ICT and e-Business Impact in the Steel Industry - empirica

empirica.biz

ICT and e-Business Impact in the Steel Industry - empirica

ICT and e-Business Impact in the

Steel Industry

Study report

No. 02/2008


European Commission, DG Enterprise & Industry

e-Mail: entr-innov-ict-ebiz@ec.europa.eu,

info@ebusiness-watch.org

Impact Study No. 2 / 2008

ICT and e-Business Impacts in

the Steel Industry

A Sectoral e-Business Watch study by

empirica

Final Report

Version 4.0

September 2008

This report was prepared by empirica on behalf of the European Commission,

Enterprise & Industry Directorate General, in the context of the "Sectoral e-

Business Watch" programme. The Sectoral e-Business Watch is implemented by

empirica GmbH in cooperation with Altran Group, Databank Consulting, DIW

Berlin, IDC EMEA, Ipsos, GOPA-Cartermill and Rambøll Management based on a

service contract with the European Commission.


ICT and e-business in the steel industry

About the Sectoral e-Business Watch and this report

Disclaimer

Acknowledgements

Contact

The European Commission, Enterprise & Industry Directorate General, launched the Sectoral e-

Business Watch (SeBW) to study and assess the impact of ICT on enterprises, industries and the

economy in general across different sectors of the economy in the enlarged European Union, EEA

and Accession countries. SeBW continues the successful work of the e-Business W@tch which,

since January 2002, has analysed e-business developments and impacts in manufacturing,

construction, financial and service sectors. All results are available on the internet and can be

accessed or ordered via the Europa server or directly at the e-Business W@tch website

(www.europa.eu.int/comm/enterprise/ict/policy/watch/index.htm, www.ebusiness-watch.org).

This document is a final report of a Sector Impact Study, focusing on electronic business in the

steel industry. The study describes how companies use ICT for conducting business, and, above

all, assesses implications thereof for firms and for the industry as a whole. The elaborations are

based on an international survey of enterprises on their ICT use, econometric analyses, expert

interviews and case studies.

Neither the European Commission nor any person acting on behalf of the Commission is

responsible for the use which might be made of the following information. The views expressed in

this report are those of the authors and do not necessarily reflect those of the European

Commission. Nothing in this report implies or expresses a warranty of any kind. Results from this

report should only be used as guidelines as part of an overall strategy. For detailed advice on

corporate planning, business processes and management, technology integration and legal or tax

issues, the services of a professional should be obtained.

This report was prepared by empirica GmbH on behalf of the European Commission, Enterprise

and Industry Directorate General. The main author was Stefan Lilischkis. The study is a deliverable

of the Sectoral e-Business Watch, which is implemented by empirica GmbH in cooperation with

Altran Group, Databank Consulting, DIW Berlin, IDC EMEA, Ipsos, GOPA-Cartermill and Rambøll

Management, based on a service contract with the European Commission (principal contact and

coordination: Dr. Hasan Alkas).

The SeBW would like to thank the members of the Advisory Board in 2007/2008 for reviewing the

draft report and providing valuable comments and suggestions: Georges Kirps (Eurometal), Freddy

De Vos (ArcelorMittal Gent), Roel de Jong (Corus IJmuiden), Martin Größchen (Deutscher

Gießereiverband), Enrico Gibellieri (Advisor to the European Metalworkers Federation).

For further information about this Sector Study or the Sectoral e-Business Watch, please contact:

empirica

Gesellschaft für

Kommunikations- und

Technologieforschung mbH

Oxfordstr. 2, 53111 Bonn,

Germany

info@empirica.com

Sectoral e-Business Watch

c/o empirica GmbH

Oxfordstr. 2, 53111 Bonn,

Germany

info@ebusiness-watch.org

European Commission

Enterprise & Industry

Directorate-General

D4 "ICT for competitiveness and

innovation"

entr-innov-ictebiz@ec.europa.eu

Rights restrictions

Material from this report can be freely used or reprinted but not commercially resold and, if quoted,

the exact source must be clearly acknowledged.

Bonn / Brussels, 2008

2


ICT and e-business in the steel industry

Table of Contents

Executive Summary ...................................................................................................5

1 Introduction...................................................................................................9

1.1 About this report..................................................................................................................9

1.2 About Sectoral e-Business Watch......................................................................................10

1.3 ICT and e-business – key terms and concepts...................................................................13

1.4 Study methodology............................................................................................................18

2 Context and background.............................................................................20

2.1 Sector definition – scope of the study.................................................................................20

2.2 Industry background..........................................................................................................22

2.3 Trends and challenges......................................................................................................26

3 The state-of-play of ICT and e-business adoption ......................................30

3.1 Overview of topics in focus................................................................................................30

3.2 Basic issues: access to ICT networks, e-skills and ICT expenditure...................................31

3.3 Electronic procurement......................................................................................................38

3.3.1 Introduction to procurement issues..................................................................................................38

3.3.2 Findings about e-procurement.........................................................................................................40

3.4 Internal e-business systems..............................................................................................45

3.4.1 Introduction to internal e-business systems......................................................................................45

3.4.2 Findings about internal e-business systems use...............................................................................46

3.4.3 Systems integration after mergers...................................................................................................57

3.5 Sales-side processes ........................................................................................................58

3.5.1 Introduction to sales-side processes................................................................................................58

3.5.2 Findings about customer interfaces.................................................................................................60

3.5.3 Findings about distribution and logistics management......................................................................65

3.6 Joint procurement and sales side issues............................................................................66

3.6.1 Introduction to joint procurement and sales side issues....................................................................66

3.6.2 Electronic marketplaces..................................................................................................................67

3.6.3 Data exchange standards................................................................................................................70

3.7 Barriers and drivers of e-business use...............................................................................73

3.8 Overall differences between size classes, countries, sub-sectors and industries................78

3.9 Summary of ICT and e-business deployment.....................................................................83

4 Impacts of ICT adoption..............................................................................85

4.1 Conceptual framework: the structure – conduct – performance paradigm...........................85

4.2 ICT and productivity...........................................................................................................88

4.2.1 Background and hypotheses...........................................................................................................88

4.2.2 ICT impact on value added growth..................................................................................................91

3


ICT and e-business in the steel industry

4.2.3 ICT impact on labour productivity growth.........................................................................................95

4.2.4 Conclusions: Minor ICT impact on growth of value added and labour productivity ........................... 100

4.3 ICT and innovation.......................................................................................................... 101

4.3.1 Survey findings about ICT and innovation...................................................................................... 102

4.3.2 Links between skills, e-collaboration and ICT-enabled innovation................................................... 105

4.3.3 Links between ICT innovation, firm performance and organisational change................................... 109

4.3.4 Overview of results on ICT and innovation..................................................................................... 113

4.4 ICT and market structure................................................................................................. 114

4.4.1 Survey findings on ICT and competition......................................................................................... 114

4.4.2 Market structure and ICT diffusion................................................................................................. 117

4.4.3 ICT impact on market structure...................................................................................................... 118

4.4.4 Overview of results on ICT and market structure............................................................................ 120

4.5 ICT and the value chain................................................................................................... 120

4.6 Summary of impact analysis............................................................................................ 123

5 Case studies..............................................................................................125

5.1 Electronic sourcing at ThyssenKrupp Steel, Germany...................................................... 127

5.2 Enterprise resource planning at Śrem iron foundry, Poland.............................................. 133

5.3 Enterprise Resource Planning with an Oracle system at Farwest Steel, USA................... 138

5.4 Electronic environment and safety management at TenarisDalmine, Italy......................... 143

5.5 e-Business platforms at Baosteel, China.......................................................................... 147

5.6 Internet-based information about customers’ orders at Corus IJmuiden, Netherlands....... 152

5.7 e-Warehouse management at ArcelorMittal Gent, Belgium.............................................. 157

5.8 Electronic sales with the former e-Arbed.com platform, Luxembourg................................ 162

5.9 ESIDEL standard implementation at CMC Coil Steels, Australia...................................... 166

5.10 Basic ICT use at the Patina foundry, Hungary.................................................................. 173

5.11 Summary of case study findings...................................................................................... 178

6 Conclusions: outlook and policy implications ..........................................179

6.1 Outlook on further possible developments....................................................................... 179

6.2 Policy implications........................................................................................................... 182

6.2.1 Introduction to policy implications.................................................................................................. 182

6.2.2 Promoting ICT and e-business use in steel value chains................................................................ 183

6.2.3 Supporting ICT skills development................................................................................................. 185

6.2.4 Supporting the development of the ESIDEL standard..................................................................... 186

6.2.5 Using ICT for reduced energy consumption and increased environment protection......................... 187

References.............................................................................................................189

Annex I: The e-Business Survey 2007 – Methodology Report ..............................197

Annex II: Econometric analysis methodology.......................................................203

4


ICT and e-business in the steel industry

Executive Summary

Key findings

ICT are important for the steel industry. ICT

are used to increase productivity, reduce costs,

and improve customer relationships. Almost two

thirds of the large steel companies reported that

ICT has increased competition in the sector.

e-Procurement is common, e-sales are not.

Along the value chain, many steel firms practice

e-procurement (66%, employment-weighted),

internal systems are fairly well developed (ERP:

59%), but e-sales are not very common (26%).

No lag behind other industries. ICT use in

steel firms is similar to the furniture and

chemicals industries, which may contradict the

industry’s public image of being old-fashioned.

The EU steel industry lags behind US. Steel

firms in the US reported a much higher use of

ICT and e-business than EU-7 firms. This may

potentially influence competitiveness.

High ICT impact on skills requirements.

More than 40% of the medium-sized and large

steel firms confirmed such impacts.

ICT may have high future impacts. Steel

firms representing 80% of the industry’s

employment foresee ICT impacts on logistics,

75% on management and controlling.

Current policy activities lack ICT focus. They

may not adequately reflect the importance of

ICT for the steel industry. ICT standards

development may be of particular importance.

Objectives and scope of the study

The objective of this report is to analyse how

companies in the steel industry use Information

and Communication Technology (ICT) for

conducting business, to assess impacts of this

use for firms and for the industry as a whole,

and to indicate possible implications for policy.

The analysis is based on results of an

international survey of steel enterprises,

econometric analyses, evaluation of recent

literature, and ten case studies.

The steel industry as defined for the study

purpose covers large parts of division 24 in

NACE Rev. 2, “manufacture of basic metals”. 1

The steel-related parts of NACE 24 are 24.1

“manufacture of basic iron and steel and of

ferro-alloys”, 24.2 “manufacture of tubes, pipes,

hollow profiles and related fittings, of steel”,

24.3 “manufacture of other first processing of

iron and steel”, 24.51 “casting of iron”, and

24.52 “casting of steel” (section 2.1).

Industry characteristics and trends

The European iron and steel industry

comprised 9,459 enterprises and employed

776,800 people in 2004. The basic metals

manufacturing sector is dominated by large

multinational enterprises, with 74% of its EU-27

value added created by enterprises with 250 or

more employees. However, the majority of

companies in the industry are small or mediumsized.

While the strategic importance of the

steel producing industry for Europe has

declined during the past decades, steel remains

a very important production material (section

2.2). Since 2003 there has been an

unprecedented upward cycle in the industry,

caused by increased demand for steel

particularly from China. A further trend is an

ongoing process of consolidation of the steel

industry which may lead to further large-scale

enterprises. Skills and employment issues are

becoming more important since many

employees will retire within a few years and

hiring new skilled personnel may become

difficult. Furthermore, environment issues,

energy saving in particular, are becoming more

important for the steel industry (section 2.3).

1

NACE Revision 2 is a four-digit classification of

business activities. It is a revision of the “General

Industrial Classification of Economic Activities

within the European Communities”, known by the

acronym NACE and originally published by

Eurostat in 1970. NACE Rev. 2 replaced the

previously used Rev. 1.1 on 1 January 2008.

5


ICT and e-business in the steel industry

Infrastructure, skills, investment

Steel business can apparently not be done

without the internet any longer. Practically all

companies in the sector are connected to the

internet. The share of steel firms that said they

have a broadband connection to the internet

was 41% (34% weighted by employment) so

that there is much scope for improving internet

connections. As regards skills, only large

companies reported to have experienced

difficulties to find ICT practitioners (20%) which

reflects their higher demand. As regards

budgets, 69% (employment-weighted) said that

they would keep the ICT budget at about the

same level, and further 30% said they would

increase the budget.

Electronic procurement

Procurement is a fundamentally important

activity in the steel industry, as in most

manufacturing industries, because upstream

supply chains tend to be complex and

fragmented (section 3.1). Firms representing

66% of the EU-7 steel industry’s employment

were found to procure goods via the internet or

other computer-mediated networks. The share

of goods procured online tends to be small.

Electronic sourcing platforms can make

procurement processes more efficient and

reduce procurement costs. The case of

ThyssenKrupp shows that such platforms may

not only be beneficial for the procuring

company but also for the suppliers because

their tendering procedures can become more

streamlined, too (section 5.1). However, iron

and steel companies are likely to continue to

procure raw materials in long-term offline

relationships, due to an oligopolistic market

structure in iron ore supply.

Internal e-business systems

Internal e-business systems can significantly

enhance workflows and business processes

and thus increase productivity and reduce costs

in steel enterprises (section 3.2.1). While large

companies may benefit from implementing

comprehensive applications such as enterprise

resource planning (ERP) systems, small

companies may already benefit from simple

software and basic ICT. The use of software for

managing orders is quite prevalent: companies

representing 76% of the steel sector’s

employment said they use such software. 59%

reported to have an ERP system. The use of

internal systems for document management,

supply chain management (both 27%), and

customer relationship management (21%) was

found to be not so widespread. Radio

Frequency Identification (RFID) is also not

prevalent. Steel firms representing 12% of

employment reported to use RFID and 6% said

they plan to do so.

Case study evidence from the Śrem iron

foundry, Poland (section 5.2), and Farwest

Steel, US (section 5.3) point to challenges of

implementing e-business systems related to

ICT acceptance and the need for changing

management practices. Moreover, the

integration of information systems in the course

of mergers poses particular challenges to

systems interoperability (section 3.2.2). The

cases of ArcelorMittal Gent (section 5.7) and

Baosteel (section 5.5) refer to such challenges.

Sales-side e-business

The steel industry is largely driven by

requirements from customers. Thus the

customer interfaces are vitally important. e-

Business solutions may enhance

communication with customers, including for

example product specification, scheduling, and

invoicing. Online platforms for data exchange

with customers, such as the one at Corus Steel

IJmuiden (section 5.6) may improve order

processes, reducing orders processing costs

and lead times. The case of Baosteel (section

5.5) also provides a related example:

Workflows were reported to now require on

average only 60% of the time spent before

introducing digitised operations. However, steel

firms representing only 26% of the industry’s

employment actually sell goods electronically,

which is lower than in other industries. Steel

products may not be well suited for e-sales due

to their specificities (section 3.5.2).

Distribution and logistics of steel products to

customers has long been neglected as a

6


ICT and e-business in the steel industry

strategically important issue in the sector

(section 3.5.3). However, steel firms

representing 80% of the industry’s employment

expect high or medium impacts of ICT on

logistics in the future (section 6.1). The

Eurometal association sees a new paradigm for

steel distribution emerging, moving from a

product driven business model to a steel

solution business model. ICT and e-business

can contribute to making distribution and

logistics in the steel industry more effective.

ArcelorMittal Gent provides an example of

linking warehouses electronically, enhancing

the overview of materials in stock and on

transport, thus reducing storage costs and

allowing faster invoicing (section 5.7).

No e-marketplace survived

In the steel industry, e-marketplaces were not

successful. The last e-marketplace for the steel

industry in Europe, Steel 24-7, was terminated

in September 2007. e-Marketplaces did not fulfil

the expectations. Companies preferred to

sophisticate their own sales platforms rather

than trading via third-party platforms (section

3.4.1). The case of the former e-Arbed.com

illustrates the high expectations attributed to

electronic market places and their potential to

enhance sourcing and selling efficiency, but it

also shows some of the difficulties that led to

the closure of all e-marketplaces in Europe

(section 5.8).

ICT standardisation may help to

sophisticate e-communication

The development of ICT standards in the steel

industry may be important for sophisticating e-

business communication in the industry and

beyond. Eurofer, the European Federation of

Iron and Steel Industries, supported the

development of the European Steel Industry

Data Exchange Language (ESIDEL) standard.

ESIDEL version 1.0 was introduced in 2004; an

upgraded version 1.1 was published at the end

of 2005. In 2007 the further development of

ESIDEL in Europe was stopped (section 3.4.2).

Only 1% of the interviewed EU steel companies

reported to use ESIDEL, while even 7% of the

US steel firms stated to use it. ESIDEL version

1.1 was however adopted in Australia. At CMC

Coil Steels, Australia, the standard was

implemented successfully, while opportunities

for improvement also emerged (section 5.9).

Overall differences between size

classes, industries, and countries

Taking a bird’s eye view on the survey findings,

the following differences were found:

Steel industry no laggard – but lacking

innovation activity: ICT endowment and e-

business use in the European steel industry

was found to be broadly in line with other

manufacturing industries; on average in

between chemicals and furniture which were

also included in the survey (see section 3.7).

This may be in contrast to an image of an oldfashioned

industry that may be present in the

general public. However, the e-Business

Survey 2007 also found that the steel industry

is indeed lagging behind other industries in

innovative activities (see section 4.4.1). This

applies to general product innovation, to

process innovation of both general and ICTrelated

nature, and to organisational innovation.

SMEs lag behind large firms: In all ICT and e-

business domains, small steel firms lag behind

medium-sized ones, and medium-sized ones in

turn lag behind large firms. The differences

between SMEs and large firms are smallest for

e-sales indicators and largest for internal

systems (see section 3.7). The differences for

internal systems may reflect SME’s limited

ability and necessity to invest in comprehensive

back-office systems. For e-procurement and

ICT infrastructure, the differences are similar.

EU steel firms lag behind US: EU-7 steel

firms were found to use less ICT than their US

counterparts. The differences between the EU

and the US were found to be smallest for

internal systems and largest for e-procurement

indicators. For ICT infrastructure and e-sales

indicators, the differences are similar. Nevertheless,

the SeBW advisory board assesses the

EU steel industry as more competitive than the

US one because US steel firms are bound to

tight shareholder requirements which limit their

investment capabilities.

7


ICT and e-business in the steel industry

ICT and e-business impact

Findings from an econometric analysis suggest

that ICT have considerable impacts on the steel

industry but they did not change business in

this industry fundamentally. Key findings for the

items analysed include the following:

Productivity: Results from other studies

indicate that ICT-induced productivity effects

are relatively less pronounced in capital

intensive, mature manufacturing industries such

as steel. On the other hand, empirical evidence

shows that particularly the larger companies in

the steel industry have dynamically adopted

ICT, notably for managing the supply chain

(chapter 3). A growth accounting analysis

suggests that changes in the ICT-capital stock

accounted only for minor shares of overall value

added growth in the basic and fabricated metals

industries. As regards labour productivity, non-

ICT capital intensity and the intermediate inputs

intensity were found to be the main components

of labour productivity growth. However, ICT can

be embedded in other types of capital, so there

may be a "hidden ICT-impact".

Innovation: The findings indicate that ICT

impact in the steel industry is mainly on process

innovation, not on product innovation. Many

case studies conducted for this report confirm

that ICT can be considered as an enabler of

innovation and positively impact on firm

performance (section 4.4).

Market structure: In the steel industry, the

number of potential customers is limited and the

products sold are not well-suited for online

sales. ICT and e-business are rather used to

support, not conduct, sales processes. The

analysis indicates that ICT and e-business can

hardly be used to open up new markets, to

increase the number of customers and impact

on the steel market’s structure (section 4.5).

Value chains: ICT facilitating B2B interactions

continues to be used in a way that enhances,

not replaces individual companies’ business

strategies, apparently also in the steel industry.

Analyses findings indicate that outsourcing

propensity is correlated with intensity of ICT

use, while the direction of this relationship is not

clear (section 4.6).

Policy implications

Current industry policy appears to not

adequately reflect the importance of ICT and e-

business for the steel industry. Several political

activities may be suggested (section 6.2):

Fostering value chains and e-business use.

Public organisations may support activities to

foster value chain development through ICT in

the steel industry. While the European

Commission should have a focus on crossborder

activities, Member States may promote

national or regional activities. In recent years,

several EU Member States have launched

initiatives to facilitate e-business exchanges

within specific industry supply chains. A key

objective in most of these initiatives is to

enhance SME participation because they are at

risk to be eliminated from the supply chain.

Supporting ICT skills development. The steel

industry has the image of a declining industry

and may thus face difficulties to attract skilled

employees, also in the field of ICT. The steel

firms themselves, their industry associations as

well as public policy could become more active

in this respect. First of all they can promote

awareness about and uptake of e-business

skills in steel companies. Furthermore they can

support e-learning solutions and enhance cooperation

activities with universities to support

e-skills development.

Promoting ICT standards. The EC could play

a more active role towards standardisation of e-

communication processes in the steel industry.

The EC could promote the positive Australian

experience and the idea of further ESIDEL

development among European steel

enterprises as well as their customers and

suppliers. The EC could also initiate and cofund

European projects to implement this

standard. These could focus on SMEs because

they tend to be reluctant to adopt standards due

to the related investment costs.

Promoting ICT use for saving energy. ICT

and e-business may be used to better protect

the natural environment and, in particular, to

save energy. Policy makers may promote

findings from a related study conducted by the

e-Business Watch in 2007/8.

8


ICT and e-business in the steel industry

1 Introduction

1.1 About this report

Objectives, sources and addressees

This is a final report of the Sectoral e-Business Watch study in the steel industry. 2 The

study is about the state-of-play how companies use information and communication

technology (ICT) for managing their business processes – internally and in exchanges

with suppliers and customers. It identifies related opportunities, possible barriers for ICT

adoption and digital integration, and it assesses the impact of ICT deployment for firms

and for the industry as a whole. Possible implications for policy actions are indicated.

Findings presented in this report are based on results of an international survey of

enterprises on their ICT usage conducted by the SeBW in August and September 2007

and also on literature, expert interviews and case studies. The study addresses, in

particular, policy makers in the fields of innovation and ICT-related policies and in

sectoral economic policy. It also addresses representatives of the steel industry, notably

decision makers in industry associations as well as firm managers in marketing,

procurement, ICT and e-solutions, and human resources.

Study structure

This report is structured into six main sections. Chapter 1 explains the background and

context why this study is being conducted: it introduces the Sectoral e-Business Watch

(SeBW) programme of the European Commission, a conceptual framework for the

analysis of e-business, and the specific methodology used for this study. Chapter 2

provides some general information and key figures about the steel industry in Europe and

also beyond. Chapter 3 analyses the current state-of-play in e-business in this industry,

focusing on specific ICT-related issues that were found to be particularly relevant.

Chapter 4 assesses the impact of selected ICT and e-business developments on

productivity and innovation, work processes and employment, value chain characteristics

and – at sector level – on market structure. Chapter 5 presents case studies which

provide further evidence for the issues discussed in chapters 3 and 4. The final Chapter 6

provides an outlook to future developments and draws conclusions on policy implications.

Combining exploratory, descriptive and explanatory approaches

The study approach is exploratory, descriptive and explanatory, thus applying a broad

and sound methodological basis: A qualitative case study approach (chapter 5) is

combined with a descriptive presentation of quantitative survey data (chapter 3) and an

economic analysis of ICT adoption and its impacts (chapter 4). This threefold approach

is meant to produce an in-depth understanding of current e-business issues in the

industry (the "practitioner's view") as well as the state of the art of e-business practice

(the “empiricist’s view”), while also assessing the economic effects of this practice, for

instance on firm productivity and innovation (the "economist's perspective"). While the

results from these different approaches are presented like self-sustained pieces of

research in separate chapters, they are intertwined and cross-referenced.

2

The comprehensive term would be “iron and steel industry”, see section 2.1. For the sake of

briefness, the term “steel industry” is used throughout the report.

9


ICT and e-business in the steel industry

1.2 About Sectoral e-Business Watch

Mission and objectives

The "Sectoral e-Business Watch" (SeBW) explores the adoption, implication and impact

of electronic business practices in different sectors across the European economy. It

represents the continued effort of the European Commission, Directorate-General (DG)

Enterprise and Industry to support policy in the fields of ICT and e-business, which

started with "e-Business W@tch" in late 2001.

In ICT-related fields, DG Enterprise and Industry has a twofold mission: "to enhance the

competitiveness of the ICT sector, and to facilitate the efficient uptake of ICT for

European enterprises in general." The services of the SeBW are expected to contribute to

these goals. This mission can be broken down into the following main objectives:

to assess the impact of ICT on enterprises, industries and the economy in

general, particularly with regard to productivity, employment and workforce

composition, innovation, market structure and value chains;

to highlight barriers for ICT uptake, i.e. issues that are hindering a faster and/or

more effective use of ICT by enterprises in Europe;

to identify and discuss policy challenges stemming from the observed developments,

notably at the European level;

to engage in dialogue with stakeholders from industry and policy institutions,

providing a forum for debating relevant issues.

By delivering evidence on ICT uptake and impact, SeBW is supporting informed policy

decision-making, in particular in the fields of innovation, competition and structural policy.

Policy context

The original e-Business W@tch programme was rooted in the eEurope Action Plans of

2002 and 2005. The goal of eEurope 2005 was "to promote take-up of e-business with

the aim of increasing the competitiveness of European enterprises and raising

productivity and growth through investment in information and communication

technologies, human resources (notably e-skills) and new business models". 3

The i2010 policy 4 , a follow-up to eEurope, also stresses the critical role of ICT for

productivity and innovation, stating that "the adoption and skilful application of ICT is one

of the largest contributors to productivity and growth throughout the economy, leading to

business innovations in key sectors" (p. 6). This Communication anticipates "a new era of

e-business solutions", based on integrated ICT systems and tools, which will lead to an

increase business use of ICT. However, it also warns that businesses "still face a lack of

interoperability, reliability and security", which could hamper the realisation of productivity

gains (p. 7).

3

4

"eEurope 2005: An information society for all". Communication from the Commission,

COM(2002) 263 final, 28 May 2002, section 3.1.2

"i2010 – A European Information Society for growth and employment." Communication from the

Commission, COM(2005) 229 final.

10


ICT and e-business in the steel industry

In February 2005, the European Commission proposed a new start for the Lisbon

Strategy. While it recommended changes in the governance structures, i.e. the way

objectives are to be addressed, the overall focus on growth and jobs remained the same.

Some of the policy areas of the renewed Lisbon objectives address ICT-related issues.

Central Policy Area No. 6 deals with facilitating ICT uptake across the European

economy. Policy-makers in this area will require thorough analysis of ICT uptake based

on accurate and detailed information on the most recent developments. Such evidencebased

analysis is also needed when targeting individual sectors to fully exploit the

technological advantages, in alignment with Central Policy Area No. 7 “Contributing to a

strong European industrial base”. Furthermore, Guideline No. 9, addressed to Member

States, encouraging the widespread use of ICT, 5 can be effectively addressed only if

actions are based on understanding of the potential for and probable effectiveness of

interventions.

"ICT are an important tool …"

"More efforts are needed to improve business processes in European

enterprises if the Lisbon targets of competitiveness are to be realised.

European companies, under the pressure of their main international

competitors, need to find new opportunities to reduce costs and improve

performance, internally and in relation to trading partners. ICT are an

important tool to increase companies’ competitiveness, but their adoption is

not enough; they have to be fully integrated into business processes."

Source: European Commission (2005): Information Society Benchmarking

Report

In 2005, taking globalisation and intense international competition into consideration, the

European Commission launched a new industrial policy 6 with the aim to create better

framework conditions for manufacturing industries in the coming years. Some of the

policy strands described have direct links to ICT usage, recognising the importance of

ICT for innovation, competitiveness and growth.

The SeBW is one of the policy instruments used by DG Enterprise and Industry to

support the implementation of the industrial policy and related programmes. Its activities

are complementary to other related policy programmes in the field of ICT, such as:

the e-Business Support Network (eBSN), a European network of e-business policy

makers and business support organisations,

the eSkills Forum, a task force established in 2003 to assess the demand and

supply of ICT and e-business skills and to develop policy recommendations,

the ICT Task Force, a group whose work is to draw together and integrate various

activities aiming to strengthen Europe's ICT sector, and

5

6

"Working Together for Growth and Jobs: a New Start for the Lisbon Strategy", Communication,

COM (2005) 24, Brussels, 02.02.2005

http://europa.eu.int/growthandjobs/pdf/COM2005_024_en.pdf

"Implementing the Community Lisbon Programme: A Policy Framework to Strengthen EU

Manufacturing - towards a more integrated approach for Industrial Policy." Communication from

the Commission, COM(2005) 474 final, 5.10.2005

11


ICT and e-business in the steel industry

activities in the areas of ICT standardisation, as part of the general

standardisation activities of the Commission. 7

In parallel to the work of the SeBW, the "Sectoral Innovation Watch" (see www.europeinnova.org)

analyses innovation performance and challenges across different EU sectors

from an economic perspective. Studies cover, inter alia, the following sectors: chemical,

automotive, aerospace, food, ICT, textiles, machinery and equipment.

Scope of the programme

Since 2001, the SeBW and its predecessor "e-Business W@tch" have published e-

business studies on about 25 sectors 8 of the European economy, annual comprehensive

synthesis reports about the state-of-play in e-business in the European Union, statistical

pocketbooks and studies on specific ICT issues. All publications can be downloaded from

the programme's website at www.ebusiness-watch.org. In 2007/08, the focus is on the

following sectors and specific topics: 9

No. Sector / topic in focus NACE Rev. 1.1

Reference to earlier

studies by SeBW

1 Chemical, rubber and plastics 24, 25 2004, 2003

2 Steel 27.1-3, 27.51+52 --

3 Furniture 36.12-14 --

4 Retail 52 2004, 2003

5 Transport and logistics services 60, 63 (parts thereof) --

6 Banking 65.1 2003

7 RFID adoption and implications (several sectors) --

8 Intellectual property rights for

ICT-producing SMEs

9 Impact of ICT and e-business on

energy use

10 Economic impact and drivers of

ICT adoption

30.01+02, 32.1-3, 33.2+3;

64.2; 72 (parts thereof)

--

-- --

-- --

The SeBW presents a 'wide-angle' perspective on the adoption and use of ICT in the

sectors studied. Studies assess how ICT is having an influence on business processes,

notably by enabling electronic data exchanges between a company and its customers,

suppliers, and other business partners. The underlying conceptual framework is

explained in more detail in the following section. In addition, the studies also provide

background information on the respective sectors, including a briefing on current

trends.

7

8

9

The 2006 ICT Standardisation Work Programme complements the Commission's "Action Plan

for European Standardisation" of 2005 by dealing more in detail with ICT matters.

See overview at www.ebusiness-watch.org/studies/on_sectors.htm.

See section 2.1 for an explanation why the steel industry was selected.

12


ICT and e-business in the steel industry

1.3 ICT and e-business – key terms and concepts

A definition of ICT

This study examines the use of information and communication technology (ICT) in

European businesses. ICT is an umbrella term that encompasses a wide array of

systems, devices and services used for data processing (the information side of ICT) as

well as telecommunications equipment and services for data transmission and

communication (the communication side). The European Information Technology

Observatory (2007) structures the ICT market into four segments with an estimated total

market value of about € 670 billion in 2007 (Exhibit 1.3-1).

Exhibit 1.3-1: The EU ICT market according to EITO (2007)

Market segment

ICT equipment

Products / services included (examples)

computer hardware, end-user communications

equipment (such as mobile phones), office

equipment (such as copiers) and data

communications and network equipment (such

as switching and routing equipment, cellular

mobile infrastructure)

Market value for

EU (2007)

(EITO estimate)

€ 159 billion

Software products system and application software € 76 billion

IT services

Carrier services

consulting, implementation and operations

management

fixed voice telephone and data services, mobile

telephone services, cable TV

Source: EITO 2007

€ 140 billion

€ 293 billion

In its widest sense, 'e-business' refers to the application of these technologies in business

processes, including primary functions (such as production, inbound and outbound

logistics or sales), and support functions (such as administration, controlling, procurement

and human resources management). Companies in all sectors use ICT, but they do so in

different ways. This calls for a sectoral approach in studies of ICT usage and impact.

The following section introduces a wider framework for the discussion of e-business

developments that will be used in the following analysis of the steel industry.

