’s core CSR activity. The

POSCO’s Corporate Citizenship: Its Meaning and Application

POSCO Education Foundation (POSEF) operates 12 schools in regions including Pohang and Gwangyang. The POSEF contributes to closing the education gap by granting scholarships to local low-income students. POSTECH has provided the foundation for turning Pohang into an advanced center for science and has become a symbol of the city of Pohang. t ÉĽF DPNQBOZ PQFSBUFT WBSJPVT QSPHSBNT BOE employee-led volunteer groups to empower the vulnerable classes in local communities, including low-income citizens, the disabled, and multicultural families. ‘POSCO Steel Village’ is a representative project that utilizes POSCO’s steel products and construction techniques to build safer houses and ensure basic services supporting healthy lives for MPDBM SFTJEFOUT 0WFS OJOF ZFBST TUFFM IPVTFT XFSF CVJMU JO 4PVUI ,PSFB and houses and bathrooms were supplied for needy residents near PT Krakatau POSCO, a joint venture between POSCO and PT Krakatau in Indonesia. This project has been named as an ‘Excellent Practice’ by the United Nation Partnerships for SDGs on the UN SDGs (Sustainable Development Goals) website. t 104$0 BMTP DPOEVDUT .FDFOBU QSPKFDUT UIBU offer high-quality cultural performances to local residents who otherwise have only limited access to art and cultural events. Furthermore, it sponsors the Pohang Steelers and Jeonnam Dragons FC professional football clubs. t I mproving the environment around local

communities is the goal of POSCO’s environmental management and a key factor for building trust with local residents. The company has recently increased its investment in the reduction of fine particulates and CO2 emissions, afforestation and reforestation projects, and solar power generation projects using idle land near local communities. "T QBSU PG JUT DPSQPSBUF DJUJ[FOTIJQ 104$0 is endeavoring to address emerging issues facing South Korean society. The first is the low fertility rate. South Korea is experiencing an unprecedentedly low fertility rate. Despite a massive budget for countermeasures, Korea’s total fertility rate IJU B SFDPSE MPX PG JO *G UIJT DPOUJOVFT the working-age population is expected to fall by CZ BOE UIF WJBCJMJUZ PG MPDBM DPNNVOJties in which POSCO is doing business, including Pohang and Gwangyang, will come under serious threat. POSCO is taking part in addressing this grave social issue. The company plans to improve the environment for childbirth and childcare in local communities and raise awareness to promote a social consensus. Furthermore, the company is strengthening support for employment and startups in an effort to address youth VOFNQMPZNFOU *O JU QMBOT UP PQFSBUF KPC training programs that will provide jobseekers with basic work capabilities and field experience. *U XJMM BMTP PQFO BO "* BOE CJH EBUB BDBEFNZ GPS university graduates who wish to start their own CVTJOFTTFT PS XPSL JO UIF "* PS CJH EBUB ĂŤFMET *U is also operating a ‘Business Incubating School’ to help convert entrepreneurial ideas into actual businesses.

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BEING A GOOD CORPORATE CITIZEN

Encouraging volunteerism and creativity The achievement of a corporate culture of voluntarism and creativity will determine the success of the corporate citizenship initiative. Corporate citizenship is unattainable without enterprise-level innovation activities that help all employees fully understand this vision and put it into practice at work. In particular, a culture of creativity is imperative for addressing social issues with the outof-the-box thinking and open cooperation. POSCO maintains a deep-rooted culture of WPMVOUFFSJTN BOE HJWJOH *O UIF BOOVBM WPMunteering hours of POSCO employees averaged IPVST QFS FNQMPZFF 8JUI SPPUT JO B TJTUFS village volunteer work program from 1988, POSCO has been conducting various volunteer activ-

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Asian Steel Watch

ities over the last three decades through a group DBMMFE A104$0 7PMVOUFFST DSFBUFE JO 4JODF declaring its corporate citizenship vision, POSCO has further developed its culture of volunteerism and giving and has worked to create an environment that encourages employees to voluntarily contribute as corporate citizens. The company has expanded its conventional volunteer programs into talent-sharing programs that take advantage of employees’ work skills, techniques, and specialties. In addition, POSCO has rolled out an idea contest to help employees improve their local communities, called ‘Change NZ UPXO ÉĽF 104$0 'PVOEBUJPO XBT JOJUJBUFE JO *U JT PQFSBUFE UISPVHI EPOBUJPOT GSPN executives and employees of POSCO and its affiliates who donate 1 percent of their salaries, which

POSCO’s Corporate Citizenship: Its Meaning and Application

ates, overseas offices, partners, and even external philanthropists for their extraordinary volunteer services. The company changed the conventional A104$0 'BNJMZ "XBSE UP UIF A104$0 $PSQPSBUF Citizenship Grand Prize’ for the three sectors of business, society, and people.

What’s next

is then matched by the company. To encourage more voluntary participation by employees, the company has expanded the scope of direct participation and disclosed information related to fundraising and management in a more transparent manner. To this end, employees can become members of a fund management committee and directly collect opinions from contributors and independently implement the projects they designate. Furthermore, it has introduced a ‘Volunteer Service Mileage System’ that clocks the volunteer hours of employees and grants certificates and badges that instill pride in employees. The company has recently revamped its award system. It has created ‘Corporate Citizenship Volunteer Service "XBSE UP SFDPHOJ[F FNQMPZFFT PG 104$0 BGGJMJ-

POSCO’s vision of corporate citizenship is just starting out, and it requires further refinements to succeed. These include an improved understanding by management of corporate citizenship and a determination on their part to lead by exBNQMF TPQIJTUJDBUJOH UIF DPSQPSBUF NJTTJPO BOE management philosophy to state clear directions BOE BDUJWJUJFT NBLJOH WBMVF PSJFOUFE EFDJTJPOT that take into consideration the sustainability of companies and society rather than short-term QSPGJUT JODSFBTFE USVTU BOE DPNNVOJDBUJPO CFUXFFO UIF NBOBHFNFOU BOE FNQMPZFFT DSFBUJOH BO PQFO DPSQPSBUF DVMUVSF GPS B CFUUFS XPSLQMBDF hiring people with a mindset balanced between FDPOPNJD BOE TPDJBM WBMVF BOE PO TJUF USBJOJOH for employees, to name just a few. POSCO’s determination to become a positive corporate citizen is becoming all the more meaningful as it spreads the concept of corporate citizenship throughout society and creates a positive impact, eventually contributing to making society a better place for all. Corporate citizenship is not a challenge for POSCO alone, but an issue that many other global companies and communities must consider and undertake. In this sense, POSCO’s corporate citizenship activities merit close attention.

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BEING A GOOD CORPORATE CITIZEN

Sooyoung Kim Professor, Division of Humanities and Social Sciences, POSTECH Director, POSTECH CCRI (Corporate Citizenship Research Institute)

Five Social Issues Facing the Korean Steel Industry: A Corporate Citizenship Perspective

Michael Porter, Bishop William Lawrence University Professor at Harvard Business School asserted in his article, Creating Shared Value, in Harvard Business Review:1 Companies have overlooked opportunities to meet fundamental societal needs and misunderstood how societal harms and weaknesses affect value chains. Our ďŹ eld of vision has simply been too narrow. In understanding the business environment, managers have focused most of their attention on the industry, or the particular business in which the firm competes. This is because industry structure has a decisive impact on a firm’s profitability. What has been missed, however, is the profound effect that location can have on productivity and innovation. Companies have failed to grasp the importance of the broader business environment surrounding their major operations.

1

Michael E. Porter and Mark R. (N=IAN Ĺ€ NA=PEJC 0D=NA@ 3=HQA ˆ %=NR=N@ QOEJAOO /AREAS '=JQ=NU #A>NQ=NU

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Asian Steel Watch

With their narrow focus on profitability, companies have neglected to address the needs of the societies to

which they belong, leading to deteriorating social perceptions of companies and lost opportunities to improve shared value in both the economy and society. The narrow vision described above limits growth potential, and companies fail to seek further avenues for innovation and growth. Professor Porter’s ideas on creating shared value (CSV) have been further developed and expanded into the concept of corporate citizenship. Still, we lack the strategic framework or methodology required to put this concept more fully into practice. It seems no easy task to uncover means to extend our narrow field of vision. This article explores major social issues that may impact the Korean steel industry in order to examine how to connect companies’ economic and social perspectives. In order to extend the conventional economic perspective, it is necessary to examine social issues and their direct and indirect impacts on companies. To this end, systems thinking is required, which can be defined as follows: Systems thinking is a holistic approach to analysis

Five Social Issues Facing the Korean Steel Industry: A Corporate Citizenship Perspective

that focuses on the way that a system’s constituent parts interrelate and how systems work over time and within the context of larger systems. The systems thinking approach contrasts with traditional analysis, which studies systems by breaking them down into their separate elements.2 This article has selected five pressing social issues in South Korea to explore how they may affect the steel industry. By establishing system diagrams that comprehensively encompass these issues, it tests a new social perspective on industry that could complement the conventionBM FDPOPNJD QFSTQFDUJWF "MUIPVHI BEEJUJPOBM pressing issues and their correlations could be covered, this article is simply a first step toward further research. The causal loop diagrams here are restricted to a simple form to provide a better understanding of the five issues being addressed, and more sophisticated research is required in the future.

Five social issues This article has selected five social issues not based on quantitative analysis or any specific standards, but rather based on how frequently these issues are addressed in the media and the degree of social attention they are attracting. Population mix "NPOH UIF GJWF TPDJBM JTTVFT UIF rapid decline in the working-age population is the one projected to have the greatest impact on the Korean steel industry. Influenced by both a low fertility rate and aging population, the proportional size of the working-age population has been falling rapidly. This will drag down steel demand in the Korean market and deserves considerable attention in corporate citizenship activities. Income gap The gap between highand low-income earners is widening 2 0A=N?D &, DPPLOÄĽ OA=N?D?EK in South Korea more quickly than in PA?DP=NCAP ?KI @AĹˆJEPEKJ many other countries. This could rap- systems-thinking

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BEING A GOOD CORPORATE CITIZEN

Figure 1. Number of Newborns and Total Fertility Rate in Korea (Thousands)

(Births per woman)

1,200 4.53

Number of newborns

1,000 (‘70)

1,000

4.50

Total fertility rate

870 (‘75) 3.43

800

770 (‘83) 3.00

620 (‘87) 560 (‘01)

600

440 (‘05) 2.06

400

327 1.53

1.31

200

1.09

0.98

0 ‘70

‘75

‘80

‘85

‘90

‘95

‘00

‘05

1.50

‘10

‘15

‘18(e)

0.00

Source: KOSIS

idly intensify social instability. It is not enough to initiate a tax increase on high income earners or other policies intended to close the gap between the rich and the poor through the trickle-down FĂŞFDU ÉĽJT JTTVF NBZ JOĂŹVFODF UIF HSPXUI PG UIF steel industry both directly and indirectly. Youth unemployment In South Korea, the unemployment rate among people aged 15-29 years PME SFBDIFE BO VOQSFDFEFOUFE IJHI PG JO .BSDI -JLF UIF JODPNF HBQ UIJT JT FSPEJOH social stability. The future of the Korean steel industry will be impacted by how effectively social instability can be addressed. Environmental impact The steel industry has been subject to particular social attention from an environmental perspective. Fine particulate air pollution has recently emerged as one of the most pressing social issues in South Korea, and the steel industry must pay close attention to the matter and respond appropriately. The rising social cost of environmental damage is not simply an issue for the government and environmental

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Asian Steel Watch

groups. The steel industry must participate in addressing this issue as part of its corporate citizenship efforts. Energy mix South Korea is facing a rapid shift in its energy mix toward renewable energy, and the effects will be felt by industry over time. The energy-intensive steel industry should consider carefully whether it can simply sit on the fence as an energy consumer or if it should include this issue in its corporate citizenship agenda. First of all, it must carefully examine the growth potential and impact of changes in the energy mix from the perspective of social value. The five social issues can be elaborated as follows. 1

Population mix

The population mix is one of the most rapidly changing social elements in South Korea. The decline in the working-age population will greatly affect the future business environment for the TUFFM JOEVTUSZ " SFQPSU SFMFBTFE CZ 104$0 3F-

Five Social Issues Facing the Korean Steel Industry: A Corporate Citizenship Perspective

Figure 2. Korea’s Working Age Population Trend (Millions)

