Transnational marriages in the steel industry: Experience and Lessons for global business

Ganh L Mangum

Sae-Young Kim

Stephen B. Tallman

TRA N SN A TIO N A L

M A RRIAG ES IN THE

STEEL INDUSTRY

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TRANSNATIONAL

MARRIAGES IN THE

STEEL INDUSTRY

Experience and Lessons for Global Business

Garth L. Mangum

Sae-Young Kim

Stephen B. Tallman

Q U O R U M B O O K S

Q

Westport, Connecticut • London

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Mangum, Garth L.

Transnational marriages in the steel industry : experiences and

lessons for global business / Garth L. Mangum, Sae-Young Kim,

Stephen B. Tallman.

p. cm.

Includes bibliographical references and index.

ISBN 1-56720-040-0 (alk. paper)

1. Steel industry and trade—United states—Mergers.

2. Consolidation and merger of corporations—United states.

3. International business enterprises—United States. 4. Joint

ventures—United states. 5. Holding companies—United states.

6. Subsidiary corporations. 7. Competition, International.

I. Kim, Se-yong. II. Tallman, Stephen B. III. Title.

HD9515.M35 1996

338.8’3669142’0973—dc20 95-45964

British Library Cataloguing in Publication Data is available.

Copyright © 1996 by Garth L. Mangum, Sae-Young Kim, and Stephen B. Tallman

All rights reserved. No portion of this book may be

reproduced, by any process or technique, without the

express written consent of the publisher.

Library of Congress Catalog Card Number: 95-45964

ISBN: 1-56720-040-0

First published in 1996

Quorum Books, 88 Post Road West, Westport, CT 06881

An imprint of Greenwood Publishing Group, Inc.

Printed in the United States of America

Library of Congress Cataloging-in-Publication Data

The paper used in this book complies with the

Permanent Paper Standard issued by the National

Information Standards Organization (Z39.48-1984).