Gaining momentum after a phase of disappointment

When the bust phase of the previous economic cycle – commonly referred to as the 'new

economy' – started in 2001, the former internet hype was suddenly replaced by a

widespread disappointment with e-business strategies. Companies adopted a more

reserved and sceptical attitude towards investing in ICT. Nevertheless, ICT has proved to

be the key technology of the past decade (OECD 2004, p. 8), and the evolutionary

development of e-business has certainly not come to an end. The maturity of ICT-based

data exchanges between businesses and their suppliers and customers, fostered by

progress in the definition and acceptance of standards, has substantially increased

across sectors and regions over the past five years. In parallel, recent trends such as

"Web 2.0" and social networking are widely discussed in terms of their business

implications and it is widely recognised that 'e'-elements have become an essential

component of modern business exchanges. In short, e-business has regained

momentum as a topic for enterprise strategy both for large multinationals and SMEs.

13


ICT and e-business in the steel industry

"Measurement of e-business is of particular interest to policy makers

because of the potential productivity impacts of ICT use on business

functions. However, the ongoing challenges in this measurement field are

significant and include problems associated with measuring a subject which

is both complex and changing rapidly."

OECD (2005): ICT use by businesses. Revised OECD model survey, p. 17

Companies use ICT in their business processes mainly for three purposes: to reduce

costs, to better serve the customer, and to support growth (e.g. by increasing their market

reach). In essence, all e-business projects in companies explicitly or implicitly address

one or several of these objectives. In almost every case, introducing e-business can be

regarded as an ICT-enabled process innovation. Understanding one's business processes

and having a clear vision of how they could be improved (be it to save costs or to

improve service quality) are therefore critical requirements for firms to effectively use ICT.

The increasing competitive pressure on companies, many of which operate in a global

economy, has been a strong driver for ICT adoption. Firms are constantly searching for

opportunities to cut costs and ICT holds great promise in this respect as it increases the

efficiency of a firm’s business processes, both internally and between trading partners

in the value chain. While cutting costs continues to motivate e-business activity,

innovative firms have discovered and begun to exploit the potential of ICT for delivering

against key business objectives. They have integrated ICT into their production

processes and quality management and, most recently, in marketing and customer

services. These last sectors are widely considered key to improve competitiveness in the

current phase of development of European economies. Competing in mature markets

requires not only optimised cost structures, maximal efficiency, and products or services

of excellent quality but also the ability to communicate effectively and cooperate with

business partners and potential customers.

A definition of e-business

As part of this maturing process, electronic business has progressed from a specific to a

very broad topic. A central element is certainly the use of ICT to accomplish business

transactions, i.e. exchanges between a company and its suppliers or customers. These

can be other companies ('B2B' – business-to-business), consumers ('B2C' – business-toconsumers),

or governments ('B2G' – business-to-government). In the broad sense,

transactions include commercial as well as other exchanges such as sending tax return

forms to the tax authorities.

14


ICT and e-business in the steel industry

Glossary

Definitions by standardisation groups (ISO, ebXML)

The term 'business transaction' is a key concept underlying the development

of e-standards for B2B exchanges. Therefore, definitions have been

developed by standards communities to underpin their practical work.

Examples include:

Business: "a series of processes, each having a clearly understood

purpose, involving more than one party, realized through the exchange of

information and directed towards some mutually agreed upon goal,

extending over a period of time [ISO/IEC 14662:2004]

Business transaction: "a predefined set of activities and/or processes of

parties which is initiated by a party to accomplish an explicitly shared

business goal and terminated upon recognition of one of the agreed

conclusions by all the involved parties even though some of the

recognition may be implicit" [ISO/IEC 14662:2004]

e-Business transaction: "a logical unit of business conducted by two or

more parties that generates a computable success or failure state

[ebXML Glossary]

If transactions are conducted electronically ('e-transactions'), they constitute e-

commerce. Transactions can be broken down into different phases and related

business processes, each of which can be relevant for e-commerce (see Exhibit 1-2).

The pre-sale (or pre-purchase) phase includes the presentation of (or request for)

information on the offer, and negotiations over the price. The sale or purchase phase

covers the ordering, invoicing, payment and delivery processes. Finally, the after sale or

purchase phase covers all processes after the product or service has been delivered to

the buyer, such as after sales customer services (e.g. repair, updates).

Practically each step in a transaction can either be pursued electronically (through the

internet or other computer-mediated networks, i.e. “online”) or non-electronically (e.g. by

fax or postal mail, i.e. “offline”). Different combinations of electronic and non-electronic

means are possible in a particular transaction process. It is therefore difficult to decide

which components actually have to be conducted via computer networks in order to call a

transaction “electronic”.

Exhibit 1-2: Process components of transactions

Pre-sale / pre-purchase

phase

Request for offer/quote

Offer/quote delivery

Information about offer

(e.g. sales catalogue)

Negotiations

Sale / purchase phase

Placing an order

Invoicing

Payment

Delivery (with information

about status)

Source: empirica

After sale / purchase

phase

Customer service

Guarantee management

Credit administration

Handling returns

In 2000, the OECD proposed broad and narrow definitions of electronic commerce, both

of which remain valid and useful today 10 . While the narrow definition focuses on 'internet

10

In 1999, the OECD Working Party on Indicators for the Information Society (WPIIS) established

15


ICT and e-business in the steel industry

transactions' alone, the broad definition defines e-commerce as "the sale or purchase of

goods or services, whether between businesses, households, individuals, governments,

and other public or private organisations, conducted over computer-mediated

networks. The goods and services are ordered over those networks, but the payment

and the ultimate delivery of the goods or service may be conducted on- or offline" (OECD,

2001). The addendum regarding payment and delivery illustrates the difficulty mentioned

above to specify which of the processes along the transaction phases constitute e-

commerce (see Exhibit 1-2). The OECD definition excludes the pre-sale / pre- purchase

phase and focuses instead on the ordering process. The SeBW follows the OECD

position on this issue, 11 while fully recognising the importance of the internet during the

pre-purchase phase for the initiation of business.

Glossary

Definition of key terms for this study

e-Transactions: commercial exchanges between a company and its

suppliers or customers which are conducted electronically. Participants

can be other companies ("B2B" – business-to-business), consumers

("B2C"), or governments ("B2G"). This includes processes during the presale

or pre-purchase phase, the sale or purchase phase, and the aftersale

/ purchase phase.

e-Commerce: the sale or purchase of goods or services, whether

between businesses, house-holds, individuals, governments, and other

public or private organisations, conducted over computer-mediated

networks. (OECD)

e-Business: automated business processes (both intra- and inter-firm)

over computer mediated networks. (OECD)

e-Interactions: covers the full range of e-transactions, and in addition

collaborative business processes (e.g. collaborative online design

processes) which are not directly transaction focused.

Using the OECD definition, e-commerce is a key component of e-business but not the

only one. A wider focus oriented on business processes has been widely recognised.

This vision of e-commerce also covers the digitisation of internal business processes

(the internal processing of documents related to transactions) as well as cooperative or

collaborative processes between companies that are not necessarily transactionfocused

(for example industrial engineers collaborating on a design in an online

environment). The OECD WPIIS 12 proposes a definition of e-business as "automated

business processes (both intra-and inter-firm) over computer mediated networks" (OECD,

2004, p. 6). In addition, the OECD proposed that e-business processes should integrate

tasks and extend beyond a stand-alone or individual application. 'Automation' refers here

to the substitution of formerly manual processes. This can be achieved by replacing the

11

12

an Expert Group on Defining and Measuring Electronic Commerce, in order to compile

definitions of electronic commerce which are policy-relevant and statistically feasible. By 2000,

work of the Group had resulted in definitions for electronic commerce transactions.

The respective survey questions ask companies whether they "place / accept online orders".

Working Party on Indicators for the Information Society.

16


ICT and e-business in the steel industry

paper-based processing of documents by electronic exchanges (machine-to-machine)

but it requires the agreement between the participants on electronic standards and

processes for data exchange. All of these definitions can be applied to the steel industry.

e-Business and a company's value chains

In some contexts, the term c-commerce (collaborative commerce) is used. Although this

concept was mostly abandoned when the 'new economy' bubble burst in 2001, it had the

merit of pointing towards the role of ICT in cooperations between enterprises and the

increasing digital integration of supply chains. These developments go beyond simple

point-to-point exchanges between two companies.

Despite dating back 20 years to the pre-e-business era, Michael Porter's framework of

the company value chain and value system between companies 13 remains useful to

understand the relevance of e-business in this context. A value chain logically presents

the main functional areas ('value activities') of a company and differentiates between

primary and support activities. However, these are "not a collection of independent

activities but a system of interdependent activities", which are "related by linkages within

the value chain". 14 These linkages can lead to competitive advantage through

optimisation and coordination. This is where ICT can have a major impact, in the key role

of optimising linkages and increasing the efficiency of processes.

The value system expands this concept by extending its scale beyond the single

company. The firm's value chain is linked to the value chains of (upstream) suppliers and

(downstream) buyers; the resulting larger set of processes is referred to as the value

system. All e-commerce and therefore electronic transactions occur within this value

system. Key dimensions of Porter’s framework (notably inbound and outbound logistics,

operations, and the value system) are reflected in the Supply Chain Management

(SCM) concept. Here, the focus is on optimising the procurement-production-delivery

processes, not only between a company and its direct suppliers and customers, but also

aiming at a full vertical integration of the entire supply chain (Tier 1, Tier 2, Tier n

suppliers). In this concept, each basic supply chain is a chain of sourcing, production, and

delivery processes with the respective process interfaces within and between

companies. 15 Analysing the digital integration of supply chains in various industries has

been an important theme in most sector studies by the SeBW. The supply chain concept

is very important for the steel industry because the benefits of e-business become visible

along the steel value chain as a whole, not with a focus on certain parts of it.

Applying the concept to the steel industry

The conceptual framework outlined above is fully applicable to the steel industry. In this

sector, companies use ICT for a broad range of applications along the value chain. All

basic goals of e-business are highly relevant in this sector: reducing costs by increasing

the efficiency of processes, optimally serving customer by innovative means of

information provision and communication, and enabling growth by increasing the market

reach. This study shows that e-business adoption is advanced in this industry, in

13

14

15

Porter, Michael E. (1985). Page references in quotations refer to the Free Press Export Edition

2004.

Porter, Michael E. (1985), p. 48.

See SCOR Supply-Chain Council: Supply-Chain Operations Reference-model. SCOR Version

7.0. Available at www.supply-chain.org (accessed in March 2006).

17


ICT and e-business in the steel industry

particular in large companies. However, the study also points at some of the bottlenecks

and challenges for an even wider and faster adoption of e-business activity.

1.4 Study methodology

Progress towards analysing impacts of ICT and e-business

The methodological framework of the SeBW builds upon the methodology established for

the previous implementation of the e-Business Watch. However, the methodology has

been adapted to the new focus of activity, supporting the progress to the evidence-based

analysis of "e-impact" from monitoring "e-readiness" and "e-activity".

Data and information sources

The Sectoral e-Business Watch approach is based on a well-tuned composition of data

collection instruments, including the use of existing sources (e.g. the Eurostat Community

Survey on ICT usage in enterprises) as well as primary research (notably the SeBW

Survey and case studies). The main sources of information used for this study on the

steel industry are:

SeBW CATI Survey (2007): In 2007, the SeBW conducted a decision-maker

survey about e-business activity in the chemicals, steel and furniture sectors. 449

interviews were conducted in the steel sector of eight countries, including seven EU

Member States and the US. This survey was the main source for analysing the

state of play in ICT adoption, process integration and automation. The survey

approach is described in detail in the methodology annex.

Case studies: Ten case studies on e-business adoption in companies from the

sector covered were conducted for this study. The selection was made with a view

to achieve a balanced mix of cases in terms of countries, business activities (subsectors),

and company size-bands. Cases may include best practices, innovative e-

business approaches, as well as typical examples of e-business activity (state-ofthe-art)

in the sector.

In-depth interviews: In addition to the interviews conducted with firm

representatives as part of the case study work, in-depth interviews with company

representatives, industry and e-business experts have been conducted.

Literature analysis: SeBW evaluates literature from various sources, including

scientific books, journal articles and conference presentations, websites, and

newspaper articles. Annual reports and position papers of industry federations are a

particularly important source, for example from:

• Eurofer, European Confederation of Iron and Steel Industries

(http://www.eurofer.org),

• Eurometal, “the voice of European steel, tubes and metal distribution”

(http://www.eurometal.net),

• European Foundry Association (http://www.caef-eurofoundry.org),

• European Association of Steel Service Centres (EASSC)

(http://www.buymygames.net/eassc).

18


ICT and e-business in the steel industry

Data analysis: descriptive and analytical

For data analysis, SeBW uses descriptive and analytical statistical methods:

Descriptive secondary statistics: The discussion of the Eurostat survey results in

Chapter 2 is mostly based on descriptive cross-tabular presentation of simple

frequencies (typically percentages of enterprises with a certain activity). This

constitutes the first and most basic step in data presentation.

Descriptive primary statistics: Descriptive presentation and discussion of

extended survey results, including the use of compound indicators derived from

simple frequencies, is provided in Chapter 3. Survey results for the steel industry

are broken down by sub-sector and size classes. As regards sub-sectors,

producers of hollow steel products (NACE Rev. 1.1, Group 27.2) and of coldprocessed

ones (Group 27.3) had to be combined because the number of cases

would otherwise have been too small.

Analytical statistical methods: Analysis of appropriate data sets using advanced

statistical methods is required to gain robust and meaningful evidence on ICT

impacts. A description of the methods used will be provided in the final report. The

analysis of ICT impact (chapter 4) does not only require data on ICT adoption, but

also background information such as structural data and economic indicators on

firm performance, innovation activity and growth. Not all of this information can be

obtained from the SeBW Survey. Therefore, parts of the analysis are based on the

EU KLEMS database. The analysis focuses on the following five areas: productivity,

employment and workforce composition, innovation, market structure, value chain

composition. For each dimension, hypotheses were specified on (i) how they

influence ICT adoption and (ii) how ICT has a rebound effect on themselves.

Validation of results by an advisory board

The study was conducted in consultation with an Advisory Board that was specifically

implemented to critically accompany the study from the start. Members of the Advisory

Board for this study were (by order of membership approval):

Georges Kirps, Vice-President, Eurometal, Luxembourg,

Freddy De Vos, Support Manager Accounting and Controlling, Arcelor Mittal Gent,

Belgium,

Roel de Jong, Project Manager Information Systems, Corus Steel IJmuiden,

Netherlands,

Martin Größchen, Business Consultant, German Foundry Association / European

Foundry Association, Germany,

Enrico Gibellieri, Advisor to the European Metalworkers’ Federation, Italy.

In addition to informal exchanges with the study team via telephone, e-mail and in

bilateral meetings, four meetings took place. The first meeting took place on 30 May 2007

in Brussels, during the inception phase. At this meeting, the study exposé and research

plan was discussed. A second meeting was held on 11 September in Brussels with the

objective to discuss and validate an advanced study plan and first findings. A third

meeting was held on 15 January 2008 to discuss the interim report and findings from the

e-Business Survey 2007. A fourth meeting took place on 22 May 2008 to discuss the final

report and further activities to promote ICT and e-business use in the steel industry.

19


ICT and e-business in the steel industry

2 Context and background

2.1 Sector definition – scope of the study

Sector definition in NACE categories

In terms of business statistics, the iron and steel industry comprises large parts of division

24 in NACE Rev. 2, “manufacture of basic metals”. 16 The iron and steel related parts of

NACE 24 are the first three groups and two classes of the fifth group: 17 24.1 “manufacture

of basic iron and steel and of ferro-alloys”, 24.2 “manufacture of tubes, pipes, hollow

profiles and related fittings, of steel”, 24.3 “manufacture of other products of first

processing of steel”, 24.51 “casting of iron”, and 24.52 “casting of steel”. In short, these

activities are related to four types of iron and steel products: basic, hollow, cold

processed, and casted. For the sake of briefness, the term “iron and steel industry” is

only used in section 2.1; in the other sections of the report the term “steel industry” is

used.

The remaining parts of NACE 24 that do not belong to the iron and steel industry are

group 24.4 “manufacture of basic precious and non-ferrous metals” as well as classes

24.53 “casting of light metals”, and 24.54 “casting of other non-ferrous metals”. Exhibit

2.1-1 provides an overview of the business activities of the iron and steel industry.

Exhibit 2.1-1: Business activities covered by the iron and steel industry (NACE Rev. 2 and

1.1)

NACE Rev. 2 NACE Rev. 1.1 Business activities

24 27 Manufacture of basic metals

24.1 27.1 Manufacture of basic iron and steel and of ferro-alloys

24.2 27.2 Manufacture of tubes, pipes, hollow profiles and related

fittings, of steel

24.3 27.3 Manufacture of other products of first processing of steel

24.31 27.31 Cold drawing of bars

24.32 27.32 Cold rolling of narrow strip

24.33 27.33 Cold forming or folding

24.34 27.34 Cold drawing of wire

(24.4) (27.4) (Manufacture of basic precious and non-ferrous metals)

24.5 27.5 Casting of metals

24.51 27.21

27.51

Casting of iron

24.52 27.52 Casting of steel

(24.53) (27.53) (Casting of light metals)

(24.54) (27.54) (Casting of other non-ferrous metals)

Note: NACE sections in italics and brackets do not belong to the iron and steel industry; they are

listed to indicate which classes of NACE Rev. 2 Division 24 are not included in this report.

16

17

NACE Revision 2 is a four-digit classification of business activities. It is a revision of the

“General Industrial Classification of Economic Activities within the European Communities”,

known by the acronym NACE and originally published by Eurostat in 1970. NACE Rev. 2 will

replace the currently used Rev. 1.1 on 1 January 2008.

NACE applies the following terms: “division” for two-digit levels (e.g. 24), “group” for three-digit

levels (e.g. 24.5), and “class” for four-digit levels (e.g. 24.51).

20


ICT and e-business in the steel industry

NACE group 27 of Rev. 1.1 largely corresponds to NACE group 24 in Rev. 2. The only

difference is that Rev 1.1 class 27.21 “manufacture of cast iron tubes” will in Rev. 2 be

included in class 24.51 “casting of iron”.

NACE group 24 and group 25, “manufacture of fabricated metal products, except

machinery and equipment”, together form sub-section DJ “manufacture of basic metals

and fabricated metal products”.

The steel industry has not been covered by the e-Business Watch in previous years. It

was selected for the 2007/2008 studies because of the key economic importance of steel

as a material for many other manufacturing sectors, because of the high world-wide

competition in the sector, and because of its importance for energy and climate policy

since the basic metal producing industry is a major producer of greenhouse gas

emissions.

The large companies in NACE Rev. 2 group 24.1, manufacture of basic steel, comprise

what is commonly perceived as “the steel industry”. While it would be insightful to analyse

this sub-group in more detail, the number of cases included in the e-Business Survey

2007 is too small for such an analysis. The survey included only nine EU-7 steel firms of

NACE Rev. 2 group 24.1 with more than 250 employees, among them one company with

more than 1,000 employees.

A brief definition of steel and its importance

A brief definition of steel may facilitate the understanding of the steel industry. Steel is an

alloy comprised mostly of iron, containing less than 2% carbon and 1% manganese and

small amounts of silicon, phosphorus, sulphur and oxygen. 18 Varying the amount of

alloying elements and their distribution in the steel controls qualities such as the

hardness, elasticity, ductility, and tensile strength of the resulting steel. 19

According to the International Iron and Steel Institute, “steel is the most important

engineering and construction material in the world. It is used in every aspect of our lives,

from automotive manufacture to construction products, from steel toecaps for protective

footwear to refrigerators and washing machines and from cargo ships to the finest scalpel

for hospital surgery.” 20 As a production material, steel competes with plastics, aluminium,

glass and ceramics. According to the OECD, steel “can only maintain its leadership by

continuous development of new high performance products. The rise in energy costs and

demand for complete recycling are factors that favour steel.” 21

A sketch of the steel industry value chain

The main physical inputs for making steel include iron ore, coal and coke, lime, recycled

steel, and energy products. 22 The EU is deficient in deposits of many raw minerals from

which metals are derived, and as a result its refining activity often depends on imports, as

well as recycling waste and scrap materials. The production of steel involves several

stages, with iron ore, coke and lime being fed into a blast furnace to produce liquid iron.

18

19

20

21

22

An alloy is a material that consists of at least two elements of which one is a metal. The

character of the alloy is in any case metallic.

See http://en.wikipedia.org/wiki/Steel, referring to Ashby/Jones (1992).

See http://www.worldsteel.org/index.phpaction=faqlist&id=6#12.

See OECD (2004), p. 4.

Information for this sub-section was taken from Eurostat (2006), p. 159 and p. 164.

21


ICT and e-business in the steel industry

Secondary steelmaking processes change either the shape or the physical properties of

the metal through processes such as casting, forming, shaping, machining, joining,

coating, heat treatment, or surface treatment.

e-Business in the steel industry is exclusively a business-to-business (B2B) issue. The

steel industry produces basic goods that are further manufactured by other industries, no

consumer goods. The main downstream sectors that use steel and steel products include

construction, machinery and equipment manufacturing, and transport equipment

manufacturing. A relatively small share of output is destined for households, in the form of

products like cutlery, saucepans or tools for home improvements. These are, however,

not produced by the steel industry but for example by companies in NACE Rev. 2 group

25.7, “manufacture of cutlery, tools and general hardware”.

2.2 Industry background

Historical background and recent developments

In the 20 th century, the steel industry was of primary importance for national economic

and political power because of the importance of steel for manufacturing, particularly for

infrastructure and defence. The cradle of the European Union was made of steel: The

European Steel and Coal Community (ECSC) treaty, the first of the European Union

treaties, entered into force in 1952. It had a validity period of 50 years and expired in July

2002. 23 Since then, ECSC industries have been treated as any other industrial activity

within the European Union. This reflects a decline in the strategic importance of the metal

manufacturing industries, as well as the progressive privatisation of publicly held

enterprises within this activity. 24 However, since the importance of steel as a material

remains and since there has been an unprecedented upward turn of steel demand since

2003, 25 the steel industry is still of high importance for political economies.

The number of persons employed in basic metals manufacturing (NACE Rev. 1.1, 27) in

EU-25 fell in consecutive years during the period 1996 to 2004, with losses of 2% or more

per annum. This was much more than in other manufacturing sectors. The decline was

mainly a consequence of synergies resulting from mergers, higher levels of automation,

process innovation, and improved work organisation. 26 In contrast, the production index

had an upward trend during this period of time. The evolution of the production index for

basic metals manufacturing followed closely that of the industrial average, but tended to

report somewhat larger fluctuations in both an upward and downward direction. 27

Basic indicators: enterprises, employment, value added and productivity

According to the most recent Eurostat data, the European steel industry – i.e. NACE Rev.

1.1 groups 27.1-3 and classes 27.51-52 in all 27 EU Member States – comprised 9,459

23

24

25

26

27

See http://europa.eu/scadplus/treaties/ecsc_en.htm.

See Eurostat (2006), p. 159.

See section 2.3 for some details about the upward trend in the steel industry.

Information from Enrico Gibellieri, advisor to the European Metalworkers’ Federation, member

of the Sectoral e-Business Watch Advisory Board.

See Eurostat (2006), p. 162; no separate development for basic metals shown in a similar

presentation in Eurostat (2007).

22


ICT and e-business in the steel industry

enterprises in 2004. 28 The number of enterprises was fairly equal in four of the five

NACE categories of which the iron and steel industry consists: 2,269 in group 27.1 (basic

iron and steel), 2,162 in group 27.2 (hollow products), 2,440 in group 27.3 (other first

processing), and 2,022 in group 27.51 (casting of iron). Group 27.52 (casting of steel)

comprised only 566 enterprises.

The distribution of employment across NACE categories was not as equal as for

enterprises. Altogether 776,800 people worked in the EU-27 iron and steel industry in

2004. More than half of them, 422,600, were employed in basic iron and steel

manufacturing, 130,000 in the production of hollow products, 74,800 in other first

processing, 114,300 in iron foundries, and 35,100 in steel foundries. As regards the

overall number of employees in the iron and steel industry, many more people are

employed indirectly in its processing and in the user and recycling industries.

As regards value added, the share of basic iron and steel production relative to the other

NACE categories was even higher, accounting for two thirds of the industry’s total value

added which was 46.9 billion euros in EU-27 in 2004.

A breakdown by size classes is only available for the basic metals sector (NACE Rev.

1.1 Division 27) in total. The sector is dominated by large multinational enterprises, with

74% of its EU-27 value added created by large enterprises with 250 or more persons

employed in 2004. 29 In the same year, 66% of the employees in this sector worked in

large enterprises. According to the International Iron and Steel Institute (IISI),

ArcelorMittal was the single largest steel producer in the world in 2006, producing 117.2

million metric tonnes of crude steel which was 10% of the world’s steel output.

ArcelorMittal is headquartered in Luxembourg and London. At the end of 2007 it had

320,000 employees in more than 60 countries and industrial presences in 27 countries. 30

In terms of production in 2006, ArcelorMittal was followed by the two Japanese-based

firms Nippon steel (32.7 million tonnes) and JFE (32 million tonnes). Among the 20

largest steel companies, there are, beside ArcelorMittal, three others based in Europe:

Corus Group (UK, 18.3 million tonnes, rank 9), Riva Group (Italy, 18.2 million tonnes,

rank 10) and ThyssenKrupp (Germany, 16.8 million tonnes, rank 11).

However, the first processing activity for steel use in downstream sectors is mainly

carried out by SMEs. The vast majority of companies in the iron and steel industry are

small or medium-sized. In the total basic metals industry, 95% of the firms are SMEs. 31

While SMEs account only for around 20% of the value added in NACE Rev. 1.1, 27.1-3

(manufacture and first processing of ferrous metals), the contribution of SMEs to value

added in group 27.5 (foundries) is much larger, more than 50%. 32 There are numerous

small companies in the iron and steel industry, foundries in particular, that operate quite

different from the huge steel trusts.

The apparent labour productivity of the first processing of ferrous metals sector (NACE

Rev 1.1, 27.1-3) was 49,900 euros per person employed in the EU-25 in 2002. 33 This was

slightly higher than the industrial average, just 800 euros per person employed more.

28

29

30

31

32

33

Calculation by empirica with excerpts from the Eurostat online database, November 2007.

Calculation by empirica with data from Eurostat online database, November 2007.

For the preceding information about ArcelorMittal see the company’s website,

http://www.arcelormittal.com/index.phplang=en&page=9.

Calculation by empirica with data from Eurostat online database, November 2007.

See Eurostat (2006), p. 262, figure 9.2.

See Eurostat (2006), p. 166.

23


ICT and e-business in the steel industry

However, it was 9,600 euros per person employed higher than the average for metals

and metal products manufacturing. In the casting sub-sector (NACE Rev 1.1., 27.5), the

apparent labour productivity was considerably lower than the industrial average: 38,000

per person employed in 2002. 34 This may indicate opportunities for business process

enhancement, also through ICT.

The iron and steel industry in European countries

Among the European countries, the German iron and steel industry has by far the largest

value added at factor cost: 13,895 million euros in 2004, which was 30% of the value

added in the EU-27 (see Exhibit 2.2-1). Germany was followed by Italy (6,571 million

euros), France (5,020 million euros), Spain (4,063 million euros) and the UK (2,968

million euros). The German steel industry also has the largest number of persons

employed (165,810), followed by Italy (87,042), France (68,379), Poland (50,816) and

Spain (50,161). 35 The iron and steel industry in the EU-7 countries accounted for two

thirds of the EU-27 value added (67%), employment (65%), and number of enterprises

(65%). Exhibit 2-2 provides an overview of number of enterprises, persons employed and

value added in the iron and steel industry in European countries.

Exhibit 2.2-1: Enterprises, persons employed and value added in the iron and steel industry

(NACE rev. 1.1, 27.1-3, 27.51-52) broken down by EU countries in 2004

Country

Number

of

enterprises

Persons

employed

Value

added

(mio €)

Country

Number

of

enterprises

Persons

employed

Value

added

(mio €)

Germany 1,380 165,810 13,895 Greece 1247 7,490 416

Spain 827 50,161 4,063 Cyprus n.a. n.a. n.a.

France 460 68,379 5,020 Latvia 10 3,061 n.a.

Italy 1,845 87,042 6,571 Lithuania 13 759 4

Poland 467 50,816 1,325 Luxembourg 5 n.a. n.a.

Sweden 251 35,913 2,302 Hungary 142 11,262 266

UK 928 48,336 2,968 Malta n.a. n.a. n.a.

EU-7 6,158 506,457 31,626 Netherlands 100 3,390 126

Austria 71 21,203 2,382

Belgium 201 25,549 2,843 Portugal 199 6,060 241

Bulgaria 129 15,836 118 Romania 228 53,480 518

Czech Rep. 166 35,405 85 Slovenia 49 5,616 191

Denmark 107 1,810 105 Slovakia 18 2,380 28

Estonia 4 n.a. n.a. Finland 103 12,422 1,378

Ireland 65 1,392 82 EU-27 9,459 776,800 46,924

n.a. = not available. Note: Value added at factor cost. EU-7 countries are included in the SeBW Manufacturing

Survey 2007.

Source: Eurostat (2006), p. 177.

34

35

See Eurostat (2006), p. 169. Figures can only be provided including NACE classes 24.53 and

24.54 which are not part of the steel industry.

The apparent labour productivity, measured in euros per person employed, was not found to be

a meaningful value to be included here. Country differences for labour productivity may be

related to considerable differences in the composition of the basic metals manufacturing

industry, i.e. differing importance of the single NACE groups of Division 27.

24


ICT and e-business in the steel industry

Among the EU Member States, only in Luxembourg – where ArcelorMittal is

headquartered – basic metals (NACE Rev. 1.1 Division 27) is the largest industry in terms

of value added and employment within the overall manufacturing sector. 36 Basic metals is

the second most important industry in terms of value added within the manufacturing

sector in Slovakia. However, as steel is usually produced in large-scale units, steel

production is of particular importance in certain regions such as the Ruhr area in

Germany 37 . This may pose particular challenges to regional industrial policy.

World steel production and consumption

On a world-wide level, the major steel-producing country is China, with 422.7 million

metric tonnes (mmt) produced in 2006, followed by the EU-25 (206 mmt), Japan (112.5

mmt) and the US (94.9 mmt). European countries considered separately, Germany

comes on rank 6 (44.5 mmt), Italy on rank 9 (29.3 mmt). Of the 1244 mmt of crude steel

produced in the world in 2006, China had the largest share (34%), followed by the EU

(15.9%), the states of the North American Free Trade Agreement (NAFTA), i.e. the US,

Canada and Mexico (10.5%) and other Asian countries (10.5%), the Confederation of

Independent States (9.6%), Japan (9.3%), other countries (7.2%) and other European

countries (2.9%) – see Exhibit 2.2-2.

Exhibit 2.2-2: World production of crude steel by regions in 2006

EU-25 15.9%

Other Europe 2.9%

CIS 9.6%

NAFTA 10.5%

Others 7.2%

China 34.0%

Japan 9.3%

Other Asia 10.5%

Source: IISI (2007), p. 8.

The consumption shares are similar to the production shares, with China (30.9%) leading

before the EU-25 (17.1%), NAFTA (14.5%) and other Asia (14%) – see Exhibit 2.2-4.

36

37

See Eurostat (2006), p. 20-21.

The second largest steel production area in the world is that of ThyssenKrupp in Duisburg.

25


ICT and e-business in the steel industry

Exhibit 2.2-3: World consumption of crude steel by regions in 2006

EU-25 17%

Other Europe 3%

CIS 5%

NAFTA 15%

Others 9%

China 30%

Japan 7%

Other Asia 14%

Source: IISI (2007), p. 8.

2.3 Trends and challenges

On a wave upwards – but competitiveness pressure continues

The steel industry business cycle is on an upward trend. Since 2001 there has been a

steep increase in world-wide steel production, with a growth rate of 6.1% from 2000 to

2005 and 9% from 2005 to 2006 (see Exhibit 2-4, green circle). Before this upturn, there

was small growth and in some years even a decline in production for almost 30 years

(see Exhibit 2.3-1, red circle).

The steeply increasing steel production in recent years has been caused by increasing

demand from the principal steel-consuming sectors. The apparent use of steel in the

world has increased from 756.6 mmt in 2000 to 1113.2 mmt in 2006. 38 This has been

largely due to China. China almost tripled its steel consumption from 124.3 mmt in 2000

to 356.2 mmt in 2006. China needs more high-quality steel than it can produce and

increased its imports of high-quality steel also from Europe.