60 Working age population

40 32.8

35.2

37.6

35.1 30.2

28.0

25.6 21.9

21.8 20

17.8

16.0

0 1967

1977

1987

1997

2007

2017

2027

2037

2047

2057

2067

Source: KOSIS, Korea From the Angle of Population http://kosis.kr/visual/populationKorea/PopulationByNumber/PopulationByNumberMain.do?mb=Y&menuId=M_1_4&themaId=D02

search Institute (POSRI) forecasts several shocks that will result from the ‘demographic cliff’ facing Korean society.3 t "T ,PSFB IBT CFFO FYQFSJFODJOH B QSPMPOHFE decline in its fertility rate and a rapidly aging population, there are increasing warning signs about the advent of a demographic cliff and its effects. However, there is a lack of public awareness of this issue and Korean society does not appear to be prepared to respond. t 5IF FYQFSJFODFT PG BEWBODFE DPVOUSJFT XJUI aged societies show that steel-intensive industries, including manufacturing and construction, shrink under such conditions. The adverse impact of an aging workforce in the steel industry is also a major issue. t *O UIF DBTF PG +BQBO XIJDI IBT UIF XPSME T most aged population, the changes in the working-age population are highly correlated with steel consumption and steel-consuming industry trends, including in automobiles and construction.

t (JWFO UIBU 4PVUI ,PSFB T XPSLJOH BHF QPQVMBUJPO CFHBO UP GBMM JO BOE UIF EFDMJOF IBT been accelerating ever since, it is feared that steel consumption will wane in the future. t ÉĽF TJ[F PG UIF XPSLJOH BHF QPQVMBUJPO JO $IJna, the world’s largest steel-producing counUSZ FOUFSFE B EFDMJOF JO 5IJT POHPJOH trend will be another factor that pushes down steel consumption. "T 'JHVSF TIPXT 4PVUI ,PSFB T UPUBM GFSUJMJUZ SBUF IJU B SFDPSE MPX PG JO B SFNBSLBCMF QMVOHF GSPN UIF SFDPSEFE JO XIFO the government began compiling relevant data.4 No OECD country has fallen to below 3 PO BWFSBHF JO ÉĽF A[FSP DQJC DAKH %K Ĺ€1DA !AIKCN=LDE? HEBB 1DNA=PAJO percent range’ is an unprecedented = 0DK?G PK PDA 0PAAH &J@QOPNUÄĽ level never before reached in the world. )AOOKJO BNKI CEJC @R=J?A@ Korea is the only country to present Economies and Demographic Outlook,â€? POSRI Issue Report, such a mind-boggling number. Figure 2 shows the changes in the 0ALPAI>AN 4 working age population with the fall- 0P=PEOPE?O (KNA= Ĺ€ -KLQH=PEKJ =J@ %KQOEJC AJOQO ˆ ing fertility rate in Korea.

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BEING A GOOD CORPORATE CITIZEN

Figure 3. Japan and Korea’s Working Age Population and Steel Consumption (Mt)

(Mt)

120

72%

Apparent crude steel use (ACSU) Working age population

70%

100

68% 80

64% 62%

40

60%

70% 50 65%

40

Forecast 30

60%

20

…

…

20 10 20 15

ge

tes lity ra erti f &

Popu lat io

ix

Ma rria

Figure 4. CLD for Population Mix

nm Internal d em

In

and

Drawing upon the case of Japan, the POSRI report forecasts Korea’s apparent crude steel use "$46 BOE XPSLJOH BHF QPQVMBUJPO JO 'JHVSF The interrelation among the fertility rate, working age population, and steel consumption signals that the steel industry is expected to face difficulUJFT JO UIF EPNFTUJD NBSLFU *O EPNFTUJD TUFFM EFNBOE GFMM CZ UP .U DPNQBSFE UP B ZFBS FBSMJFS BOE JU EFDMJOFE GVSUIFS CZ BCPVU JO UIF ëSTU IBMG PG This interrelationship can be explained by a causal loop diagram (CLD), which is widely used in systems thinking (See Figure 4). First of all, the falling working age population triggered by the low fertility rate and aging of society decreases consumer demand for construction, automobiles, and home appliances. Sinking customer demand diminishes investment in facilities and the willingness to undertake new business. Less facility investment results in a decline in job numbers and income, which in turn triggers further decreases in marriage and fertility rates, leading to a decline in the working age population. Through

50%

level come

20 00

19 90

19 80

19 70

19 60

54%

55%

10

19 50 19 56 19 62 19 68 19 74 19 80 19 86 19 92 19 98 20 04 20 10 20 16 20 22 20 28

56%

19 50

60

58%

20

Asian Steel Watch

75%

Apparent crude steel use (ACSU) Working age population

66%

60

44

70

Willing for investment

repetition, this spirals down into a vicious cycle. 2

Income gap

The income gap in Korea has continued to widen. "T JMMVTUSBUFE JO 'JHVSF UIF TIBSF PG UIF IJHIFTU FBSOJOH QFSDFOU JO UFSNT PG UPUBM JODPNF JODSFBTFE GSPN JO UP JO ɥJT JT SFMBUJWFMZ IJHI DPNQBSFE UP 'SBODF JO $IJOB JO BOE (FSNBOZ

Five Social Issues Facing the Korean Steel Industry: A Corporate Citizenship Perspective

Figure 6. CLD for Income Gap

Fiscal income | Top 1% | share | adults | individual Fiscal income | Top 10% | share | adults | individual

2016

40

43.3% 12.2%

So

50

st l co cia

Incom e

ine ty ali qu

Share of total(%)

Figure 5. Income Inequality in Korea

30

ial conflict Soc

Inequality o fo p p ort un it

1976 20

25.7% 7.1%

10

y 1980

1990

2000

2010

Misallocation

0KQN?AÄĽ 4KNH@ &JAMQ=HEPU !=P=>=OA DPPLOÄĽ SE@ SKNH@ ?KQJPNU GKNA=

JO BOE DMPTF UP UIF 64 JO according to the World Inequality Database.5 "T explained by Thomas Piketty in his book Capital in the 21st Century, income inequality becomes a global trend when the return on capital surpasses economic growth. This trend is progressing particularly rapidly in Korea. In Figure 5, it is worth noting that the gradient of income inequality steepens after the 1997 financial crisis. Just as Piketty’s forecast, the aggravating income inequality in Korea has seemingly reached a level where it dampens economic growth. The IMF report warns that:6 (Income) Inequality can be a signal of lack of income mobility and opportunity—a reflection of persistent disadvantage for particular segments of the society. Widening inequality also has significant implications for growth and macroeconomic stability, it can concentrate political and decision-making power in the hands of a few, lead to a suboptimal use of human resources, cause investment-reducing political and economic instability, and raise crisis

risk. The economic and social fallout from the global financial crisis and the resultant headwinds to global growth and employment have heightened the attention to rising income inequality. The report also explains the adverse consequences of rising social inequality: High and sustained levels of inequality, especially inequality of opportunity can entail large social costs. Entrenched inequality of outcomes can significantly undermine individuals’ educational and occupational choices. Further, inequality of outcomes does not generate the ‘right’ incentives if it rests on rents (Stiglitz 2012). In that event, individuals have an incentive to divert their efforts toward securing favored treatment and protection, resulting in resource misallocation, corruption, and nepotism, with atten- 5 4KNH@ &JAMQ=HEPU !=P=>=OA dant adverse social and economic con- DPPLOÄĽ SE@ SKNH@ ?KQJPNU GKNA= sequences. In particular, citizens can 6 lose confidence in institutions, eroding International Monetary Fund, “Causes and Consequences social cohesion and confidence in the KB &J?KIA &JAMQ=HEPUÄĽ $HK>=H -ANOLA?PERA ˆ 'QJA future.

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BEING A GOOD CORPORATE CITIZEN

Figure 7. Korea’s Unemployment Number and Rate (Thousands)

Unemployed Unemployment rate

1,500

Youth unemployed Youth unemployment rate

(%)

12.5

1,250 10

1,000 7.5 750

5 500

2.5

250 2018. 04

2018. 05

2018. 06

2018. 07

2018. 08

2018. 09

2018. 10

2018. 11

2018. 12

2019. 01

2019. 02

2019. 03

Source: e-Narajipyo, http://www.index.go.kr/potal/main/EachDtlPageDetail.do?idx_cd=1063

Taking this point of view, the CLD in Figure 6 shows the impact of increasing income inequality on the Korean steel industry. Inequality in income and opportunity leads to a misallocation of resources, corruption, and nepotism, triggering social conflicts and ballooning social costs. Intensifying social instability and mounting social costs give rise to a vicious cycle of shrinking economic activity and investment and a widening income gap. Just like the decline in the working age population, the steel industry’s growth and sustainability cannot be uncoupled from this vicious cycle. 3

Youth unemployment

One of the most pressing issues in South Korea today is countering youth unemployment. The

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country has even devised overseas employment programs for young people to help address this JTTVF "T TFFO JO 'JHVSF UIF ZPVUI VOFNQMPZment rate (the share of unemployment in the population aged 15-29 years old) is relatively high compared to the total unemployment rate. FurUIFSNPSF JU IBT SFDFOUMZ CFFO SJTJOH "T PG .BSDI UIF ZPVUI VOFNQMPZNFOU SBUF SFBDIFE B SFDPSE IJHI PG QFPQMF *O ,PSFB T ZPVUI VOFNQMPZNFOU SBUF XBT OFBSMZ IBMG PG UIF 0&$% BWFSBHF PG CVU JU SPTF UP JO BOE JT OPX BMNPTU DBUDIJOH VQ XJUI UIF 0&$% BWFSBHF PG .PSFPWFS UIF SFBM KPCless rate for this age group, including part-time work, those who are preparing for seeking a job, and those who have abandoned seeking work, BMTP SFBDIFE BO VOQSFDFEFOUFE IJHI PG

Five Social Issues Facing the Korean Steel Industry: A Corporate Citizenship Perspective

Table 1. Korean and Japanese Youth Unemployment Rates (25-29 Years Old)

Figure 8. CLD for Youth Unemployment

Japan

6.2

6.2

7.1

4.1

Korea

6.0

6.4

6.9

9.5

OECD

7.5

8.4

10.6

7.6

Source: OECD (2019)

Youth u

ne

m

Social co nfli cts

meaning that one out of four young people are jobless. "O 0&$% SFQPSU TIPXT UIBU BU +BQBO had the group’s lowest unemployment rate for JO UIF QPQVMBUJPO BHFE ZFBST GPMlowed by Iceland and Germany (although both TVSQBTTFE 5BCMF JOEJDBUFT UIBU ,PSFB T youth unemployment rate (25-29 years old) was lower than that of Japan and the OECD average JO CVU JU IBE TVSHFE UP NPSF UIBO EPVCMF UIF +BQBOFTF SBUF CZ 4JODF UIF MBUF T Japan has formulated various measures to address youth unemployment and offered employment information and vocational training to bridge the gap between supply and demand for employment.7 Meanwhile, Korea’s unemployment measures have been mostly of a quick-fix nature. Like tax-funded temporary youth job creation and support for job seekers to find work overseas, such measures are far from fundamental solutions. The Korean president has plans to establish a Youth Policy Office, a control tower to supervise and manage youth policies, but it will take considFSBCMF UJNF UP BDUVBMMZ JOìVFODF UIF FNQMPZNFOU

n atio cre

In

2017

t & Start-ups m en t s ve

2010

nt me

2005

oy pl

2000

Job

(%)

F ut ur e uncertainty

SBUF "GUFS BMM JU JT DPNQBOJFT UIBU IPME UIF LFZ UP employment and must take the initiative to seek solutions and alternatives. That is why companies need to actively embrace the perspective and activities of corporate citizenship. The impact of youth unemployment on the steel industry is well illustrated in the CLD in Figure 8. Youth unemployment may further exacFSCBUF TPDJBM DPOìJDU *U JT POF PG UIF GBDUPST UIBU aggravate confrontations and friction between different classes, ideologies, and generations in ,PSFB É¥FTF DPOìJDUT JODSFBTF UIF GVUVSF VODFStainty in society and reduce corporate investment in facilities and new business, diminishing the motivation and support for youth startups. This further erodes job stability and undermines youth unemployment. Through 7 =JG KB (KNA= Å€ ,( "?KJKIE? this process, the steel industry might /AOA=N?D ˆ +K be subjected to a negative impact on !A?AI>AN

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BEING A GOOD CORPORATE CITIZEN

its growth and sustainability due to rising social costs and uncertainty. 4

Environmental impact

"DDPSEJOH UP UIF 8PSME 4UFFM "TTPDJBUJPO XPSMETUFFM UIF TUFFM JOEVTUSZ JT SFTQPOTJCMF GPS of global direct emissions of CO2 from the use of GPTTJM GVFM 0O BWFSBHF JO UPOOFT PG CO2 were emitted for every tonne of steel produced. The steel industry accounts for the highest TIBSF PG $02 emissions in the Korean industry. Furthermore, worsening fine particulate BJS QPMMVUJPO IBT CFDPNF B IPU CVUUPO JTTVF " SFport released by the Korea Institute for Industrial Economics and Trade (KIET), Industrial Impact and Implication of Fine Particulates, states that fine particulates are generated by four sources: power generation, industry, transportation, and IPVTFIPMET "NPOH UIFTF JOEVTUSZ BDDPVOUT GPS BMNPTU 5IF SFQPSU FYQMBJOT UIF 8 characteristics of the steel industry in (&"1 ŀ&J@QOPNE=H &IL=?P =J@ terms of fine particulate emissions and &ILHE?=PEKJ KB #EJA !QOPˆ