10 987654321

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Contents

Tables and Figures vii

1 The Emergence of International Joint Ventures 1

The Magnitude of International Joint Venturing 2

Steel Industry Joint Venturing 2

Why Study International Joint Ventures? 3

Organization of the Book 7

Notes 7

2 The International Joint Venture from

a Theoretical Perspective 9

The Theory of Foreign Direct Investment 9

Defining the International Joint Venture 12

Joint Ventures and Other

International Strategic Alliances 13

The Multinational Firm and the

International Joint Venture 15

The Managerial Perspective on

International Joint Ventures 19

Uses of Joint Ventures—Host-Country Perspectives 21

Expectations for International Steel Joint Ventures

in the United States 23

Notes 23

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VI Contents

3 Steel Industry Challenges of the 1980s 25

Steel on the Industrial Staircase 25

The Role of Steel in Economic Development 28

The World’s Steelmakers 30

Back to U.S. Developments 39

Notes 60

4 Steel Industry Joint Venture Responses 63

Beginnings of the Steel Joint Venture Movement 63

Joint Venture Motives 66

Census of Steel Joint Ventures 67

The Continuing Thrust 71

Notes 74

5 Steel Case Studies—Three Integrated Mills 77

The National/NKK Joint Venture 77

Armco/Kawasaki 90

USS/Kobe 98

Notes 112

6 Steel Case Studies—Three Finishing Mills 115

California Steel Industries 115

A U.S./Korean Joint Venture 123

Inland and Nippon Steel 139

Notes 154

7 Lessons from Steel Industry Joint Ventures 157

The Steel Industry in 1995 157

Joint Venture Lessons 166

Back on the Industrial Staircase 175

Notes 177

8 Theoretical Implications 179

International Joint Venture Formation—Theory and

Practice in the American Steel Industry 180

Managing IJVs in the American Steel Industry 189

Conclusion 195

Notes 196

Index 199

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Tables and Figures

T A B LES

2.1 TVpes of Cooperative Arrangements 14

3.1 Capacity versus Consumption for Major Countries 38

3.2 Adoption of New Technologies 41

3.3 U.S. Trade in Steel Mill Products 45

3.4 Hourly Wage Trends in the U.S. Steel Industry

and All Manufacturing 47

3.5 Steel Industry Hourly Employment Costs 48

3.6 Labor Productivity for All Steel Industry Employees 48

3.7 Employment in the U.S. Steel Industry

from 1973-1985 49

3.8 Production Cost Consequences of Exchange Rates 50

3.9 Consolidated Return on

Steel Industry Sales: Net Income/Sales 53

3.10 U.S. Comparative Return (Loss) as a

Percentage of Equity for Integrated, Mini-Mill,

and All Manufacturing from 1972-1983 57

3.11 Output Levels. Costs, and Revenues for

U S Integrated Facilities from 1976-1985 59

4.1 Foreign Steelmakers' Investment in

U.S. Joint Ventures 68

5.1 Production. Sales, Profits, and Losses, 1985-1993 86

7.1 Production, Capacity, Utilization,

and Income, 1984-1993 158

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viii Tables and Figures

7.2 Percentage of U.S. Raw Steel Production by

Furnace and Cast Type 159

7.3 Productivity Index 160

7.4 Employment and Labor Costs 161

7.5 Sources of Steel Supply 162

7.6 World Steel Production, 1984-1993 164

7.7 Hourly Compensation Costs for

Production Workers 166

7.8 Income Data 167

FIG U RES

3.1 The Industrial Staircase 26

3.2 Real Import Prices and Full Japanese Costs

for Carbon Steel from 1973-1983 51

3.3 Real Domestic and Import Carbon Steel Prices

from 1973-1983 56

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T RAN SN ATIO N A L

M ARRIA G ES IN THE

STEEL INDUSTRY

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C h apter

The Emergence of

International Joint

Ventures

Globalization is generally perceived as a two-dimensional phe￾nomenon. Firms in nations unable to sell their entire desired

output within their own borders attempt to market the surplus

abroad. There, consumers attracted by price or quality welcome

these imports. At the same time, competing producers within

those target nations attempt to erect protectionist barriers.

Sometimes firms attempt to leap over borders to establish pro￾duction outposts in target countries and abandon any concept of

a home base, thereby becoming truly rootless multinationals.

Another international trade phenomenon has attracted less

attention: that of transnational industrial marriages in which

two competing business organizations maintain their respective

home bases but join resources and combine strengths to exploit

markets otherwise inadequately available to either. Such interna￾tional joint ventures are the focus of this book, which illustrates

the magnitude of the international joint venture movement, as￾sesses its motivations, relies upon the basic steel industry for illus￾trations of its strengths and weaknesses, and draws lessons from

that experience. Those lessons are the purpose of and justifica￾tion for this book—strategic lessons for firms both within the

steel industry and outside it, public policy lessons for those won￾dering whether to promote or discourage such international

marriages, and academic lessons for those whose motives are

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2 Transnational Marriages in the Steel Industry

only to understand and encase in theoretical simplifications the

perplexing realities of a complex world.

TH E M A G N IT U D E O F IN T E R N A T IO N A L

JO IN T V E N T U R IN G

By all accounts, the incidence of joint venture usage is climbing

rapidly, both domestically and internationally. The speed of new

technology emergence, the convergence of markets, and the high

cost of new products argue for the value of cooperative arrange￾ments. In the United States, Harrigan reports that the percent￾age of joint ventures and other cooperative strategies in relation

to all organization-forming activity has increased dramatically

across a variety of industries—from 1 or 2 percent before 1975 to

between 10 and 35 percent of new ventures in more than half the

categories she examines in 1985.' International alliances are

comparably important. Contractor and Lorange, using Depart￾ment of Commerce data, report that in 1977 there were some

10.000 foreign subsidiaries wholly owned by U.S. firms, some

14.000 to 15,000 equity participations, and 30,000 licensing ar￾rangements.2 The U.S. Department of Commerce reports that an

average of almost 40 such foreign joint ventures and equity in￾creases in the United States w ere counted annually between

1978 and 1983,3 with a further 33 equity increases and 49 joint

ventures in 1985.'' Ellen Auster reports from Japanese government

sources that Japanese firms form ed 48 cooperative ventures

and 33 equity joint ventures out of 136 total investments in the

United States in 1984, and 76 cooperative ventures and 63 equity

joint ventures among 223 total U.S. ventures in 1985.5 In other

cases, the incidence of joint ventures into China has increased

from six in 1979 to 3,909 in 1988 and 3,659 in 1989 from all sources.6

Other studies indicate a steady increase of cooperative ventures in

Europe over the last decade, and comparable increases in a vari￾ety of industries.7 Cooperation in general, and equity joint ven￾tures in particular, are increasing in importance rapidly as firms

deal with world markets and technology-intensive products.