According to a market report by Eurofer dating May 2007, the outlook for global steel

demand continues to be positive. This applies particularly to Asia, the Middle East as well

as Central and Eastern Europe. At the same time, however, Eurofer sees output of global

crude steel and finished products also continuing to be on a rising trend. In particular,

China is seeking to consolidate its steel industry, which currently has a relatively low

productivity, and to upgrade it to higher quality steel production. This will keep the

international steel trade environment highly competitive and this could also create

pressure for process enhancement through e-business solutions.

38

See IISI (2007), p. 16.

26


ICT and e-business in the steel industry

Exhibit 2.3-1: World crude steel production in million metric tonnes, 1950 - 2006

Steep

increase

since

2001

Small growth

or decline for

30 years

Source: IISI (2007), p. 2.

The high level of competition which the European steel industry faces is also reflected in

reduced market shares. From 1982 to 2005, the European steel industry’s share in the

world production decreased from 25% to 16%, and the part of European steel

consumption that is produced in Europe has been declining in the past 20 years. 39

Continuing consolidation – creation of very large units expected

Privatisation and streamlining of the European and world-wide steel market led to a wave

of mergers, acquisitions and also joint ventures since the 1980s. 40 In Central and Eastern

Europe, capacity was reduced because of declining demand, while remaining facilities

39

40

See European Commission (2008a), p. 4-5.

While a merger involves a mutual decision of two equal companies, an acquisition is not

necessarily mutual and normally takes place between companies of different size, see

http://www.investopedia.com/ask/answers/05/mergervstakeover.asp. An example of an

acquisition is the one of the Lucchini Group (Italy) by Severstal (Russia); an example of a joint

venture is that between Duferco (Belgium/Italy/Switzerland) and Novolipesk (Russia).

27


ICT and e-business in the steel industry

were modernised to enhance their international competitiveness. 41 Other producers in the

EU and also in the US undertook major restructuring as well. Globally, more than 100

million tonnes of capacity have been closed since 1998. At the same time, expanding

markets in Asia have invested in new plants and equipment.

Steel industry experts generally expect further mergers and acquisitions. 42 The recent

mergers of Arcelor and Mittal as well as Tata and Corus may just be the beginning of a

further round of creating very large-scale steel enterprises. Pressure to further

consolidation in the steel industry comes from the fact that from a global perspective, the

steel industry is still highly fragmented. The shares in the world market of the ten largest

enterprises, beside ArcelorMittal, remain between 1.2 and 3.6%, which is virtually

unchanged compared with the 1970s. 43 Such fragmentation is unfavourable for

bargaining with a highly concentrated iron ore industry 44 on the supply side and powerful

enterprises, particularly in the automobile industry, on the customers side.

Labour force shortages

According to the EC, the steel industry finds it increasingly difficult to attract skilled

workers, with demand for engineers far exceeding supply. 45 The OECD points out the

challenge that a large share of the labour force of the steel industry will retire over the

next years, particularly in more advanced economies. 46 Given rapid population aging in

these economies, the available pool of new employees for the steel industry will be

smaller than it is now. Since the steel industry has the image of a declining industry, it

may be a considerable challenge to compete for new workers with other industries. The

OECD does not specify whether there may arise shortages for particular types of skills

but the competitive disadvantage may be the case for all types of employees, also for ICT

and e-business management. This development may also lead to competitive

disadvantages against steel industries in economies that do not face such challenges.

The OECD considers it to be an open question what workforce training and development

issues need to be addressed.

Environmental issues – energy use and greenhouse gas emissions

The steel industry is energy intensive and thus a major producer of greenhouse gas

emissions, in particular at the start of the production chain. According to the IISI, the iron

and steel industry accounts for 3 to 4% of world-wide man-made greenhouse gas

emissions. The steel industry is thus under pressure to address climate change issues. At

the same time, the competitiveness of the European steel industry is closely linked to

energy policy and pricing.

As regards EC climate policy, the Emission Trade Scheme (ETS) is a major pillar. The

ETS was enforced in January 2005 and is “the largest multi-country, multi-sector

greenhouse gas emission trading scheme world-wide” 47 . EU Member States agree

national emission caps, allocate allowances to industry, track and validate the actual

41

42

43

44

45

46

47

For this and the following see OECD (2004), p. 7.

See OECD (2007b), p. 16.

Own calculations with figures from IISI (2007a), p. 3 and 8.

See Nezu (2006).

See European Commission (2008a), p. 5.

See OECD (2007), p. 10.

See http://ec.europa.eu/environment/climat/emission.htm.

28


ICT and e-business in the steel industry

emissions, and require the allowances to be retired after the end of each year. The ETS

is a very sensitive issue for the steel industry. The IISI states that “cap and trade regional

policies such as those currently used in the EU are not effective in reducing carbon

dioxide emissions” on a global level because the “best emission performing plants” are

located in the EU. 48

The European Commission’s industrial policy foresees to pay particular attention to

energy intensive industries such as the steel industry, as also recognised by the

European Council. In a mid-term review of the Commission’s industrial policy in summer

2007, the Commission states that “cost-efficient measures are needed to improve both

the competitiveness and the environmental impact of such European industries”. 49 The

European Commission also published a policy document setting out possible ways how

this goal could best be met. 50

A number of European countries have introduced energy taxes in support of efforts to

reduce such gases. In most, if not all, of these instances, the taxes have been reduced in

the case of energy-intensive industries like steel, in light of the substantial economic

impact the taxes would otherwise have on industry costs and competition. 51

The IISI states that it was one of the first international associations to report on the

environmental sustainability of an industry. In 2007 the Board of Directors approved the

collection and reporting of carbon dioxide emissions data by steel plants in all major steel

producing countries. 52 The steel industry is also investing in research to develop new

steelmaking technologies with reduced emissions. However, in the course of research for

this report, major initiatives to use ICT and e-business to decrease energy consumption

in steel plants were not identified. Thus there will be no related section in this report.

48

49

50

51

52

See Eurofer (2007) for a similar statement.

See European Commission (2007d), p. 9.

See European Commission (2008a).

See OECD (2004), p. 8.

See IISI (2007b).

29


ICT and e-business in the steel industry

3 The state-of-play of ICT and e-business adoption

3.1 Overview of topics in focus

This chapter aims at providing insights into current trends of ICT use and e-business

activities which are specific to the steel industry. The chapter does not claim to provide a

comprehensive overview, as that would exceed the limits of this report. In fact, it would be

difficult to realise, as ICT and e-business are relevant for nearly all core business areas of

the steel industry. Therefore, the issues analysed should rather be understood as

representative examples of current practice and the related opportunities and challenges.

In terms of ICT usage and e-business, the steel business may be characterised by similar

challenges as in other manufacturing sectors: improvement of sourcing and supply

chains, increasing productivity of internal business processes and production, as well as

enhancing distribution and sales. Thus, the topics studied in this report are related to

business process efficiency along the steelmaking value chain. The case studies carried

out for this report substantiate and illustrate related issues (see section 5 and references

in section 3). Findings from the SeBW Manufacturing Survey 2007 provide related

quantitative data. The following issues have been selected in coordination and agreement

with DG Enterprise and Industry as well as with industry experts as particularly relevant:

Electronic procurement: The current and potential role of ICT and e-business in

the sourcing and supply process of the steel industry is analysed. Online

procurement platforms as well as systems for Supply Chain Management are of

special interest. (See section 3.1 as well as the case study about ThyssenKrupp in

section 5.1 and also the case study about the former e-Arbed.com in section 5.8.)

Internal e-business applications: A study of internal e-business systems, i.e. of

systems for electronic in-house operations in steel companies is of interest in at

least two respects. First, in the steel industry, the cost effectiveness of large

volumes to be produced has to be balanced against relatively small customer

orders, and the production process has long lead times of several weeks.

Consequently, ICT and e-business may be valuable for making internal business

processes and production planning more effective. Second, since there have been

consecutive mergers in the steel industry, the integration of information systems

from different companies is an important issue. The study highlights related

challenges and solutions. (See section 3.2 as well as the case studies about the

Srem iron foundry, section 5.2, Farwest Steel, section 5.3, and TenarisDalmine,

section 5.4.)

Electronic sales-side processes: The steel industry is largely driven by

requirements from customers so that the customer interfaces are vitally important.

e-Business solutions may facilitate communication with customers, including for

example negotiation, product specification, scheduling, shipping and invoicing. The

current use of such applications and perspectives for further development is

studied. The distribution and logistics of steel products to customers has long been

neglected as a strategically important issue in the sector. The report investigates

challenges of steel distribution and how ICT and e-business can contribute to

making distribution and logistics in the steel industry more effective. Warehouse

management and “delivery just in time” play a particularly important role in this

respect. (See section 3.3 as well as the case studies about Baosteel, section 5.5,

ArcelorMittal Gent, section 5.7, and the former e-Arbed.com, section 5.8.)

30


ICT and e-business in the steel industry

Joint procurement and sales side issues – e-marketplaces and ICT standards:

There are two issues that deal with both the procurement and the sales side of e-

business in the steel industry: e-marketplaces and ICT standards. In the steel

industry, e-marketplaces were apparently not successful in the past. The reasons

for the apparent lack of success are examined. Special attention is paid to the

development of standards for e-business in the steel industry’s supply chain. The

study will describe the current situation and benefits of ICT standards use in the

steel industry, and it will point out opportunities of further standards development.

(See section 3.4.3 and the case study about CMC Coil Steels, section 5.9.)

Furthermore, there are two sections of a more general nature which mainly present

findings from the SeBW 2007 Manufacturing Survey: an introductory section about ICT

networks, skills and expenditure (section 3.2) as well as a section about overall

importance, drivers and barriers of ICT and e-business adoption (section 3.7). Section 3.8

provides an overview of indicators broken down by size class, country differences, subsectors,

and manufacturing industries.

3.2 Basic issues: access to ICT networks, e-skills and ICT

expenditure

Objective of this section: measure “e-readiness”

This section looks at steel companies' access to ICT networks, their endowment with ICTrelated

skills and at expenditure for ICT in 2007. The objectives are to assess the sector's

overall "e-readiness", i.e. to what extent the basic infrastructure and skills for doing

business electronically is in place, and current trends in ICT budgeting.

Internet access and broadband deployment

Doing business in the steel industry is apparently no longer possible without having

internet access. Practically all companies (100%) in the sector and in all NACE classes

are connected to the internet (see Exhibit 3.2-1). Only in small companies there was a

tiny share of 1% that reported to not have internet access. In the other two manufacturing

sectors included in the survey, chemicals and furniture, virtually all companies (99%) are

connected to the internet, too.

A further indicator is how many employees use the internet as part of their day-to-day

work. In steel companies, the average share of employees with internet access at

their workplace is about 24%. This is less than in the chemicals sector (36%) and the

same as in the furniture sector (24%). The share of employees with internet access is an

indicator for the "informatisation" of work and production processes. In sectors in which

manual work is still important, e.g. furniture, fewer workers need ICT to perform their

tasks. In other sectors, ICT are increasingly used to manage and control production

processes. The degree of informatisation in the steel industry was found to differ slightly

by firm size. The average share of employees with internet access tends to be higher in

large firms (29%) than in medium-sized (26%) and small firms (22%). Many of the smaller

firms may have only recently connected to the internet, and only employees in

management positions may have access to it (see also the case study about the Patina

foundry in section 5.10).

31


ICT and e-business in the steel industry

The share of steel firms that said they have a broadband 53 connection to the internet, i.e.

a bandwidth of more than 2 Mbit/s, was 41% (34% weighted by employment). Internet

access at a bandwidth of less than 144 kbit/s was reported to be used by 11% of the steel

firms which was firms representing only 2% of the industry’s employment. The majority of

companies, firms representing 64% of the industry’s employment, connect with a rate

between 144 kbit/s and 2 Mbit/s. 54 Thus there is much scope for improving internet

connections. In the future, broadband internet access may be considered as basic

infrastructure and become the norm for the majority of steel companies.

Exhibit 3.2-1: Companies and employees with Internet access (2007)

Companies with

internet access

Average share of

employees with

internet access in

firms

Companies with

internet access

>2 Mbit/s

Weighting scheme: % of empl. % of firms % of empl. % of firms % of empl. % of firms

Steel – 2007 total (EU-

7)

100 100 30 24 34 41

NACE 27.1: basic steel 100 100 25 22 49 46

NACE 27.2-3: hollow /

cold processed steel

NACE 27.51+52:

casting

100 100 25 25 36 39

100 100 38 23 21 39

Steel – USA 100 100 45 39 70 57

Steel – by size (EU-7)

Small (10-49 empl.) 99 22 37

Medium (50-249 empl.) 100 26 51

Large (250+ empl.) (100)* (29)* (31)*

Other sectors (EU-7)

Chemicals 100 99 45 36 46 40

Furniture 100 99 26 24 46 39

Base (100%) all firms

all firms, excl. DK

N (2007, EU-7+USA) 449 449 449

Questionnaire reference A1 A2 A3c

firms with internet access,

excl. “don’t know“

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

* = percentage only indicative due to a small number of observations (N = 20-50)

Source: e-Business Survey 2007

Use of internal networks

Similarly to internet access, the use of ICT to connect computers internally to a company

network (Local Area Networks – LAN) has become a commonplace in the steel industry,

even for small firms (see Exhibit 3.2-2). Altogether 78% of the steel companies, which

was companies representing 94% of the industry’s employment, reported to have a LAN.

Almost all large firms (99%) as well large shares of medium sized (88%) and small firms

(70%) reported to have a LAN.

Wireless LAN (W-LAN) technology was reported to be used in 30% of the steel

53

54

Broadband is defined in this study as internet connection with a bandwidth of at least 2 Mbit/s.

The percentages for firms with an internet connection below 144kbit/s and with 144kbit/s – 2

Mbit/s are not shown in the Exhibit.

32


ICT and e-business in the steel industry

companies. In large firms, the adoption rate has reached 56%. This is indicative for the

fast diffusion of W-LAN as a means to facilitate network access within a site or building.

Exhibit 3.2-2: Internal networks used in 2007

LAN W-LAN Intranet

Remote access

to company

network

% of % of % of % of % of % of % of % of

Weighting scheme:

empl. firms empl. empl. empl. firms empl. firms

Steel – 2007 total (EU-7) 94 78 49 30 71 36 63 37

NACE 27.1: basic steel 95 76 50 30 66 30 56 34

NACE 27.2-3: hollow /

cold processed steel

95 81 44 31 75 39 68 38

NACE 27.51+52: casting 93 73 53 26 70 36 64 40

Steel – USA 99 89 79 65 79 58 92 76

Steel – by size (EU-7)

Small (10-49 empl.) 70 23 22 22

Medium (50-249 empl.) 88 36 48 60

Large (250+ empl.) (99)* (56)* (86)* (69)*

Other sectors

Chemicals 95 82 58 38 69 43 77 49

Furniture 84 71 47 30 45 31 50 30

Base (100%) all firms all firms all firms all firms

N (Steel, 2007, EU-7+USA) 449 449 449 449

Questionnaire reference A4a A4b A4d A5

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

* = percentage only indicative due to a small number of observations (N = 20-50)

Source: e-Business Survey 2007

As regards intranet, 36% of the steel firms (representing 71% of the industry’s

employment) reported to operate an intranet in 2007. This technology is mainly used for

internal knowledge sharing.

Another good indicator for "e-readiness" is the share of companies that enable remote

access to their computer network. This means that employees can access the company's

network for example when working at home or while travelling. In the steel industry, about

37% of firms with at least ten employees (comprising 63% of the sector's employment)

enable remote access (see Exhibit 3.2-2). Just as broadband access, remote access is a

good indicator for SMEs' progress on the e-maturity ladder. Diffusion of this functionality

in the steel industry is only 22% in firms with 10-49 employees but 60% in firms with 50-

249 employees, which comes close to firms with 250 or more employees (69%).

For most of the ICT infrastructure indicators discussed in this section (internet access,

LAN, W-LAN, intranet, remote access), there are only small differences between the

three sub-sectors (basic iron and steel, hollow and cold-processed steel, casting).

Diffusion of internal network technology appears to be most advanced among firms in the

hollow and cold-processed steel sub-sectors. Broadband connections are most prevalent

in the basic iron and steel sub-sector which in which large firms play the most important

role.

33


ICT and e-business in the steel industry

ICT skills requirements

Improving e-business skills, especially among SMEs, has been identified as a relevant

concern for policy in various studies by e-Business Watch. A clear distinction has to be

made in this context between (typically larger) companies that can afford employing ICT

practitioners, i.e. staff with the specialised skills and tasks of planning, implementing

and maintaining ICT infrastructure, 55 and (typically smaller) companies that do not employ

practitioners.

The critical divide here is between small and medium-sized firms. In total, 24% of all steel

companies with at least ten employees said that they employed ICT practitioners in 2007

(see Exhibit 3.2-3). Among small firms, 11% of firms reported to have specialists for ICT

tasks, among medium-sized firms 38%. These figures are similar to findings for other

process manufacturing sectors such as chemicals. If employing practitioners is used as a

proxy for having an IT department, it may come as a surprise that “only” 61% of large

companies report that they employ ICT practitioners.

Exhibit 3.2-3: ICT skills requirements (2007)

Employ ICT

practitioners

Have experienced

difficulties in finding

qualified

practitioners

Companies saying

that e-business

developments have

a significant impact

on skills

requirements

Weighting scheme: % of empl. % of firms % of empl. % of firms % of empl. % of firms

Steel – 2007 total (EU-7) 52 24 20 5 36 28

NACE 27.1: basic steel 29 18 23 5 35 24

NACE 27.2-3: hollow /

cold processed steel

66 26 17 5 41 32

NACE 27.51+52: casting 57 25 22 6 34 24

Steel – by size (EU-7)

Small (10-49 empl.) 11 (0)* 19

Medium (50-249 empl.) 38 (0)* 42

Large (250+ empl.) 61 (20)* 41

Steel – USA 13 12 (--)** (--)** 33 28

Other sectors (EU-7)

Chemicals 45 22 21 15 36

Furniture 33 18 7 9 39

Base (100%) all firms

Firms employing ICT

practitioners (E1=yes)

N (2007, EU-7+USA) 449 96 449

Questionnaire reference E1 E3 E5

All firms

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

* = percentage only indicative due to a small number of observations (N = 20-50)

** = percentage not shown due to a too small number of observations (N < 20)

Source: e-Business Survey 2007

55

The European eSkills Forum, established by the EC in March 2003, defined "ICT practitioner

skills" as the "capabilities required for researching, developing and designing, managing,

producing, consulting, marketing and selling, integrating, installing and administrating, maintaining,

supporting and service of ICT systems." Cf. eSkills For Europe: The Way Forward",

Synthesis Report by the eSkills Forum, September 2004.

34


ICT and e-business in the steel industry

Assuming that most companies with 250 or more employees have some sort of IT

department with at least one or two people mainly charged with IT-related tasks, why

then does more than one of three enterprises appear to have the perception that it does

not employ ICT practitioners Maybe the term "ICT practitioner" in itself can be

misleading in time-constrained telephone interviews, and some companies do not count

their computer and network administrators, although they are mainly charged with ICT

tasks. 56

Out of those firms that employ practitioners, about 5% reported that they had experienced

difficulties in finding qualified practitioners in the past twelve months (see Exhibit 3.2-

3). Due to the relatively small number of firms that employ ICT practitioners, values by

size-class can only be interpreted with caution. In the survey only large companies

reported to have experienced difficulties to find ICT practitioners (20%). This reflects their

higher demand. In any case, these figures appears to be surprisingly low, considering the

attention which policy is paying to the presumed ICT skills gap. The findings may indicate

that the shortage in ICT skills is mostly a problem for the ICT industries themselves, e.g.

for the large providers of e-business software, but only to a smaller extent for the user

industries, at least in manufacturing sectors. This is not only supported by evidence from

the steel industry but also from the chemicals and furniture industries. In chemicals, 15%

of the firms reported difficulties to hire ICT experts, and in furniture it was 9%.

The survey also found that e-business is important for skills requirements. 28% of the

steel firms, which is 36% of employment, said “yes” when asked whether e-business

developments have significant impacts on skills requirements. This is the same as in US

steel firms and somewhat below the percentages for the other two industries. The most

insightful figures here are for size classes: 42% of the medium-sized steel firms and 41%

of the large ones stated significant impacts. In small firms, only 19% stated significant

impacts.

In fact, there is evidence that companies increasingly outsource ICT and e-business

functions, either partially of fully, to specialised service providers. About 22% of the

companies interviewed in 2007 said that they had outsourced ICT functions to external

service providers which they had previously conducted in-house in the past twelve

months prior to the interview. Outsourcing can mean a wide array of practices in this

context. It includes the Software as a Service (SaaS) distribution model, where

companies pay a license to use a software online which is hosted and operated by the

service provider, rather than purchasing the software to be installed within the company.

See for example the case study about Farwest steel in section 5.3. It can also mean that

whole business processes are outsourced to specialised service providers. More findings

about ICT and outsourcing are presented in section 4.5.2.

ICT investment and budget trends

The general climate for ICT investments has significantly improved over the past few

years. This has a number of reasons. First, the positive economic framework conditions

since 2004 have made it easier for companies to make investments. 57 Second, the widespread

distrust of ICT for some years after the crash of the "new economy" in 2001 has

56

57

This possible explanation was also supported by the SeBW advisory board for the steel

industry.

It remains to be seen whether the risk of an economic downturn in the wake of the financial

market crisis in late 2007 will have a sizable impact on companies' ICT expenditure.

35


ICT and e-business in the steel industry

mostly faded away. Third, ICT solutions have become more mature and better adapted to

the requirements of specific firms. It may also help that there are plenty of business cases

which demonstrate that well-planned investments in ICT can generate return-oninvestment

even in the short term, often within less than two years. 58

The Sectoral e-Business Watch asked steel companies whether they had made

investments in ICT during the past twelve months prior to the interview, for example for

new hardware, software or networks. 85% said that they had done so (see Exhibit 3.2-4).

Exhibit 3.2-4: Companies that made investments in ICT hard- or software in 2006/07 (in %)

0 20 40 60 80 100

Steel (EU-7)

85

Basic steel

79

Hollow / cold

processed steel

91

Casting

83

10-49 employees

62

50-249 employees

81

250+ employees

88

Steel (USA)

47

Chemical (EU-7)

83

Furniture (EU-7)

75

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

Basic steel = NACE Rev. 1.1, 27.1; hollow / cold processed steel = NACE 27.2+3; casting = NACE 27.51+52.

Base (100%) = companies with at least 10 employees and using computers; N (Steel, EU-7) = 349,

N (Steel, USA) = 100.

Weighting: Figures for sector totals and countries are weighted by employment ("firms representing x% of

employment in the sector / country"), figures for size-bands in % of firms.

Source: e-Business Survey 2007 by the SeBW

There are no considerable differences between the NACE groups but between size

classes. While 88% of the large steel companies and 81% of the medium-sized firms

reported to have invested in ICT, only 62% of the small firms said so. In the US, the share

of firms reporting ICT investments was considerably smaller than in the EU-7, only 47%.

58

See, for example, business cases of ICT investments by SMEs documented by the German

"PROZEUS" initiative (www.prozeus.de).

36


ICT and e-business in the steel industry

The reason may be that US steel firms are bound to tight shareholder value requirements

which decreases their ability to invest. The percentages of firms investing in ICT in the

EU-7 chemicals and furniture industries were similar to the steel industry.

Companies were also asked whether they would rather increase their ICT budget,

decrease it or keep it roughly the same in the forthcoming financial year. More than two

thirds (69%) said that they would keep the ICT budget at about the same level. About one

third (30%) of the companies said they would increase the budget – about one fifth by

more than 10% and one tenth by up to 10%. Only very few companies (about 1%) said

they would decrease the budget (see Exhibit 3.2-5). These figures indicate a continued

importance of ICT investment in the steel industry. The share of companies intending to

increase the ICT budget is 10 percentage points higher than in the chemicals industry

and 10 percentage points smaller than in the furniture industry. This may reflect different

levels of advancement in ICT endowment within industries.

Exhibit 3.2-5: EU-7 steel companies planning to increase / decrease their ICT budget in the

forthcoming financial year (in %)

69%

1%

18%

12%

Increase ICT budget >10%

Increase ICT budget 1-10%

Keep budget

Decrease ICT budget 1-10%

Decrease ICT budget >10%

Reading

example:

"11% of all

companies (by

their share of

employment)

said that they

expected to

increase their

ICT budget by

up to 10% in

the forthcoming

financial year."

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA. Base (100%) = companies with at least 10 employees and using computers;

N (Steel, EU-7) = 349.

Weighting: Figures are weighted by employment ("firms representing x% of employment in the sector").

Source: e-Business Survey 2007 by the SeBW

The finding that companies expect to either maintain or increase their budgets is confirmed

by other market studies. Some of them are even more "bullish" in their forecasts:

IDC, an ICT market research company, estimates that German enterprises spent about

76 billion euros for ICT hardware, software and services in 2007, and forecasts that this

figure would increase by 7.5% in 2008. 59

The right ICT strategy is by no means a simple equation of "the more the better". A

survey by the consulting company Accenture among 700 companies world-wide found

that companies with a high turnover and profit spend on average 17% less for IT than

their competitors. Typically, these companies have specified clear priority areas for their

ICT investments and implemented sophisticated reporting systems to keep control of their

ICT budgets. 60 This holds true as a general recommendation, in particular for SMEs: they

should carefully think about ICT priorities, and then focus their resources on these areas.

59

60

Quoted from Leendertse (2008), p. 98.

Quoted from Leendertse (2008), p. 98.

37


ICT and e-business in the steel industry

3.3 Electronic procurement

3.3.1 Introduction to procurement issues

Importance of procurement issues

Procurement management is a fundamentally important activity in the steel industry, as in

most manufacturing industries, because upstream supply chains tend to be complex and

fragmented. The larger the number of transactions, the more will even slight

improvements in this domain save costs. The production of basic iron and steel products

requires numerous input goods:

Raw material such as iron ore, coal and coke, lime, manganese, and scrap steel,

energy supply goods such as petrol, gas, and electricity,

production facilities and machines such as blast furnaces and rolling mills, as well

as spare parts for them and related maintenance services,

operating supply items such as lubricating oil,

auxiliary goods such as paints and tools,

furnishing goods for production and office spaces such as desks and chairs,

organisational goods such as office paper, pens, fax machines, and computers.

In large steel mills, many goods are procured in huge volumes, and business units with

dozens of specialised buyers are dedicated towards procurement.

Framework conditions for procuring iron ore

The most important input material for steel production is iron ore, i.e. chemical

compounds of iron with other elements, mainly oxygen, silicon, sulphur or carbon. There

are only a few very large sellers of iron ore that form a close oligopoly. The three largest

suppliers account for 70% of the world’s iron ore supply. The largest producer is the

Brazilian mining corporation (Companhia Vale do Rio Doce, CVRD), followed by the

Australian company BHP Billiton and the Anglo-Australian Rio Tinto Group. 61 The

oligopoly could become even closer, as BHP offered to acquire Rio Tinto in December

2007, followed by an even higher offer from Baosteel, the largest Chinese steel

producer. 62 Australia is the largest producer of iron ore in the world (570 million tons in

2006), followed by China (520), Brazil (300), India (150) and Russia (105). 63

The oligopolistic structure of the iron ore market and increased demand have led to sharp

increases of the price for iron ore in recent years. It also determines procurement

relationships which tend to be long-term and offline. The European Commission

recognises that the European industry in general and the steel industry in particular is

facing increasing challenges to ensure access to raw materials. It is “committed to

improve the conditions of access to raw materials”. 64

61

62

63

64

See http://en.wikipedia.org/wiki/Iron_ore.

The most recent information included in this report is of 14 December 2007.

See http://en.wikipedia.org/wiki/Iron_ore.

See the press release on 5 June 2007 in European Commission (2007c). See also the working

document about the competitiveness of the non-energy extractive industry in the EU in

European Commission (2007b).

38


ICT and e-business in the steel industry

Characteristics of steel firms’ suppliers

In the e-Business Manufacturing Survey 2007, the firms were asked about several

characteristics of their suppliers. One question was about the location of suppliers. It

turned out that the majority of steel firms procures mainly from national suppliers (firms

representing 55% of employment) – see Exhibit 3.3-1. A large share procures mainly

from international suppliers (40% of employment), while the share of steel firms that

mainly procure from regional suppliers is small (6% of employment). Within size classes,

as one could expect, the share of firms that mainly have regional supplier is highest

among small firms (23%). There are no considerable differences between NACE groups

with regard to suppliers’ location.

Exhibit 3.3-1: Main locations of suppliers (2007)

regional suppliers

Companies that procure mainly from…

national suppliers

international

suppliers

Weighting scheme: % of empl. % of firms % of empl. % of firms % of empl. % of firms

Steel – 2007 total (EU-7) 6 17 55 58 40 25

NACE 27.1: basic steel 12 21 38 57 50 22

NACE 27.2-3: hollow /

cold processed steel

4 16 57 57 38 27

NACE 27.51+52: casting 2 14 64 62 33 24

Steel – by size (EU-7)

Small (10-49 empl.) 23 61 16

Medium (50-249 empl.) 8 54 38

Large (250+ empl.) (4)* (49)* (46)*

Steel – USA 20 27 60 55 20 17

Other sectors (EU-7)

Chemicals 3 8 42 56 54 36

Furniture 15 24 54 59 31 17

Base (100%) all firms all firms all firms

N (2007, EU-7+USA) 449 449 449

Questionnaire reference G5a G5b G5c

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

Source: e-Business Survey 2007

A further question was about the volatility of suppliers. The vast majority of steel firms in

the EU-7 and in the US as well as in the chemicals and furniture industries has mainly a

regular customer base (see Exhibit 3.3-2). The percentages are around 90% for all

variables. The casting sub-sector reported the largest share of firms with a changing

customer base: 12% of firms and 21% weighted by employment.

Finally, there was a question about whether the number of suppliers has increased,

decreased or stayed the same in the past twelve months (without Exhibit). More than two

thirds of steel firms (67% of employment and 72% of firms) reported that the number has

stayed the same. In a notable share of companies, the number of suppliers has increased

(28% of employment and 26% of firms).

39


ICT and e-business in the steel industry

Exhibit 3.3-2: Volatility of suppliers (2007)

mainly regular

Suppliers’ volatility:

changing customer

base

mixed

(regular/changing)

Weighting scheme: % of empl. % of firms % of empl. % of firms % of empl. % of firms

Steel – 2007 total (EU-7) 88 91 10 7 2 3

NACE 27.1: basic steel 91 90 2 6 7 5

NACE 27.2-3: hollow /

cold processed steel

97 92 3 5 1 3

NACE 27.51+52: casting 79 88 21 12 0 0

Steel – by size (EU-7)

Small (10-49 empl.) 90 6 4

Medium (50-249 empl.) 93 7 0

Large (250+ empl.) (88)* (9)* (3)*

Steel – USA 93 92 7 6 0 2

Other sectors (EU-7)

Chemicals 92 88 7 8 1 3

Furniture 91 91 6 7 3 2

Base (100%) all firms all firms all firms

N (2007, EU-7+USA) 449 449 449

Questionnaire reference G19a G19b G19c

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

Source: e-Business Survey 2007

3.3.2 Findings about e-procurement

Cost reduction opportunities through online sourcing

Online procurement can be carried out simply by placing orders via a supplier's website,

which is often a first step towards a more comprehensive use of ICT in business

processes. In more sophisticated processes, the systems of the purchasing and the

supplying company are integrated. Simply exchanging e-mails between suppliers and

purchasing firms may enhance the procurement process, particularly in SMEs (see the

case study example of Patina in section 5.10), but this is not considered as e-

procurement here.

Electronic sourcing platforms can streamline procurement processes and reduce costs in

the steel industry. An extended example presented in section 5.1 of this report is the

sourcing platform of ThyssenKrupp. It is open to suppliers from anywhere in the world

and available in different languages. Suppliers have to register and place their offer in the

platform and are selected by price and fulfilling specified requirements. According to

ThyssenKrupp, gains from reduced prices and process enhancement amounted to a twodigit

million sum of euros within one and half a year. Procurement costs were reduced

due to enhanced market transparency and improved purchasing conditions. Processes

were streamlined because buyers do no longer have to print inquiries and send them to

potential suppliers by normal mail, and offers coming in by paper mail do not have to be

transcribed into the computer system any more. ThyssenKrupp says that suppliers also

appreciate the platform because it provides a transparent tendering and selection

40


ICT and e-business in the steel industry

process for them.