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Asian Steel Watch

how the industry is responding to the issue.8 t %JSFDU FNJTTJPOT PG BJS QPMMVUBOUT SFTVMU GSPN the sintering, coking, blast furnace (BF), and basic oxygen furnace (BOF) processes in the integrated iron and steelmaking process, as XFMM BT GSPN UIF FMFDUSJD BSD GVSOBDF &"' steelmaking process. t 'JOF QBSUJDVMBUF SFNPWBM UFDIOJRVFT VTFE JO the sintering process include dry and wet electric precipitation, with the dry electric precipitation technique being most widely used. t ɥF TUFFM JOEVTUSZ ëOET JU EJïDVMU UP BDUJWFMZ react to fine particulate regulations as steelworks occupy heavy facilities without the space to install equipment for reducing fine QBSUJDVMBUFT *U XPVME UBLF BU MFBTU ZFBST UP complete such installation safely while steelworks are in operation. "DDPSEJOH UP B TVSWFZ PG TUFFMNBLFST QFSGPSNFE GPS UIF ,*&5 SFQPSU PG SFTQPOdents stated that their technological capacity to meet the targets for reducing fine particulate

Five Social Issues Facing the Korean Steel Industry: A Corporate Citizenship Perspective

r co bo

st

Envir onm en t

al

La

Figure 9. CLD for Environmental Effect

Social c

n decline uctio d o Pr

t pac im

ost

Policy restriction

NBUUFS JT PG UIF MFWFM SFRVJSFE XIJMF PG UIFN TBJE BOE SFQPSUFE UIBU UIFJS DBQBCJMJUZ JT MFTT UIBO 5IFTF figures are relatively lower than the average of UIF DPNQBOJFT TVSWFZFE .PTU PG UIF SFTQPOEFOUT XFSF QFTTJNJTUJD BCPVU UIF possibility of achieving the goal of ‘cutting fine QBSUJDVMBUFT JO ,PSFB CZ UIBU XBT TVHHFTUFE in the government’s ‘Comprehensive Measures for the Control of Fine Particulates.’ In particular, they suggested that the air-polluting cement and steel industries would have a lower reduction rate compared to other industries due to concerns PWFS B EFDMJOF JO PVUQVU BCPVU DPNQBSFE UP #VTJOFTT "T 6TVBM #"6

BOE JODSFBTFE MBCPS DPTU BCPVU DPNQBSFE UP #"6 The CLD in Figure 9 shows the issues related to the environmental impacts, such as greenhouse gas and fine particulate emissions, of the steel industry. Both environmentally-induced social costs and technology investment to reduce these impacts will increase. The more aggressive

air pollution control measures become, the more companies are burdened by rising costs, leading in turn to the decline in production and the rise in labor costs. It is therefore necessary to strike a balance among government policies, industrial efforts, and social consensus. For this reason, we need corporate citizenship activities to provide proper information on environmental impacts and to develop solutions to rising social costs. 5

Energy mix

Energy mix has recently emerged as an issue in Korea. Under the government’s declared ‘nuclear and coal phase-out’ program, South Korea is rapidly shifting its energy mix to favor renewable energy. Energy mix is not only a policy determination, but also a countermeasure given the aftereffects of the Fukushima nuclear disaster in BOE UIF FOWJSPONFOUBM JNQBDU PG UIF DPOventional energy mix. The Korean government has recently released a plan to halt new nuclear development, including the cancellation of plans

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grow

th

En e rgy

In

tm ves

Cost inc rea se

pa e n t c a b ili t y

n to

x mi

Imp ac

Figure 10. CLD for Energy Mix

Te ch

n o l o g y i n v e s t me n t

for new nuclear power plants and prohibition of extending the working lives of obsolete nuclear power plants. It also plans to increase the share of renewable energy within total energy generBUJPO GSPN UIF DVSSFOU UP CFUXFFO BOE CZ 9 The steel industry is one of the most enerHZ JOUFOTJWF JOEVTUSJFT BDDPVOUJOH GPS of Korea’s industrial energy consumption and PG GJOBM FOFSHZ DPOTVNQUJPO JO *U has a tremendous impact on national 9 energy consumption. The voluntary *EJEOPNU KB 1N=@A &J@QOPNU =J@ Energy, “3rd Energy Master agreement to reduce consumption -H=J ˆ LNEH DVU BOOVBMMZ CZ FOFSHZ JOUFOTJWF 10 DPNQBOJFT TVSQBTTJOH UPOOFT Kang Cheol-gu, Jeon So-young, ŀ4D=P EO PDA HPANJ=PERA PK of oil equivalent (TOE) per year in the 0QOP=EJ=>HA /AJAS=>HA "JANCU Energy Master Plan will be significant -KHE?U ˆ $UAKJCCE /AOA=N?D for large steel companies. Case studies Institute, Issue & Examination, +K 0ALPAI>AN and examples from other countries

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Asian Steel Watch

will be helpful for the Korean steel industry as it attempts to predict the results of changes to the national energy mix. It is still not easy to foresee the social value and costs of the new energy mix and its impact on the Korean steel industry. However, the rapid shift in the energy mix has already brought about new adverse impacts. One example is the degradation of forests and green spaces as photovoltaic power generation has become a source for easily making money, especially for seniors. Environmental harm from solar and wind power, which has been called a ‘conflict between green and green’, could result from a change in the energy mix. In this sense, striking a balance between environmental concerns and economic feasibility is an issue.10 "EKVTUJOH UIF FOFSHZ NJY UP SFEVDF HSFFOhouse gas emissions is a clear global trend and SFTQPOTF UP B TPDJBM OFFE "NPOH UIF WBSJPVT changes that may impact the steel industry, energy mix is expected to become one of the highly JOìVFOUJBM GBDUPST "T TIPXO JO UIF $-% JO 'JHVSF JG B TIJGU JO FOFSHZ NJY MFBET UP SJTJOH FMFDUSJDity costs as took place in Germany, it would result in an increase in unit production cost and add an additional burden to technology investment for WPMVOUBSJMZ SFEVDJOH FOFSHZ DPOTVNQUJPO "T B result, the growth potential of the steel industry may be negatively affected by the sudden shift in the energy mix.

Implications for the steel industry Figure 11 provides a CLD for all five social is-

Five Social Issues Facing the Korean Steel Industry: A Corporate Citizenship Perspective

Figure 11. Overall CLD for Five Key Social Issues

Population mix

Marriage &Childbirth

Internal demand

Will for investment

Environmental impact

Policy restriction

Income level

Production decline

Cost increase

Energy mix

Opportunity gap

Social cost

sues. Connecting all the factors in the individual CLDs for the five social issues, this version DMFBSMZ TIPXT IPX UIF JTTVFT DPSSFMBUF "MUIPVHI this CLD is far from perfect, it can be helpful for understanding how these issues that have been discussed separately are connected and through which links, as well as how each issue affects the others. In reality, the myriad factors that constitute the economy, society, and the environment do not operate independently within a given area, but operate dynamically through systematic interaction.

Social conflict

Distribution

Labor cost

Job creation

Income gap

Future uncertainty

Youth unemployment

The issues described in this article are only the tip of the iceberg. The proposed diagram is a first step toward an alternative approach that is needed to expand the ‘narrow field of vision on the economy’ described by Professor Porter and UP EFWFMPQ BT CFUUFS DPSQPSBUF DJUJ[FOT "T BO FYample for a wider perspective, five pressing issues in South Korean society and their causal relations have been elaborated here. It may serve as a rough sketch for developing corporate citizenship strategies and activities for the steel industry in the future.

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Special Report

Restructuring of the Chinese Steel Industry: Challenges and Prospects Zheng Yuchun Deputy Director China Steel Development and Research Institute

Restructuring of the Chinese Steel Industry: Challenges and Prospects

Since 2000, the Chinese steel industry has been expanding dramatically apace with the nation’s rapid industrialization and urbanization. However, with the achievement of full industrialization by the Chinese economy, steel consumption has passed out of the high-growth phase. Growth in steel demand has failed to keep pace with facility expansion, leading to steel overcapacity and eventually incurring huge losses for the steel industry in the second half of 2016. Issues and conflicts masked by the dramatic growth of the past have begun to reveal themselves. In 2016-2018, the Chinese government eliminated massive illegal and obsolete capacity through supply-side structural reforms. The steel industry’s profit margins have since reached the average of the manufacturing sector, and its capacity utilization rate has recovered to a normal level. Still, fundamental issues and conflicts within the Chinese steel industry yet to be addressed.

Challenges for restructuring the Chinese steel industry 1

Low steel industry concentration ratio

Since the 1990s, China’s steel industry concentration ratio has peaked twice: once in 2000 and again in 2010. These occurred in the wakes of the Asian financial crisis in 1997 and the global financial crisis of 2008. The Chinese government began actively seeking mergers and acquisitions (M&As) in the steel sector a few years ago and published a series of goals for improving the steel industry concentration. However, M&A in the steel industry has failed to result in significant progress for several reasons. First, timing matters. Past M&A surges tell us that M&A becomes active when an industry falls under hard times. When companies are profitable, M&As lose steam.

Figure 1. China’s Steel Industry Concentration ratio (%) 50.0

40.0

30.0

20.0

Top 10 steelmakers’ concentration ratio Top 4 steelmakers’ concentration ratio

10.0

0.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: China Steel Development and Research Institute

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Second, it lacks a driver. In the past, acquired companies were typically money-losing enterprises with little hope for recovery. Local governments wished these companies to be acquired as a means to reduce their fiscal burdens, while steel companies seeking to acquire such companies hoped to increase their market share and gain economies of scale through M&A. In reality, however, acquired companies failed to generate profits and instead became a burden to the acquiring companies. For example, Tonggang and Shuigang made losses after their acquisition by Shougang. Since then, companies have become cautious of entering into M&As with ailing companies. In addition, profitable companies have seen no reason to acquire other companies, and local governments have not wanted profitable companies in their areas to be acquired by companies in other regions. The third issue is difficulty in post-merger integration. Many M&A cases illustrate the difficulty of post-merger integration. This is particularly challenging between companies with different ownership schemes, i.e., state-owned vs. private companies. The most pressing issue is managing the employees of acquired companies. This is especially troublesome when private companies acquire their public counterparts. If not addressed properly, a clash can occur between the two. Therefore, only a handful of companies, including Baowu, Shagang, and Jianlong are positioned for M&As. The recent M&A trend has been the restructuring of bankrupt companies. For instance, Jianlong Heavy Industry took over bankrupt Shanxi Haixin Iron and Steel, while Baowu

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Asian Steel Watch

acquired Chonggang Steel through the Siyuanhe Steel Industry Equity Investment Fund. Shagang became the largest shareholder in debt-strapped Dongbei Special Steel, and Delong Holdings is in the process of rescuing debt-ridden Tianjin Bohai Group. Restructuring appears to be the surest way to address the debt issue. 2

&JABň?EAJP EJ@QOPNE=H =HECJIAJP

The alignment of the steel industry under China’s planned economy was closely related to the origination of raw materials. Steel raw materials such as iron ore and coal are generally found in northern China. Since introduction of the reform and opening policies, however, economic development in southern China has outpaced other areas. As a result, China’s steel market has become detached from the production bases and requires long-distance transport, as seen in Figure 2. China has relatively abundant reserves of iron ore, most of which is low-grade and requires ore dressing. In terms of both quantity and production cost, the domestic supply of iron ore has fallen short of rapidly rising demand. Under these circumstances, steel mills have appeared in coastal areas, including Baowu and Shagang. Traditional inland steel mills that use iron ore with high production costs have become financially challenged. When market demand stagnates and steel prices fall, these companies generally lose money. For example, when the steel market turned sour in 2015, most state-owned steel companies in China suffered losses or achieved only small profits. Nine of the top ten most unprofitable members of the China Iron and Steel

Restructuring of the Chinese Steel Industry: Challenges and Prospects

Figure 2. China’s Top 5 Crude Steel Producing Provinces (Mt)

Hebei Province

232.8 (25.1%)

Jiangsu Province

106.0 (11.4%)

Shandong Province 73.9 (8.0%)

Liaoning Province

67.6 (7.3%)