ST EEL IN D U ST R Y JO IN T V E N T U R IN G

Joint venturing in the world steel industry began in the years

immediately following World War II, not in steel production but

in the development of raw materials necessary to it. Iron ore.

coking coal, limestone, and other more exotic necessities of the

steelmaking process were not in short supply-, but they were not

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The Emergence of International Joint Ventures 3

always available in convenient locations and desired qualities.

All-out war production had exhausted many of the most conve￾nient and most attractive supplies and sent older producers and

new entrants to the industry scurrying to find new sources, first

in Canada in the 1950s; later in Australia, Africa, and Latin

America; and later still in Asia." Some of those international

joint ventures were arranged between competing steel firms

anxious to share the costs and the outputs, both of which tended

to be beyond the capacities and needs of any one firm. Others

were joint ventures between mining firms with both the exper￾tise and the requirement of a guaranteed market and steel pro￾ducers bringing to the marriage both the capital and the market.

Maturing of home markets during the 1960s accelerated the

hunt for export markets during the 1970s in an atmosphere of

rapidly rising energy and other costs. Primarily to integrate the

raw-materials-supplying and steel-producing functions with

consequent transportation-cost savings, new international joint

ventures were undertaken by the Americans and Europeans in

Australia, by Japanese and Brazilian firms in Brazil, and be￾tween Austrians and South Africans in the latter country. All

foundered, either over government regulation or from the mul￾tiplying economic problems of the world steel industry docu￾mented in later chapters.

The political climate in the United States during those years

was hostile toward any joint venture, foreign or domestic, that

might be perceived as reducing competition. But “combine or

perish” becam e the obvious alternatives for Am erican steel

firms during the 1980s, and antitrust policy responded to that

reality. Superior quality had been demonstrated abroad which

struggling U.S. producers could not obtain the capital to dupli￾cate. M eanw hile, em ergin g world producers bursting the

boundaries of their domestic markets and hungry to tap the

world’s largest and most lucrative market were willing and ea￾ger to offer capital, technology, and expertise.

The result was a one-industry joint venture boom that con￾summated at least seventeen international marriages in less

than ten years.9 Most of these are summarized, and six are ex￾amined closely in the chapters that follow.

W H Y ST U D Y IN T E R N A T IO N A L JO IN T V E N T U R E S ?

International joint ventures may not have been the salvation of

the steel industry in the United States, but that industry would

be much sm aller and substantially weaker today had those

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4 Transnational Marriages in the Steel Industry

transnational marriages not occurred. Therefore, there are les￾sons for the industry to be reviewed. Those joint ventures helped

change the look of steel in this country from an entrenched and

protected but dying industry to a revitalized, technologically so￾phisticated, internationally competitive industry, lean but once

again powerful. This impressive turnaround cannot be attrib￾uted entirely to the international cross-fertilization; but we shall

see that foreign capital, foreign technology, and foreign commit￾ment to steelmaking have been critical to saving plants, jobs,

and even communities in the United States.

There is even more to be learned by industries of parallel and

contrasting experience. Therefore, this book follows two paths

in the investigation of international joint ventures in steel. First,

it provides a historical narrative of the industry and the role of

these international joint ventures in that industry’s recent reju￾venation. By focusing on detailed case studies of six joint ven￾tures, this book provides an in-depth look at why these ventures

succeeded and failed; the practical value of joint ventures in this

industry; the economics of foreign investment in one industry

and country; and at the importance of human interaction in

business relationships.

This aspect of the book is aimed at the manager with an inter￾est in steel or international joint ventures. It shows what worked

and did not work for these companies at a practical level in the

hope of illuminating a complex process and providing ideas for

other companies in similar situations. It is also intended for

those who take a particular interest in the steel industry,

whether serious scholars or casual readers who understand the

importance of this industry to the industrial economy on both

practical and symbolic levels. In this sense, this book provides a

historical record (although one which is updated daily) because

these ventures persist today; failing and succeeding, learning

new lessons, and enriching their industry even as we try to

evaluate what they did last month or last year. As such, this book

is intended to be both entertaining and insightful. It provides six

views of the real world of steel and suggests some conclusions

about how these ventures were created and managed. It is also

intended to provide the raw m aterial with which readers can

draw their own conclusions.

