As South Korea's economy transforms, with central government control slowly yielding to free competition and open markets, one state enterprise most attractive to buyers may prove to be the hardest one for the government to privatize.
Pohang Iron and Steel Company (Posco) is highly profitable and cost-efficient. Expansion plans call for it to overtake Japan's Nippon Steel in 1999 as the world's largest steelmaker, with a projected capacity of 28 million tons.
The problem is that it's too important to the economy, and the government would like to curb the power of the only companies with enough money to buy it: the chaebol.
Such conglomerate companies already make nearly everything under the sun. Sales of the biggest chaebol, like Samsung or Hyundai, eclipse the central government's annual budget. Allowing them to expand their scope would make them more unwieldy, and would stir up a public suspicious of concentrations of wealth.
Posco is a particularly big prize. "Whoever owns Posco will have one of the largest economic empires in Korea", says Kim Jong Sok, an economist at Hongik University. As South Korea's only steelmaker, Posco has a big influence over many manufacturing industries. It would be quickly eaten by chaebol eager for vertical integration and expansion.
So although Posco has some inefficiency problems common to state companies, according to analysts Posco may be retained by the government for years. Two other state-run giants - Korea Telecom and Korea Electric Power Corp. - will have similar problems being sold off. The alternative of offering shares to the public would take a long time and the sheer volume would depress the stock market, analysts say.
Until recently when international steel prices fell, Posco has been a useful tool for the government. For years the company kept domestic steel prices below international levels, enhancing the competitiveness of Korean cars, ships and electronics - a practice US trade officials often said was unfair. Officials in the Ministry of Trade Industry and Energy don't want to relinquish this and other powers, say observers.
State-owned businesses are often inefficient. But although Posco's founder, Park Tae Joon, was a government appointee, he treated the business like his own. An ex-general, he ran Posco like a "military camp" by all accounts, and replaced profit with patriotism to motivate workers at the only blast furnace steel mill during South Korea's blitzkrieg industrialization.
Workers wore combat boots. Wrong steps were totally reversed. Once after deciding the layout of a plant under construction was inefficient, Mr. Park dynamited the place and made everyone start over.
Posco became known for its efficiency: It took only 24 months to build a blast furnace at Kwangyang, compared with the 40 months Japanese companies take. Posco spends four hours making hot-rolled steel, while Japan's Nippon Steel takes 14. Efficiency and new technologies contributed to its competitive edge - it costs Posco $241 per ton to produce hot-rolled steel, while Nucor Corp., an efficient American firm, spends $309, Japan $319, and Germany $366 according to BZW, a securities company.
Posco, one of South Korea's best-paying companies, has no labor problems. In 1994, it was the first South Korean company to list shares on the New York Stock Exchange.
Posco hasn't hit hard times yet. But for its future survival, it has been investing overseas. Like other South Korean companies, Posco fears rising wages and a saturated home market. Although Posco is concentrating in China, Vietnam, and Indonesia, it also operates a joint venture with USX Corp. to cold-roll steel at a revamped plant in Pittsburg, Calif.
Steel analysts say it has to meet the competition of Japan and the US, especially when South Korea's steel market opens to imports in 2005.
A study on improving Posco's management by Korea Development Institute, a government think-tank, suggests privatization. Though the government wants to restrain chaebol, it is considering letting Hyundai build a steel mill to balance Posco's monopoly, a move that would make it easier to privatize Posco, concedes an official at the Ministry of Finance and Economy.