Shanxi Province

53.9 (5.8%) +KPAÄĽ 1DA JQI>ANO EJ L=NAJPDAOAO @AJKPA PDA OD=NA EJ DEJ=‡O PKP=H ?NQ@A OPAAH LNK@Q?PEKJÄŚ PDA OD=NA KB PDA PKL ĹˆRA LNKREJ?AO‡ PKP=HO Source: China Iron and Steel Association (CISA)

Association (CISA) at this time were state-owned. These companies will continue to be pressured by potential restructuring in the future. With the increase in steel scrap generation, the electric arc furnace (EAF) process will come to the forefront. The EAF process is environmentally-friendly and flexible in terms of production and will threaten many integrated steel mills, including those located in coastal areas. Therefore, the Chinese steel industry will be realigned with the rise of steel scrap generation. 3

!EBĹˆ?QHPU EJ NABKNIEJC OP=PA KSJA@ OPAAH IEHHO

As of 2018, private steel mills account for 59%

of steel production in China. Many state-owned steel mills remain, however, mainly belonging to the large iron and steel groups. Many stateowned enterprises (SOEs) are bearing a heavy burden due to historical and structural causes. In particular, due to the size of their workforces and employee benefits, their production costs remain high. In August 2015, China’s State Council released its ‘Guidelines to Deepen the Reform of StateOwned Enterprises’ and suggested reform goals and measures to create a more favorable environment for SOE reform: comprehensive reform requirements; SOE reform by type; refurbishment of a modern corporate system; refining the

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management scheme for state assets; the development of mixed ownership; and strengthened supervision to prevent the loss of state assets. However, SOE reform faces certain challenges and difficulties under several current unfavorable conditions. There are many challenges with ownership reform, particularly in regard to employee compensation. I believe that private companies will face challenges in establishing a modern corporate system. Most private steel companies in China need to be upgraded in terms of their level of technological innovation, operational norms, and ability to deal with market risks. 4

*KQJPEJC AJRENKJIAJP=H NAMQENAIAJPO

On May 7, 2018, the Ministry of Ecology and Environment of China released a draft plan for ‘ultra-low emission’ modifications that would require new steel mills (including those relocated with a reduced capacity) to meet ultra-low emissions standards. Steel companies located in designated areas for the prevention of air pollution and required to undergo modifications, including in JingJinJi— Beijing, Tianjin, and Hebei—and surrounding areas, the Yangtze River Delta, and the Fenwei plain, should complete the ultra-low emissions modifications by October 2020. Steel companies in the Pearl River Delta, Chengyu, Central Liaoning, Wuhan, Changzhutan, and Wuchang areas should complete their relocation by the end of 2022, and the rest should comply with the new low emissions targets by the end of 2025. The plan requires companies to control both

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systematic and non-systematic exhaust. It also demands clean transportation. This means that companies are required to control not only the exhaust from plants, but also the life-cycle emissions of products ranging from raw materials to transportation. However, companies are unable to independently satisfy this requirement. For example, the plan states that “more than 80% of companies’ major products and byproducts should be transported through a clean mode, such as railway, pipeline, or pipeline-like transport modes.” It adds that companies unable to meet the above requirement can transport using new-energy vehicles or vehicles satisfying the China 6 Emission Standard. However, transport through pipeline is unrealistic for companies far from ports, and new-energy vehicles remain unready for mass transport. In addition, the large number of steel mills that sprung up in coastal areas are inflicting pressure on the environments surrounding their local communities. In particular, air pollution in Northern China is severe, especially in Hebei Province where a number of steel mills are concentrated. Even stricter emissions rules are insufficient for meeting air quality standards due to the great number of steel mills. For this reason, development in environmentally-sensitive areas should entail capacity cuts to complement stricter emissions rules. 5

&IL=?P KB OI=NP I=JQB=?PQNEJC

The steel industry is one of the definitive materials industries. It needs to evolve its management methods through IT and smart manufacturing

Restructuring of the Chinese Steel Industry: Challenges and Prospects

techniques. It should achieve agile manufacturing and sophisticated management and change or upgrade its means of development. Although there are differences in degree, most mediumand large-sized Chinese steel mills have made significant progress in the modernization of production and manufacturing, corporate management, logistics, sales, and energy source control using IT technology, as well as in infrastructure and process automation and the augmentation of corporate management schemes. There remains progress to be made, however. The first issue is the disparities or gaps in development among companies. For example, leading companies including Baowu, Nangang, and Angang have already adopted smart manufacturing practices, but many steel mills are still in the early stages of informatization modification and far from smartization. Next, compared with traditional industrialization, the platform economy highlights the convergence of manufacturing and services. Service-like manufacturing has emerged as a new trend. Many steel companies understand that they need to change their traditional means of development, such as economies of scale, in order to become service companies that offer materials based on technological innovation. However, they remain far behind and are still attempting to explore various paths. China is just now shifting from ‘Internet Plus’ to ‘Smart Plus.’

Forecast for steel restructuring in China 1

Potential for restructuring

First, local governments have formulated M&A

plans. In 2016, Hebei Province released its ‘13th Five-Year Plan for Industrial Transformation and Upgrading’ and pledged to accelerate M&A. Hebei plans to reduce the number of steel mills from 109 to 60 by 2020. It also publicized its ‘2310’ industrial pattern, which means two major groups (Hegang and Shougang) as the leaders, three local steel groups (Qianan, Fengnan, and Wuan) playing a support role, and ten specialty steel makers as a supplement. Jiangsu Province continues to shift its development direction for the steel industry and proceed with upgrading and restructuring. In 2017, Jiangsu began promoting its ‘134’ industrial pattern, that is, one super-large iron and steel enterprise group as the first echelon (Shagang with an annual capacity of 50Mt), three large steel companies as the second echelon (Zhongtian, Yanhai, and Xuzhou with an annual capacity of more than 20 Mt each), and four specialty steel makers as the third echelon (Nangang, Xingcheng, Tiangong, and Delong). It aims to increase the share of the top-four steel companies’ crude steel production to 81%, and that of the top-eight steel companies to 100%. Other provinces have similar plans. Second, companies are actively poised for M&A. China has set up three steel industry equity investment funds to support corporate-led M&A and restructuring. First, the Siyuanhe Steel Industry Equity Investment Fund was created in 2017 by Baowu Group with RMB 40 to 70 billion in funding. The Siyuanhe Fund is now financing the restructuring of Chongqing Iron and Steel. Changcheng Investment Management

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Table 1. Hebei and Jiangsu Provinces’ M&A and Restructuring Goals

Goal

Hebei Province

‘2310’ Industrial pattern

•Two major groups as the leaders (Hegang, Shougang) •Three local steel groups (Qianan, Fengnan, Wuan) •Ten specialty steel makers ※ The number of steel mills cut from 109 to 60 by 2020

Jiangsu Province

‘134’ Industrial pattern

•One super-large steel group with an annual capacity of 50 Mt •Three large steel companies with an annual capacity of 20 Mt •Four specialty steel makers ※ Crude steel production target for the top-four companies: 81%

Co. Ltd., and HBIS Group Co. Ltd. raised RMB 10 billion for the Changcheng Hegang Industrial Development Fund in 2017. In addition, Shanxi Investment Group Co. Ltd., Shangu Group, Zhongye Jingcheng, and Jianlong Group jointly established the Shanxi Province Steel Industrial Structure Adjustment Fund with RMB 50 billion and raised RMB 5 billion for its first phase. Third, with a slowdown in the global economy, the Chinese steel industry will face severe difficulties over the coming several years, which will in turn offer renewed opportunities for M&A. Restructuring and M&A will accelerate in the steel industry, but it will take considerable time to forge an environment for the quantitative and qualitative development of the steel industry. The competition among SMEs in the past has shifted to competition among large companies: the steel industry will not be free from cut-throat competition. To address this issue, the steel industry must

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Details

nurture select leading companies and allow them to assume a monopoly position within their regional markets so they can manage production to adapt to changing demands. This requires inter-regional restructuring, which faces challenges under the current economic system. 2

/A=HECJIAJP KB PDA OPAAH EJ@QOPNU QJ@AN OPNE?PAN AIEOOEKJO NQHAO

The Chinese government’s priority on environmental protection in recent years poses significant impacts on steel companies, especially those located in urban areas or their surroundings. Rapid urbanization has sparked conflicts between cities and steel companies. In addition to air pollution, steel companies are being forced to relocate their plants as cities demand additional land for urban development. For example, Tangshan City released a plan for qualitative growth in the steel industry in June 2018. Under this plan, Tangshan aims to

Restructuring of the Chinese Steel Industry: Challenges and Prospects

relocate local steel mills to coastal areas or nearby railways. It plans to relocate the steel mills within urban development districts, those in ecological redline areas, and those distant from coastal areas or railways to coastal or port locations. As a result, the alignment of the steel industry in Tangshan City will be focused on four regions: the southeastern coastal areas (Leting and Chaofeidian), eastern areas (Luanxian Guy), northeastern areas (Qianan), and northwestern areas (Qianxi, Zunhua). In addition, Shandong Province also plans to concentrate steel production in its coastal areas. Furthermore, Baowu Group is scheduled to relocate its Meigang facility in Nanjing to coastal Jiangsu. Currently 38 steel mills are located in urban areas and account for almost 40% of total steel production capacity. Among these, 20 steel companies have been requested to relocate. I believe that the urban steel mills in the Jingjinji and Yangtze River Delta areas, which suffer air pollution and feature a heavy concentration of steel production capacity, should reduce capacity rather than consider shifting to other areas. Further problems face the realignment of the Chinese steel industry: the realignment of resource-dependent steel mills and the impact of rising EAF production. These problems will not be resolved in the short term. 3

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China has released a series of policies to reform SOEs, and some are implementing these policies as pilot programs. SOE reform will be accelerated in the future. An important component of

China’s SOE reform is mixed ownership reform, which means incorporating private funds into SOEs. Through mixed ownership reform, SOEs can pursue mutual growth with private companies, take advantage of their strengths, and complement their weakness. However, it should be noted that mixed ownership reform is dissimilar from the more common privatization of SOEs. It is quite different from privatization as generally understood in the West. Under mixed ownership reform, state-owned funds are not fully withdrawn and SOEs can even remain as the largest shareholder in the new enterprise. The concept of mixed ownership reform is not new: It dates back to the 1990s when China first pursued market reforms. Some issues arose during the initial process of reform, including the loss of state assets, and SOE reform waned for a period. The current Chinese government has enacted a policy to promote SOE reform, but there remain daunting tasks for its implementation. Stateowned enterprises worry about the loss of state assets while private enterprises fear the failure of their investments since they hold no decision-making power. Therefore, mixed ownership reform remains in its initial stages. One plus one can equal more than two if mixed ownership reform means that SOEs can take full advantage of their state assets, human capital, and technology while private enterprises apply their management systems, flexible-benefit plans, and capacity for exploring new markets. More importantly, however, the two should complement each other’s weaknesses and create synergies.

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The Evolution of Smart Cities and Opportunities for the Steel Industry

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Shifting Needs for Steel Materials with the Rise of 5G Telecommunications and Smart Cities Joonho Lee

Cheong Je-Ho

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The Evolution of Smart Cities and Opportunities for the Steel Industry Cheong Je-Ho Senior Principal Researcher, POSCO Research Institute jhcheong@posri.re.kr

Urbanization has been p ro g re s s i n g ra p i d l y worldwide. The number of megacities with more than 10 million inhabitants is projected to rise from the 14 noted in 1995 to 46 by 2035. Increasing numbers of people are moving from rural to urban areas. The global share of the urban population is expected to rise to 62% by 2035, up from 45% in 1995.

Why smart cities?

Massive centralized cities are advantageous in terms of economic efficiency and effectiveness since production, consumption, education, and cultural development can all take place within a single area. For this reason, urbanization has been a natural response in many industrialized countries as a means to increase returns from investment and for sourcing talent. However, the rise of megacities and increasing population density have resulted in several threats to the quality of life of city dwellers.