There are other examples of iron and steel companies that make use of online

procurement. For example, ArcelorMittal Ostrava in the Czech Republic made good

experiences with a reverse auction system, i.e. a system in which suppliers can bid with

their offers to win calls for tenders – see the related business example.

Business example:

Reverse auctions at ArcelorMittal Ostrava, Czech Republic

ArcelorMittal Steel Ostrava is the largest steel mill in the Czech Republic and

one of the largest employers in the country. It was founded in 1951 as Nová

huť Klementa Gottwalda. Its production activities are focusing mainly on long

and flat rolled products. In 2002, the company implemented an internetbased

reverse auction function into its procurement process. Reverse

auction means that suppliers can bid with their offers to win calls for tenders.

The company’s motivation to implement such a solution was twofold: first to

save costs through lower prices of procured goods and decreased

transaction times and second to increase transparency of decision making in

procurement.

The company applies the reverse auction solution for purchasing materials

such as lye, oils, chemicals, conveyors and office supplies, but also for

services, especially logistics, as well as metal waste and scrap. ArcelorMittal

Ostrava chose the Czech-made software PROe.biz (http://www.proe.biz/)

which is especially designed for reverse auction purposes and implemented

as software-as-a-service, i.e. to be accessed from a remote server of the

provider. Today, six specialised employees work with the system.

By the end of 2007, ArcelorMittal Ostrava had performed approximately 340

auctions with a total procurement volume of more than 56 million euros. Cost

savings per bid ranged between 5% and 45%. The achieved savings

surpassed the company’s expectations. However, training and motivation of

employees dealing with the reverse auction system turned out to be

important. Especially in the early phase of using the system, the company’s

buyers had to become familiar with the system and did not always trust it.

In accordance with internal business plans, the company is seeking to

increase the volume of goods procured electronically every year. Beside

internal application, the system is also used for co-operative electronic

procurement: After gaining some experience in joint procurement with a

subsidiary in Poland, the company management decided to implement

reverse auctions also in several alliance purchases within the ArcelorMittal

Group. The objective is to achieve synergies in cost reduction, better

business conditions and improved work effectiveness.

Business example compiled by Radoslav Delina, Faculty of Economics, Technical

University of Kosice, Slovakia, for the Sectoral e-Business Watch. Sources:

Company website (http://www.mittalsteelostrava.com); interview with Ing. Lenka

Vítečková, Head of Department for purchasing of materials and replacement parts,

ArcelorMittal Ostrava, a.s., May 2008.

In general however, supply-side e-business is not much prevalent in the European steel

industry. This is mainly due to the fact that most of the suppliers, except the supplier of

raw materials, are SMEs that seek to avoid expensive investments in related solutions.

The reasons behind include that related solutions may not be based on widely used

international standards but are customer specific, or there is no specific standard

41


ICT and e-business in the steel industry

software available that allows re-use for other customers. 65

Share of firms ordering goods online

Two thirds of the EU-7 steel firms (66%, weighted by employment) were found to procure

goods on the internet or via other computer-mediated networks. This is about the same

as in the chemicals (70%) and the furniture (64%) industries. The casting sub-sector

reported the largest share of firms procuring online (75%); hollow and cold processed

steel (63%) and basic steel (58%) are somewhat behind. Large firms reported the largest

share of online procurers (73%), followed by medium-sized (67%) and small firms (52%).

While small firms lag behind, half of them practicing e-procurement can be considered

quite a high share. However, in comparison with the US, EU-7 firms lag behind

considerably: US steel firms representing 92% of employment reported to procure goods

online.

Exhibit 3.3-3: Companies ordering goods or services on the internet or via other computermediated

networks (2007)

Steel (EU-7)

Basic steel

Hollow / cold

processed steel

Casting

10-49 employees

50-249 employees

250+ employees

Steel (USA)

0

0 20 40 60 80 100

52

58

63

66

67

75

73

92

The survey was

conducted in seven EU

Member States

(Germany, France,

Italy, Spain, Poland,

Sweden, United

Kingdom) and in the

USA.

Basic steel = NACE

Rev. 1.1, 27.1; hollow /

cold processed steel =

NACE 27.2+3; casting

= NACE 27.51+52.

Base (100%) =

companies with at least

10 employees and

using computers; N

(Steel, EU-7) = 349,

N (Steel, USA) = 100.

Weighting: Figures for

sector totals and

countries are weighted

by employment ("firms

representing x% of

employment in the

sector / country"),

figures for size-bands in

% of firms.

Questionnaire

reference: B1

Chemical (EU-7)

70

Furniture (EU-7)

64

Source: e-Business Survey 2007 by the SeBW

65

Statement from Freddy De Vos, ArcelorMittal Gent, member of the Sectoral e-Business Watch

advisory board 2007/2008.

42


ICT and e-business in the steel industry

Share of goods ordered online

Those firms that procure goods online were asked about the share of orders placed

online. The share of goods procured online tends to be small. In firms representing

almost half of the industry’s employment (47%), less than 5% of their orders are placed in

the internet or through other computer-mediated networks. In 35% (weighted by

employment), the share was reported to be between 5 and 10%, and in 10% it was 11-

25%. The employment-weighted share of firms in which more than 25% of the orders are

placed online is small, only 9%. These shares are similar across size classes. In the

chemicals and furniture industries, the shares of companies reporting to place more than

10% of the orders online is somewhat larger than in the steel industry. All in all, there

appears to be scope for more intense e-procurement in the steel industry.

Exhibit 3.3-4: Share of goods ordered online in firms conducting e-procurement (2007)

10

1

8

47

Share of orders placed

online: 50%

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA. Base (100%) = companies with at least 10 employees and using

computers; N (Steel, EU-7) = 349.

Weighted by employment ("firms representing x% of employment in the sector / country").

Source: e-Business Survey 2007 by the SeBW

Electronic invoices in procurement processes

Electronic invoicing is defined here as a computer-mediated transaction between a seller

and biller (invoicing entity) and a buyer and payer (receiving entity). It replaces

conventional paper-based invoices. The invoice is electronically generated and sent by

the biller, and electronically received, processed and archived by the payer. In practice,

e-invoicing typically goes hand in hand with electronic payments. Electronic invoicing

promises rather easy-to-achieve cost savings for both the invoicing and receiving entity.

Processing invoices in a standardised, electronic format can be accomplished much

faster compared to the often cumbersome handling of printed invoices. In recent years, e-

invoicing has therefore attracted much attention in business and policy making. Initiatives

to promote adoption have been launched in several countries, for example in Finland and

Slovenia. Furthermore, the European e-Business Support Network (eBSN) has e-

invoicing as one of its priorities, in particular to solve cross-border problems. 66 Reflecting

the broad interest in this topic, the e-Business Survey 2007 paid special attention to e-

66

See European Commission, DG Enterprise and Industry (2007), and website of the eBSN

(http://ec.europa.eu/enterprise/e-bsn/index_en.html).

43


ICT and e-business in the steel industry

invoicing.

There are different technical ways of delivering an invoice electronically, and different

views on which of these ways actually constitutes an "e-invoice". Notably, there is

disagreement whether an invoice sent as a PDF document, typically a scan from a paper

invoice, by e-mail is an e-invoice. The counterargument is that this document is not

machine-readable, thus data have to be keyed in manually by the receiver into his

system. It is only sent electronically but not processed electronically. Savings are

therefore significantly reduced. Moreover, PDF invoices are not necessarily legally

binding; Member States apply different rules in this respect. "Real" e-invoicing can for

example be accomplished in a web-based environment, or invoicing processes can be

integrated with the ERP system or in Electronic Data Interchange (EDI) applications.

Companies may also practice several of these forms in parallel.

In the e-Business Survey 2007, the PDF document was found to be the most popular

means of e-invoicing: steel firms representing 48% of employment receive invoices in this

way – see Exhibit 3.3-5. This share is slightly smaller than in the chemicals (58%) and

furniture sectors (57%), and it is smaller than in the US (60%). The two more advanced

forms of e-invoicing were found to be quite rare in the steel industry but also in chemicals

and furniture. However, US steel firms reported much higher levels than the EU-7 firms.

Firms representing 58% of employment said invoices are directly sent to their computer

system, and firms representing 52% said they can access invoices on a website.

Digital signatures in invoices received are also not very popular. Steel companies

representing 6% of the industry’s employment said the frequently receive invoices with

digital signatures, and in 25% digital signatures are received sometimes. These shares

are similar in the other two manufacturing industries and also to the US.

Exhibit 3.3-5: Companies receiving electronic invoices from suppliers (2007)

as PDF documents

per e-mail

Companies that receive invoices…

44

from suppliers

directly to their

computer system

which they can

access on a website

Weighting scheme: % of empl. % of firms % of empl. % of firms % of empl. % of firms

Steel – 2007 total (EU-7) 48 51 15 9 17 13

NACE 27.1: basic steel 34 59 20 10 8 17

NACE 27.2-3: hollow /

cold processed steel

49 50 14 8 11 10

NACE 27.51+52: casting 56 46 13 8 30 14

Steel – USA 60 55 58 41 52 41

Steel – by size (EU-7)

Small (10-49 empl.) 50 6 12

Medium (50-249 empl.) 59 11 14

Large (250+ empl.) (42)* (18)* (15)*

Other sectors (EU-7)

Chemicals 58 55 22 12 25 14

Furniture 57 48 12 12 17 13

Base (100%) all firms all firms all firms

N (2007, EU-7+USA) 449 449 449

Questionnaire reference B6a B6a B6b

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

Source: e-Business Survey 2007


ICT and e-business in the steel industry

In those companies that reported to receive invoices from suppliers directly to their

computer systems, the average share of invoices received this way was 20%. This is very

similar to the chemicals (19%) and the furniture (18%) industries.

Raw material procurement preferred offline

For many steel products, the quality of the raw material is very important. Often, steel

firms order only input materials from particular suppliers, as they know the materials from

them suits their quality demands. Longstanding, trusted business relationships are

therefore quite common in the steel industry. Thus, buyers will not easily switch their

suppliers by means on e-procurement only on the basis of cost considerations. As

regards ThyssenKrupp, even though the online sourcing platform is successful, the

company does not intend to switch to online procurement for raw materials but will

continue to buy them in long-term offline relationships.

3.4 Internal e-business systems

3.4.1 Introduction to internal e-business systems

Importance of internal e-business systems in the steel industry

Computerised information systems that mainly serve processes inside a company, i.e.

that are not in the first instance designed for communication with suppliers, customers or

other business partners, are considered here as “internal systems”. A study of internal e-

business systems in steel companies is of interest because, as in all industries, ICT and

e-business may be valuable for making internal business processes more effective. This

may be highly relevant for the steel industry as it is dominated by large enterprises with

huge amounts of data to be dealt with, complex processes and products with complex

specificities. In particular, steel enterprises have to balance the cost effectiveness of large

volumes to be produced against relatively small customer orders, and the production

process has long lead times of several weeks.

Business process efficiency, streamlining and related productivity increases are core

subjects whenever ICT and e-business use is analysed. They are also very often implicit

or explicit themes in e-Business Watch case studies. Even the very first e-Business

Watch report in May 2002 argued that the real revolution had occurred and was about to

take place in internal e-business processes – as well as in business-to-business e-

commerce. Since then, this assessment has been confirmed frequently. In most sectors,

particularly in manufacturing, the major impact of e-business has been on reducing costs

by making business processes more efficient. All sector reports about manufacturing

industries published in 2004-2006 provide evidence which supports this claim, and this

report about the steel industry is no exception. For example, in the e-Business Survey

2006, firms representing 57% of employment in the ten sectors included stated that ICT

had positive impacts on business process efficiency, and 61% stated that ICT had

positive impact on work processes. 67

A further import issue is the integration of information systems from different companies

in the course of mergers and acquisitions which will be discussed in a special part at the

67

See for example the report about the pulp and paper industry, European Commission (2006), p.

158.

45


ICT and e-business in the steel industry

end of this section about internal systems.

Types of internal systems

There are numerous types of software applications that can be subsumed under internal

systems:

Resource-oriented systems for enterprise resource planning (ERP) and supply

chain management (SCM), material resource planning, and manufacturing resource

planning. Knowledge management (KM) systems may also be included in this

category as they serve the management of human resources.

Documentation-oriented systems for managing the placement and receipt of

orders, for document management (DM), and content management.

Customer-oriented systems for customer relationship management (CRM), i.e.

software systems for storing, processing and analysing customer data and using

these data for marketing, sales and service purposes.

Production-oriented systems for product lifecycle management (PLM), computeraided

design (CAD), two- or three-dimensional modelling (2D or 3D), computeraided

engineering (CAE), computer-aided manufacturing (CAM), material

requirements planning and manufacturing resources planning, as well as for

production and process control.

Radio Frequency Identification (RFID) systems for tracking goods or people.

All these systems can help to file, structure and process information in their field of

activity – information that may have huge scope particularly in large enterprises.

The SeBW Manufacturing Survey 2007 included all these systems except content

management and knowledge management. In the following sections of the report, internal

systems are discussed in three groups: First the resource-oriented systems are

discussed because they are particularly important for process efficiency in manufacturing

firms. A second group covers production-oriented systems which were for the first time

included in detail in the e-Business Survey. Third, RFID systems deserve special

attention as they are attributed high potential efficiency effects. Systems oriented towards

documentation were not investigated in more detail because they have a rather

administrative purpose.

3.4.2 Findings about internal e-business systems use

Overall importance of e-business

In the survey the interviewees were asked what overall importance e-business has for

business processes in the company. They could state “most”, “a good deal”, “some”, or

“none”. A relative majority of 46% of the companies said that they conduct some

processes by e-business. 36% said “none”. A “good deal” of processes is done by e-

business in 14% of the steel firms, and in only 4% most processes are conducted

electronically. These shares are very similar to the chemicals and furniture industries, as

Exhibit 3.4-1 shows.

46


ICT and e-business in the steel industry

Exhibit 3.4-1: Importance of e-business for processes in steel companies (2007)

some processes

46%

none 36%

good deal of

processes 14%

Most processes 4%

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

Base (100%) = companies with at least ten employees and using computers; N (Steel, EU-7) = 349.

Weighting: in % of firms.

Source: e-Business Survey 2007 by the SeBW

As regards size classes, the share of steel firms that report “some” importance of e-

business is equal (slightly below 50%) in all three groups – see Exhibit 3.4-2. However,

the percentage of medium-sized firms reporting a good deal of business processes to be

conducted by e-business was 22% which is almost twice as high as in small firms (12%),

and the share of large firms stating that most of the processes are done by e-business

was 16% which was much larger than for small (2%) and medium-sized firms (3%). Thus

the importance of e-business apparently increases with the size of the steel companies.

The three steel sub-sectors do not present a clear picture of e-business importance.

While the casting sub-sector reported the highest share of firms that do not practice e-

business at all (44%), it also revealed the highest share of firms doing most processes by

e-business (5%) – although this was not considerably more than in the other two classes.

Basic steel as well as hollow and cold processed steel reported similar percentages for

“most processes” and “a good deal”, while hollow and cold processed steel had a larger

share of “some processes” (50%) than basic steel (40%).

47


ICT and e-business in the steel industry

Exhibit 3.4-2: Overall importance of e-business for processes in the company (2007)

Companies saying that ... are conducted as e-business

most of their

business

processes

good deal of

their business

processes

some of their

business

processes

none of their

business

processes

% of % of % of % of % of % of % of % of

Weighting scheme:

empl. firms empl. empl. empl. firms empl. firms

Steel – 2007 total (EU-7) 10 4 11 14 49 46 31 36

NACE 27.1: basic steel 9 3 20 18 43 40 28 39

NACE 27.2-3: hollow /

cold processed steel

13 4 13 16 37 50 37 30

NACE 27.51+52: casting 7 5 2 7 64 44 27 44

Steel – USA 0 0 14 9 64 57 22 34

Steel – by size (EU-7)

Small (10-49 empl.) 2 12 46 40

Medium (50-249 empl.) 3 22 48 27

Large (250+ empl.) (16)* (10)* (45)* (30)*

Other sectors

Chemicals 8 7 20 17 46 46 26 30

Furniture 10 7 20 15 45 46 26 32

Base (100%) all firms all firms all firms all firms

N (Steel, 2007, EU-7+USA) 449 449 449 449

Questionnaire reference F1a F1a F1b F1b

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

* = percentage only indicative due to a small number of observations (N = 20-50)

Source: e-Business Survey 2007

Overview of internal systems use

The use of a software for managing orders is quite prevalent: Firms representing 76% of

the steel sector’s employment said they use such a software – see Exhibit 3.4-3. Many of

the respondents may have had their more comprehensive software products in mind,

such as Enterprise Resource Planning (ERP) and Supply Chain Management (SCM),

which may also support order functions. In fact, more than half (59%) of the steel

companies (weighted by employment) reported to have an ERP system. The use of other

internal systems is not so widespread: 27% have a Document Management system, also

27% an SCM system, and 21% a Customer Relationship Management (CRM) system.

48


ICT and e-business in the steel industry

Exhibit 3.4-3: Internal systems use in steel companies (in %)

0 10 20 30 40 50 60 70 80 90 100

Software for managing

orders

76

Enterprise Resource

Planning

59

Document Management

27

Supply Chain

Management

27

Customer Relationship

Management

21

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA. Base (100%) = companies with at least 10 employees and using computers;

N (Steel, EU-7 and USA) = 449.

Weighting: Figures are weighted by employment ("firms representing x% of employment in the sector").

Questionnaire reference: A6, A7

Source: e-Business Survey 2007 by the SeBW

Resource-oriented systems

Systems for enterprise resource planning (ERP) help to integrate and cover all major

business activities within a company, including product planning, parts purchasing,

inventory management, order tracking, human resources and finance. For manufacturing

companies, ERP systems are an important "hub" for much of their e-business activities

with other companies. B2B data exchanges as well as planning and controlling processes

are largely based on functionalities provided by ERP systems.

Supply chain management (SCM) software fulfil similar purposes as ERP systems but

are less comprehensive. They can help companies to match supply and demand through

integrated and collaborative interaction tools. SCM provides an oversight of the flows of

products and materials, information and finances, as they move in a process from

supplier to manufacturer to distributors to end customers. SCM coordinates and

integrates these flows both within and among companies. One of the key objectives of

any effective SCM system is to reduce inventory, with the assumption that products are

available when needed. 68

Both ERP and SCM systems are a domain of large firms. 71% of the large steel firms use

an ERP system and 37% an SCM system. The percentages for medium sized firms (47%

ERP, 17% SCM) and small firms (21% ERP, 9% SCM) are much smaller. This may

reflect that data complexity increases by firm size and thus the need to apply ERP or

SCM systems. Compared with the US, ERP is apparently more prominent in the EU while

68

See www.mariosalexandrou.com/definition/scm.asp: "Definition of Supply Chain Management".

49


ICT and e-business in the steel industry

SCM is more prominent in the US. If one adds the figures for both systems, the share of

US steel firms that have an ERP or SCM system (67%) is much larger than in the EU

(47%). Finally, the figures of use of ERP and SCM systems in the steel industry are

smaller than in the chemicals industry but larger than in the furniture sector.

Exhibit 3.4-4: Use of resource-oriented systems (2007)

Enterprise Resource Planning

(ERP) Systems

Supply Chain Management

(SCM) Systems

Weighting scheme: % of empl. % of firms % of empl. % of empl.

Steel – 2007 total (EU-7) 59 33 27 14

NACE 27.1: basic steel 68 27 27 13

NACE 27.2-3: hollow /

cold processed steel

55 34 29 15

NACE 27.51+52: casting 56 39 24 13

Steel – USA 45 32 57 35

Steel – by size (EU-7)

Small (10-49 empl.) 21 9

Medium (50-249 empl.) 47 17

Large (250+ empl.) (71)* (37)*

Other sectors

Chemicals 68 38 39 17

Furniture 39 21 15 10

Base (100%) all firms

N (Steel, 2007, EU-7+USA) 449 449

Questionnaire reference A7a

all firms

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

* = percentage only indicative due to a small number of observations (N = 20-50)

A7b

Source: e-Business Survey 2007 by the SeBW

Several case studies conducted for this report illustrate the benefits of resource-oriented

systems, but also related challenges. Enterprise Resource Planning systems may help to

reduce inventory costs, increase the use of production capacities, speed up business

processes and improve management processes. At the Srem Iron Foundry in Poland

(see section 5.2), the implementation of an ERP system had two strategic impacts. First,

the firm was able to reduce inventory costs substantially and to increase utilisation of

production capacities. Second, due to an increased operation transparency, the firm

could speed up business processes and improve management practices. Today, the

management has all necessary information available immediately, whereas collecting

necessary data with dispersed and isolated tools took weeks in former times. At Farwest

Steel, US (section 5.3), the main benefits of the ERP system include improved order-todelivery,

inventory visibility, and cost tracking. However, both cases also revealed

challenges related to the implementation of internal systems. At the Srem foundry,

employees, particularly in production, did not immediately welcome the system and its

opportunities because it required to make decisions and take responsibility which they

were not used to. Furthermore, management had to realign management practices and

business processes in order to make best use of the data that was suddenly available. At

Farwest Steel, the employees lacked confidence into the system and feared

organisational changes.

However, business processes may not only be improved by implementing comprehensive

systems as in the case of the Srem foundry. The use of simple applications may already

50


ICT and e-business in the steel industry

improve workflows in smaller companies. This may include software for accounting and

human resources management, normal e-mail for communication with suppliers and

customers, and internet research for business-related information. The case of the Patina

foundry in Hungary (section 5.7) provides a related example. This confirms findings from

the e-Business Watch 2006 that in smaller companies, accounting software typically

substitutes to some extent the functionality which ERP software provides in larger firms,

although on a much simpler level and with a lower potential for automating order-related

document flows. 69

RFID implementation and plans

Radio Frequency Identification (RFID) is a technology for automated collection of data

about a certain object or person, including localisation. Its core functionality is to track

moving objects or people for improving the management and use of resources. RFID is a

prime example of rapid ICT development. Within a few years, RFID has matured from a

specialist topic into an important issue for many companies. It is expected to become a

key technology for innovation, particularly in inventory management and logistics.

Technically, an RFID system consists of several components, including tags, tag readers,

servers and application software. RFID tags consist of a microchip attached to an

antenna. Data stored on the tag may for example include type of product, manufacturer,

and series. When an RFID tag passes through an electromagnetic zone, it detects the tag

reader's activation signal. The reader decodes the data in the tag and passes the data to

the host computer. The combination of data stored on the tag with data about its

movements may be powerful information. It potentially enables companies to track their

products through the supply chain and product life cycle.

In the European steel industry, the use of RFID is currently not very prevalent. Steel firms

representing 12% of employment in the sector reported to use RFID and 6% said they

plan to do so – see Exhibit 3.4-5. These figures are similar to the chemicals industry. As

regards steel sub-sectors, there is not much difference between use but between plans.

Plans were reported to be highest in the casting sub-sector (10%) and lowest in the basic

steel sub-sector (1%). RFID appears to be a large-firm technology which can be

explained by high investment costs. None of the small firms interviewed for the survey

reported to use RFID and only 2% said they plan to introduce this technology.

RFID use was reported to be much higher in the US: firms representing 26% of the US

steel industry employment said they use RFID which is more than twice the EU-7 figure.

However, none of the US steel firms said they plan to introduce RFID so that the upper

level of using this technology may already be reached in the US. Nevertheless there may

be a need for EU steel firms to catch up to the US in terms of RFID use.

69

European Commission (2007a), p. 54.

51


ICT and e-business in the steel industry

Exhibit 3.4-5: RFID implementation and plans in steel companies (2007)

0 10 20 30 40 50

Steel (EU-7)

12

6

Basic steel

Hollow / cold

processed steel

10

13

6

1

Casting

13

10

10-49 employees

2

50-249 employees

8

5

250+ employees

12

9

USA

26

Chemical (EU-7)

13

8

Furniture (EU-7)

1

10

RFID use

RFID plans

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

Basic steel = NACE Rev. 1.1, 27.1; hollow / cold processed steel = NACE 27.2+3; casting = NACE 27.51+52.

Base (100%) = companies with at least 10 employees and using computers; N (Steel, EU-7) = 349,

N (Steel, USA) = 100.

Weighting: Figures for sector totals and countries are weighted by employment ("firms representing x% of

employment in the sector / country"), figures for size-bands in % of firms.

Questionnaire reference: A12, A13

Source: e-Business Survey 2007 by the SeBW

Production-oriented ICT systems

In the steel industry, design and manufacturing of products is a complex process. ICT is

crucial in steel production and for production control and planning. ICT in steel production

ensures high-quality output, it ensures that the final product meets the physical

characteristics the customer requires. For example, ICT is very important for production

process simulation and modelling. In this way, ICT avoids waste, i.e. the production of

flawed goods that do not meet the customer’s requirements and need to be redone. 70

The e-Business Survey 2007 for the first time included production-oriented systems. The

70

Assessments in this paragraph stem from the SeBW advisory board for the steel industry.

52


ICT and e-business in the steel industry

following systems were included: Computer-Aided Design (CAD) is a commonly used

tool to support the design of new steel products. CAD systems include hard- and software

that create and store drawings as well as related text and numeric information that can

be viewed, printed or updated as required. From being able to merely develop flat twodimensional

drawings, today’s CAD systems create mathematically enriched threedimensional

(3D) models. Furthermore, Computer-Aided Manufacturing (CAM) may be

used to automate the manufacturing process, for example with industry robots, automatic

warehouses and driverless transport. Computer-aided engineering (CAE) systems that

analyse engineering designs are becoming increasingly important. Most CAD and CAM

systems have a CAE component, but there are also independent CAE systems. CAE

systems are able to simulate a design under a variety of conditions to see if it actually

works. Further production-oriented systems include Product Lifecycle Management

(PLM) systems for managing descriptions and properties of a product through its

development and “lifetime”, systems for Material Requirements Planning (MRP)

ascertaining amounts of material needed in a certain production period, and

Manufacturing Resources Planning (MRP II) that additionally include a module for

capacity planning. There are other production-oriented ICT systems, namely for

production and process control, which are, according to the SeBW advisory board, very

important for the steel industry. Production and process control systems were however

not included in the survey.

Exhibit 3.4-6 shows an overview of the use of production-oriented systems in the steel

industry; Exhibit 3.4-7 provides detailed figures for sub-sectors, size-classes and other

industries. Steel firms representing 83% of the industry’s employment reported to use a

CAD system. This is more than in the chemicals industry (63%) and even in the furniture

industry (72%) in which one would expect product design to be much more important

than in steel business. CAD is particularly important in the casting sub-sector where firms

representing 93% of employment use this technology. The same applies to 2-D and 3-D

modelling systems as well as CAE and CAM. Again there are large differences between

firms of different size. 89% of large steel firms use CAD, 68% of the medium-sized firms

and 41% of the small firms. The same sequence applies to the other design systems.

Compared with the US, CAD use is more prevalent in the US when considering the share

of firms (68% of US firms and 54% of EU-7 firms), but when considering employmentweighted

figures, EU-7 firms are leading (83% versus 79%). The same applies to 2-D and

3-D systems, but in CAE and CAM systems the US steel firms apparently have a clear

lead.

Material Requirements Planning systems (49%, weighted by employment) and

Manufacturing Resources Planning systems (20%) are less prevalent than design

systems. Both types of systems are more frequently used in large firms than in SMEs. US

firms lead in both systems’ use when considering percentages weighted by firms, while

EU-7 companies lead when considering employment-weighted figures. This means that

in the EU-7 such systems are more frequently used by large firms than in the US.

53


ICT and e-business in the steel industry

Exhibit 3.4-6: Use of production-oriented systems in EU-7 steel companies in % (2007)

0 20 40 60 80 100

Computer-Aided Design

(CAD)

83

Material Requirements

Planning

49

Computer-Aided

Manufacturing (CAM)

30

Computer-Aided

Engineering (CAE)

21

Manufacturing

Resources Planning

20

Product Lifecycle

Management (PLM)

16

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

Base (100%) = companies with at least 10 employees and using computers; N (Steel, EU-7) = 349.

Weighting: Figures are weighted by employment ("firms representing x% of employment in the sector").

Questionnaire reference: A7, A10, A11

Source: e-Business Survey 2007 by the SeBW

54


ICT and e-business in the steel industry

Exhibit 3.4-7: Use of production-related systems (2007)

Product

Lifecycle

Management

Systems

Computer

Aided Design

(CAD) Systems

Two-

Dimensional

Modelling

Systems

Three-

Dimensional

Modelling

Systems

% of % of % of % of % of % of % of % of

Weighting scheme:

empl. firms empl. firms empl. firms empl. firms

Steel – 2007 total (EU-7) 16 7 83 54 64 30 66 34

NACE 27.1: basic steel 13 9 81 57 66 27 71 39

NACE 27.2-3: hollow /

cold processed steel

7 6 75 52 61 30 42 25

NACE 27.51+52: casting 27 10 92 53 64 35 86 50

Steel – by size (EU-7)

Small (10-49 empl.) 5 41 16 20

Medium (50-249 empl.) 9 68 45 49

Large (250+ empl.) (19)* (89)* (70)* (75)*

Steel – USA 7 7 79 68 52 41 65 46

Other sectors

Chemicals 16 6 63 41 31 23 31 25

Furniture 9 5 72 55 48 30 51 37

Base (100%) all firms all firms all firms all firms

N (Steel, 2007, EU-7+USA) 449 449 449 449

Questionnaire reference A7e A10a A10b A10c

Computer

Aided

Engineering

(CAE) system

Computer

Aided

Manufacturing

(CAM) system

Material

Requirements

Planning

system (MRP)

Manufacturing

Resources

Planning

system (MRPII)

% of % of % of % of % of % of % of % of

Weighting scheme:

empl. firms empl. empl. empl. firms empl. firms

Steel – 2007 total (EU-7) 21 9 30 15 49 16 20 8

NACE 27.1: basic steel 2 4 12 13 34 9 9 6

NACE 27.2-3: hollow /

cold processed steel

15 11 25 16 52 18 41 10

NACE 27.51+52: casting 41 14 50 18 59 20 9 8

Steel – by size (EU-7)

Small (10-49 empl.) 6 10 6 3

Medium (50-249 empl.) 13 22 25 14

Large (250+ empl.) (22)* (31)* (54)* (27)*

Steel – USA 26 21 39 29 26 21 13 12

Other sectors

Chemicals 18 8 31 16 49 20 31 11

Furniture 11 8 26 20 23 12 16 7

Base (100%) all firms all firms all firms all firms

N (Steel, 2007, EU-7+USA) 449 449 449 449

Questionnaire reference A10d A11a A11b A11c

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

* = percentage only indicative due to a small number of observations (N = 20-50)

Source: e-Business Survey 2007

55


ICT and e-business in the steel industry

Customer-oriented systems

CRM systems promise the ability to collect, store, synthesise and analyse data on

customers' behaviour and needs. Such systems may thus provide a more analytical view

of the customers and allow to craft and conduct measures to best approach them. The

use of CRM systems appears to differ by NACE groups: While firms representing 33% of

employment in the hollow and cold processed steel business reported to use a CRM

system, the related figures are only 16% of the basic steel firms and 13% of the casting

firms – see Exhibit 3.4-8. Apparently the use of CRM systems is particularly widespread

in large firms of the hollow and cold processed steel sub-sectors.

Exhibit 3.4-8: Firms using a Customer Relationship Management (CRM) system (in %)

0 10 20 30 40 50

Steel (EU-7)

21

Basic steel

16

Hollow / cold

processed steel

33

Casting

13

10-49 employees

7

50-249 employees

21

250+ employees

26

Steel (USA)

33

Chemical (EU-7)

40

Furniture (EU-7)

25

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

Basic steel = NACE Rev. 1.1, 27.1; hollow / cold processed steel = NACE 27.2+3; casting = NACE 27.51+52.

Base (100%) = companies with at least 10 employees and using computers; N (Steel, EU-7) = 349,

N (Steel, USA) = 100.

Weighting: Figures for sector totals and countries are weighted by employment ("firms representing x% of

employment in the sector / country"), figures for size-bands in % of firms.