Another aspect of this book is that of a serious scholarly look at

international joint ventures and their increasingly important posi￾tion in today’s economy. Alliance ventures of one sort or smother

have become an increasingly important form of international

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The Emergence of International Joint Ventures 5

investment Contractor and Lorange reported in 1988 that alliance

forms of investment outnumbered wholly owned subsidiaries by

more than four to one.10 In concert with their increasing numbers,

alliance strategies are becoming a favored means of investment

in many industries: This is a considerable change from their

previous status as a last resort when foreign governments

blocked wholly owned investment. As outsourcing, re-engineering,

and “redefining the firm ” have become the hottest concepts in

m anagement technology, joint ventures and other alliances

have exploded in both numbers and interest to managers and

scholars of management. Their importance in global industry

environments is at the top of the agenda.

A quick look at the changing environment of international

business shows why this is an increasing trend. First, more and

more industries are developing global markets. Global compe￾tition, world scale technology, and converging demands from

customers in many lands force multinational firms to invest

widely. Firms must challenge their competitors in their home

markets and wherever they may find a competitive advantage.

Whether competing for customers or for the latest technologies

in product or process, or for the best value in input materials,

companies face each other around the globe. New technologies

are so expensive to develop, yet so fleeting in their superiority,

that companies in electronics, pharmaceuticals, software, and

other industries must have global distribution from the day of

introduction of a new product. No longer can development costs

be spread over years of technical superiority in a product life

cycle that moves gradually from region to region and country to

country. Now, product knowledge seems to spread almost in￾stantaneously, and when customers everywhere want the same

hamburger, computer, video game, or high-strength steel, the

company that can first provide this worldwide standard reaps

tremendous advantage from being first to match global tastes.

Globalization is more than a cliched term, it is characteristic of

the com petitive situation in a growing number of industries,

even the traditional “heavy industries” such as steel. In steel,

new process and product technologies, internationalizing cus￾tomers, and new competition put pressure on existing companies.

This competitive trend which is critical, vastly expensive, and

highly risky, provides one powerful incentive to pursue alliance

strategies.

At the same time, new countries are moving into the world

economy from the developing world and the old socialist world.

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6 Transnational Marriages in the Steel Industry

New political and economic alliances are developing, and old

alliances are changing form. Countries previously dismissed as

“less developed" or “centrally planned failures” are suddenly the

fastest growing sources of both demand and supply. These coun￾tries provide hungry consumers and undervalued productive

assets which cannot be ignored. Among the industrialized de￾mocracies, an era of alliances is also well under way: the Euro￾pean Union is proceeding with economic unification of a scope

previously unknown among sovereign nations; the industrial

nations of North Am erica are committed to a free trade area;

and efforts at economic cooperation in East Asia are beginning.

These major changes in political and econom ic systems are

paced by less globally significant, but equally wrenching changes

in other parts of the world. International companies are forced

to expand their geographical horizons to protect their access to

markets and resources. Multinational businesses face a world

where no borders are permanent, no political systems solid, and

no government policies dependable. The uncertainty of the in￾ternational business environment is perhaps as high as it has

ever been without a major war, and the usual business response

to uncertainty is to play safely and carefully—to hedge all bets.

How are multinational companies to deal with increasing un￾certainty coupled with a burgeoning demand for global prod￾ucts, global technology, and global competitiveness? From a

strategic perspective, greater uncertainty in the environment

suggests careful thought, limited commitments, flexibility, diver￾sification of risks, and protection of assets. Organizationally,

such protective qualification of strategic direction is enhanced

by the use of alliances in place of solo operations. Joint ventures

reduce resource commitments in any one location, lowering

diversifiable risks while perm itting any single firm to cover

more of the globe with the same assets. The internal difficulties

and risks inherent to shared ownership and control of opera￾tions have caused alliance ventures to be treated as less than

optimal organizational solutions for a long time. However, in

times of turbulence and rapid growth, the risks from misjudging

the direction of the environment, blowing an opportunity for

market entry, or missing the introduction of a new technology

appear to outweigh the risks of divided loyalties and leadership

When international firms must be able to operate effectively ev￾erywhere and anywhere while also remaining ready to make

immediate adjustments in their worldwide systems, even the

largest multinational companies need the resource leverage,

the improved market access, the political connections, and the

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