Figure 1. Growing Urban Populations and Cities Number of megacities*

Urbanization rate Urban population (million)

62% 54% 45%

5,394

46 29 14

3,957

1,536

1,039

2,568

639 * World population: 5,742 → 7,325 → 8,743 (million)

1995

2015

2035

Source: UN World Urbanization Prospects, POSRI (’17)

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Number of cities with 500,000 population

* Number of cities with 10 million populations

1995

2015

2035

The Evolution of Smart Cities and Opportunities for the Steel Industry

Figure 2. Development Stages of Smart Cities Growth stage (2000s)

Early stage (1990s) 7KH WHUP tGLJLWDO FLW\u FRLQHG ZLWK WKH ULVH RI WKH LQWHUQHW x 'LJLWDO FLW\ SODQV UHOHDVHG E\ WHOHFRPPXQLFDWLRQV DQG RQOLQH FRPSDQLHV LQFOXGLQJ $2/ DQG IRU FHUWDLQ FLWLHV LQFOXGLQJ $PVWHUGDP DQG +HOVLQNL x

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Expansion stage (2010s~) *OREDO SURMHFWV DQQRXQFHG LQ ,QGLD &KLQD DQG RWKHU FRXQWULHV x $ YDULHW\ RI LQQRYDWLYH VHUYLFH PRGHOV DQG H[SHULPHQWDO FLW\ SODQV UHOHDVHG ZLWK PDUNHW SDUWLFLSDWLRQ E\ *RRJOH DQG $OLEDED x

Source: Weekly KDB Report (’18) edited by POSRI

Ironically, the industrial complexes, high-rise buildings, and transport infrastructure that were intended to increase public convenience have triggered several issues such as excessive energy consumption, environmental pollution, public insecurity, and income disparities. This in turn has threatened the quality of life of urban dwellers and diminished the sustainability of cities. Smart cities aim to address some of the issues stemming from rapid urbanization and high population density by using scientific and information technology to forge a more sustainable urban environment. The concept of smart cities emerged in the mid1990s as the internet and information infrastructure became widespread. America Online (AOL) first suggested the concept of a smart city in which services are provided through a network. With the advent of

Development of smart cities

the internet, telecommunications companies began offering new service models and testing pilot projects. The notion was given increasing attention when a series of smart city plans was formulated for megacities, including Amsterdam Digital City in 1993, Helsinki Arena 2000 in 1996, and Tokyo Smart City in 1998. Smart cities began to spread during the 2000s when their commercial value was recognized. With the expanding popularity of the internet, various projects were planned in Europe and the US. Following the announcement of IBM’s Smarter Planet strategy, global companies including Cisco and Siemens actively entered the smart city field, which began to be regarded as an industry. In South Korea, the u-City concept was introduced in 2003. The Ubiquitous Cities Act was legislated in 2008 and applied to several new cities, including Hwasung and Dongtan. After 2010, major Asian cities, including some in China and India, released hundreds of smart city plans and global smart city projects gained momentum. With the rise of the Fourth Industri-

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al Revolution and related technologies such as AI, IoT, and big data, bold government policies and corporate innovations are on the rise, exemplified by Google’s Sidewalk Labs in Toronto and Alibaba’s City Brain model in Hangzhou. A smart city can be defined by its purpose or its means. So far, ‘smart city’ has been generally understood according to its purpose. As multiple definitions were released by diverse organizations and institutions, there has been some confusion surrounding the concept of a smart city. According to a report by the

What is a smart city?

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Asian Steel Watch

7HOHFRPPXQLFDWLRQV

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International Telecommunication Union (ITU) in 2014, there were 116 definitions of a smart city. Five keywords can be extracted from these various definitions, however: 1) competitiveness; 2) intelligence and informatization; 3) eco-friendliness and sustainability; 4) quality of life of inhabitants; and 5) infrastructure and services. However, some argue that defining a smart city according to its purpose is not helpful for solving urban problems due to the differences in their social, cultural, and industrial backgrounds. For this reason, a new concept of a ‘city as a platform’ has been gaining ground, meaning that cities should serve as a means or platform for troubleshooting. The concept of a ‘smart city as a means’ relates that customized solutions can be

The Evolution of Smart Cities and Opportunities for the Steel Industry

Figure 4. Layers of Smart Cities as a Platform

Urban innovation

based on software and data to ensure sustainable city management. Through a smart city competition open to local residents, they collect ideas to address social issues, verify the outcomes of pilot projects, and spread them to other cities.

Services

Algorith s m & Service Data sharing

loT Spa ture ce inf ormation infrastruc ICT infrastructure

Data

Infrastructure

Urban infrastructure Source: National Information Society Agency of Korea (2016)

created to address urban issues economically and effectively by activating the upper layers of data and service in a structure consisting of infrastructure, data, and service layers, as seen in Figure 4. Many cities and local governments have selected low-cost and high-efficiency methods

Smart city projects first emerged in advanced nations, including in North America and Europe, but are now rapidly spreading to developing nations. The goals and implementation schemes for smart cities vary by region. Developing nations build infrastructure and new cities using massive infusions of public funds for the purpose of the urban development required for establishing industrial infrastructure and achieving economic growth. In contrast, advanced nations generally aim to address urban issues through ICT, including IoT and big data, by making existing infrastructure intelligent and

Differences in smart cities by region and major keywords

Table 1. Hardware and Software Approaches to Urban Issues Urban issue

Hardware Approach

Software Approach

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Source: Convergence Research Policy Center, “Concepts and Policy Trends in Smart Cities� (February 2017)

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Table 2. Goals of Global Smart City Projects Goals

Share

Key projects

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Note: Based on projects for 53 cities in 32 nations, including eight Asian countries (Japan, China, India, Thailand, Indonesia, the Philippines, Vietnam, and Malaysia), 13 European countries (the UK, France, Spain, the Netherlands, Austria, Germany, Sweden, Finland, Norway, Luxembourg, Belgium, Denmark, and Malta), three African nations (South Africa, Kenya, and Ghana), two in North America (USA and Canada), four Latin American countries (Mexico, Brazil, Chile, and Colombia) and two in Oceania (Australia and New Zealand) Source: Korea Research Institute for Human Settlements (KRIHS), 2016

pursuing technological innovation and open data. There is one common keyword shared by all types of smart city projects: energy efficiency. Energy efficiency accounts for 36% of stated goals and new urban development accounts for 19% of the goals of smart city projects currently underway across major cities. Energy efficiency is relevant in both advanced and developing countries, while new urban development is generally considered a priority in developing countries. In the EU and North America, the key agenda is the shift to a low-carbon economy that can help to address climate change. The related goals include making cities more energy efficient and addressing urban issues through innovative technologies and open data. Ideas for solving urban problems have been collected through smart city competitions sponsored by public-private part-

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nerships or with private funds. Pilot projects can be verified through living labs and the outcomes gradually applied. Projects are generally conducted by local governments while central governments provide R&D resources for technological innovation. However, Asian countries with lower levels of industrialization than advanced countries generally pursue new urban development projects. These projects are commonly large-scale projects to build industrial complexes and fuel urban development while supplementing insufficient resources. Rather than the mitigation of climate change being pursued in the EU and North America, Asian projects are mainly focused on industrial infrastructure to enhance urban competitiveness and bolster the local economy. These urban development projects are led by local

The Evolution of Smart Cities and Opportunities for the Steel Industry

Figure 5. Goals of Smart City Projects

EU 21.6% 29.7% 8.1% 10.8%

16.2%

"JANCU ABň?EAJ?U Innovative technology development Citizen participation City management New urban development Open data

North America 16.7% 5.6% 55.6%

11.1%

"JANCU ABň?EAJ?U Innovative technology development Citizen participation City management Open data

11.1%

13.5%

Asia

5.6% 5.6% 33.3%

38.9%

"JANCU ABň?EAJ?U Innovative technology development Citizen participation New urban development Open data

Latin America "JANCU ABň?EAJ?U Innovative technology development

20.0%

10.0%

50.0%

City management New urban development Open data

10.0% 16.7%

10.0%

Source: Korea Research Institute for Human Settlements (KRIHS), 2016

governments in collaboration with foreign governments and corporations in an effort to attract foreign investment and technology transfers. Just like in the cases from the EU and North America, Latin American projects are pursuing energy efficiency, innovative technology, and open data to resolve urban issues. This stems from their early westernization leading to an urban structure where more than 80% of people live in cities. The smart city agenda for these countries consequently includes addressing the heavy concentration of people into large cities and the resulting issues such as public insecurity,

traffic jams, and obsolete infrastructure. Diverse smart city projects are underway in Latin America, including in Brazil and Mexico. Many countr ies and local governments are implementing a variety of support measures for smart cities in an effort to boost competitiveness and improve the quality of life of urban dwellers. India and China are encouraging smart city projects as a means

Smart city policies and implementation by country

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The diverse efforts being made to support smart cities will change people’s lives, the type of industries, and the value chains for related industries. The source of added value is shifting from hardware to software under this transformation. As business models rapidly evolve with the rise of smart cities, the steel industry must think seriously about how the future will be unfold.

to refurbish national infrastructure and enhance urban competitiveness. In 2015, the government of India announced its Smart Cities Mission budgeted at INR 480 billion, which aims to develop 100 smart cities through 2022: establishing nine satellite cities with populations of over 4 million; turning 44 cities with populations of 1 to 4 million into smart cities; and establishing 20 small cities with populations less than 1 million. By connecting this mission to the country’s industrial master plan, India is endeavoring to improve industrial competitiveness and sophisticate its infrastructure. The Chinese central government has been implementing massive smart city projects since 2013. Under the 12th Five-Year Economic Development Plan (2011-2015), the central government announced its intention to invest RMB 300 billion in establishing 320 smart cities by 2015 in the first phase of the project. Ninety pilot cities were selected in January 2013 and 103 more in

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August 2013. It expanded the existing smart city plan by 2017 with a combined investment reaching RMB 2 trillion in 2025. It is worth noting that China’s smart city projects are not simply about the sophistication of urban infrastructure. They also aim to increase the share of application and utilization of new technologies, including big data, IoT, and cloud computing in connection with the ‘Internet Plus’ strategy. South Korea is also working on smart city projects through public-private collaborations. Recognizing smart cities as one of the enablers of the Fourth Industrial Revolution, the country has created a Special Subcommittee on Smart Cities under the Presidential Committee on the Fourth Industrial Revolution. In 2018, the Act on the Promotion of Smart City Development and Industry was legislated to support the industrialization of smart cities. Busan and Sejong City were selected as pilot cities for new technologies in autonomous cars, renewable energy, and block

The Evolution of Smart Cities and Opportunities for the Steel Industry

chains, as well as to provide incubators for new services. Meanwhile, US and EU smart city projects are being led by local governments rather than central institutions. Central governments there fund a variety of R&D projects to develop and apply innovative technologies for the realization of smart cities, while local governments select prospective smart cities and formulate relevant strategies. The EU set up the European Innovation Partnership on Smart Cities and Communities (EIPECC) in 2011 in an effort to spread the smart city concept across Europe. In 2013, it announced strategic plans for implementing smart city projects and funded 350 projects conducted by 2,500 partners from the EU-32. In the US, the Obama administration released the US Smart Cities Initiative in 2015 with funding of USD 160 million for R&D projects on 25 new energy and environmental technologies. As illustrated in the cases of these countries,

smart city projects have been implemented in a variety of manners suited to the respective countries’ social and cultural backgrounds and level of industrial development. Both the perception and role of smart cities are rapidly changing, too. Their role is expanding from being simply a means to improve the convenience of citizens to providing a test bed that inspires the emergence of new and disruptive business models. Both the central government-led smart city projects in South Korea, China, and Singapore and the local government-led projects in the USA, Canada, and Germany are designed to promote the emergence of experimental services based on the Fourth Industrial Revolution, such as AI, AR/ VR, blockchain, and IoT, and entail complex policy requirements for technological development, start-ups, and job creation. This means that these projects are not just being managed by teams focused on urban infrastructure, but by diverse teams specialized in technology, industry, and

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Figure 6. Development Directions for Smart Cities

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human resources, as well as by councils featuring representatives of civic, academic, and research institute perspectives. Smart cities originated in the digital cities that emerged with the rise of the internet in the 1990s. After a lengthy discussion of smart cities over the last two decades, diverse projects are underway across the

Development direction of and market opportunities for smart cities

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AS-IS

globe. However, these efforts are mostly one-time projects for the purpose of overseeing urban infrastructure more efficiently and improving the management of disasters, safety, parks, and traffic. Such projects have been operated as silos with independent functions: the public sector places orders, companies take the orders and build systems, and citizens make use of the resulting services. In contrast, recent projects have been implemented through alliances featuring citizens,

The Evolution of Smart Cities and Opportunities for the Steel Industry

research institutes, and corporations aiming to create a service model that ensures continuous evolution and development. A black-or-white approach in which the public sector must become the providers of services and the citizens become the receivers must be avoided. Instead, the public sector should participate in creating a platform-based ecosystem and serve as mediators that coordinate any conflicts of interests. They should also operate as facilitators in an ecosystem that utilizes public funds to encourage citizens to undertake challenges and assist in the creation of new business models. Through these experiments, many companies will continue to develop business models and enrich the ecosystem. This evolution entails a shift in market opportunities in smart cities. From the perspective of traditional industry, market opportunities in smart cities lie in the construction of urban infrastructure, such as urban development and base infrastructure projects. In terms of market size, public infrastructure, industrial complexes, and residential buildings still account for the lion’s share of the construction market. It is now time to move on from hardware and take a fresh new approach to emerging opportunities. In the automotive industry, various experiments are being tested, resulting in new business models for electric and autonomous cars. In addition, the energy industry is transforming itself from a massive processing industry into a platform industry with distributed generation. Future cities will not remain merely an aggregate of hardware comprised of concrete and steel,

but a fusion of new and disruptive service models based on infrastructure. In coming years, value will be created not by hardware, but by the software within it. This is also true for the construction and steel industries. Selling buildings or steel is not enough to seize the major opportunities within the smart city market. Related changes are underway. The construction industry is shifting its business model from the one-time construction of infrastructure to its operation and management. When combined with AI, IoT, and other emerging technologies, this will be expanded to more diverse fields and formats. The steel industry is in the same boat. E-commerce took off just a few years ago, but it is now taking over. Such a change goes beyond the expansion of offline transactions into online distribution channels. Taking into account the characteristics of e-commerce platforms on which various stakeholders interact, steel e-commerce will be developed from steel transactions into a new business model blending finance, logistics, and other manufacturing. This transformation will be connected to the new services and markets sparked by smart cities, eventually expanding the field for the steel industry. Smart cities are the future of industry. The diverse efforts being made to support smart cities will change people’s lives, the type of industries, and the value chains for related industries. The source of added value is shifting from hardware to software under this transformation. As business models rapidly evolve with the rise of smart cities, the steel industry must think seriously about how the future will unfold.