Source: e-Business Survey 2007 by the SeBW

There are also considerable differences between size classes. 26% of the large firms and

56


ICT and e-business in the steel industry

21% of the medium-sized firms said they have a CRM system, but only 7% of the small

firms. This may not only reflect the high cost of such systems which many small firms

may be unwilling to invest but also a relatively small number of customers of small firms

that does not require a CRM system. Furthermore, CRM use was reported to be much

higher in the USA (33%) and also in the EU-7 chemicals industry (40%).

The overall low levels of CRM use in the steel industry may reflect that steel sales is a

quite personalised business that cannot easily be reflected in standard software and that

does not allow mass communication. It may also reflect a lack of innovative approaches

towards dealing with customers and analysing data about customers.

3.4.3 Systems integration after mergers

Challenges related to systems integration after mergers

Since there have been consecutive mergers in the steel industry and further mergers are

forecasted to take place, the integration of information systems from different companies

is an important issue. Mergers pose a considerable challenge not only for technical but

also for managerial reasons. As regards technology, information systems from different

companies may operate with different technologies and different standards, sometimes

from different generations, resulting in interoperability problems. As regards

management, teams from the merged companies may favour their own approach and

more or less openly fight technology and approaches from the other company. There may

be different approaches to and “philosophies” about information systems.

Systems integration after mergers has not received particular attention in earlier studies

of the e-Business Watch, but the issue played a role in various industries. For example, it

was touched in 2006 in a case study in the pulp and paper industry about the Mayr-

Melnhof Cartonboard Group: “The single most important success factor for operating an

e-business portal is that the underlying ICT system(s) from which the portal is fed –

typically the ERP system – is perfectly organised. This can be a challenge in the case of

mergers, when different legacy systems for resources planning have to be integrated." 71

However, literature about ICT integration challenges in the course of mergers is rare; no

dedicated sources were identified on research for this report. Furthermore the subject

was not included in the e-Business Survey 2007 because it would have required too

special questions that would have been beyond the scope of the survey. Some

information can be drawn from the case studies.

Case study findings about mergers

Three of the case studies conducted for this report deal with merger issues. The case of

ArcelorMittal Gent (section 5.7) illustrates how different technologies may have to be

harmonised in the course of mergers. It also shows that different ways of electronic

communication may remain after mergers. While the company adopted the common

layout for e-communication within the group, it maintains a web application for

communicating with warehouses all over Europe. The reason is that this web application

is a simple and effective tool of communication with some warehouses. Furthermore, the

case shows that systems integration is a gradual process. While all EDI communication in

71

Shortened quotation from European Commission (2006), p. 118.

57


ICT and e-business in the steel industry

the group is meant to be routed through a Primary EDI Centre, ArcelorMittal Gent

temporarily continues direct EDI communication with some warehouses. The company is

seeking to combine the existing technologies to a single solution for the whole group.

The case study on e-Arbed.com (section 5.8) includes an example of conflicting interests

after mergers. After the merger of Arbed, Aceralia and Usinor to Arcelor in 2001, the IT

teams of the formerly independent companies supported the e-commerce solutions they

were used to. This was one reason why the e-Arbed.com platform eventually failed. The

case of Baosteel, China, (section 5.5) also touches on the challenges related to

integrating and unifying customer-facing information systems after mergers. While the

company successfully rolled out e-business platforms at different mills step by step, this

approach had a drawback: consolidation measures became necessary in order to provide

centralised, unified functions for all platforms.

3.5 Sales-side processes

3.5.1 Introduction to sales-side processes

Sales-side issues

In general, sales side business activities comprise of various aspects. The first focus is

on actual sales of steel products, i.e. transactions, the second on related customer

support activities. Both will be discussed as “customer interfaces” in the following.

Furthermore, logistics and distribution aspects related to sales are also important. All

these activities may take place or may be supported by computerised systems.

Customers’ characteristics

The main sectors that use intermediary steel products include construction, machinery

and equipment manufacturing, and transport equipment manufacturing. Construction is

the largest market for steel and presents the greatest opportunities for growth, particularly

with regard to growing concerns about supplies of wood, which competes with steel in a

number of applications. 72 A second key customer industry is the automobile sector. A

typical passenger car requires approximately one ton of steel and a large amount of

different steel products. 73 A third important group of steel buyers are household

equipment manufacturers, the so-called white good industry. While customers in the

construction industry are quite differentiated in terms of location, size and volumes

purchased, the automobile and also the white goods industries are quite concentrated so

that the steel producers deal with large and powerful buyers.

European steel firms sell mainly to national and international markets. 58% of the EU-

7 steel firms in the survey, which is firms representing 41% of employment in the industry,

said they sell mainly to the national market. 24% (55% weighted by employment) said

they sell mainly to international markets. These patterns are similar in the steel subsectors,

with the exception that firms in the hollow and cold processed business are

somewhat more prone to sell to international markets (66% employment-weighted) than

the basic steel (51% employment-weighted) and casting (48% employment-weighted)

sub-sectors. The propensity to sell mainly to international markets increases with firm

72

73

See OECD (2004), p. 4.

See OECD (2004), p. 4.

58


ICT and e-business in the steel industry

size.

Exhibit 3.5-1: Main locations of customers (2007)

Companies whose most significant market area is the

regional market national market international market

Weighting scheme:

Steel – 2007 total (EU-7) 4 19 41 58 55 24

NACE 27.1: basic steel 3 20 46 59 51 20

NACE 27.2-3: hollow /

cold processed steel

6 19 28 55 66 26

NACE 27.51+52: casting 2 16 50 61 48 23

Steel – USA 27 36 66 58 7 6

Steel – by size (EU-7)

Small (10-49 empl.) 26 61 13

Medium (50-249 empl.) 9 58 33

Large (250+ empl.) (0)* (36)* (64)*

Other sectors (EU-7)

Chemicals 4 14 39 53 57 33

Furniture 14 28 45 49 41 23

Base (100%) all firms all firms all firms

N (2007, EU-7+USA) 449 449 449

Questionnaire reference G5a G5b G5c

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

* = percentage only indicative due to a small number of observations (N = 20-50)

Source: e-Business Survey 2007

The vast majority of steel firms (86%) reported that they sell to a regular, i.e. nonchanging

customer base. There are no significant differences between steel sub-sectors

and size classes in this respect.

Particularities of steel trade

Steel products are sold in particular ways. There are basically three different types of

steel trade:

selling of steel by the producing company itself;

selling of steel through third party enterprises such as steel trade firms – also called

service centres – and online portals that are independent from the steel-producing

companies;

steel trade on exchange markets such as the London Metal Exchange (LME) that

do not primarily but also deal with steel. The LME is launching two steel billet

futures contracts that will commence trading in April 2008. 74

Direct sales from the steel mill to customers is bound to particular amounts of products

ordered, which normally only very large customers can fulfil. In Europe there is an

estimated amount of 10,000 steel customers that can meet these conditions. The overall

amount of customers is approximately 800,000. This is why there is also selling from

steel warehouses that store what the other 790,000 customers require. The warehouses

74

See http://www.lme.co.uk/steel.asp.

59


ICT and e-business in the steel industry

can usually supply all types of steel products within one or two days.

Service centres that buy and sell intermediate steel products play an important role in

steel distribution. While the large steel producers have an international perspective and

deal with a relatively small number of customers directly, the vast amount of end

customers, for example firms in the construction industry, purchases steel products from

service centres that have a regional focus. The largest independent steel trading

company is Duferco (http://www.duferco.com), a world-wide operating enterprise

founded in 1979 with corporate offices in Belgium, Italy and Switzerland. In 2006, the total

steel sales volume of Duferco exceeded 27 million metric tons which equalled 2.2% of the

world-wide steel output in that year. 75 The company operates in more than 40 countries,

has 32 trading, distribution and service centres and also owns 17 production sites. 76

The reason that steel trade on exchange markets is new is, firstly, that steel producers

seek to settle the price themselves; they seek to prevent speculation on steel prices as it

is the case for other metals. Secondly, future trading requires to have a homogeneous

product but steel products have many different grades.

3.5.2 Findings about customer interfaces

About the importance of customer interfaces

The steel industry is largely driven by requirements from customers. This also applies to

e-business solutions, and it applies to firms of all size classes. For example, as regards

SMEs, a research project including nine case studies about e-business in the German

foundry industry in 2002 and 2003 found that demands from large customers, particularly

in the automotive industry, were the most important driver for implementing e-business

solutions. 77 Therefore, electronic customer interfaces are vitally important for steel

companies. e-Business solutions may facilitate transactions and communication with

customers, including for example negotiation, product specification, scheduling, shipping

and invoicing.

The steel industry began conducting e-commerce, i.e. selling products, with key global

customers in the 1970s through basic Electronic Data Interchange (EDI) and, later, e-

mail. Since then, electronic sales in the steel industry developed steadily and burgeoned

in the mid-1990s. Today, most steel companies use customer-facing EDI, but mainly with

large enterprises and not with SMEs. Even with the large customers, steel enterprises

usually exchange only a few messages electronically, such as delivery instructions,

despatch advices and invoices. 78

Findings for this report indicate that the design of the platforms provided by the steel

industry often follows the requirements of customers, notably the automobile industry.

Steel companies rather have to integrate their systems with the customers’ systems than

75

76

77

78

See key company data at http://www.duferco.com/en/01-Group/addresses.asp.

See the company’s worldwide locations data profile at http://www.duferco.com/en/01-

Group/world.asp.

See SFS/DGV/RKW/IGM (2003), p. V.

Assessment for today from Freddy De Vos, ArcelorMittal Gent, member of the Sectoral e-

Business Watch advisory board 2007/2008. He stated that he has “never seen a full

implementation of an e-business solution from ordering to payment between a steel company

and its customers”.

60


ICT and e-business in the steel industry

the other way round. The ICT standards used for e-communication are usually those of

the customers (see also section 3.4.3).

However, steel enterprises may also use online sales platforms to sell smaller volumes to

specific customers. For example, in August 2007 ThyssenKrupp Materials NA

purchased the Seattle-based firm OnlineMetals.com to act as a counterpart to the

company’s high volume distribution segment. Onlinemetals.com is an online retailer of

hot-rolled, cold-rolled and stainless steels specialising in small orders and also offers

value-added services such as cut-to-length sizes. ThyssenKrupp said that the company

seeks to widen its customer base to include low-volume commercial customers and

individual consumers. 79

Case study findings

Three case studies in chapter 5 of this report are related to customer interfaces: e-

Arbed.com (section 5.8), Baosteel (section 5.5) and Corus IJmuiden (section 5.6). The

case of e-Arbed.com illustrates the high expectations that were attributed to electronic

sales platforms in the late 1990s as well as the difficulties related to such efforts. e-

Arbed.com was an attempt to establish electronic sales and also supply of steel in the

Arbed Group, Luxembourg, which is today part of ArcelorMittal. e-Arbed.com was meant

to be an e-business platform for all suppliers and customers of Arbed’s distribution

branch. However, in 2003 the system was terminated for several reasons: virtual and real

distribution channels had struggled to sustain their competencies, steel demand which is

highly specific turned out to be not sufficiently suitable for e-commerce, and steel

business turned out to be too heavily depending on personal relationships.

For Baosteel, the largest steel producer in China, the key driver for implementing and

extending e-business applications is to align processes towards customer centric

operations. This implies to build platforms for e-sales and e-collaboration with strategic

partners, particularly in the automobile industry. Baosteel successfully improved

operation efficiency and drove down process cost. On average, workflows now require

only 60% of the time spent before introducing digitised operations. The order cycle time

has also been reduced up to 20%.

Corus IJmuiden implemented an internet-based system that allows customers to

retrieve the most relevant data about their orders anytime and on their own. This

application supports customers to plan just-in-time production. On both sides, Corus and

its customers, this application reduced the time previously spent on phone calls and faxes

considerably. Due to its user-friendliness, the system is also used by Corus sales forces

and facilitates their operations – which was not intended at the outset.

Findings about electronic sales

Electronic sales may take place through the internet or through other computer-mediated

networks such as EDI. If e-sales are to be conducted through the internet, a website is a

basic precondition. A website has become a commonplace: According to the e-Business

Manufacturing Survey 2007 (without Exhibit), the vast majority of steel companies have a

website – 79% of firms and firms representing 90% of the industry’s employment. The

values for US steel firms and for the European chemicals and furniture industries are very

similar. Even 71% of the small steel firms have a website. For some firms, the simple

79

Information from Steel Business Briefing, 6 August 2007.

61


ICT and e-business in the steel industry

implementation of a website may be the single computerised means to support sales. For

example, the Patina foundry in Hungary (section 5.10) uses its websites to present types

of products and some technical specifications.

Other companies may go a step further and implement comprehensive electronic

catalogues that describe products. The e-Business Manufacturing Survey 2007 found

that 15% of firms, which is firms representing 27% of the industry’s employment, have

such an e-catalogue. As regards the share of firms, e-catalogues are more frequently

used in the chemicals (18%) and the furniture (24%) industries as well as in US steel

firms (25%). “Real” electronic sales imply transactions, i.e. customers’ opportunity to

order goods or services through the internet or computer-based networks. 25% of

steel firms, representing 28% of the industry’s employment, offer this opportunity (see

Exhibit 3.5-2).

Exhibit 3.5-2: Companies selling goods on the internet or via other computer-mediated

networks (2007)

0 10 20 30 40 50

Steel (EU-7)

28

Basic steel

30

Hollow / cold

processed steel

19

Casting

35

10-49 employees

50-249 employees

23

25

250+ employees

28

Steel (USA)

39

Chemical (EU-7)

Furniture (EU-7)

33

32

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

Basic steel = NACE Rev. 1.1, 27.1; hollow / cold processed steel = NACE 27.2+3; casting = NACE 27.51+52.

Base (100%) = companies with at least 10 employees and using computers; N (Steel, EU-7) = 349,

N (Steel, USA) = 100.

Weighting: Figures for sector totals and countries are weighted by employment ("firms representing x% of

employment in the sector / country"), figures for size-bands in % of firms. Questionnaire reference: B3.

Source: e-Business Survey 2007 by the SeBW

62


ICT and e-business in the steel industry

In terms of firms, there are no big differences between the steel sub-sectors; in terms of

employment, the hollow and cold processed steel sub-sector (19%) reported a lower

share than the basic steel (30%) and casting (35%) sub-sectors. Much different to other

e-business indicators, no considerable differences between size classes were found:

25% of the small steel firms said the practice e-sales, 23% of the medium-sized firms and

28% of the large firms. It may be that electronic sales requires some kind of

organisational flexibility that favours the application of such practices in small firms. e-

Sales practice is more prevalent in US steel firms (35% of firms representing 39% of

employment) as well as in the chemicals (33%, employment-weighted) and furniture

(32%, employment-weighted) industries. These figures are in line with statements from

SeBW advisory board members that steel products are not much suited to being sold

online and that e-sales practices are not a particular strength of the steel industry.

Of those steel firms that sell online, 29% of them (weighted by employment) said that the

share of orders placed online is less than 5% (see Exhibit 3.5-3). A further 25% (weighted

by employment) said that the share is between 5 and 10%. The percentages for

companies selling more than 10% of their goods online are considerable: In 22%

(weighted by employment) the share of online sales was reported to be between 26 and

50% and in 18% more than half of total sales. This means that e-sales is not very

common in the steel industry, but those companies that apply this practice do it in

considerable scope. Thus, the situation is the other way round compared with e-

procurement (see section 3.2) which is quite common but the share of goods procured

online tends to be small.

The figures for the overall shares of e-sales in steel firms are roughly similar when

considering size classes. As regards the shares of companies selling more than 25% of

their goods online, the figures for the steel industry are slightly below the chemicals

industry but larger than in the furniture industry. A comparison with the US is not

meaningful because the number of cases is too small.

Exhibit 3.5-3: Share of goods sold online in firms conducting e-sales (2007)

18

29

Share of orders received

online: 50%

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA. Base (100%) = companies with at least 10 employees and using

computers; N (Steel, EU-7 and USA) = 449.

Figures weighted by employment ("firms representing x% of employment in the sector / country").

Source: e-Business Survey 2007 by the SeBW

63


ICT and e-business in the steel industry

Electronic invoices sent to customers

Electronic invoices can facilitate and speed up payment processes. About one third

(36%) of European steel firms, which is firms representing 39% of the industry’s

employment, reported to send invoices electronically to customers. 12% of the steel firms

(24% weighted by employment) send invoices directly from their computer system to that

of customers. The share of steel firms sending invoices which customers can access on a

website is negligible (2%). All these figures are similar to the chemicals and furniture

industries, but they are considerably smaller than in US steel firms. Almost half (47%) of

the US steel firms reported to send invoices as PDF documents to customers, 40% said

they send invoices directly to the computer system of a customer, and 13% said

customers can access invoices on a website. This is a further indicator that US steel firms

are more advanced than their EU counterparts in electronic transactions.

The companies were also asked whether and how often they use digital signatures in

messages sent. Digital signatures may also be used to sign invoices to customers. A

minority of 7% of European steel firms reported to use digital signatures frequently, and

22% said they use them sometimes (without Exhibit). This is very similar not only to the

chemicals and furniture industries but also to the US steel firms. Apparently, digital

signatures are generally not a common means in communication with business partners.

However, companies using Electronic Data Interchange (EDI) – which is companies

representing 34% of the steel industry’s employment, see section 3.6.3 – do not need to

sign with electronic signatures.

Exhibit 3.5-4: Companies sending electronic invoices to customers (2007)

as PDF documents

per e-mail

Companies that send invoices…

directly from the

computer system to

that of a customer

which customers

can access on a

website

Weighting scheme: % of empl. % of firms % of empl. % of firms % of empl. % of firms

Steel – 2007 total (EU-7) 39 36 24 12 0 2

NACE 27.1: basic steel 31 42 21 14 0 2

NACE 27.2-3: hollow /

cold processed steel

54 37 13 11 1 1

NACE 27.51+52: casting 30 28 38 15 0 1

Steel – USA 53 47 52 40 19 13

Steel – by size (EU-7)

Small (10-49 empl.) 34 8 2

Medium (50-249 empl.) 43 16 1

Large (250+ empl.) (34)* (27)* (0)*

Other sectors (EU-7)

Chemicals 49 39 33 17 5 3

Furniture 45 35 18 12 2 2

Base (100%) all firms all firms all firms

N (2007, EU-7+USA) 449 449 449

Questionnaire reference B5a B5a B5b

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom; N = 349) and in the USA (N = 100).

* = percentage only indicative due to a small number of observations (N = 20-50)

Source: e-Business Survey 2007

64


ICT and e-business in the steel industry

3.5.3 Findings about distribution and logistics management

Importance of distribution and logistics issues in the steel industry

In recent years, the large steel enterprises have tended to focus on mergers and

production issues in order to reduce the cost of raw material supply and steel

manufacturing. However, the distribution and logistics of steel products to customers is

also strategically important for the sector to save costs and retain customers. This has,

according to Eurometal, long been neglected. 80 Different customer industries pose

different challenges with regard to steel distribution and logistics: On the one hand, the

automotive and household goods industries are highly concentrated, powerful and

demanding customised products just in time. On the other hand, there is a large number

of customers in construction and other industries, which implies diverse demand patterns

and dispersed target locations on a regional and local level. 81 For both types of customer

industries, the markets for steel in Europe are maturing, implying that they are very

complex regarding product offer, service offer, processing, insourcing, outsourcing,

product availability, supply chains and commercial networking. 82 A further challenge for

the steel industry is that many of their customers, particularly in the automotive industry,

are relocating from Western Europe to Central and Eastern Europe. 83 All this raises

serious questions of how to manage downstream supply chain issues effectively.

In order to meet the challenges of downstream supply chain management, steel trade is

currently changing its characteristics. Intermediaries are becoming even more important.

A large variety of business models has emerged with regard to steel stockholding and

customer service, “adapted to ever changing customer needs”. 84 Beside product

specifications, one of the key customer constraints is that they often restrict their stocks in

order to save storage costs or because they do not have enough space. Traders can hold

stock for customers at warehouses and deliver stocks just in time when required. 85

Eurometal sees an new paradigm for steel distribution emerging, moving from a product

driven business model to a steel solution business model. According to Eurometal, three

main stages of steel industry development can be distinguished in the past 50 years,

which shaped distribution and logistics: 86

Stage 1, 1960 – 1990: Critical factors for steel production were product quantity

and public interest. The market guideline was that consumption was adjusted to the

offer.

Stage 2, 1990 – 2003: The critical factors changed to product quality,

competitiveness as well as reducing costs and increasing margins. Key strategies

were to diversify markets and products, increase productivity and improve

technologies. The market guideline was to please “demanding consumption”.

Stage 3, since 2003: Critical factors are the Kyoto process, raw materials supply,

and logistics. Key strategies are related to debt management, cost reduction and

80

81

82

83

84

85

86

See Eurometal (2006), p. 2.

See Eurometal (2006), p. 2.

See Eurometal (2006), p. 31.

See Eurometal (2006), pp. 20 and 25-30.

Eurometal (2006), p. 31.

Eurometal (2006), p. 34.

Eurometal (2007), pp. 10-13.

65


ICT and e-business in the steel industry

capacities. The market guideline is effectiveness throughout the entire value chain.

In this move towards supply chain management as a core issue, ICT and e-business can

contribute to making distribution and logistics in the steel industry more effective. e-

Business applications can help to meet the demands of just-in-time delivery from

powerful customers as well as to manage distribution to dispersed smaller customers.

Case study findings

One of the case studies in chapter 5 of this report, ArcelorMittal Gent (section 5.7) deals

directly with distribution issues. The company uses a tailor-made, internally developed

and web-based tool to support external warehouse management activities. This tool

offers an alternative to both an EDI system, which may be costly to implement by external

warehouses and smaller customers, and a manual information circuit, i.e. e-mail or fax,

which is insecure and burdensome. The web application, though quite simple, had a clear

positive impact on shipment and warehouse management at ArcelorMittal Gent. It

allowed to integrate communication with warehouses at low cost. The application has

also eased the company’s ability to develop rapidly a full network of external warehouses,

regardless of their ability to implement EDI, and improved business relationships with

smaller clients.

3.6 Joint procurement and sales side issues

3.6.1 Introduction to joint procurement and sales side issues

Computerisation level of orders processing

In order to receive an overall impression of the digitisation of the companies’

communication with suppliers and customers, they were asked the following question: “All

in all, which of the following statements best describes the way your company exchanges

data with business partners: Orders and related messages are (a) mostly processed and

exchanged electronically; (b) mostly processed and exchanged in paper based format,

that is by letter or fax; (c) mostly electronically processed internally, but then exchanged

in a paper-based format.” Steel companies representing 31% of the industry’s

employment said their orders and related messages are mostly electronically, 26% said it

is mostly paper based and 43% said it is mixed – see Exhibit 3.6-1 There are large

differences between size classes. While 59% of the small firms and 48% of the mediumsized

firms reported that their messages are mostly paper-based, only 23% of the large

firms said so. In 38% of the large firms, orders and related messages are mostly

processes by electronic means. Apparently there is a considerable difference between

SMEs and large firms with regard to digitisation of messages with business partners.

66


ICT and e-business in the steel industry

Exhibit 3.6-1: Share of orders and related messages processed electronically in the EU steel

industry (2007)

0 20 40 60 80 100

Steel (EU-7)

31

26

43

10-49

11

59

31

50-249

16

48

36

250+

38

23

39

mostly electronically mostly paper-based mixed

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA. Base (100%) = companies with at least 10 employees and using

computers, except answers of “don’t know”; N (Steel, EU-7 and USA) = 433.

Weighting: Figures for sector totals and countries are weighted by employment ("firms representing x% of

employment in the sector / country"), figures for size-bands in % of firms.

Source: e-Business Survey 2007 by the SeBW

e-Marketplaces and ICT standardisation as important issues

There are two important specific issues related to ICT and e-business in the steel industry

that do not fall neatly into a particular category of the industry’s value chain: electronic

marketplaces and ICT standardisation. Both issues can be related to the procurement

and sales side of e-business as well as to internal systems, and both inevitably deal with

communication between steel companies and other enterprises. The issues of e-

marketplaces and ICT standards may have a common intersection, namely when e-

marketplaces use particular ICT standards.

A further commonality of both issues is that they currently have a shadowy existence in

Europe: the last e-marketplace in Europe was closed in September 2007, and the

European Steel Industry Data Exchange Language (ESIDEL) standard is rarely used and

currently not being further developed in Europe. Nevertheless both issues are still

important for the further development of e-business in the steel industry.

3.6.2 Electronic marketplaces

Definition and potential benefits of e-marketplaces

Electronic marketplaces are trading platforms on the internet where companies can sell

goods to other companies, buy goods from other companies or both. E-Marketplaces can

be operated by a single buyer or seller or by a third party. Many marketplaces are

industry-specific. Some marketplaces require registration and membership fees from

companies that want to conduct trade on them.

67


ICT and e-business in the steel industry

The prime objective of e-marketplaces is to increase market transparency with regard to

sellers, buyers and prices and to facilitate transaction. Thereby, e-marketplaces can

reduce costs of purchasing and selling processes as well as costs of traded goods. e-

Marketplaces can also help companies to expand their existing markets or to enter new

markets.

Unlike sell-side solutions of individual companies, virtual marketplaces feature several

suppliers, not just one. And unlike the procurement networks run by some large

corporations, often called extranets or buy-side solutions, e-marketplaces bring together

several buyers. Furthermore, e-marketplaces differ from simple information directories

and industry networks in their transaction focus. Marketplaces lead to actual transactions

and usually offer facilities for the direct settlement of such trades. In contrast, an internet

portal is a site with classified links to other internet sites. Therefore, sites that name

themselves a marketplace but only contain links to the websites of other companies

should be considered portals.

e-Marketplaces in the steel industry – non survived in Europe

At the time of high expectations in the internet economy, in the late 1990s, many e-

marketplaces for the steel industry were established world-wide. At its peak in September

2001, the Metal Bulletin was quoted to count 211 e-marketplaces selling metals. 87

Consolidation was foreseen and actually took place. By the end of 2007, e-marketplaces

were not sustained in the steel industry. The last active e-marketplace for the steel

industry in Europe, Steel 24-7 (http://www.steel24-7.com), was closed in September

2007. The following business example describes the background and functions of this

platform.

Business example:

Steel trade at the former Steel 24-7 marketplace

Steel 24-7 was an e-business platform launched as a joint venture between

the four largest European steel producers in November 2001. Its mission

was to “create a virtual communications hub in order to facilitate

collaboration between buyers and sellers in the steel industry”. The platform

sought to be unique, independent, open, secure and proven:

Unique: Steel 24-7 provided advanced interactive e-commerce tools.

Buyers could “purchase steel from their existing network of sellers and

also follow up and manage the execution of their orders, with a direct link

into the internal system of their suppliers”.

Independent: Steel 24-7 was “not party to any of the transactions” on the

platform and was neither a buyer nor a seller of steel.

Open: The platform sought “all steel market participants to join”.

Secure: Steel 24-7 operated with “a rigorous data protection policy”.

Proven: Steel 24-7 worked closely with the steel business community,

incorporating business requirements particularly for the steel industry as

well as designed and tested by the steel industry.

The intention of the platform was “not to replace the human relationships

that are vital to the steel industry but to support them by simplifying the

87

See Cleary (2001).

68


ICT and e-business in the steel industry

processes”. The two types of services Steel 24-7 offered through a simple

browser interface were transaction services and follow-up services, both

supported by catalogue management and partner management functions.

The transaction services included modules for “offer to sell”, “auctions”,

“online order entry”, “sales list”, and “forecast”. The follow-up services

included “material call-off”, “document management”, and “order progress”.

Furthermore, integration services were meant to allow Steel 24-7 customers

to integrate web applications to their back-end systems. The integration

services were based on the EDIFACT and ESIDEL standards but also

supported standards used in specific customer segments.

Steel 24-7 was closed in September 2007. At its end it was a joint venture of

ArcelorMittal and ThyssenKrupp Steel; the original member Corus had sold

out in 2004. A related press release of both companies stated that “the

evolution of information technology and the fast-paced consolidation of the

steel industry have given a decisive competitive edge to more individualised

solutions, thus making the original concept of Steel24-7 obsolete”. Visitors to

the website http://www.steel24-7.com are directed to the ArcelorMittal sales

platform SteelUser.com as well as to the e-commerce website of

ThyssenKrupp Steel (status: 2 December 2007). The Steel 24-7 platform

had around 700 registered customers from 37 countries and had been used

for more than a million transactions.

Sources: http://web.steel-24-7.com, June 2007; ArcelorMittal and

ThyssenKrupp press releases 28 September 2007; Steel Business Briefing

27 September 2007.

Other former marketplaces, e-steel (http://www.e-steel.com) and metalsite

(http://www.metalsite.com) were also meanwhile closed. There may be various reasons

for the apparent lack of success of electronic marketplaces and the steel enterprises’

preference to sophisticate own customer portals:

Steel product specificities: Steel products tend to have numerous specificities,

related to, for example, types of products, qualities, lengths and measures, mass

tolerances, types of distribution, and accompanying certificates. Such specificities

are difficult to translate into electronic processes.

Steel business is personalised: Personalised customer care remains important

for selling steel in a market environment that is largely driven by powerful buyers.

Customers mainly sought reduced prices: Customers sought to use electronic

marketplaces mainly or solely to reduce prices. They were reluctant to pay

adequately for portal services.

These were also some of the reasons why the procurement and sales platform e-

Arbed.com at the former Arbed company, Luxembourg, failed (section 5.8).

Apparently, steel enterprises have turned to favour their own sales platforms. Some of

the prominent examples include the sales platforms of ArcelorMittal, ThyssenKrupp,

Corus and Voestalpine. Since a primariy objective for steel enterprises to use e-

marketplaces is to save process costs, it may appear more beneficial for steel companies

to set up their own sales solutions to make best use of cost reductions through sales

process enhancement.

69


ICT and e-business in the steel industry

3.6.3 Data exchange standards

Definition of standards and their importance

In formal terms, a standard is "a technical specification approved by a recognised

standardisation body for repeated or continuous application, with which compliance is not

compulsory". 88 There are national, European and international technical standards. In

addition to such formal standards there are also industry specifications which result from

collaboration, in consortia or smaller partnerships, subject to differing levels of openness

and participation. Moreover, there are also solutions for data exchange agreed upon

among a limited number of companies operating in the same supply chain, which can be

referred to as proprietary standards.

Whatever the source, agreement on shared technical standards is an instrument to

achieve interoperability between different systems. Without interoperability of ICT

systems, which requires standards and compatibility between standards, advanced forms

of e-business – such as the digital integration of systems in B2B exchanges – are hardly

possible.

The European Commission emphasises the importance of standards for innovation,

pointing out that "the lack of standards, the limited uptake of new standardisation items or

the slow updating of existing standards hamper the uptake of innovation," while

"standardisation that is lively and strong has the power to accelerate the access of

innovation to both domestic and global markets." 89 One of four priority areas identified is

"the integration of ICT in industry and administrations", since the Commission sees an

important potential here to improve the competitive position of the European economy

through a more efficient and effective use of ICT tools.

Findings about ICT standards use in the steel industry

In the e-Business Watch Manufacturing Survey 2007, the companies were asked whether

they use particular ICT standards. The most common standards appear to be EDI-based

standards (12% of firms which is firms representing 34% of employment), proprietary

standards (14% of firms, 22% weighted by employment), and XML-based standards

(10% of firms, 22% weighted by employment). The European Steel Industry Data

Exchange Language (ESIDEL), a standard developed particularly for the steel industry, is

apparently used only in a tiny share of 1% of European steel firms. In the survey, a few

medium-sized firms in Germany, Italy and Sweden reported to use ESIDEL. In some

cases, the firms may use ESIDEL but the interviewee is not aware of it. Many of the

interviewees did not know this standard at all. Unexpectedly, a relatively high share of 7%

of the US steel firms said they use the ESIDEL standard. Since the technical descriptions

of ESIDEL are available for free on the internet, these figures may actually be correct and

not necessarily based on a misunderstanding on the part of the US steel firms. The

following paragraphs elaborate on the background and current status of ESIDEL

development and use.

88

89

Directive 98/34/EC of the European Parliament and the Council of 22 June 1998, laying down a

procedure for the provision of information in the field of technical standards and regulations, see

http://europa.eu.int/eur-lex/pri/en/ oj/dat/1998/l_204/l_20419980721en00370048.pdf

European Commission (2008).