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Shifting Needs for Steel Materials with the Rise of 5G Telecommunications and Smart Cities Joonho Lee Professor, Department of Materials Science and Engineering Korea University

On April 3, 2019, former Olympic figure skating champion Yuna Kim became the world’s first 5G subscriber. If we consider history to be about the conquest of materials by human beings, the advent of 5G technology heralds an era in which humans finally transcend time. We can now overcome any lag in the receipt or transmission of information anywhere around the world. 5G networks are not yet fully operational, and the effects of 5G technology are still being realized, but it will not take much longer before subscribers are enjoying full-fledged 5G services. On June 27, 2018 when South Korea and Germany faced off in a World Cup match in Russia, shouts rose up in Seoul four times due to the time lag: Those watching on TV first cried out in triumph with the two Korean goals, followed quickly by those watching via the internet. In fact, those cheering in Seoul, whether through TV or the internet, saw the goal a slightly later than those watched at the stadium in Russia. Such time lags will vanish with the advent of 5G telecommunications. Humans can finally tran-

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scend time. Is it too much to say that a time lag might result in errors in industrial fields? When autonomous robots detect an error and halt operations at a plant, there is a time lag before the signals detected by sensors can be processed and transmitted to the control unit. Arithmetic units and programs must be installed in equipment to address this issue, causing the size and cost of equipment to rise. When equipment is managed online using the cloud, the size and cost of the equipment required can be reduced significantly. Time matters in this case. If equipment can become quicker than human reaction time, this would be an important breakthrough. Generally, the control center must be placed within a steel plant to allow it to control the process without a time delay. However, if signals can still be transmitted faster than human reactions, the control center does not have to be located within the steel plant itself. In fact, one control center could oversee several plants of the same type. What about meetings in the workplace?

Shifting Needs for Steel Materials with the Rise of 5G Telecommunications and Smart Cities

Figure 1. Five 5G-integrated Solutions 5G Multi-functional Collaborative Robot

Equipment Management AR

•Loads cargo into itself autonomously and transports it in self-driving mode

•Workers wear goggles that show real-time information on equipment, parts, and control manuals

•Transmits orders to other collaborative robots via intelligent servers connected through 5G networks

•Connected through 5G, workers can move freely and safely

5G Flexible Smart Production Facility •Equipment modules in the 1.5 x 1 x 2 m size are independently operated for each section of the production line •3 to 10 modules can be integrated like Lego blocks for each section of production, inspection, and packaging to complete a production line

5G AI Machine Vision

Five 5Gintegrated Solutions

•Cameras take twenty-four 120 million-pixel photos of each product on a conveyor belt and AI is used to detect any defects based on the photos •AI sends the photos to a cloud server through a 5G network

5G Autonomous Mobile Robots (AMR) •Small robots designed to help line workers •With four wheels installed underneath, AMR can freely move autonomously even within confined spaces •AMR send photos to a cloud server through a 5G network

Source: SK Telecom website

These days many companies hold remote meetings. Although theoretically feasible, remote video conferencing can still become inconvenient when the transmission speed for video and sound cannot support a reasonable time delay. This issue can be addressed through 5G technology. With video conferencing, people might feel like they are talking to one another face-to-face without any time lag. If this can be combined with three-dimensional holographic imaging, it will feel like talking to a real person even if they are actually on the other side of the world. The commercialization of 5G technology will bring rapid changes to people’s lives. The first might be an expansion of shared offices. As shared offices are now generally used only for specific businesses, the impact of shared offices has been relatively minimal. If large companies

and public institutions install shared offices near residential areas serving their employees, shared offices could have a significant impact on society. In major cities like Seoul, Tokyo, and Beijing, workers will no longer have to spend as much time on the road. They can go to shared offices near their homes and hold remote meetings through holographic communication with their headquarters. Today, it is common to share desks at a workplace. It will not take much time to transition from desk sharing to office sharing. People will enjoy greater business opportunities as they encounter people from different teams or companies. The declining number of commuters will reduce traffic volumes. Fine particulate matter, recently a hot-button issue in South Korea, can also be mitigated to some degree. Fewer people will buy cars as they perceive less need to own

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Figure 2. Future Materials-Related Issues and Development Need for New Materials Adapting to a new climate regime

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Continuous economic growth

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Source: The Korean Institute of Metals and Materials (2018)

them. This is evidenced by the fact that car sales are slipping in New York, Tokyo, and other large cities. Even the number of drivers’ licenses being issued is falling. With the spread of 5G technology, autonomous cars will become ubiquitous and shared cars will emerge as a norm, transforming the landscape for the automotive industry. Autonomous cars are already a future realized. Autonomous cars collect traffic information to find optimal routes and detect road risks by monitoring the movement of nearby cars with active sensors. Intelligent autonomous car technology will advance with the significant improvement in the speed of telecommunication to cloud servers responsible for processing information using big data. 5G technology will help complete the

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real-time intelligent driving control systems required for autonomous cars. Changes over the upcoming years or decades will be more significant than those that occurred during the last century. People’s ways of life will alter. Such changes in society will disrupt the order of conventional production and consumption and result in a new order. This new arrangement will in turn generate new demand. The question is who will seize this opportunity first. In the materials industry, companies that take a preemptive approach to this new order will certainly take the lead. On the other hand, the Korean Institute of Metals and Materials (KIM) has selected five future materials-related issues and suggested

Shifting Needs for Steel Materials with the Rise of 5G Telecommunications and Smart Cities

promising materials for development. Their five issues are: adaptation to a ‘new climate regime’; preparation for a super-aged society; disaster prevention; continuous economic growth; and a hyper-connected society. KIM has proposed types of materials to suit these five issues: materials adaptable to climate change, wellness bio-materials, safe materials, sustainable materials, and smart materials. For the steel industry, future materials adaptable to climate change, safe materials, and sustainable materials will all rise in importance. The changes in society triggered by 5G technology are closely related to the construction of smart cities using the future materials. With the construction of smart cities, several factors will impact the steel industry: the rise of large cities; the establishment of new logistics systems; and the construction of sustainable urban systems. The following needs will arise spurring the development of new materials. Metropolitan cities are essentially comprised of business and residential districts. In the morning, people travel long distances from residential to business areas and reverse the trip every evening. Such long-distance commuting will disappear if shared or co-working offices become commonplace near public transportation terminals. In Korea, numerous knowledge industry centers have already been established near subway transfer stations to be used as shared offices. People could go to shared

The rise of future metropolitan cities

offices in the suburbs near their homes, creating new business opportunities through interaction with people from other companies. Unlike in the past when people worked with the same group of persons in the same office, they can encounter others from diverse fields of business, helping them become more creative. Time once spent on commuting can instead be used for self-development and leisure. Sports and entertainment facilities, including theaters, indoor sports centers, and tennis courts, will expand, and small businesses will flourish as they serve community residents.1 Such towns will require different types of buildings, and reconstruction projects refurbishing old town centers will gain ground. Once again, steel will present itself as the most suitable material for construction to proactively adapt to a rapidly changing society. The mandatory 52-hour workweek, rising labor costs, and burdensome environmental restrictions in the construction field will provide steel an opportunity to regain the position as the favored construction materials that it lost to concrete. In Great Britain, where steel is widely used for building, it is easy to procure steel components for construction. However, this industrial structure is less mature in Korea and other Asian countries where concrete buildings can easily be built due to low labor costs. This is one of the main reasons why it is essential to develop new steel construction materials in various types. Moreover, the steel industry should carefully consider how to inform consumers about the advantages of steel as a construction material: providing safety 1 and convenience with resistance to Kim Nan-do, ‘Trend Korea 2019’

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Featured Articles

both natural (typhoons, earthquakes, tsunamis, etc.) and human-caused disasters (war, terrorism attacks, fires). Although human mobility may decline, the volume of cargo transport is projected to increase. The f lourishing of e-commerce businesses such as Amazon has ensured that the logistics industry will become one of the most important industries in the future. SoftBank Chairman Masayoshi Son, who has gained remarkable returns from his investment in the Chinese web retailer Alibaba, has recently invested in Korea’s e-commerce firm Coupang, underlining the importance of the e-commerce field. To suit the rise in both dual-income and single-person households in Korea, even fresh products can be now delivered to homes. For rapid delivery of major volumes of fresh vegetables, fruit, and dairy products, it is necessary to develop new kinds of transportation systems that connect farms and cities. What is important here is how we can improve energy efficiency and reduce fine particulate pollution in a future where massive logistics becomes the norm. The best way to improve energy efficiency is to reduce the weight of the given transport mode. Materials development in transportation, including cars, trains, ships, and airplanes as well as drones, is primarily focused on weight reduction as a means to improve energy efficiency. Steel has long been advantageous compared to other ma-

Establishment of new logistics systems

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Asian Steel Watch

terials, but it is being challenged by other lightweight materials. Especially for the automotive industry, improved fuel economy has become a pressing issue under increasingly strict environmental standards. The US government plans to require US vehicles to achieve fuel economy of 23.9 km/l by 2025, while Europe and Japan have set fuel economy targets of 26.5 km/l and 20.3 km/l, respectively, by 2020. Korea also plans to meet the fuel economy target of 24.3 km/l by 2020. This means that the automotive industry must improve fuel economy by more than 50% on average by 2025. The steel industry is preparing for this situation by developing next-generation automotive steel. One example is high-strength Fe-Mn-Al-C lightweight steel, which is made over 10% lighter than conventional Fe-Mn-C steel through the addition of 5-10% aluminum content, and thereby becoming more competitive than aluminum on its own. Lightweight steel commonly has a disadvantage of having less than 1 GPa grade tensile strength. In order to overcome this, precipitation hardening martensite steel is being developed, and analysis is underway on the utilization of retained austenite. Aluminum is one of the fastest growing materials for use in vehicles, and carbon fiber reinforced composites and titanium are increasingly being applied as aerospace materials. Steel is used for aircraft landing gear, but the scope of application of steel is falling. To reduce the weight of high-speed trains, the share of the steel frame in railway rolling stock is declining and high-strength aluminum extrusion alloys and aluminum plate are on the rise in lightweight

Shifting Needs for Steel Materials with the Rise of 5G Telecommunications and Smart Cities

Figure 3. Application of POSCO's Giga Steel

Source: POSCO Steel Gallery

frames. Recently, extensive research is being conducted for saving weight in frames and internal materials using ignition-proof magnesium alloy. The TGV Duplex is the first high-speed train using AZ91 magnesium alloy for seat components, and it has reduced body weight by 16.7% compared to conventional aluminum alloys. Korea’s highspeed train KTX also uses magnesium alloy for seat components to achieve a weight reduction of up to 35.6%. In the shipbuilding industry, steel is increasingly being replaced by corrosion-resistant aluminum alloys in both high speed and leisure vessels. For the logistics industry, when the cost of energy for transporting a certain volume of cargo exceeds the cost of the materials in the transport, a wider range of choices of materials will be available. Under these changing trends,

aluminum, magnesium, and titanium had growth rates of 9.2%, 8.0%, and 6.3%, respectively, in 2014, according to the market research firm, Markets and Markets. In an effort to reduce fine particulates, transport modes that burn fossil fuels within cities may be edged out of the logistics industry. A socalled hyperloop, which is a future high-speed transportation concept first proposed by Elon Musk, could be used for long-distance travel while electric vehicles (EVs) or drones could be applied for short-distance travel and rapid delivery. Due to their considerable battery weight, weight reduction is an important issue for EVs. The steel industry is actively working to meet this need with advanced high strength steels (AHSS). Steel pipes seem to be the most suitable material