70


ICT and e-business in the steel industry

Exhibit 3.6-2: Use of ICT standards for data exchange in the EU-7 steel industry in % (2007)

EDI-based

standards

XML-based

standards

Proprietary

standards

Other technical

standards

0 20 40 60 80 100

34

22

22

11

The survey was

conducted in seven EU

Member States

(Germany, France, Italy,

Spain, Poland, Sweden,

United Kingdom) and in

the USA. Base (100%) =

companies with at least

10 employees and using

computers; N (Steel, EU-

7) = 349.

Weighting: Figures are

weighted by employment

("firms representing x% of

employment in the sector

/ country").

ESIDEL

0.4

Source: e-Business Survey 2007

The figures for standards use can be considered as the lower margins. Many companies

may use particular ICT standards but the person interviewed may not necessarily know

because the standards are “hidden”, i.e. integrated into the software used.

Exhibit 3.6-3: Use of ICT standards for data exchange (2007)

XML-based

standards

EDI-based

standards

Proprietary

standards

ESIDEL

Other

technical

standards

for data

exchange

% of % of % of % of % of % of % of % of % of % of

Weighting scheme:

empl. firms empl. firms empl. empl. empl. firms empl. firms

Steel – 2007 total (EU-7) 22 10 34 12 22 14 0.4 1 11 11

NACE 27.1: basic steel 29 12 28 11 24 13 1 1 13 13

NACE 27.2-3: hollow /

cold processed steel

21 8 26 12 27 16 1 1 15 9

NACE 27.51+52: casting 17 12 45 15 15 12 0.2 1 5 14

Steel – USA 32 20 45 32 52 36 13 7 0 3

Steel – by size (EU-7)

Small (10-49 empl.) 7 5 9 0 8

Medium (50-249 empl.) 12 16 23 3 18

Large (250+ empl.) (24)* (45)* (19)* (0)* (9)*

Other sectors

Chemicals 16 11 38 15 31 18 n.a. n.a. 15 12

Furniture 16 9 21 8 34 18 n.a. n.a. 16 11

Base (100%) all firms all firms all firms all firms all firms

N (Steel, 2007, EU-7+USA) 449 449 449 449 449

Questionnaire reference C1a C1b C1c C1d C1f

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

* = percentage only indicative due to a small number of observations (N = 20-50). n.a. = not applicable

Source: e-Business Survey 2007

71


ICT and e-business in the steel industry

Background and characteristics of the ESIDEL standard

ESIDEL is an open standard in eXtensible Mark-up Language (XML) for electronic

messages supporting trade between steel companies. It provides solutions for the

following business processes: basic information, ordering, scheduling, shipping, invoicing,

and payment. Based on the experience of the members and the difference business

processes described, 32 business documents, i.e. messages, were identified for XML

schemes development, as described in Exhibit 3.6-3.

Exhibit 3.6-4: Business processes and documents supported by the ESIDEL standard

Business process

Basic

Ordering

Scheduling

Shipping

Invoicing

Payment

Business documents

Party information; Sales catalogue; including Product specification

Request for quote; Quote; Orders, Order change; Order response; Sales

list; Sales list – capacity selling; Sales list bid; Sales list bid response;

Order status request; Order status report

Delivery schedule; Delivery just in time

Despatch advice; Packing list; Receiving advice; Inventory request;

Inventory balance; Inventory movement; Inventory switch; Instruction to

despatch; Goods ready for despatch request; Goods ready for despatch

balance; Goods ready for despatch movement, Certificate request;

Certificate; Return of goods notice; Return of goods instructions

Invoice

Remittance advice

Source: Eurofer/Edifer (2006), p. 10.

In 1993, on request of the members, the Board of Directors of the European Federation

of Iron and Steel Industries (Eurofer) decided to set up a committee named EDIFER. It

was implemented to develop solutions that meet the requirements of the steel industry in

the field of B2B e-commerce and EDI. From 1993 to 2000 EDIFER was active in the

development of user implementation guides of the United Nations Electronic Data

Interchange For Administration, Commerce, and Transport (UN/EDIFACT) standard

messages for the European steel industry. At the end of 2000, being aware of the

growing acceptance of B2B based on the Internet and its technologies, the EDIFER

committee decided to set up a new working group for the standardisation of the

information exchange based on XML.

EDIFER was supported by nine major steel companies: Arcelor, Corus, Duferco, Outu

Kumpu, SSAB, ThyssenKrupp Steel, UK Steel Association, U.S. Steel Košice, and

Voestalpine. In 2004 the EDIFER committee published officially the ESIDEL standard

version 1.0 to support the business processes and business transactions of the supply

chain for steel products in Europe. As a recognised European EDI user group,

EUROFER was actively participating in meetings organised by standardisation bodies at

the European level (European Standardisation Committee, CEN) and world level (United

Nations Centre for Trade Facilitation and Electronic Business, UN/CEFACT).

Based on a change request received from steel companies in Europe and Australia, an

upgraded ESIDEL version 1.1 was published at the end of 2005. While the aim was to

create a version 2.0 of the ESIDEL standards that would make it an interoperable crossindustry

standard on the basis of UN/CEFACT XML message standard, the companies

formerly promoting the EDIFER committee did not support such further efforts.

Consequently, the activities of the EDIFER committee were stopped. The available

version of ESIDEL was not widely adopted by steel firms so that no considerable benefits

of investment in ESIDEL development were reaped. Further development would be

72


ICT and e-business in the steel industry

needed to make ESIDEL adoption more attractive, but this would require further costs

with benefits only prospective and vague. Thus, one may have the impression that

EDIFER stopped its activities because ESIDEL was not widely adopted, but one may also

say that stopping further development is the main reason why the ESIDEL standard is not

widely adopted.

Benefits of ESIDEL in Australia and enhancement possibilities

ESIDEL was further developed in Australia by the Australian Steel Institute’s (ASI) Online

Group to a version 1.1. A case study about ESIDEL use in the CMC Steel Coils company,

Australia, was conducted for this report that describes the benefits and challenges of this

standard (see section 5.9). The standard implementation at CMC went smoothly. The

company benefits greatly from process automation due to reduced need for manual data

entry and from enhanced inventory accuracy. However, several issues for refinement and

further development were detected, related to:

lack of completeness in the ESIDEL business process description,

lack of consolidated implementation guidelines and documentation repository,

lack of ASI specific schemas; schemas are a set of rules to which an XML

document must conform in order to be considered ”valid” according to that schema,

lack of clarity regarding trading partner identification.

A principal conclusion is that the value of a single standard accepted globally for e-

business in the steel industry, while still being actively sought, has not yet been reached.

A further conclusion is that international collaboration in standardisation activities would

need to be improved to move forward into this direction.

3.7 Barriers and drivers of e-business use

Barriers for e-business adoption

Those companies that stated that they conduct some or none of their business processes

as e-businesses (see section 3.3.2, “overall importance of e-business”) were further

asked why they do not use e-business more intensively. Seven possible reasons were

suggested and the interviewees could answer “yes, important” or “no, not important”. The

results were the following (see also Exhibit 3.7-1):

The circumstance that “suppliers or customers are not prepared for e-business”

appears to be the most important reason to not apply e-business more intensively.

64% of the companies, representing 57% of the industry’s employment, agreed to

this statement. The high level of agreement may be due to network benefits of e-

business: the benefits increase with the number of companies using it. However,

this only applies to e-communication with other companies, not to the great variety

of internal systems. Thus, one could also argue that many firms blame customers

and suppliers for not using e-business while their own efforts to introduce e-

business are not considerable either. In any case, the share of small (66%) and

medium-sized firms (65%) that agreed was larger than the share of large firms

(49%). The overall share in the US was slightly smaller (51%), while the level in the

chemicals (62%) and furniture (75%) industries was found to be larger. In general,

the differences may be explained by different shares of SMEs among suppliers and

73


ICT and e-business in the steel industry

customers – the larger the share of SMEs, the higher the level of firms stating that

customers or suppliers are not prepared for e-business.

Size class matters: 47% of the steel firms (representing 12% of the industry’s

employment) said that their company is too small to benefit from e-business.

The figures differ very much by size class: 61% of the small firms agreed to this

statement, 29% of the medium-sized ones and only 2% of the large firms. e-

Business applications are apparently perceived as benefiting mainly large firms.

The high percentage of US steel firms stating that they are too small to benefit from

e-business (49%, employment weighted) can be explained by a different industry

structure in the US with relatively more SMEs.

These two reasons appear to be by far the most important ones. The following reasons

were stated by much less steel firms:

36% of the steel firms (26% weighted by employment) confirmed that e-business

technologies are too expensive to implement. As one could expect, the share of

small firms (41%) that tend to have less investment capability was larger than the

share of medium-sized and large firms (26% each).

26% of the steel companies (20% weighted by employment) found that e-business

technology is too complicated. Again, the share of small firms (32%) agreeing

was larger than the share of medium-sized firms (14%) and large firms (21%). This

may be explained by the fact that not many small firms have IT personnel to deal

with e-business professionally (see section 3.2, Exhibit 3.2.3).

Security issues appear to play a minor role. Steel firms representing 20% of

employment were found to be concerned about security risks. This is somewhat

lower than in the chemicals (34%) and furniture industry (30%) and on the same

level as in the US (18%).

The employment-weighted level of steel firms that see important legal problems or

complications involved is small, only 19%. This level was found to be similar across

size classes and other sectors as well as in US steel firms.

Finally, the least important reason of the ones suggested was found to be that “it is

difficult to find reliable IT suppliers” (not included in Exhibit 3.7-3). 16% of the steel

firms (15% weighted by employment) stated this. The reason for this small figure may be

that most steel firms find that standard IT solutions are sufficient. There were no

considerable differences between size classes about this, and the figure is similar to the

US steel firms. In the chemicals (20%) and furniture (22%) industries, the percentage of

firms stating difficulties to find reliable IT suppliers was a few percentage points higher.

74


ICT and e-business in the steel industry

Exhibit 3.7-1: Barriers to e-business adoption as perceived by steel companies (2007)

Customers / suppliers not prepared

0 20 40 60 80 100

Company too small

0 20 40 60 80 100

Steel (EU-7)

0

10-49 employees

50-249 employees

250+ employees*

57

66

65

49

Steel (EU-7)

0

10-49 employees

50-249 employees

250+ employees*

12

2

29

61

Steel (USA)

51

Steel (USA)

49

Chemical (EU-7)

Furniture (EU-7)

62

75

Chemical (EU-7)

Furniture (EU-7)

19

37

ICT too expensive

0 20 40 60 80 100

Technology too complicated

0 20 40 60 80 100

Steel (EU-7)

0

10-49 employees

50-249 employees

250+ employees*

26

26

26

41

Steel (EU-7)

0

10-49 employees

50-249 employees

250+ employees*

20

32

14

21

Steel (USA)

26

Steel (USA)

9

Chemical (EU-7)

Furniture (EU-7)

26

41

Chemical (EU-7)

Furniture (EU-7)

24

30

Security issues

Legal challenges

0 20 40 60 80 100

0 20 40 60 80 100

Steel (EU-7)

0

10-49 employees

50-249 employees

250+ employees*

20

29

26

18

Steel (EU-7)

0

10-49 employees

50-249 employees

250+ employees*

19

25

23

24

Steel (USA)

18

Steel (USA)

18

Chemical (EU-7)

Furniture (EU-7)

30

34

Chemical (EU-7)

Furniture (EU-7)

25

25

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

Basic steel = NACE Rev. 1.1, 27.1; hollow / cold processed steel = NACE 27.2+3; casting = NACE 27.51+52.

Base (100%) = companies with at least 10 employees and using computers; N (Steel, EU-7) = 349,

N (Steel, USA) = 100.

* = % only indicative due to small number of cases (20-40).

Weighting: Figures for sector totals and countries are weighted by employment ("firms representing x% of

employment in the sector / country"), figures for size-bands in % of firms. Questionnaire reference: F2.

Source: e-Business Survey 2007

75


ICT and e-business in the steel industry

Drivers of e-business adoption: pressure from suppliers and customers

There may be many drivers of e-business adoption, including for example and most

prominently competition. Farwest Steel (see section 5.3) is an example of a company that

introduced an ERP system because competitors had already invested into similar e-

business applications. Companies may be forced to reduce costs of their products and

processes in order to remain competitive, and ICT may help to reach this goal. This may

be taken for granted. Some companies may operate in market niches without such

competitive forces to adopt ICT, such as the Patina foundry in Hungary (section 5.10).

The e-Business Survey 2007 asked more specific questions, namely whether the steel

companies experienced pressure from customers and suppliers to adopt ICT solutions.

22% of the steel firms in the sample, which is firms representing 43% of the industry’s

employment, reported to have experienced pressure from customers – see Exhibit 3.7-2.

Exhibit 3.7-2: Companies’ experiences with e-business pressure from customers (2007)

having experienced

that ICT solutions

should be adapted

eBiz pressure from customers: Companies ...

having introduced

new ICT solutions

due to pressure from

customers

expecting that they

will have to

introduce new ICT

solutions in the next

2 years

Weighting scheme: % of empl. % of firms % of empl. % of firms % of empl. % of firms

Steel – 2007 total (EU-7) 43 22 91 67 4 15

NACE 27.1: basic steel 22 14 (--)** (--)** (--)** (--)**

NACE 27.2-3: hollow /

cold processed steel

43 23 (81)* (62)* (12)* (20)*

NACE 27.51+52: casting 61 30 (96)* (65)* (1)* (14)*

Steel – USA 45 29 (--)** (--)** (--)** (--)**

Steel – by size (EU-7)

Small (10-49 empl.) 12 61 24

Medium (50-249 empl.) 35 58 14

Large (250+ empl.) (45)* (--)** (--)**

Other sectors (EU-7)

Chemicals 44 26 84 72 6 14

Furniture 28 14 81 64 13 23

Base (100%) all firms

Companies having Companies having

experienced pressure to experienced pressure to

introduce ICT from introduce ICT from

customers (B13=yes) customers (B13=yes)

N (2007, EU-7+USA) 449 100 100

Questionnaire reference B13 B14a B14b

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

* Percentage only indicative, due to small number of observations (n = 20 - 50);

** Percentage not displayed because number of observations is too small (n


ICT and e-business in the steel industry

pressure from customers. 67% of companies (91% employment-weighted) confirmed this.

Further 15% of firms (representing 4% of employment) said they expect that they will

have to introduce new ICT solutions in the next two years, responding to customer

pressure. All in all, pressure from customers appears to be a considerable driver of e-

business adoption in the EU steel industry. The values in the US steel industry and in the

EU chemicals industry are similar so that the EU steel industry is not special in this

respect.

On the other hand, the share of steel firms reporting pressure from suppliers was small:

Only 5% of the firms, which was 18% of the industry’s employment, reported such

pressure – see Exhibit 3.7-3. The percentages of firms that responded to such pressure

or will have to respond in the future can not be indicated due to a too small number of

observations.

Exhibit 3.7-3: Companies’ experiences with e-business pressure from suppliers and own

pressure on customers and suppliers (2007)

Pressure from

suppliers:

Companies having

experienced that ICT

solutions should be

adapted

Companies

demanding from

suppliers that they

implement new ICT

solutions

Companies

demanding from

customers that they

implement new ICT

solutions

Weighting scheme: % of empl. % of firms % of empl. % of firms % of empl. % of firms

Steel – 2007 total (EU-7) 18 5 20 9 22 6

NACE 27.1: basic steel 20 6 24 9 17 10

NACE 27.2-3: hollow /

cold processed steel

21 4 11 8 22 4

NACE 27.51+52: casting 13 4 26 10 27 9

Steel – by size (EU-7)

Small (10-49 empl.) 1 5 4

Medium (50-249 empl.) 7 14 6

Large (250+ empl.) 20 (19)* (22)*

Steel – USA 45 26 13 8 19 12

Other sectors (EU-7)

Chemicals 21 10 21 10 12 9

Furniture 11 8 21 12 15 8

Base (100%) all firms all all

N (2007, EU-7+USA) 449 449 449

Questionnaire reference B15 B17a B17b

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

* Percentage only indicative, due to small number of observations (n = 20 - 50)

Source: e-Business Survey 2007

A further question is whether the steel companies themselves exerted pressure to adopt

ICT solutions on their customers and suppliers. In other words: Did the steel companies

themselves act as a driver of e-business adoption Only 9% of the steel firms (20% of

employment) confirmed that they demanded from suppliers to implement new ICT

solutions, and 6% (22% of employment) said they demanded it from customers. This may

indicate that steel firms are rather being driven to use ICT than drive others. In the US

steel industry (12% of firms) as well as in the other EU industries included in the survey

(chemicals: 9% of firms, furniture: 8% of firms), the related percentages were also small.

77


ICT and e-business in the steel industry

3.8 Overall differences between size classes, countries, subsectors

and industries

“Lagmark” calculations

In the previous sections of Chapter 3, findings from the e-Business Survey 2007 were

presented by sub-sectors and size classes as well as in comparison to the US and other

manufacturing industries. The figures indicated that in the EU-7, SME steel companies

lag behind large ones and that EU-7 steel firms tend to lag behind the US. There were no

obvious overall differences between sub-sectors, and the steel industry appeared to be in

between chemicals and furniture. In the following, these differences will be analysed with

average values in order to provide a more concrete overview.

Average values for groups of indicators were calculated for four principal domains: ICT

infrastructure, e-procurement, internal systems, and e-sales. Taking the group of most

advanced firms as a benchmark, the results can be considered as “lagmarks”. For

example, the “lagmark” calculations for size classes indicate how much SMEs lag behind

large firms.

Differences between size classes

The average values show the same ranking for all domains: small firms lag behind

medium-sized ones, and medium-sized ones in turn lag behind large firms – see Exhibit

3.8-1. For ICT infrastructure and e-procurement indicators, the figures are almost the

same: small firms reach on average around 40% of the possible maximum, medium-sized

firms somewhat more than 50% and large firms slightly more than 60%. For internal

systems, the differences are most pronounced. Small firms reach only 18% of the

possible maximum, medium-sized firms 34%, and large firms (45%). This ranking may

reflect the ability to invest in expensive internal systems, and the overall relatively small

values for all size classes may reflect that internal systems require considerable

investments. For e-sales, the SME values are smaller than for infrastructure and e-

procurement but larger than for internal systems. Small firms reach 28% of the possible

maximum, medium-sized firms 38%, large firms (45%).

78


ICT and e-business in the steel industry

Exhibit 3.8-1: Size class differences in e-business performance in the steel industry (2007)

Average values for…

ICT infrastructure indicators

0 20 40 60 80 100

e-Procurement indicators

0 20 40 60 80 100

Small

(10-49 empl.)

38

Small

(10-49 empl.)

43

Medium

(50-249 empl.)

52

Medium

(50-249 empl.)

56

Large

(250+ empl.)*

61

Large

(250+ empl.)*

62

Indicators:

Firms with internet access, average share of

employees with internet access, broadband internet

access, LAN, WLAN, intranet, extranet, remote

access to company’s computer network.

Indicators:

Firms procuring online, SCM, e-invoices from

customers directly to the computer system.

Internal systems

0 20 40 60 80 100

e-Sales indicators

0 20 40 60 80 100

Small

(10-49 empl.)

18

Small

(10-49 empl.)

28

Medium

(50-249 empl.)

34

Medium

(50-249 empl.)

38

Large

(250+ empl.)*

45

Large

(250+ empl.)*

45

Indicators:

ERP, CRM, software to manage placement or receipt

of orders, Document Management System,

Computer-Aided Design system, Computer-Aided

Manufacturing system, RFID.

Indicators:

Own website, selling online, electronic catalogue

describing products or services, sending e-invoices to

customers directly from the computer system.

Reading example: For the eight indicators of ICT infrastructure, small steel firms (i.e. firms with 10-49

employees) reach on average 38% of the possible maximum (100%).

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

Base (100%) = companies with at least 10 employees and using computers; N (Steel, EU-7) = 349,

N (Steel, USA) = 100. * = % only indicative due to small number of cases (20-40).

Weighting: Figures for sector totals and countries are weighted by employment ("firms representing x% of

employment in the sector / country"), figures for size-bands in % of firms. Questionnaire reference: F2.

Source: e-Business Survey 2007

Differences between EU and US

The steel industry of the EU and the US are difficult to compare. US steel companies

have many more customers than EU steel companies, the average order lot is much

higher in the US, and the shares of product types in overall production differ between the

US and the EU. The US steel industry did not undergo as intense restructuring as the EU,

and EU steel firms are more advanced in processes and products. 90

90

Assessment from SeBW steel industry advisory board members.

79


ICT and e-business in the steel industry

The “lagmarks” for country differences show that EU-7 steel firms apply less ICT and e-

business than their US counterparts in all domains. The differences between the EU and

the US are smallest for internal systems (6 percentage points) and largest for e-

procurement indicators (33 percentage points) – see Exhibit 3.8-2. For ICT infrastructure

(16 percentage points) and e-sales indicators (12 percentage points), the differences are

similar. These differences apply even if one compares large EU firms versus all US firms.

Exhibit 3.8-2: “Lagmarks” of ICT performance in EU-7 and US steel firms (2007)

Average values for…

ICT infrastructure

e-Procurement

0 20 40 60 80 100

0 20 40 60 80 100

EU-7

58

EU-7

36

US

74

US

69

Indicators:

Firms with internet access, average share of

employees with internet access, broadband internet

access, LAN, WLAN, intranet, extranet, remote

access to company’s computer network.

Internal systems

0 20 40 60 80 100

Indicators:

Firms procuring online, SCM, e-invoices from

customers directly to computer system.

e-Sales

0 20 40 60 80 100

EU-7

44

EU-7

42

US

50

US

54

Indicators:

ERP, CRM, software to manage placement or receipt

of orders, Document Management System,

Computer-Aided Design system, Computer-Aided

Manufacturing system, RFID.

Indicators:

Own website, selling online, electronic catalogue

describing products or services, sending e-invoices to

customers directly from the computer system.

Reading example: For the eight indicators of ICT infrastructure, EU-7 steel firms reach on average 76% of the

US firms’ values.

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

Base (100%) = companies with at least 10 employees and using computers; N (Steel, EU-7) = 349,

N (Steel, USA) = 100.

Weighting: Figures for are weighted by employment ("firms representing x% of employment in the sector/

country"). Questionnaire reference: F2.

Source: e-Business Survey 2007

However, according to the SeBW steel industry advisory board, European steel

enterprises are all in all more competitive than the US ones. US steel firms are bound to

tight shareholder value requirements which decreases their ability to invest. In particular,

EU steel firms are better equipped with ICT in production which is crucial for

competitiveness but which was not included comprehensively in the e-Business Survey

2007. The most important competitors for European steel enterprises are not in the US

but in countries such as Ukraine, Russia, Turkey and increasingly China which is

improving in product quality.

80


ICT and e-business in the steel industry

Differences between sub-sectors

The “lagmarks” for sub-sector differences show very similar average values for ICT

infrastructure, e-procurement indicators, and internal systems. The differences are only

two percentage points for each domain – see Exhibit 3.8-3. The differences are larger for

e-sales. Here, the casting sub-sector (50%) has a lead over basic steel (43%) as well as

hollow and cold processed steel (34%). The casting companies appear to be most

advanced in electronic communication with customers.

Exhibit 3.8-3: “Lagmarks” of ICT performance in steel sub-sectors (2007)

Average values for…

ICT infrastructure

e-Procurement indicators

0 20 40 60 80 100

0 20 40 60 80 100

Basic steel

58

Basic steel

35

Hollow / cold

processed

steel

57

Hollow / cold

processed

steel

35

Casting

58

Casting

37

Indicators:

Firms with internet access, average share of

employees with internet access, broadband internet

access, LAN, WLAN, intranet, extranet, remote

access to company’s computer network.

Internal systems

0 20 40 60 80 100

Indicators:

Firms procuring online, SCM, e-invoices from

customers directly to computer system.

e-Sales indicators

0 20 40 60 80 100

Basic steel

44

Basic steel

43

Hollow / cold

processed

steel

43

Hollow / cold

processed

steel

34

Casting

45

Casting

50

Indicators:

ERP, CRM, software to manage placement or receipt

of orders, Document Management System,

Computer-Aided Design system, Computer-Aided

Manufacturing system, RFID.

Indicators:

Own website, selling online, electronic catalogue

describing products or services, sending e-invoices to

customers directly from the computer system.

Reading example: For the eight indicators of ICT infrastructure, EU-7 steel firms reach on average 76% of the

US firms’ values.

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

Base (100%) = companies with at least 10 employees and using computers; N (Steel, EU-7) = 349,

N (Steel, USA) = 100.

Weighting: Figures for are weighted by employment ("firms representing x% of employment in the sector/

country"). Questionnaire reference: F2.

Source: e-Business Survey 2007

81


ICT and e-business in the steel industry

Differences between manufacturing sectors

The averages by industry show that the steel industry is in between the leading chemicals

industry and the lagging furniture industry in most domains – see Exhibit 3.8-4. The

differences between the three industries are quite similar for all domains. The differences

are largest for e-procurement, where furniture lags 14 percentage points behind

chemicals, and there are no differences at all for e-sales (42% for all industries). These

findings confirm results from earlier e-Business Watch surveys which indicated that the

levels of ICT and e-business use are similar across the manufacturing industries. Overall

differences may mainly be due to the share of SMEs in the industry – the larger the SME

share, the smaller the values for ICT and e-business use. For example, the furniture

industry has a relatively large share of SMEs which explains their lag behind steel and

chemicals.

Exhibit 3.8-4: “Lagmarks” of ICT performance in manufacturing industries (2007)

Average values for…

ICT infrastructure

e-Procurement indicators

0 20 40 60 80 100

0 20 40 60 80 100

Steel

59

Steel

36

Chemicals

64

Chemicals

44

Furniture

51

Furniture

30

Indicators:

Firms with internet access, average share of

employees with internet access, broadband internet

access, LAN, WLAN, intranet, extranet, remote

access to company’s computer network.

Internal systems indicators

0 20 40 60 80 100

Indicators:

Firms procuring online, SCM, e-invoices from

customers directly to computer system.

e-Sales indicators

0 20 40 60 80 100

Steel

44

Steel

42

Chemicals

48

Chemicals

42

Furniture

36

Furniture

42

Indicators:

ERP, CRM, software to manage placement or receipt

of orders, Document Management System,

Computer-Aided Design system, Computer-Aided

Manufacturing system, RFID.

82

Indicators:

Own website, selling online, electronic catalogue

describing products or services, sending e-invoices to

customers directly from the computer system.

Reading example: For the eight indicators of ICT infrastructure, EU-7 steel firms reach on average 76% of the

US firms’ values.

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

Base (100%) = companies with at least 10 employees and using computers; N (Steel, EU-7) = 349,

N (Steel, USA) = 100.

Weighting: Figures for are weighted by employment ("firms representing x% of employment in the sector/

country"). Questionnaire reference: F2.

Source: e-Business Survey 2007


ICT and e-business in the steel industry

3.9 Summary of ICT and e-business deployment

Chapter 3 has shown that ICT and e-business can be beneficial for the whole value chain

of the steel industry. It can support procurement, internal workflows as well as sales and

distribution. Process efficiency is a major objective for steel enterprises to implement and

enhance ICT and e-business applications. The e-Business Survey 2007 revealed that

steel firms do not lag behind other manufacturing industries in using ICT and e-business

solutions. However, there are also indications of challenges related to e-business use, for

example related to acceptance among the workforce, integration difficulties in the course

of mergers, and unsolved problems of ICT standardisation. Along the value chain, the e-

Business Survey 2007 shows that e-procurement is widely practiced, internal systems

are fairly well developed, but e-sales are not very common. Key findings of chapter 3

include the following:

ICT infrastructure: Steel business can apparently not be done without the internet

any more: Practically all steel companies are connected to the internet. However,

the share of steel firms that said they have a broadband connection to the internet,

i.e. a bandwidth of more than 2 Mbit/s, was 41%, so that there is much scope for

improving. Local Area Networks (78%) have become a commonplace in the steel

industry; Wireless LAN technology was reported to be used in 30% of firms. About

37% of firms enable remote access to the company’s computer network.

ICT skills: In total, 24% of all steel companies said that they employed ICT

practitioners in 2007. If employing practitioners is used as a proxy for having an IT

department, “only” 61% of large companies reported that they employ ICT

practitioners. Outsourcing IT is common: About 22% of the companies interviewed

in 2007 said that they had outsourced ICT functions to external service providers

which they had previously conducted in-house.

ICT investment: 85% of the steel companies said that they had made investments

in ICT during the past twelve months. 69% said that they would keep the ICT

budget at about the same level. About one third (30%) of the companies said they

would increase the budget and only a tiny share of 1% would decrease it.

Electronic procurement fairly widespread: Online procurement practice can offer

considerable cost reduction benefits to the iron and steel industry, mainly through

process streamlining and improved purchasing conditions. At ThyssenKrupp Steel,

an online sourcing system was reported to save the company a two-digit million

sum of euros within one and half a year after introducing the system (see section

5.1). Steel firms representing 66% of the industry’s employment reported to procure

goods electronically. However, iron and steel companies are likely to continue to

procure raw materials in long-term offline relationships, due to an oligopolistic

market structure in iron ore supply and due to the necessity to fulfil high quality

standards for input raw material.

Internal e-business systems – ICT is crucial in production: Internal e-business

systems can significantly enhance workflows and business processes and thus

increase productivity and reduce costs in steel enterprises. ICT is crucial in steel

production technologies and for production control and planning in the steel

industry. For example, steel firms representing 83% of the industry’s employment

reported to use a Computer-Aided Design (CAD) system, which is more than in the

chemicals industry and even in the furniture industry. As regards resource-oriented

83


ICT and e-business in the steel industry

systems, software for managing orders is quite prevalent (firms representing 76% of

the steel sector’s employment). More than half (59%) of the steel companies

(weighted by employment) reported to have an ERP system. The use of other

internal systems is not so widespread: Document Management (27%), Supply

Chain Management (SCM) (27%), Customer Relationship Management (CRM)

(21%), and RFID (12%). Case study evidence points to challenges of implementing

e-business systems related to ICT acceptance and the need for changing

management practices.

Electronic sales and distribution: 25% of the steel firms reported to sell goods

electronically, which is less than in US steel firms and in other manufacturing

industries. This confirms the perception that steel is difficult to sell electronically.

However, ICT and e-business applications can significantly enhance sales-side

processes even without actual e-transactions. e-Business solutions may facilitate

communication with customers with regard to negotiation, product specification,

scheduling, shipping and invoicing. This is confirmed by the case study about Corus

IJmuiden (section 5.6). ICT may also support distribution of steel products to

customers, for example by electronic warehouse management that allows to keep

an overview of packages on the way to and stored in warehouses as well as

packages being transported to customers. The case study about ArcelorMittal Gent

(section 5.9) provides a related example.

e-Marketplaces – non of them survived: Many electronic marketplaces for the

steel industry were created at the end of the 1990s, but none of them survived in

Europe. There may be three main reasons for failure: steel trade is customer-driven

and largely personalised, steel products are very specific and difficult to translate

into electronic processes, and customers mainly sought to reduce prices by using e-

marketplaces. These arguments are supported by the case study about the former

e-Arbed.com (section 5.8).

ESIDEL standard not widely used but beneficial: A particular standard, the

European Steel Industry Data Exchange Language (ESIDEL) was developed for

trade in the European steel industry. It is however not widely used in Europe – only

1% of steel firms reported to use it – and it is no longer maintained by Eurofer, the

developing organisation. However, even 7% of steel firms in the US reported to use

ESIDEL, and experience from Australia shows that the further development of this

standard may be worth while (see case study CMC Coil Steels, section 5.9).

Drivers and barriers of ICT use: The most important reported barrier to adopt ICT

solutions is that customers and suppliers are not ready to use such technology.

64% of the steel firms stated this. 47% of the steel firms and 61% of the small steel

firms stated that they are too small to benefit from e-business solutions. Other

possible barriers such as expensive or complicated technology as well as security

or legal issues do apparently not play an important role. As regards drivers, there is

considerable reported pressure from steel companies’ customers to adopt ICT

solutions, particularly on large steel firms (45%). The majority of steel firms actually

responded to such pressure. Pressure from suppliers is apparently small. Vice

versa, only a small share of steel firms exerted pressure on customers and

suppliers to adopt ICT solutions.

84


ICT and e-business in the steel industry

4 Impacts of ICT adoption

4.1 Conceptual framework: the structure – conduct –

performance paradigm

Adding an analytical perspective

Chapter 3 presented a descriptive assessment of the state-of-play of ICT and e-business

use in the Steel industry. It focused on the diffusion of ICT-based applications and on

how they are used by companies, both for internal processes and for exchanges with

other organisations or consumers. This Chapter 4 adds a more analytical perspective

on the impacts of ICT adoption in the Steel industry, based on an econometric analysis.

The section is organised as follows. First, it outlines a conceptual framework to assess

the economic drivers and impacts of the ICT adoption. Second, it includes four sections

with econometric analysis on of the relationship between ICT and four business

dimensions, i.e. productivity, innovation dynamics, market structure and value chain. In

the analysis data from the e-Business Survey 2007 and EU KLEMS are used. The

chapter concludes with a summary of the main results.

The standard “structure – conduct – performance” paradigm

The conceptual framework of this sectional is a common analytical way for all sector

studies included in the Sectoral eBusiness Watch project. Therefore references on the

specific sectoral outcomes like retailing are based on this joint concept to make it

comparable with other sectoral reports and to make them comparable in the crosssection

report as well.

Economic literature suggests that the ongoing diffusion of ICT and e-business

technologies and services among firms in the economy at large is a striking example of

the possible dynamics of technological change and economic development (see, for

example Breshnahan and Trajtenberg, 1995, Helpman, 1998a and 1998b). The adoption

and diffusion of new technologies can be spurred by many different drivers and can have

far-reaching consequences. Virtually all economic spheres can be affected by

technologically induced changes, including innovation dynamics, productivity and growth,

the development of market structures, firm performance, and the composition of the

demand for labour.

As a conceptual framework for the analysis of the interplay between these characteristics,

ICT diffusion and innovation, an extended Structure – Conduct – Performance (SCP)

paradigm is adopted. 91 Developed by Mason (1939) and Bain (1951), the paradigm states

that firm and industry performance is determined by the conduct of buyers and sellers,

which is a function of the market structure.

The term structure is used here meaning “industry structure” which includes but goes

beyond market structure characteristics of the original concept. The primary features of

an industry’s structure are related to market structure in the conventional sense: the

number and size of supplying firms as well as the number and preferences of customers

and their size in case of businesses. An important aspect of market structure dynamics is

91

Following the discussion with Advisory Board members, the SCP paradigm was chosen over

other alternatives because it constitutes a comprehensive framework that allows to capture and

study the interdependencies between sector characteristics and firms’ behaviour.

85


ICT and e-business in the steel industry

the level of ease of market entry. Further industry structure characteristics are related to

products, production and production factors: the degree of product differentiation, the

degree of vertical integration of production, i.e. value chain characteristic, the

technologies available to the firms, the firms’ cost structure (i.e. the relative importance of

costs for items such as production facilities, energy, personnel), and finally the workforce

composition and the demand for labour, most importantly with regard to knowledge and

skills. All these characteristics determine the level of competition in the industry.

These industry structure components influence a firm’s conduct. The conduct aspects

most important here are production strategies, particularly with regard to inter-firm

collaboration, as well as investments in ICT and in ICT-enabled innovation.

Finally, a firm’s performance is assumed to be the outcome of its conduct. Successful

innovations improve firm performance by, for example, reducing production cost,

increasing productivity, improving product quality or enabling it to enter new markets. This

may eventually lead to increased sales, turnover and market shares.

Extending the SCM paradigm: feedback effects

In contrast to the standard SCP paradigm, the flow of causality is in fact not onedirectional

(Fauchart and Keilbach, 2002 and Nepelski, 2003). As an example of

feedback between performance and industry structure, successful and innovative

companies are more likely to grow and increase their market share at the expense of less

progressive firms, which transforms the market structure. There may also be feedbacks

between conduct and industry structure: For example, depending on the innovation type

– i.e. product or process innovation, ICT-enabled or not –, innovations influence the

choice of products manufactured and a firm’s cost structure. Innovations may also

change the incentives to perform activities in-house versus outsourcing them and,

consequently, may influence the demand for labour and its composition. It may also

further shape the relationships with suppliers and customers, for example with regard to

collaboration intensity. Thus, in the following discussion it is assumed that firm

performance may have a feedback effect on both firm conduct and industry structure, and

conduct may have a feedback on structure. This conceptualisation allows for an

enhanced economic approach that studies the drivers and impacts of ICT and ICTenabled

innovations at the firm and sector level.

Exhibit 4.1-1 illustrates the SCP paradigm together with the causality relationships of the

elements studied in this sector report. The extended SCP paradigm defines the two

dimensions of the forthcoming analysis. First, the extended SCP paradigm identifies

market structure and firm characteristics that drive the diffusion of ICT and the process of

turning ICT use into marketable products and production processes, i.e. ICT-enabled

innovations. Second, the paradigm seeks to identify the feedback effects of firms’

innovative activity on these characteristics and firm performance.

86


ICT and e-business in the steel industry

Exhibit 4.1-1: Conceptual framework for the analysis of drivers and impact of ICT adoption

Structure

Structure

Conduct

Conduct

Performance

Performance

Market Market / / firm

firm

characteristics:

characteristics:

- - Market

Market

structure

structure

- - Technology

Technology

- - Value Value chain

chain

ICT

ICT

ICT ICT enabled

enabled

adoption

adoption

innovation

innovation

Feed-back loops

Performance:

Performance:

- - Productivity

Productivity

- - Turnover

Turnover

- - Market Market share

share

Source: DIW/empirica

Applying the SCM paradigm to an analysis of ICT impacts

The SCM paradigm allows to identify firm and industry dimensions that can be

considered as relevant for the diffusion of ICT and its impact on these dimensions.

Consequently, the following elements of market and firm structure were identified as ICT

drivers: market rivalry, supplier-buyer relations and workforce composition. The impact of

ICT adoption and ICT enabled innovation is studied through productivity as a proxy for

firm performance. This construct enables the understanding of not only uni-directional

causal relationships but recognises the presence of firm performance impacting upon the

drivers of ICT adoption.

The following analysis is based on a set of hypotheses which focus on the critical role of

ICT for innovation. The hypotheses allow for an economic approach to study the impacts

of ICT at the firm level for the following business dimensions: productivity (section 4.2),

innovation dynamics (Section 4.3), market structure (Section 4.4), and value chain

characteristics (Section 4.5). The hypotheses in section 4.2 are tested on the basis of

data from the EU KLEMS database and the hypotheses in sections 4.3-4.5 with data from

the e-Business Manufacturing Survey 2007.

In sections 4.3 - 4.5, regression analysis is used. For methodological reasons one should

be cautious with drawing conclusions about “drivers” and “impacts” of ICT; it is

more reasonable to refer to “links” between ICT adoption and other variables. Firstly,

regression analysis is a technique used for modelling and analysing data, assuming that

one variable is dependent upon another single independent variable (simple regression)

or several independent variables (multiple regression). Although regression can be used

to analyse causal relationships, one must be cautious in drawing conclusions regarding

causality, because there is typically a broad range of potential non-causal explanations of

links between variables. In statistics, this is referred to as "confounding", i.e. a

confounding variable is associated with both the assumed cause (independent variable)

and the assumed outcome (dependent variable). Secondly, the estimation results do not

allow for conclusions about the direction of causality, mainly because the dependent and

the independent variables are reported for the same time period.

87


ICT and e-business in the steel industry

4.2 ICT and productivity

4.2.1 Background and hypotheses

Empirical findings on ICT and productivity

This section will analyse to what extent ICT-capital investments, as compared to other

factors, effect on productivity growth in the steel industry. With reference to the Structure-

Conduct-Performance framework, the analysis in this section focuses on the links

between conduct, i.e. ICT adoption and innovation, and performance.

In knowledge-driven market economies exposed to global competition, increasing

productivity is considered as crucial for sustained competitiveness and growth. Therefore,

an analysis of ICT impacts on productivity are of particular interest. Studies on the impact

of ICT confirm productivity increasing effects in both the user sectors and the ICT

producing sectors (Oliner and Sichel, 2000). In particular, ICT was found to have positive

effects on labour productivity and total factor productivity (Pilat, 2005). An important

finding is, however, that ICT-induced productivity effects vary significantly between

sectors and among countries (Nordhaus, 2002). Recent research suggests that the

largest productivity growth effect occurs in the ICT-producing sectors themselves, and in

selected service industry sectors like banking, wholesale, retailing, and telecommunication

(Jorgenson, Ho, Samuels, Stiroh, 2007, Jorgenson, Ho, Stiroh, 2007,

Inklaar, Timmer, van Ark, 2007). Hence for the steel industry one can expect that ICTinduced

productivity gains are not too large.

On the other hand, the e-Business Survey 2007 shows that particularly the larger

companies in the steel industry have adopted ICT for a variety of purposes, notably for

managing production processes and the supply chain (see chapter 3). Thus, ICT

investments should induce productivity effects in this industry as well, not only on the

firm- but also on the sector-wide level.

Exhibit 4.2-1: Scope of the analysis in Section 4.2

Structure Conduct Performance

Market / firm

characteristics

ICT

adoption

ICT enabled

innovation

Performance

indicators

(productivity)

Section 4.2

Source: e-Business Watch/DIW

Findings from case studies

Findings from case studies for this report indicate that steel enterprises use ICT and e-

business mainly to increase productivity and reduce costs, primarily process costs. All

case studies conducted for this report name explicit productivity benefits from e-business:

ThyssenKrupp, Germany, (section 5.1) shows how an e-procurement platform can

increase productivity in purchasing activities. For example, the procurement

platform, integrated into an ERP system, allowed to automate the processing of

incoming tenders and to drastically reduce paperwork.

88


ICT and e-business in the steel industry

At the Srem iron foundry, Poland (section 5.2), the implementation of an SAP ERP

system increased productivity by improved production planning and management

because formerly dispersed data became available much easier and more quickly.

At Farwest Steel, US (section 5.3), an Oracle ERP system helped to realise

productivity gains in the form of efficient inventory management and quicker data

access.

Tenaris, Italy (section 5.4), developed a system for managing data about health,

safety and environmental issues that made related processes more efficient.

Baosteel, China, (section 5.5) implemented electronic platforms for purchasing,

sales and communication with customers which reduced the length of related

workflows considerably.

ArcelorMittal Gent, Belgium, (section 5.6) shows how a steel company can

enhance logistics by facilitating the overview of goods in dispersed warehouses with

a relatively simple web application. This application allows much more effective

operations than paper or fax information, particularly with small warehouses for

which investments in EDI would be too high.

Corus IJmuiden, Netherlands (section 5.7), implemented an internet-based

platform that allows customers to retrieve order-related information on their own,

reducing the need for telephone calls and fax messages significantly.

The former e-Arbed.com platform (section 5.8) was meant to significantly facilitate

steel selling processes.

At CMC Coil Steels, Australia, (section 5.9) the implementation of the ESIDEL

standard resulted in the automated dispatch and receipt of orders, order

confirmations, advanced ship notices and invoices. Automated pre-population of

inbound receipts with advanced ship notice details significantly reduced inbound

logistics data entry and greatly increased inventory accuracy.

The Patina foundry, Hungary (section 5.10), realised small but notable productivity

gains through using basic ICT such as e-mail for supporting procurement and sales

processes as well as internet search for improving the knowledge about market

developments.

Thus, ICT investments should lead to productivity effects in this industry as well, not only

on the firm- but also on the industry-level.

ICT-capital investment and total factor productivity growth

For the study of ICT impacts on firm-level productivity, two considerations are essential.

First, as depicted in the conceptual framework above, ICT investment does not lead to

productivity growth at firm-level by itself. It depends on how the technology is actually

used in business processes, i.e. on a company's ability to innovate its work processes

and business routines with support of ICT. Thus, only if ICT investment is combined with

complementary investment in working practices, human capital, and firm restructuring will

it have an impact on performance (Brynjolfsson and Hitt, 2000). These complementary

investments and organisational changes are highly sector- and firm-specific; therefore,

returns to ICT investments vary strongly across organisations (Pilat, 2005). The need for

complementary investments is commonly confirmed in case studies on ICT adoption. For

example, the case studies on the Srem foundry (section 5.2), Farwest Steel (section 5.3)

and CMC Steel Coils (section 5.7) illustrate the need for organisational changes in the

89


ICT and e-business in the steel industry

course of implementing new ICT. Second, it has to be considered that outsourcing is an

organisational innovation which can change firm-level productivity (Erber, Sayed-Ahmed,

2005).

Notwithstanding these considerations, the first step of the analysis is to assess the

contribution of ICT-capital investment to productivity growth (see Hypothesis P.1):

Hypothesis P.1: ICT-capital investment has become a main element in value added and

productivity growth in the steel industry, while other capital inputs summarised as non-

ICT-capital have diminished in their respective importance.

The second step is to consider the apparent need for companies to not only invest into

ICT but also into complementary items in order to increase productivity. A certain part of

such complementary investment is linked with total factor productivity (TFP). TFP

represents output growth not caused by input growth. The attribute “total” refers to the

unknown complete set of influencing factors. TFP effects may be caused by numerous

factors, e.g. organisational changes in the company such as outsourcing that lead to

improved workflows and increased productivity. 92 Thus one can assume that ICT capital

investment has become a key driver of total factor productivity (TFP) growth. This will be

tested as a second hypothesis:

Hypothesis P.2: Total factor productivity growth in the steel industry has accelerated

together with increased investment in ICT-capital.

Another important factor that may influence the extent to which ICT enables productivity

growth is the complementarity between ICT capital and skills. A large body of literature

on skill-bias in technical change supports the finding that technical change is biased

towards skilled workers, reducing demand for unskilled labour and increasing wage

inequality and polarisation (Acemoglu, 2002). The impact is clearly visible in today's

advanced economies; unskilled jobs have long been declining in absolute terms in

Europe and growing only slowly in the US, while skilled jobs for educated workers are

being created at a faster pace in most countries (Pianta, 2004). ICT tends to be a skillbiased

technology and, thus, the application of ICT may increase the demand and wages

for skilled labour and decrease the same for unskilled labour. The analysis will therefore

focus on the interdependence of ICT investments with skills requirements in the steel

industry. This will help to understand the impact on employment dynamics in a more

nuanced way than just assessing the net impact on total sector employment. The

following hypothesis addresses this issue.

Hypothesis P.3: ICT and high- and medium-skilled labour had a positive impact on

labour productivity growth.

The analysis to confirm or reject these hypotheses has been conducted in two steps:

An analysis of the development of value added growth and the contribution of

different factors to it by means of growth accounting (section 4.2.2).

An analysis of the development of labour productivity growth and the contribution

92

In terms of calculation, TFP is a residual between growth of an output indicator, like gross value

added or gross production value, minus an aggregate index of factor inputs such as labour and

capital, weighted by their respective factor shares. TFP is also named ‘Solow residual’, because

Robert Solow (1957) was one of the first economists who pointed out the significance of

disembodied technical change for economic growth opposite to the classical view that in

particular capital accumulation, i.e. embodied technical change, is the key driver of growth.

90


ICT and e-business in the steel industry

of different factors to it by means of a stochastic possibility frontier (SPF)

(section 4.2.3).

On the basis of the results it is discussed whether the hypotheses can be confirmed or

not (section 4.2.4).

Database: EU KLEMS

The empirical analyses are based on data from the EU KLEMS project. KLEMS stands

for “Capital, Labour, Energy, Material and Services”, indicating the domains for which the

project developed data, using official statistical sources. The EU KLEMS database,

published by the Groningen Growth and Development Centre (GGDC) in March 2007,

does not report specific data for the steel industry. Therefore the analysis must focus on

the broader defined sector “basic metals and fabricated metal products”, comprising

NACE Rev. 1.1 groups 27 and 28, equalling NACE Rev. 2 groups 24 and 25. The

analysis may offer the best possible proxy to the basic metals industry. Since both

sectors are intertwined, cautious conclusions to the steel industry may be drawn.

Consistent EU KLEMS data are available by country and only for a subset of the EU-27,

typically EU-15 or less. EU KLEMS provides country data. Therefore, while the country

level is not a primary item of analysis in the e-Business Watch, the following sub-sections

present country data. For the purpose of this report, it is however not insightful to

describe and interpret these country findings in detail. Country differences may be due to

numerous different characteristics of the national metal industries, e.g. overall number of

firms and employees, number of firms and employees by size class, composition by subsectors,

target markets, exceptional national business cycles, trade union power, national

industry policy, and large-scale mergers in certain periods of time.

4.2.2 ICT impact on value added growth

Gross value added growth

Exhibit 4.2-2 shows the annual average growth rates of gross value added (GVA) in the

basic and fabricated metals sectors for three different time periods (1980-1995, 1995-

2000, 2000-2005). Growth rates were found to be predominantly positive. GVA varies

greatly among countries and there are few consistent trends. For example, Spain

features an increasing and positive trend, Italy a declining but positive one. Only three

countries have experienced negative values of more than 1%, and typically only in one of

the three sub-periods: France -5.2%, Luxembourg -3.1% and Denmark -1.4%.

91


ICT and e-business in the steel industry

Exhibit 4.2-2: Average gross value added growth rates in the basic and fabricated metals

industries in EU-15 in %

-6 -4 -2 0 2 4 6 8 10 12

Austria

2.4

3.6

3.4

Belgium

0.7

1.7

3.3

Denmark

-1.4

0.6

2.8

Spain

0.9

3.3

3.6

Finland

3.5

4.3

6.1

France

-5.2

-0.2

1.3

Germany

-0.4

0.6

2.0

Greece

-0.3

3.4

4.4

Ireland

2.4

4.5

8.3

Italy

2.4

1.8

1.1

Luxembourg

-3.1

2.2

10.4

Netherlands

1.3

0.2

2.4

Portugal

-0.3

1.4

3.4

Sweden

-0.3

2.7

3.0

United Kingdom

-0.1

0.4

0.0

1980-1995

1995-2000

2000-2004

Source: EU KLEMS database, GGDC; DIW calculations

92


ICT and e-business in the steel industry

Growth accounting of gross value added

Growth accounting of gross value added is a commonly used approach that enables to

study the relative contribution of different input factors – or more precise: changes of

them – to growth. In the following, the importance of factors contributing to value added

growth for ten EU Member States is analysed – see Exhibit 4.2-3. 93 The contributions of

the different components vary among the countries but overall some factors appear to be

more important than others:

Total factor productivity developments were found to have the highest impact on

growth. This means that growth in the basic and fabricated metals industries was

predominantly due to factors that cannot be defined precisely. For the nine

countries where total factor productivity was found to be positive, TFP contributes

most to value added in seven cases. Exceptions are Finland and Spain. TFP growth

was found to be negative only in Denmark, corresponding to declining value added

in this country in the period of time considered.

ICT capital investment apparently contributed relatively little to value added growth.

This contradicts the assumed high importance of ICT for value added growth.

However, the contribution of ICT capital to growth was found to be positive in all

countries. Together with labour composition, ICT capital was the only factor with

generally positive impact on growth. Denmark featured the highest contribution of

ICT at 0.6%, followed by the UK and the Netherlands at 0.4%. Furthermore, ICT

can be embedded in other capital, for example in the complex production

equipment of the steel industry. Thus, there is probably a "hidden ICT-impact"

which cannot be measured by means of the data on ICT-investment available in the

database.

ICT capital and non-ICT capital inputs have about the same importance. The

contribution of ICT capital was found to be smaller than that of non-ICT capital

investment in four countries, equal in three countries and larger also in three

countries. The impact of non-ICT capital on growth was positive in almost all

countries, only in the UK there was a very small negative impact.

Changes in hours worked were found to have a negative impact on value added

growth in seven countries (Austria, Belgium, Denmark, France, Germany,

Netherlands, UK) and positive in three (Spain, Finland and Italy). The related bars

in the Exhibit reflect first of all whether hours worked increased or decreased in a

country and the extent to which they did so, secondly they reflect effects on value

added growth. For example, hours worked increased significantly in Austria which

had positive effects on value added growth.

Changes in labour composition in terms of skills, i.e. from lower skills to mediumlevel

and higher skills, was found to have little but positive impact in all countries.

93

For a more detailed account see also the table in Annex III.

93


ICT and e-business in the steel industry

Exhibit 4.2-3: Growth accounts for gross value added in basic and fabricated metal

industries in selected EU Member States, 1995-2004 (average growth rates in %)

-3 -2 -1 0 1 2 3 4 5 6

Austria

-0.2 0.2

0.2 0.2

3.4

Belgium

-0.7

0.4 0.3 0.3

2.4

Denmark

-2.2

-0.4

0.4

0.6

0.7

0.2

Spain

2.0

0.3

0.4

1.4

0.2

Finland

1.8

0.2

1.6

1.1

0.2

France

-0.5

0.6

0.6

0.1

Germany

-0.6

0.3

1.0

0.1

0.1

Italy

0.4

0.8

0.9

0.1

Netherlands

-0.4 0.3 0.4

0.1

1.3

United Kingdom

0.0

-2.3

0.8

0.4

1.4

Total hours worked Labour composition ICT capital Non-ICT capital Total factor productivity

Reading example: In Austria, where gross value added grew by 3.8% from 1995-2004, total factor

productivity contributed to 3.4% of this growth.

Source: EU KLEMS database, GGDC; DIW calculations

Referring to Hypothesis P.2, the growth accounting analysis does not support a possible

relationship between investments in ICT-capital and TFP growth. There is no apparent

relationship between ICT capital investment level and TFP growth. Possibly this is due to

a time lag between investments in ICT as well as related organisational changes and

their impact on TFP. 94 The standard approach in growth accounting typically assumes

94

This was confirmed, for example, for the telecommunication industry by an analysis on the J-

curve of innovation (Erber 2005, Aral, Brynolfsson, Wu 2006).

94


ICT and e-business in the steel industry

that TFP growth instantaneously increases with increased investments in ICT-capital.

This could partly explain why the analysis did not find any strong relationship between the

two. However, on the basis of this empirical evidence the hypothesis that there is an

instantaneous impact of ICT capital investments on total factor productivity growth has to

be rejected.

4.2.3 ICT impact on labour productivity growth

Labour productivity growth

EU KLEMS data on labour input are available in terms of labour productivity,

employment, average hours worked per employee and total working hours. Total working

hours are further broken down in different skills categories: low, medium and high. In the

following, a descriptive data analysis is presented that summarise trends from 1980-

1995, 1995-2000 and 2000-2004.

Exhibit 4.2-4 shows that the labour productivity growth was positive in almost all

countries and in all periods. In only three countries growth was negative, in different subperiods:

France -3.0% in 1980-1995, Luxembourg -1.2% in 2000-2004 and Spain -1.5%

in 1995-2000. Consistent trends in the growth rates are rare. Austria, Belgium, Italy and

Sweden all had a negative trend. The only country with a positive development in labour

productivity was France, where it increased from -3.0% in 1980-1995 to +2.0% in 2000-

2004. An outstanding development was detected for Luxembourg, where labour

productivity first soared from 4.5% to 11.1% and then slumped to -1.2%, possibly related

to the large-scale merger of Arcelor in 2001.

In line with other research (e.g. van Ark et al. 2003), no acceleration in productivity

growth similar to that reported for the US economy was detected (Gordon, 2004;

Jorgenson et al., 2007). Overall, at least up to 2004 there seems to be little convergence

among the EU-15 Member States regarding labour productivity growth patterns.

Employment growth

Exhibit 4.2-5 reports on employment growth, i.e. on the development of the number of

employees in the basic and fabricated metals industries. Negative values dominate,

especially in the first and third sub-period considered. Only in Luxembourg there was a

consistent trend, showing an decrease of negative growth from -2.4% to -1.9%. A few

outstandingly high employment growth figures were found for 1995-2000 in Ireland

(5.3%), followed by Finland (5.1%) and Spain (4.9%).

Average working hour per employee

Exhibit 4.2-6 shows a comparison of EU-15 countries in terms of average working hours

per employee. The overall picture of average working hours per employee is to decline.

While steady trends per country are rare, they are typically negative, such as in the case

of France, Sweden and the UK.

95


ICT and e-business in the steel industry

Exhibit 4.2-4: Labour productivity growth in the basic and fabricated metals sector in EU-15,

1980-2004 (annual average growth rates in %)

-4 -2 0 2 4 6 8 10 12

Austria

4.1

3.7

5.0

Belgium

4.0

3.8

3.2

Denmark

0.1

2.3

2.6

Spain

-1.5

2.2

2.9

Finland

1.0

3.3

5.6

France

-3.0

1.5

2.0

Germany

0.6

2.5

2.7

Greece

0.9

2.9

4.1

Ireland

3.5

4.5

6.3

Italy

1.2

0.6

4.3

Luxembourg

-1.2

4.5

11.1

Netherlands

2.5

1.7

2.5

Portugal

1.9

1.6

3.4

Sweden

1.2

1.1

4.2

United Kingdom

2.1

4.1

4.3

1980-1995

1995-2000

2000-2004

Source: EU KLEMS database, GGDC; DIW calculations

96


ICT and e-business in the steel industry

Exhibit 4.2-5: Employment growth in basic and fabricated metals industries in EU-15 (in %)

-6 -4 -2 0 2 4 6

Austria

-2.2

0.3

0.1

Belgium

-2.9

-0.8

-0.9

Denmark

-3.1

0.0

-1.0

Spain

-0.9

1.1

4.9

Finland

-1.0

0.6

5.1

France

-2.5

-1.5

0.4

Germany

-1.2

-1.0

-1.3

Greece

-1.1

0.4

0.3

Ireland

-1.7

-1.7

5.3

Italy

-1.5

1.4

1.3

Luxembourg

-2.4

-2.2

-1.9

Netherlands

-2.2

-1.1

1.2

Portugal

-1.8

-2.0

2.6

Sweden

-2.5

-0.9

1.4

United Kingdom

-4.2

-3.8

-1.9

1980-1995

1995-2000

2000-2004

Source: EU KLEMS database, GGDC; DIW calculations

97


ICT and e-business in the steel industry

Exhibit 4.2-6: Growth rates of average working hours per employee in basic and fabricated

metals industries, EU-15, 1980-2004 (in %)

-2.0 -1.0 0.0 1.0 2.0

Austria

-0.9

-0.5

-0.4

Belgium

-0.6

-0.4

0.3

Denmark

-0.6

0.2

1.5

Spain

-0.4

-0.4

0.03

Finland

-0.4

-0.4

-0.1

France

-0.6

-0.7

0.3

Germany

-0.7

0.4

0.3

Greece

-0.1

0.0

0.2

Ireland

-0.4

-0.5

-0.1

Italy

-0.8

-0.8

-0.4

Luxembourg

0.05

0.03

1.5

Netherlands

-0.5

-0.1

-0.1

Portugal

-0.7

-0.4

0.02

Sweden

-0.5

0.3

1.0

United Kingdom

-0.2

-0.3

0.03

1980-1995

1995-2000

2000-2004

Source: EU KLEMS database, GGDC; DIW calculations

98


ICT and e-business in the steel industry

Calculating the impact of ICT on labour productivity growth

In order to calculate the impact of ICT on labour productivity growth, a stochastic

production possibility frontier (SPF) was estimated. To this end the error component

model suggested by Battese and Coelli (1992) was used, which allows for estimating the

industry’s efficient, state-of-the-art production possibility frontier at a certain time period. 95

The estimation includes panel data for 14 EU Member States. 96 The calculations are

based on intermediate inputs 97 and the two primary input factors of capital and labour.

Capital was broken down into ICT and non-ICT capital; labour input was measured in

working hours, broken down into workers with low, medium and high skills. Thus

altogether six factors were considered.

In order to ensure constant returns to scale for the production possibility frontier, the

output and input variables were normalised by the total working hours. This led to a SPF

restricted accordingly, where the real gross production value per working hour is

explained by the six factors, i.e. using total working hours as a common denominator. To

account for autonomous technical change, a time trend was included as an additional

variable besides the constant term. Exhibit 4.2-7 shows the estimation results from using

a Cobb-Douglas production function specification. 98

Exhibit 4.2-7: Parameter estimates of a stochastic production possibility frontier (SPF) for

the steel industry, error component model, 1995-2004

Explanatory variables Parameters Standard error t-value

Intermediate Input per TWH 0.51 0.04 13.52

ICT-Capital Stock per TWH 0.07 0.03 2.95

Non-ICT-Capital Stock per TWH 0.17 0.05 3.32

Medium-Skilled-WH per TWH -0.10 0.13 -0.82

Coefficients:

Constant 0.03 0.01 3.31

Time 0.01 0.01 2.00

sigma squared 0.02 0.01 2.06

gamma 0.98 0.01 81.28

eta -0.09 0.02 -4.77

Log-Likelihood 267.5

No. of iterations 32

Endogenous variable: Gross Production Value per Total Working Hours (TWH) based on EU-14 Country Panel

including Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Hungary, Italy, Netherlands,

Slovenia, Spain, Sweden, UK.

Parameters estimate the impact of factor intensity (e.g. intermediate input per TWH) on output intensity (gross

production value per TWH) which can be interpreted as the impact on labour productivity.

Parameters for high-skilled and low-skilled labour insignificant and therefore not mentioned.

Source: EUKLEMS database of GGDC, DIW calculations

95

96

97

98

See Annex III for a description of the econometric approach.

Including Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Hungary,

Italy, Netherlands, Slovenia, Spain, Sweden, and the UK. Data requirements include gross

production value, total intermediate inputs, total working hours, ICT-capital stock, non-ICT

capital stock and total working hours, where the latter are broken down further into three

different skill classes (high, medium, and low skills).

An intermediate input has itself been produced and is used up in production. In the steel

industry, this includes for example raw materials and energy.

For the econometric estimation, the software package Frontiers 4.1 was used (Coelli, 1996).

99


ICT and e-business in the steel industry

The parameter estimates obtained are measures for the respective output elasticity of the

input factor concerned. In other words, an increase by one unit in the respective input

factor increases the output variable by one unit of the respective output.

With the exception of medium-skilled labour, all estimated parameter values shown in

Exhibit 4.2-7 are significantly different from zero. 99

The ICT capital stock is apparently only of minor importance for expanding the

production output, since the estimated coefficient (0.07) is much smaller than those for

non-ICT capital (0.17) or intermediate inputs (0.51). This somewhat contradicts other

studies in this field such as Jorgenson et al. (2000) who found a high impact of ICT

capital on U.S. labour productivity growth. 100 On the other hand, the high value estimated

for changes in intermediate inputs intensity might be attributable to the productivity

enhancing of outsourcing of activities in the basic and fabricated metals industry. By

focussing on the core competencies and outsourcing those activities where companies in

this sector and in a particular country lack comparative advantages, they can improve

their efficiency significantly. This aspect has been neglected in studies which exclude

intermediate inputs from their analysis.

In contrast to an analogous modelling exercise performed for the financial intermediation

sector (essentially the banking and insurance industry), the analysis did not find evidence

that labour (measured in working hours) and labour skills influenced productivity

developments in the basic and fabricated metals industry decisively.

4.2.4 Conclusions: Minor ICT impact on growth of value added and

labour productivity

Section 4.2 analysed to what extent ICT capital investments contributed to growth of

value added and productivity in the basic and fabricated metals industries. The results

indicate that ICT capital by itself is not the main element, but that it rather requires

complementary investments and organisational innovation.

Growth accounting suggests that changes in the ICT-capital stock accounted only

for minor shares of overall value added growth in the basic and fabricated metals

industries. TFP growth was found to account for much stronger contributions.

Changes in ICT capital and non-ICT capital had about the same importance for

value added growth.

However, ICT can be embedded in other capital, for example in the complex

production equipment of the steel industry. Thus, there is probably a "hidden ICTimpact"

which cannot be measured by means of the data on ICT-investment

available in the database.

Changes in non-ICT capital intensity and the intermediate inputs intensity were

found to be the main components of labour productivity growth.

99

Except of medium-skilled labour all estimates are significant at the 5% level (t-values above 2

assure by a rule of thumb this 5%-significance threshold). Estimated coefficients for high-skilled

and low-skilled labour have been insignificant.

100 In contrast to many related studies, our approach is also more disaggregate and avoids a bias

in favour of physical input factors. Specifically, we have broken down labour input by skill class

and based our analysis on gross production values instead of gross value added excluding

intermediate inputs, i.e. accounting for primary input factors only.

100


ICT and e-business in the steel industry

With respect to the hypotheses formulated in section 4.2.1, the following conclusions can

be drawn:

Hypotheses

P.1 ICT-capital investment has become a

main element in (P.1a) value added

growth and (P.1b) productivity growth in

the steel industry, while (P.1c) other

capital inputs summarised as non-ICTcapital

have diminished in their respective

importance.