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Featured Articles

to create a hyperloop for cargo transport. Although a hyperloop designed to carry passengers may require alternative materials to ensure psychological relief for passengers as they may feel uncomfortable inside opaque steel tubes, steel is the most competitive option in terms of cost for a hyperloop for cargo transport. Eco-friendly container vessels or transcontinental trains can be used for transport of transnational and transcontinental cargo. The Korea Railroad Research Institute has recently developed foldable containers to improve logistics efficiency. These types of efforts will continue to become increasingly visible in various areas of logistics. Older cities around the world share one thing in common: they have difficulty raising the massive funds required for urban regeneration. As buildings have a life cycle spanning more than 100 years, reconstruction costs are not generally included when calculating their construction costs, passing the buck down to future generations. As a result, major cities around the globe are experiencing fatigue. For a more sustainable urban system, regeneration costs must be considered from the start. Urban design should take the optimization of urban energy consumption and recycling into account. Steel is clearly the most competitive material for sustainable urban design. As nearly 80% of a steel house is recyclable, steel 2 POSCO A&C website can be considered the base material

Sustainable urban systems

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Asian Steel Watch

most suitable for sustainable cities.2 If materials development puts its highest priority on energy reduction and resource circulation, the reduction of the weight of high strength steel can be a solution. POSCO A&C, a comprehensive architectural service company fully financed by POSCO, has recently developed modular housing and other structures, but the high price tag of the design in its early stages is keeping consumers at bay. The development of modular buildings would require a dramatic shift, for example, by adopting new steel materials such as printed color steel sheet. Such newly developed steel materials should be resistant to earthquakes, typhoons, and fires. Further technological advances should be pursued to address problems at a competitive price, including floor noise and thermal insulation. Historically, the advancement of scientific technologies has resulted in social transformations. It was only after the Industr i al Revolution that workplaces became separated from places of residence. Apartments, the most common residential spaces in Korea, have been built to accommodate ballooning numbers of urban workers. The Industrial Revolution has brought profound changes to lifestyles that had been stable for centuries. In the First Industrial Revolution, steam engines created value through mass production. In the Second and Third Industrial Revolutions, the introduction of electricity and IT-based automation

Needs for innovation of steel materials

Shifting Needs for Steel Materials with the Rise of 5G Telecommunications and Smart Cities

Figure 4. The “Dreaming Attic,“ a Prefabricated Student Residence Built Using a Modular Construction Method in Seoul by POSCO A&C in 2014

Source: POSCO A&C website (http://www.poscoanc.com/kr/portfolio/view.do?p=1&IDX=354)

technology resulted in breakthroughs in production. Mass production cut costs and eventually expanded markets and increased sales. However, at the same time, it led to the reckless use of energy and resources, giving rise to several environmental and social issues. The Fourth Industrial Revolution, known for its data revolution, will also drive seismic changes in the lives of people with the advent of 5G telecommunications that can better apply the full value of data. Customized mass production is fundamentally addressing the issue of the resources wasted in mass production, while at the same time changing ways of life. The previous industrial revolutions separated work from places of residence, but the

Fourth Industrial Revolution will return workspaces to residential areas. Perhaps the distant and even broken relations among families and neighbors can be restored. New communities can be created. Novel opportunities will arise for some of the sectors of society overlooked in the past. The issue is now a matter of who will react preemptively to these changes. Time is running out: A seismic change in society is just around the corner. The steel industry’s capacity to adapt to this change will be tested. The industrial revolutions of the past have transformed the lives of people, and those well prepared for such transformations have seized the opportunities they created.

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Market Trend and Analysis

MARKET TREND & A N A LY S I S

VIETNAM'S STEEL INDUSTRY: CHARACTERISTICS AND STEEL DEMAND FORECAST

Kiyong Jeon Senior Principal Researcher, POSCO Research Institute kjeon@posri.re.kr

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VIETNAM'S STEEL INDUSTRY: CHARACTERISTICS AND STEEL DEMAND FORECAST

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Market Trend and Analysis

Figure 1. The Industrialization Phase of Developing Countries

Vietnam’s economic growth

Creativity

Economic growth in Vietnam soared to 7.1% in 2018, its

Technology Absorption

highest point in a decade.1 With a 6.8% growth rate in the first quarter of 2019, the International Monetary Fund (IMF) is

Agglomeration

projecting that the Vietnamese economy will sustain its rapid grown of the previous year. Vietnam’s accelerated economic growth has been bolstered by the effects of capital accumulation following reform and opening policies and by foreign direct investment

Development of FDI-led simple assembly and processing industries

Development of FDI-led parts and resources industries

Leading innovation and design

Production of high value-added products

(FDI). It has also been promoted by integration into the world economy, such as through accession to the World Trade Organization (WTO). Vietnam has pursued economic

1st Phase

2nd Phase

3rd Phase

4th Phase

Source: Ohno (2009), “Avoiding the Middle Income Trap: Renovating Industrial Policy Formulation in Vietnam�, pp. 6

reform and opening via its Doi Moi policy and worked to shift its industrial structure by joining the Association of Southeast Asian Nations (ASEAN) in 1995 and the WTO in

economic reforms. Unlike some Western countries that

2007.2 The country emerged in 2010 as one of the world’s

shifted abruptly to market economies, Vietnam’s transition

important production bases for the textile and clothing in-

was more gradual. Vietnam managed to transform itself from

dustry. However, in order to sophisticate its industrial struc-

a producer of simple products, such as clothing, shoes, and

tures, Vietnam has focused on nurturing select industries,

home appliances, by attracting FDI at an early stage of de-

including chemicals, electronics, construction, automo-

velopment. It was able to change from a raw materials and

biles, and steel.

parts importer into an intermediate goods producer in the expanded consumer goods market. Vietnam also developed by sophisticating its products through technology and man-

Characteristics of Vietnam’s economic growth

agement expertise.

Vietnam’s rapid growth over the past two decades is a result

In other words, the Vietnamese economy is leaping

of its successful transition to an open market economy. The

from the second to the third phase of industrialization

Vietnamese government’s support for reform has accelerat-

of developing countries, illustrated in Figure 1. With the

ed the opening of the economy while its accession to inter-

massive FDI infusions following the 2000s, Vietnam has

national institutions has provided technical support for these

registered steady growth with a CAGR of over 6%, thanks

1

Vietnam’s trade turnover reached USD 500 billion in 2018. Compared to a year earlier, exports grew by 13.8% to USD 244.7 billion and imports expanded

by 11.5% to USD 237.5 billion in 2018. Its trade surplus surged from USD 2.1 billion in 2017 to USD 7.2 billion in 2018. Foreign-invested companies contributed 20! >EHHEKJ PK PDEO OQNLHQO SDEHA 3EAPJ=IAOA ?KIL=JEAO N=J = @AĹˆ?EP KB 20! >EHHEKJ

2

The Doi Moi policy is based on the following principles: (1) formulating strategic and consistent long-term economic policies to increase productivity; (2) es-

tablishing an economic system that strikes a balance between centralized planning and a market economy; (3) implementing opening policies to boost foreign cooperation for building manufacturing, service, and knowledge industries; and (4) achieving goals by establishing an independent and autonomous economy and raising related awareness (Lee Young-Kwan, 2019).

82

Asian Steel Watch

VIETNAM'S STEEL INDUSTRY: CHARACTERISTICS AND STEEL DEMAND FORECAST

Figure 2. Foreign Direct Investment Trend in Vietnam (USD millions)

(Units) New investment Reinvestment Number of investment (New investment + Reinvestment)

80,000

5,000 3,975

3,862

4,000

3,038 3,000 40,000 1,627

1,964

2.182

1,975

1,639

1,589

1,163

1,287

2,000

1,530

20,000

-

1,000

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

-

0KQN?AÄĽ $AJAN=H 0P=PEOPE?O ,BĹˆ?A KB 3EAPJ=I

to the FDI-centered growth strategy that the country pur-

private and foreign companies began growing or entering

sued from the early stage of reforms. In addition to its high

the country after the 2000s. In the 1990s, the Vietnamese

growth potential drawing upon on abundant natural re-

government allowed monopoly and imposed import restric-

sources and labor, Vietnam has actively attracted FDI due

tions to protect state-owned steel companies, including

to its political and social stability, improved infrastructure,

Vietnam Steel Corporation. Soon, however, it worked to re-

and strategic importance within Southeast Asia. For this

form state-owned steel companies and encouraged them to

reason, Vietnam was able to successfully fund its manufac-

independently increase their business capabilities.4 Lacking

turing development in close cooperation with South Korea,

the funds to build integrated steel mills (ISM), the country

Japan, and China.3

decided to build downstream facilities first for producing flat products and then upstream facilities to complete an ISM. This step-by-step approach suited a Vietnamese steel

Development of Vietnam’s steel industry

industry with insufficient capital accumulation for economic

Under shifting external and internal circumstances, Viet-

growth.5 In order to complement the lack of upstream facil-

nam’s steel industry has expanded rapidly at a CAGR of

ities, Vietnam’s steel industry adopted electric arc furnaces

more than 10% since the 2000s. It has grown with the ac-

(EAF) as a means to expand production and buy the time

celerating introduction of an open market economy and as

needed to achieve transfer of steel technology.

3

Major reasons for FDI development: low wages, high level of education, relatively simple investment regulations, free trade agreements, geography, eco-

nomic growth, stable governmental policies, improved infrastructure, soft factors, and more.

4

Na Hee-Ryang (2008), “Changes and Prospects for the Vietnamese Steel Industry from the Perspective of Market Opening,� The Southeast Asian Review,

Vol. 18, Issue 1, pp.151-180

5

(=S=>=P= + Ĺ€1DA QNNAJP 3EAPJ=IAOA 0PAAH &J@QOPNU =J@ &PO D=HHAJCAO ˆ *"2 '& !EO?QOOEKJ -=LAN

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Market Trend and Analysis

Figure 3. Product Structure in the Vietnamese Steel Industry Iron making Iron

Steel making BOF

EAF

Continuous casting Billet

Slab

Long Steel bar Wire rod

Flat Section

HR

FH

CR

GI

Pre-painted

Hoa Phat TISCO Pomina SS Vina Vina Kyoei, ssc VPS FHS P-Vietnam CSVC Hoa Sen, Nam Kim, TDA, SUNSCO Source: POSCO Research Institute

producing HR. The long product market has been prosper-

Structure and characteristics of the Vietnamese steel industry

Group (HPG), while the flat product market, mainly coated

In 2017, Vietnam’s finished steel consumption reached 22

and pre-painted steel and steel materials for construction,

Mt and net imports recorded 13 Mt, according to the South-

is flourishing in Southern Vietnam.6

east Asia iron and Steel Institute (SEAISI). Given its insuffi-

When FHS was completed as an ISM in 2017, the land-

cient production capacity, Vietnam is highly dependent on

scape of the Vietnamese steel industry changed radically.

imports. Long products account for more than 50% of steel

FHS currently has an annual production capacity of 7 Mt

production. The country’s self-sufficiency rate for flat prod-

with 5.3 Mt of HR and 1.2 Mt of wire rod. FHS’s HR pro-

ucts is only 48%, while it requires 8.7 Mt imports of HR and

duction has provided an opportunity to bolster the supply

1.5 Mt of plate.

chain of the Vietnamese steel industry.7

The structure of the Vietnamese steel industry is clearly

Meanwhile, long product makers have also begun chal-

divided between long and flat product makers. Before For-

lenging the flat product market. With long product makers

mosa Ha Tinh Steel (FHS) entered the HR market in 2017,

such as including HPG and Pomina recently entering the

Vietnam was totally dependent on HR imports with no ISM

coated and pre-painted steel markets, competition in the

6 7

Vietnam’s galvanizing companies maintain small reversing F/H facilities, but some of the demand is met from outside. Taiwan’s Formosa Plastic Group (FPG) established Formosa Ha Tinh Steel (FHS) in the north-central Vietnamese province of Ha Tinh. FPG owns more than

10% of FHS, with China Steel Corporation (CSC) holding 25% and JFE Steel 5%.

84

ing in Northern Vietnam with leadership by the Hoa Phat

Asian Steel Watch

VIETNAM'S STEEL INDUSTRY: CHARACTERISTICS AND STEEL DEMAND FORECAST

Figure 4. Share of Steel-Consuming Industries in the Major ASEAN Countries

4%

2%

5%

6%

6%

8% 7%

19%

Vietnam

Indonesia 93%

Construction Automobile

Shipbuilding Others

4%

Construction Automobile Electrical and electronics

Thailand 65%

Shipbuilding Machinery/Industry Others

19%

60%

Construction Automobile Machinery/Industry Electrical and electronics

Source: SEAISI (2016)

Vietnamese flat product market is growing fierce. In 2018,

of an HR line to produce construction steel are attributable

HPG opened facilities with an annual production capacity

to the fact that Vietnam’s steel-consuming industries are

of 0.6 Mt for CR, 0.5 Mt for coated and pre-painted steel,

highly dependent on construction. Vietnam has lower steel

and 0.12 Mt for pre-painted steel, while Pomina installed fa-

demand for automobiles and machinery compared to Thai-

cilities with an annual production capacity of 0.2 Mt for CR

land and Indonesia, so its flat product market is mainly led

and 0.2 Mt for coated and pre-painted steel. Coated steel

by the construction industry.8

makers, including HSG, Nam Kim, and TDA, are also active

After experiencing negative growth during the global

in facility expansion. In particular, Northern Vietnam-based

financial crisis of 2008, Vietnam’s construction industry

HPG is gearing up to transform itself from a long product

recovered to a CAGR of 8%. The Vietnamese construction

maker to an integrated steel mill and is currently building a

market recorded USD 12.7 billion in 2017. Apace with the

hot-rolling line, following FHS.

country’s overall development, demand for transportation, energy, telecommunications, and housing has increased. Vietnam’s construction industry is expected to maintain a

Vietnam, a steel-consuming country particularly in terms of construction The rising production of long products and the introduction

8

CGAR of 7.2% for the 2018–2022 period, and its construction market is projected by BMI Research to reach USD 34.7 billion in 2027. 9 The number of construction com-

CNE?QHPQNA BKNAOPNU =J@ ňODANEAO =??KQJP BKN I=JQB=?PQNEJC =J@ ?KJOPNQ?PEKJ =J@ OANRE?A KB EJ@QOPNE=H ?KJPNE>QPEKJ PK $!- SDEHA

BKNAOPNU =J@ ňODANEAO =??KQJP BKN I=JQB=?PQNEJC =J@ ?KJOPNQ?PEKJ =J@ OANRE?A KB EJ@QOPNU CNKSPD 1DEO IA=JO PD=P I=JQB=?PQNEJC =J@ ?KJOPNQ?PEKJ CNAS >U ?KJPNE>QPEJC PK A?KJKIE? CNKSPD

9

2J@AN EPO NQN=H @ARAHKLIAJP LH=J PDA 3EAPJ=IAOA CKRANJIAJP LH=JO PK EJRAOP 20! >EHHEKJ >U EJ PDA ?KJOPNQ?PEKJ KB EJBN=OPNQ?PQNA EJ?HQ@EJC O?DKKHO

hospitals, roads, and water treatment facilities.

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Market Trend and Analysis

Table 1. Construction Companies in Vietnam 2015

2016

2017

Number of companies

M/S (%)

Number of companies

M/S (%)

Number of companies

M/S (%)

97

1

94

1

93

1

Private

13,412

97

13,018

97

13,043

97

Foreign

293

2

320

2

374

3

13,802

100

13,432

100

13,510

100

State-owned

Total 0KQN?AÄĽ $AJAN=H 0P=PEOPE?O ,BĹˆ?A KB 3EAPJ=I

panies increased from 13,432 in 2016 to 13,510 in 2017.

respectively, over 2018-2027, bolstering sustainable rapid

It is particularly a positive sign that the number of foreign

growth in the construction industry, as suggested by BMI

construction companies increased from 320 in 2016 to

Research.

374 in 2017, as shown in Table 1. This is the result of the

The Vietnamese government plans to increase the sup-

Vietnamese government’s active drive for attracting private

ply of middle housing for grassroots and low-wage workers

and foreign investment in real estate and infrastructure.10

and expand social housing programs for rural low-income

The country has been implementing railway modernization

households. One representative example is the construc-

projects under the “Vietnam Railway Development Strategy

tion of 12.5 million homes in urban areas with an aim to

by 2020 with Vision to 2050� and development projects for

increase the average floor area per person to 25m 2 by

seaports and port-related infrastructure in six areas (north,

2020. In particular, the country plans to increase the share

north-central, central, south-central, southeast, and the

of commercial housing (apartments) to over 90% in Hanoi

Mekong River Delta) under the “Master Plan on Develop-

and Ho Chi Minh City, where there is high-quality urban

ment of Vietnam’s Seaport System through 2020-2030�

infrastructure and accounts for the lion’s share of commer-

as well as projects to increase connections among major

cial housing transactions.12 In addition, the Vietnamese

roads and regions.11 The road and railway infrastructure

government amended the Vietnam Housing Law in 2015 to

markets are expected to rise at CGARs of 7.0% and 5.4%,

allow foreigners to trade, lease, and sub-lease real estate

10

U OA?PKN NA=H AOP=PA N=JGA@ PDEN@ EJ #!& EJ 3EAPJ=I EJ 1KL #!& 0A?PKNO EJ ÄĽ I=JQB=?PQNEJC 20! >EHHEKJÄŚ LKSAN C=O S=PAN =EN ?KJ@EPEKJEJC

20! >EHHEKJÄŚ NA=H AOP=PA 20! >EHHEKJÄŚ SDKHAO=HA =J@ NAP=EH =J@ NAL=EN KB RADE?HAO 20! >EHHEKJ 0KQN?AÄĽ $AJAN=H 0P=PEOPE?O ,BĹˆ?A KB 3EAPJ=I *-&

11

The government-led infrastructure and construction projects that merit close attention are as follows: the expansion project for Tan Son Nhat International

Airport in Ho Chi Minh City; the construction project for Long Thanh International Airport in Southern Vietnam; and the Thu Thiem district development project EJ %K DE *EJD EPU 0KIA LNKFA?PO =NA ATLA?PEJC BKNAECJ EJRAOPIAJP EJ?HQ@EJC PDA +EJD EJD 1D=JD %K= "TLNAOOS=U LNKFA?P PDA ĹˆNOP LD=OA KB PDA )KJC Thanh International Airport project, Cam Lanh International Airport, Lao Cai Airport, and Lien Chieu seaport.

12

??KN@EJC PK = NALKNP >U /" 3EAPJ=I EJ DKQOEJC EJ 3EAPJ=I EO ?H=OOEĹˆA@ EJPK BKQN ?=PACKNEAOÄĽ ?KIIAN?E=H DKQOEJC KN =L=NPIAJPO OAL=N=PA DKQOEJC

OK?E=H DKQOEJC =J@ KBĹˆ?E=H @QPU DKQOEJC

86

Asian Steel Watch

VIETNAM'S STEEL INDUSTRY: CHARACTERISTICS AND STEEL DEMAND FORECAST

Table 2. Steel Supply and Demand in Vietnam (2017)

industries, in that it is a derived demand. Changes in steel

Production

Import

Export

Demand

demand can be calculated by analyzing the requirements

Long

9,924

1,831

1,206

10,549

for steel products in steel-consuming industries and the

Flat

1,378

13,191

3,481

11,088

status of and forecast for the consumption structure of steel

Total

11,302

15,022

4,687

21,637

products. Vietnam’s construction industry and actual steel

1,378

8,712

215

9,875

use has a positive correlation (0.81, P<0.01), meaning that

-

1,495

125

1,370

it is statistically significant. By analyzing social factors and

3,505

636

504

3,637

production in steel-consuming industries, it is possible to

199

718

65

852

predict medium- to long-term changes in the steel industry caused by the evolving structure of steel-consuming indus-

(1,000 tonnes)

HR Plate CR (FH/CR) STS (HR/CR)

121

125

78

168

4,575

1,220

1,414

4,381

GI

1,766

774

747

1.1%

As part of the basic materials manufacturing sector, the

GL

1,715

11

390

49.1%

steel industry has a high inter-industry effect. Steel demand

Pre-painted steel

1,094

435

277

0.2%

for construction in Vietnam is expected to rise due to the

EG

-

224

15

209

expansion of residential areas, plans for increasing social

TP

72

37

6

103

housing, and the spread of apartments and high-rise build-

2,307

323

645

1,985

Electrical steel Coated steel/Pre-painted steel

Pipe

Source: Compiled by POSRI from VSA and SEAISI data

tries and shifts in demand for materials.

ings coming with rapid urbanization. In 2018, just like in the previous year, steel demand in Vietnam reached 22 Mt, with the long and flat product markets at a similar size. By product type, the country is 100% dependent on plate and

and housing in an effort to create a more market-friendly

EG imports.

environment.13 This amendment is intended to attract FDI

As of 2017, it imported about 8.7 Mt of HR to meet

to complement the lack of state finances, ease complaints

the total demand of 9.9 Mt. Demand for coated steel

for delayed projects, and ensure high growth in the con-

mostly used in construction stood at 4.38 Mt, 0.75 Mt of

struction market, according to the Ministry of Planning and

which was demand for GI, 0.39 Mt for GL, and 0.28 Mt for

Investment.

pre-painted steel, according to the Vietnamese Steel Association (VSA). Looking at demand structure by steel type, with the rise

Correlation between industrial structure and steel demand in Vietnam Steel demand is naturally determined by steel-consuming

13

of the construction market, long products now account for 49% of total steel consumption. Flat product consumption is also on the rise, mainly for construction. In line with the

In the Socialist Republic of Vietnam, all land is collectively owned by the state. With the amendment to the Housing Law (effective July 1, 2015), the man-

agement scope of real estate by foreigners has been expanded. In the amended Housing Law, the scope of application is expanded to foreigners, foreign-inRAOPA@ AJPANLNEOAO >N=J?DAO =J@ NALNAOAJP=PERA KBĹˆ?AO KB BKNAECJ AJPANLNEOAO BKNAECJ EJRAOPIAJP BQJ@O =J@ >N=J?DAO KB BKNAECJ >=JGO KLAN=PEJC EJ 3EAPJ=I The permitted subjects allowed are purchase, lease-purchase, receipt as a donation or heritage, and possession of up to 250 houses in any one administrative ward. It allows the effective provision of a registered 50-year leasehold title giving foreigners the same rights as Vietnamese given that they can now purchase, lease, own, and receive as a donation or heritage. The 50-year homeownership period for foreigners can be extended.

Vol.07 August 2019

87

Market Trend and Analysis

Figure 5. Demand Forecast by Steel Type for Vietnam (1,000 tonnes) Flat product 2017

Long product CAGR 5.0%

11,088

2020

12,833

Galvanized steel 2017

2017

CAGR 5.9%

10,549

2020

12,535

Finished steel 3,637

2020

CAGR 11.9% 3,932

2017

21,637

2020

CAGR 5.4% 25,369

Source: POSCO Research Institute

consumption structure by steel type, steel demand in the construction industry seems to be growing stably. As the

Steel demand forecast

housing supply ratio increases and the construction of ur-

Vietnam’s steel demand is projected to continue to show sta-

ban infrastructure increases, Vietnam’s steel consumption

ble growth since the Vietnamese economy is growing rapidly

is expected to reach 25 Mt in 2020.

and the government is actively investing in the construction

In 2020, supply is expected to rise, by 5 Mt for HR,

of infrastructure and housing. Construction for urbanization

because of FHS’s increased HR production which began

will continue for some time. The burgeoning urban popula-

operation in 2017 and HPF’s new production. By product

tion will drive rising demand for urban housing. However, in-

type, the supply of flat products including coated steel will

creasing trade restrictions stemming from the global spread

rise through revamp, resulting in new investment.

of protectionism, rising electricity rates, and the slowing real

Reflecting investment plans already underway, HR

estate market in Vietnam will have negative impacts on steel

production is expected to reach 6 Mt in 2020. Taking into

demand. Nonetheless, the Vietnamese steel industry will

account the growth rate of steel demand, import increases

continue to grow considering its current low per capita steel

will slow with the rise in the self-sufficiency rate. Vietnam’s

consumption and stable FDI inflows.

HR products are generally used for galvanizing and surface treatment, so the re-input rate is relatively high at 73%. HR

Reference

products are mostly semi-products for construction, in-

L ee Young-Kwan (2019), “Vietnamese Culture and Discussion of

cluding housing and SOC. As a result, Vietnam’s steel demand is expected to reach 25.4 Mt in 2020, namely by the government’s active drive for construction projects. If Vietnam’s GDP growth maintains a CAGR of 6.5% until 2020, finished steel de-

my after the Doi Moi Policy”, Korean Thought and Culture, Vol. 97 I MF, World Economic Outlook (April 2019), https://www.imf.org/external/datamapper/datasets/WEO O hno, K., 2009, “Avoiding the Middle Income Trap: Renovating

mand will rise to 25.4 Mt; flat product demand is expected

Industrial Policy Formulation in Vietnam,” ASEAN Economic Bulletin,

to grow by a CAGR of 5.0% to 12.8 Mt, and long product

Vol. 26, No. 1, pp.25~43

demand by a CAGR of 5.9% to 12.5 Mt.

88

Economic Development and Sustainability in the Vietnamese Econo-

Asian Steel Watch

T he World Bank, Data Bank

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