P.2 TFP growth in the steel industry has

accelerated together with increased

investment in ICT-capital.

P.3 ICT and high- and medium-skilled labour

had a positive impact on labour

productivity growth.

Result

Not confirmed. Growth accounting

indicates that ICT capital contributed to

growth of value added, but ICT capital

and non-ICT capital inputs had about

the same importance while TFP

changes played a dominant role.

A production possibility frontier analysis

points at intermediate inputs as key

drivers of labour productivity growth.

=> ICT by itself has not been the key

driver of growth in this sector

Growth accounting does not support a

possible relationship between ICT

capital investments and TFP growth.

No significant average annual rate of

technical progress for the common

production possibility frontier was

found.

Labour input does not play a significant

role in explaining productivity growth

no

no

no

4.3 ICT and innovation

This section analyses ICT-related innovation activity. It focuses on two questions. First,

what are the characteristics of firms that introduce ICT-enabled innovations In terms of

the extended SCM paradigm, this question is related to the effects of industry structure

on firm conduct. Second, how do ICT-enabled innovations affect firm performance and

organisational change This question is related to the effects of firm conduct on

performance and industry structure.

Exhibit 4.3-1: Scope of the analysis in Section 4.3

Structure Conduct Performance

Market / firm

characteristics

ICT

adoption

Section

4.3.2.

ICT enabled

innovation

Section

4.3.3.

Performance

indicators (e.g.

turnover)

Source: DIW/empirica

Section 4.3.1 provides empirical evidence on innovation from the e-Business Survey

2007. The following sections offer further insights to what degree specific factors are

linked with ICT-enabled innovation in the retail industry (4.3.2), and whether companies

which conduct ICT-enabled innovation are likely to exhibit superior performance (4.3.3).

In the Structure-Conduct-Performance framework (see introduction to this section), this

analysis explores links between ICT adoption and ICT-enabled innovation, links between

innovation and performance.

101


ICT and e-business in the steel industry

4.3.1 Survey findings about ICT and innovation

Introduction to the importance of ICT for innovation

The growing diffusion of ICT in all areas of business is a major enabler of technological

change, innovation and ultimately economic development. ICT-driven innovation activity

is central to the subsequent effects of ICT economic impact. As a general purpose

technology, ICT can have significant effects for downstream innovation in manufacturing.

For example, ICT-enabled innovation of steel products for the automotive industry can

enable innovation in the automotive industry.

The links between the adoption of new e-business technologies and innovation are

broadly recognised. ICT investments in general and e-business applications in particular

enable and drive process innovation. They are drivers, because ICT implementation, to

be successful, typically requires changes in working routines. In micro-economic terms, a

product innovation corresponds to the generation of a new production function. A process

innovation, on the other hand, can be viewed as an outward shift of an existing supply

function, which corresponds to lower variable costs in the production of an existing

product or service, and is therefore a productivity increase. Thus, ICT-driven

technological change moves firms towards new technological trajectory.

The capability for innovation is considered very important by the steel industry in order to

face global competition and to keep their position in higher market segments, which rely

on differentiation and quality. In this competitive scenario, companies should have a

strong incentive to use latest technology to innovate products, to enhance their quality

and broaden the use of materials. Process innovation in the steel industry is either

centred on production processes, such as automated and computer-based manufacturing

systems, or on supply chain processes.

Data from the e-Business Survey 2007

In order to receive evidence about the role of ICT for innovation, the Sectoral e-Business

Watch asked companies from the sectors studied in 2007 whether they had "launched

any new or substantially improved products or services" during the twelve months prior to

the interview, and if they had introduced "new or significantly improved internal

processes" in the same period of time. Innovators were then asked follow-up questions

whether their innovation(s) had been enabled by ICT.

28% of steel enterprises (representing 41% of sector employment) said that they had

launched new or improved products in 2006/07. Firms representing 20% of

employment, i.e. around half of those that reported product innovation, said that their

product innovations had been directly related to or enabled by ICT (see Exhibit 4.3-2).

This high share indicates an important role of ICT for product planning and manufacturing

processes. Data by size classes cannot be shown due to a small number of cases, but

the percentage of large and medium-sized firms using ICT to innovate products appears

to be higher than in small firms. Compared to the furniture and chemicals industries, the

share of companies from the steel industry that conducted product innovation was found

to be smaller. However, of those steel firms that reported product innovation, the share of

firms with ICT-enabled innovation was the same as in the other two sectors.

It was a consistent finding in e-Business Watch sector studies that ICT play a crucial

role to support process innovation, in manufacturing as well as in service industries.

102


ICT and e-business in the steel industry

This can be confirmed for the steel industry. Firms representing 41% of the industry’s

employment said they introduced process innovation in the past twelve months. In firms

representing 26% of employment the process innovations were ICT-related, and in only

15% the process innovations were not ICT-related (see Exhibit 4.4-1). In small firms the

share of firms innovating with ICT was apparently smaller than in medium-sized and large

firms. There appears to be evidence for a relatively higher importance of ICT for planning

and managing business processes in larger companies. Compared with the chemicals

and furniture industries, the levels of overall process innovation and of ICT-related

process innovation in the steel industry was found to be smaller.

Exhibit 4.3-2: % of companies having introduced product or process innovation (ICT enabled

versus non-ICT enabled, 2007)

Product innovation

0 20 40 60 80 100

Process innovation

0 20 40 60 80 100

Steel (EU-7)

21

20

Steel (EU-7)

15

26

Chemical

(EU-7)

35

20

Chemical

(EU-7)

15

41

Furniture

(EU-7)

26

20

Furniture

(EU-7)

16

32

non-ICT enabled product innovation

ICT-enabled product innovation

non-ICT enabled process innovation

ICT-enabled process innovation

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

Base (100%) = companies with at least 10 employees and using computers; N (Steel, EU-7) = 349.

Weighting: Figures are weighted by employment ("firms representing x% of employment in the sector").

Questionnaire reference: D1-D4.

Source: e-Business Survey 2007 by the SeBW

Organisational innovation may need to accompany product or process innovation in

order to implement such innovations successfully, or it may be introduced self-sustained.

The e-Business Survey 2007 asked about four types of organisational innovation:

changes in corporate strategy, management techniques, organisational structure, and

marketing concepts. In all these types, only a minority stated such innovation – see

Exhibit 4.3-3. Furthermore, by share of firms, in all these types the steel industry lags

behind the two other manufacturing industries included in the survey. The EU-7 steel

industry does however not lag behind the US steel industry in terms of organisational

innovation. The US steel industry was only found to have a slightly higher level of

innovation in marketing concepts.

The most common organisational innovation reported were changes in organisational

structure: 31% of the steel firms (40% of employment) said that they introduced major

changes to their organisational structure in the past twelve months. The other types of

organisational innovations were on a similar level by share of firms, all slightly below

20%. The survey found that the levels of organisational innovation were very similar in

small and medium-sized firms, while the levels for large firms were higher, except for

marketing concepts. The values for larger companies should however be interpreted with

caution due to a small number of cases (between 20 and 40).

103


ICT and e-business in the steel industry

Exhibit 4.3-3: ICT and organisational innovation (2007)

in their

corporate

strategy in the

past 12 months

Companies having introduced major changes ...

in their

management

techniques in

the past 12

months

in their

organisational

structure in the

past 12 months

in their

marketing

concepts in the

past 12 months

% of % of % of % of % of % of % of % of

Weighting scheme:

empl. firms empl. firms empl. firms empl. firms

Steel – 2007 total (EU-7) 38 18 23 17 40 31 22 19

NACE 27.1: basic steel 30 12 9 12 19 22 10 13

NACE 27.2-3: hollow /

cold processed steel

47 22 29 18 51 33 34 22

NACE 27.51+52: casting 36 16 26 21 46 35 21 21

Steel – USA 26 20 20 17 33 26 26 24

Steel – by size (EU-7)

Small (10-49 empl.) 16 16 27 19

Medium (50-249 empl.) 15 15 34 20

Large (250+ empl.) (40)* (28)* (41)* (21)*

Other sectors

Chemicals 30 23 30 23 45 36 34 24

Furniture 25 22 28 20 38 29 29 27

Base (100%) all firms all firms all firms all firms

N (Steel, 2007, EU-7+USA) 449 449 449 449

Questionnaire reference D5a D5b D5c D5d

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

* = percentage only indicative due to a small number of observations (N = 20-50)

Source: e-Business Survey 2007

Overall, the e-Business Watch findings suggest that the steel industry is less

innovative with regard to general product innovation, ICT-related process innovation and

organisational innovation than other manufacturing industries. However, this may be due

to the fact that the two other industries examined set a high benchmark. According to the

European Commission’s Innovation Sector Index, the basic metals industry (NACE Rev.

1.1 Group 27, i.e. including basic precious metals) shows an average score in terms of

overall innovation performance compared to other manufacturing and services sectors. 101

In this Index, the chemical industries come at the fourth rank of altogether 24 industries.

In a cross-sector comparison, the share of ICT-enabled process innovation within all

process innovation is broadly in line (but at the lower end) with findings for other

manufacturing sectors. Exhibit 4.3-4 shows that results for various sectors studied by e-

Business Watch over the past three years are fairly consistent. The role of ICT for

process innovation was found to be most important in the publishing and automotive

industries. Differences are more pronounced for product innovation, obviously depending

on the nature of the goods and services produced. Notably in service industries such as

telecommunications and transport and logistics, ICT are essential for the development of

new products or services.

101 See European Innovation Scoreboard (2005), p. 23.

104


ICT and e-business in the steel industry

Exhibit 4.3-4: Cross-sector comparison: percentage of product and process innovations that

are ICT-enabled

Sector

Manufacturing

Product innovation:

% ICT-linked

Process innovation:

% ICT-linked

Year of

survey*

Chemical, rubber, plastics 36% 73% 2007

Food 15% 62% 2006

Pulp and paper 34% 59% 2006

ICT manufacturing 54% 70% 2006

Steel 48% 64% 2007

Furniture 44% 67% 2007

Automotive 21% 86% 2005

Pharmaceutical 18% 72% 2005

Machinery & equipment 25% 66% 2005

Publishing 65% 83% 2005

Retail and services

Retail 70% 81% 2007

Transport and logistics 76% 75% 2007

Telecommunications 86% 92% 2006

* Surveys of 2005 and 2006 include micro-firms with up to 9 employees

Data weighted by employment. Reading example: "Out of those companies in the food industry which said they

had introduced new or significantly improved internal processes in the past 12 months, 62% said that at least

some of these process innovations were enabled by ICT."

Source: e-Business Surveys 2005, 2006 and 2007 by the SeBW

4.3.2 Links between skills, e-collaboration and ICT-enabled innovation

Internal capacity: ICT skills positively linked with ICT-enabled innovation

Knowledge stock and skills found a firm’s absorptive capacity to successfully adopt new

technologies (Cohen and Levinthal, 1989). Thus, in order to develop marketable products

or feasible production processes based on ICT, a firm needs to build up its knowledge

stock and expertise, i.e. assets complementary to the technology applied. The most

obvious example of investments in such complementary assets include investments in

education and training that accompany ICT investments. In other words, firms that

combine high levels of ICT on the one hand and high levels of knowledge and worker

skills on the other may be more active in ICT innovation.

Some of the case studies conducted for this report support this, though they do not deal

with human capital investments in-depth. For example, the implementation of electronic

platforms at Baosteel (section 5.5) went along with an upgrading of the work of the sales

team. At the Srem foundry (section 5.2), considerable efforts were spent on training

employees in the production department in order to ensure that the new ERP system is

used in an effective way. The CMC Coil Steels case study (section 5.9) found that SMEs

were reluctant to adopt the ESIDEL standard for e-communication because this would

require personnel with specific skills.

The following hypothesis was formulated to test the assumed importance of investments

in complementary assets:

105


ICT and e-business in the steel industry

Hypothesis I.1: Steel firms characterised by a higher share of employees with a

university degree are more likely to conduct ICT-enabled innovations than firms with a

lower share.

The hypothesis was tested on the basis of the following data from the e-Business Survey

2007:

Question D2: "Have any of these product or service innovations been directly

related to or enabled by information or communication technology" (asked to

companies having introduced new products / services)

Question D4: "Have any of these process innovations been directly related to or

enabled by information or communication technology" (asked to companies having

introduced new processes)

In questions D2 and D4, the innovations were not further specified. In the steel industry,

examples of ICT-enabled product innovations may include new steel products designed

with a 2-D or 3-D modelling system (see section 3.4.2, production-oriented ICT systems),

examples of ICT-enabled process-innovation may include the implementation of an ERP

system (see section 3.4.2, resource-oriented ICT systems).

The main explanatory variable is the share of employees with a university degree. To

additionally account for the effect of internal capacity on innovation, a variable controlling

for the presence of ICT practitioners was added. This should control for the effect of ICTspecific

skills on a company’s innovative potential. The variables are based on the

following survey questions:

Question G11: "Please estimate the percentage share of employees with a college

or university degree in your company."

Question E1: "Does your company currently employ ICT practitioners"

Exhibit 4.3-5 reports the results of the regression. 102 An analysis of the results leads to

the following conclusion.

Result for Hypothesis I.1: Specific ICT skills rather than general skills drive ICTenabled

innovation

Changes in the share of employees with a higher university degree do not affect the

likelihood of conducting ICT-enabled innovations. However, employing IT practitioners

significantly correlates with the steel firms’ propensity to use ICT to develop new products

and services. This finding possibly provides further evidence that the success of the ICTdriven

innovative process depends on the availability and quality of complementary

assets. These assets need to be ICT-specific; general higher education is neither

supportive nor unsupportive for ICT innovation activity. However, size class may be a

confounding factor here: IT practitioners are mainly employed in large firms, and large

firms are more likely to innovate than small firms.

102 Coefficient estimates indicate how changes of independent variables influence the dependent

variable. The estimation results do not allow for conclusions about the direction of causality,

mainly because the dependent and the independent variables are reported for the same time

period. The same applies to all following regression analyses in this chapter.

106


ICT and e-business in the steel industry

Exhibit 4.3-5: Effect of employee skills on ICT-enabled innovation activity

Independent variable a Coefficient Standard Error

% of employees with higher

university degree (G11)

0.009 0.006

IT practitioners (E1) 0.681*** 0.182

Less than 249 employees (Z2b) -0.083 0.266

Firm founded before 1998 (G2) 0.031 0.171

Model diagnostics

N = 406

R-squared = 0.07

Note: Probit estimates. Reference groups: firms with >250 employees (reference group for firms with


ICT and e-business in the steel industry

Exhibit 4.3-6: % of companies having introduced product or process innovation (ICT enabled

versus non-ICT enabled, 2007)

Companies sharing information on inventory

levels or production plans electronically with

business partners

Company using software applications other

than e-mail to collaborate with business

partners in the design of new products or

services

0 10 20 30 40 50 60 70

0 10 20 30 40 50 60 70

Steel (EU-7)

21

Steel (EU-7)

25

NACE 27.1

24

NACE 27.1

4

NACE 27.2+3

16

NACE 27.2+3

20

NACE 27.5

23

NACE 27.5

45

0

0

10-49 empl.

7

10-49 empl.

5

50-249 empl.

19

50-249 empl.

17

250+ empl.

23

250+ empl.

22

Steel (USA)

58

Steel (USA)

33

Chemical (EU-7)

Furniture (EU-7)

14

24

Chemical (EU-7)

Furniture (EU-7)

17

23

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

Base (100%) = companies with at least 10 employees and using computers; N (Steel, EU-7) = 349.

Weighting: Figures are weighted by employment ("firms representing x% of employment in the sector").

Questionnaire reference: B9, B10.

Source: e-Business Survey 2007 by the SeBW

Several case studies for this report illustrate the importance of electronic networks for

steel companies and the related innovation potential. Farwest Steel (section 5.3) uses its

new ERP system also to enhance electronic communication with business partners. For

Baosteel (section 5.5), for example, the implementation of a platform for electronic

communication with key customers in the automobile sector – an ICT-enabled innovation

as such – was crucial in order to strengthen customer relationships. At ArcelorMittal Gent

(section 5.7), pressure to improve the information flow within a network of external

warehouses led to the implementation of a web-based information application that

constitutes an electronic network alternative to EDI. The implementation of the ESIDEL

standard in Australian steel companies facilitated electronic communication between

them (section 5.9).

Thus, the following hypothesis was formulated to test the assumed importance of

collaborative applications for innovative output:

Hypothesis I.2: Steel firms that use ICT applications to exchange information or

collaborate with business partners are more likely to introduce ICT enabled innovations

than firms in the same sector that do not use such applications.

108


ICT and e-business in the steel industry

The hypothesis is tested on the basis of data from the e-Business Survey 2007. Again,

the analysis focuses only on ICT-enabled innovations (see questions D2 and D4 in

previous section). Independent variables control for the use of the following: 103

Question A7: "Does your company use a Supply Chain Management system"

Question B9: "Does your company share information on inventory levels or

production plans electronically with business partners"

Question B10: "Does your company use software applications other than e-mail to

collaborate with business partners in the design of new products or services"

Exhibit 4.3-7 reports the results of the regression. An analysis of the results leads to the

following conclusion:

Result for Hypothesis I.2: e-Collaboration increases innovative output

The use of applications and practices supporting the electronic exchange of information

between companies positively affects the likelihood of conducting ICT-enabled

innovations. Out of the three technologies, the use of Supply Chain Management

applications has the strongest effect on the firm’s propensity to introduce ICT-enabled

innovations. This may be due to the high importance of SCM for value generation.

Exhibit 4.3-7: Effect of electronic collaboration with business partners on ICT-enabled

innovation activity

Independent variable a Coefficient Standard Error

Use of SCM (A7) 0.718*** 0.187

Share information electronically (B9) 0.561*** 0.190

Applications to collaborate (b10) 0.600*** 0.205

Less than 249 employees (Z2b) 0.018 0.259

Firm founded before 1998 (G2) -0.024 0.164

Model diagnostics

N = 449

R-squared = 0.12

Note: Probit estimates. Reference groups: firms with >250 employees (reference group for firms with


ICT and e-business in the steel industry

In addition, the results vary depending on how performance and ICT payoffs are

measured and analysed. For example, one empirical study finds positive impacts of ICT

investments on productivity, but not on profits (Brynjolfsson and Hitt, 1996). Another

study did not find positive effects of ICT capital – i.e. hardware, software and physical

networks – on productivity, while ICT labour positively contributed to output and

profitability (Prasad and Harker, 1997).

These somewhat ambiguous results of the impact of ICT on corporate performance can

be explained if one drops the assumption that there is a direct link between ICT

investments and corporate performance. The key to understanding the impacts of ICT on

performance is to view ICT as an enabler of innovation (Koellinger 2006), which is the

view taken in this section.

This view was confirmed in a study by Clayton and Waldron (2003) on e-commerce

adoption and business impact in several industries. They found that businesses

maintaining higher levels of sales of new and improved products, as a proportion of their

turnover, achieve above sector average rates of sales growth. This means that these

firms increase their market share due to ICT-enabled product innovation. The effect is

present in both manufacturing and service sectors.

Many case studies conducted for this report confirm that ICT can be considered as an

enabler of innovation and positively impact on firm performance, even if the impact

cannot always be measured concretely. In the steel industry, preliminary findings indicate

that ICT impact is mainly on process innovation, not on product innovation. For example,

by implementing an online sourcing platform, ThyssenKrupp reduced its procurement

costs and may thus also have improved its competitive position (section 5.1). This may

be similar with online sales and communication platforms at Baosteel (section 5.5) and e-

warehouse management at ArcelorMittal (section 5.7). At the Srem iron foundry (section

5.2), the management explicitly stated that the implementation of an ERP system

improved company performance. The CMC Steel Coils case study (section 5.9) illustrates

implementation difficulties as a possible reason for unclear payoffs of ICT investment. In

any case, there are also examples of companies that did not experience positive impacts

at all. The owner of the Patina foundry (section 5.8), a small company for which impacts

of ICT may be relatively easy to quantify, explicitly stated the use of ICT did not impact on

the firm’s performance. A research project including nine case studies about e-business

in the German foundry industry in 2002 and 2003 found that only a few companies

reported economic effects of the e-business investment, although there were high

expectations. 104

In order to find out whether there is a positive impact of ICT-enabled innovations on firm’s

performance in the analysed sector, the following hypothesis is formulated:

Hypothesis I.3: ICT-enabled innovations are correlated with steel firms’ turnover.

The hypothesis was tested on the basis of data from the e-Business Survey 2007.

Question G9 was: "Has the turnover of your company increased, decreased or stayed

roughly the same when comparing the last financial year with the year before" For

questions D2 and D4 about innovation see the section related to Hypothesis I.1 above.

Exhibit 4.3-8 reports the results of the regression. An analysis of the results led to the

following conclusions.

104 See SFS/DGV/RKW/IGM (2003), p. V.

110


ICT and e-business in the steel industry

Results for Hypothesis I.3:

ICT-enabled output positively related with turnover increase: Firms with a higher

incidence of ICT-enabled innovation activity are more likely to report a turnover increase,

i.e. to have experienced sales growth. Although turnover increase was used as a

dependant variable, this should not be read as a simple formula for success like "the

more ICT-enabled innovation, the more turnover a firm will have". There are possible

confounding factors such as growth of a company in general. 105 A positive relationship

might also have been obtained by exchanging the dependent and independent variables,

in the sense that firms experiencing turnover growth are more likely to innovate with ICT.

In any case, the results indicate that the dynamics of business growth and innovativeness

are strongly linked, possibly reinforcing each other.

Firm size and age irrelevant for positive turnover development: Firm size and age do

not have any implications for positive turnover change. Positively formulated: The positive

link between ICT-enabled innovation and turnover increase apply to smaller and older

companies just as to larger and younger ones.

Exhibit 4.3-8: Effect of ICT-enabled innovation activity on turnover increase

Independent variable a Coefficient Standard Error

ICT enabled innovation (D2, D4) 0.315** 0.157

Less than 249 employees (Z2b) -0.368 0.258

Firm founded before 1998 (G2) -0.026 0.150

Model diagnostics

N = 449

R-squared = 0.16

Note: Probit estimates. Reference groups: firms with >250 employees (reference group for firms with


ICT and e-business in the steel industry

Xu, 2004). This is true for manufacturing industries with rapidly changing production

technologies and intensive technological competition. In such industries the speed of

adoption of new production processes plays a decisive role for remaining at the cutting

edge. On the other hand, tools, such as email, knowledge management systems, wikis or

instant messaging, considerably improve the process of innovation in knowledgeintensive

and service-oriented sectors with informal, unstructured and spontaneous type

of work, such as banking (McAfee, 2006). ICT may facilitate firms’ innovativeness by

propagating innovations that are less structured than business processes.

The case studies conducted for this report confirm that ICT implementation is often

associated with organisational changes. An obvious example is the creation of a new

company that takes over e-business issues in the course of implementing an ICT

strategy, as in the case of Baosteel (section 5.5). At CMC Steel Coils (section 5.9), work

processes had to be adapted after the implementation of the ESIDEL standard for e-

communication with customers. However, the case studies indicate difficulties related to

organisational changes. For example, the case of e-Arbed.com (section 5.8) shows that

there may be resistance from conventional sales channels against implementing an

online sales channel. The case of the Srem foundry (section 5.2) illustrates employees’

resistance to adopt increased responsibility after implementing an ERP system, and the

case of Farwest Steel (section 5.3) indicates employees’ diffidence against an ERP

system.

In order to analyse the importance of ICT for organisational change in the sector at stake,

the following hypothesis was formulated:

Hypothesis I.4: ICT use in steel firms is positively correlated with organisational

changes.

The hypothesis was tested on the basis of the following data from the e-Business Survey

2007:

Questions D5a-d: "During the past 12 months, has your company introduced major

changes in its corporate strategy / management techniques / organisational

structure / marketing concepts" 106

In order to account for various effects of different ICT components on organisations,

explanatory variables include:

Infrastructure endowment index that comprises of hardware components used by a

firm and includes the share of employees with an internet access at their workplace,

internet connection capacity and the use of LAN, Intranet and Extranet.

Software endowment index that comprises of software applications used by a firm.

The index includes the following applications: a software application to manage the

placing or receipt of orders, ERM, SCM, CRM and the use of the internet to buy and

sell goods.

ICT human capital variable that controls for the presence of ICT practitioners.

In addition, the regression includes dummy variables controlling for the percentage of

employees with a higher university degree, firm size, age and country of origin. To

analyse the relationship between ICT-enabled innovation and the use of electronic data

106 For each positive answer a firm scores one point. Consequently, the dependent variable takes a

value between “0”, if a company did not carry out any of the listed changes, and “4” if it

undertook all of them.

112


ICT and e-business in the steel industry

and information exchange between business partners, an ordered logit regression was

run. 107

Exhibit 4.3-9 reports the results of the regression. An analysis of the results leads to the

following conclusion:

Results for Hypothesis I.4: ICT software is important for organisational changes,

hardware is not

Although significantly positive, the infrastructure index has a small impact on the

likelihood of introducing organisational changes. In contrast, the intensity of ICT

applications use appears to be the major driver of organisational changes. This result

indicates that ICT soft- and hardware have different implications for companies’ conduct

and performance. Whereas hardware is a necessary condition for an efficient ICT use, it

is not a sufficient condition for business transformation. It is rather innovative software

that enables firms to rearrange their operations, functions and workflows, i.e. find

innovative ways of doing business. Hardware infrastructure, in contrast, is already a

commodity that does not offer companies any potential to create a competitive

advantage.

Exhibit 4.3-9: ICT use and organisational change

Independent variable a Coefficient Standard Error

Infrastructure index (A2, A3, A4) 0.004* 0.002

Software index (A6, A7, B1, B3) 0.136*** 0.045

Less than 249 employees (G2) -0.183 0.207

Firm founded before 1998 (Z2b) 0.011 0.142

Model diagnostics

N = 366

R-squared = 0.02

Note: Ordered probit estimates. Reference groups: firms with >250 employees (reference group for firms with


ICT and e-business in the steel industry

I.2 Steel firms that use ICT applications to

exchange information or collaborate with

business partners are more likely to

introduce ICT enabled innovations,

compared with their peer-group in the

same sector.

I.3 ICT-enabled innovations are correlated

with steel firms’ turnover.

I.4 ICT use in steel firms is positively

correlated with organisational changes.

Confirmed: The use of applications and

practices supporting the electronic

exchange of information between

companies positively affects the

likelihood of conducting ICT-enabled

innovations.

Confirmed: ICT-enabled innovative

activity positively affects the likelihood

of a firm reporting a turnover increase.

Partly confirmed: network infrastructure

usage and internet access does not

have a large impact on the likelihood of

introducing organisational changes,

but software has.

Yes

Yes

(yes)

4.4 ICT and market structure

This section analyses ICT diffusion with respect to market structure. It focuses on two

questions. First, does the structure of product markets and, in particular, the competition

affect the pace of ICT adoption, i.e. firm conduct Second, how does firm conduct with

respect to the technology adoption affect corporate performance in terms of the firm’s

market position The stream of thought is shown in Exhibit 4.4-1.

Exhibit 4.4-1: Scope of the analysis in Section 4.4

Structure Conduct Performance

Market / firm

characteristics

Section

4.4.2

ICT

adoption

ICT enabled

innovation

Section

4.4.3

Performance

indicators

(market share)

Source: Sectoral e-Business Watch /DIW

4.4.1 Survey findings on ICT and competition

Findings on the general competitive environment

The e-Business Survey 2007 included a set of questions about the companies’

perception of competition. 65% of the steel firms (representing 69% of employment) said

that rivalry in the market is increasing – see Exhibit 4.4-2. This may also be an indication

of possible changes in the steel market structure. There were no considerable differences

between NACE groups and size classes in this assessment, and the values for the

chemicals and furniture industries are similar. However, the share of US steel firms

reporting increasing rivalry in the market was smaller, only 49%. The majority of EU-7

steel firms (54%) also reported that market demand is not predictable. For the other items

asked, less than half of the steel firms agreed: “competitors’ actions are not predictable”

(41%), “production technologies change rapidly” (37%), “market position is threatened by

new entrants” (36%), “products and services become quickly obsolete in the market”

114


ICT and e-business in the steel industry

(17%).

Exhibit 4.4-2: Steel market characteristics (2007)

competitors’ actions

are not predictable

Companies which agree that their…

market position is

threatened by new

entrants

production

technologies change

rapidly

Weighting scheme: % of empl. % of firms % of empl. % of firms % of empl. % of firms

Steel – 2007 total (EU-7) 24 41 31 36 40 37

NACE 27.1: basic steel 30 36 40 33 29 41

NACE 27.2-3: hollow /

cold processed steel

32 43 19 39 37 39

NACE 27.51+52: casting 11 43 35 32 51 29

Steel – by size (EU-7)

Small (10-49 empl.) 43 41 38

Medium (50-249 empl.) 46 28 35

Large (250+ empl.) (17)* (27)* (39)*

Steel – USA 47 47 21 28 40 42

Other sectors (EU-7)

Chemicals 44 48 38 49 40 41

Furniture 45 52 39 46 52 55

Base (100%) all firms all firms all firms

N (2007, EU-7+USA) 449 449 449

Questionnaire reference G8a-a G8a-b G8a-c

products and

services become

quickly obsolete in

their market

market demand is

not predictable

rivalry in the market

is increasing

Weighting scheme: % of empl. % of firms % of empl. % of firms % of empl. % of firms

Steel – 2007 total (EU-7) 12 17 51 54 69 65

NACE 27.1: basic steel 21 22 37 42 74 61

NACE 27.2-3: hollow / 11 17 66 59 52 67

cold processed steel

NACE 27.51+52: casting 5 8 50 55 82 61

Steel – USA 13 11 41 47 41 49

Steel – by size (EU-7)

Small (10-49 empl.) 19 60 64

Medium (50-249 empl.) 13 40 65

Large (250+ empl.) (13)* (50)* (66)*

Other sectors (EU-7)

Chemicals 24 25 42 54 71 72

Furniture 30 36 54 63 68 69

Base (100%) all firms all firms all firms

N (2007, EU-7+USA) 449 449 449

Questionnaire reference G8a-d G8a-e G8a-f

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

* = percentage only indicative due to a small number of observations (N = 20-50)

Source: e-Business Survey 2007

115


ICT and e-business in the steel industry

ICT impacts on competition

The survey also found that ICT had an impact on competition in the sector. Steel firms

representing 54% of employment reported such an impact – see Exhibit 4.4-3. The

impact appears to be much more pronounced in large firms (65%) than in medium-sized

(37%) and small firms (19%). According to the SeBW steel industry advisory board, the

high percentage for large firms reflects that ICT is necessary to keep production costs as

low as possible and to fulfil customer needs, which in turn is crucial for the

competitiveness of steel companies. More precisely, ICT is crucial in production process

technologies and for production control and planning in the steel industry. ICT impact on

competition was found to be much smaller in the US steel industry (20%) and slightly

smaller in other industries.

Exhibit 4.4-3: Steel firms stating that ICT had an impact on competition in the sector

0 20 40 60 80 100

Steel (EU-7)

54

NACE 27.1

73

NACE 27.2+3

41

NACE 27.5

50

0

10-49 empl.

19

50-249 empl.

37

250+ empl.

65

Steel (USA)

20

Chemical (EU-7)

Furniture (EU-7)

44

45

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

Base (100%) = companies with at least ten employees and using computers; N (Steel, EU-7 and USA) = 449.

Weighting: in % of firms. Questionnaire reference: F4

Source: e-Business Survey 2007

Most of the steel firms (78%, representing 83% of employment) said that competition

increased “somewhat” due to ICT; 19% (14% weighted by employment) even said that

competition had increased “significantly” due to ICT – see Exhibit 4.4-4. The values for

the chemicals and furniture industry are similar, with a slightly higher reported level of

significant increase in these industries. Thus, by fuelling competition in the steel industry,

ICT potentially also impacts the market structure in the steel industry.

116


ICT and e-business in the steel industry

Exhibit 4.4-4: Reported influence of ICT on competition (2007)

Competition has

significantly

increased due to ICT

Competition has

somewhat increased

due to ICT

Competition has

rather decreased

due to ICT

Weighting scheme: % of empl. % of firms % of empl. % of firms % of empl. % of firms

Steel – 2007 total (EU-7) 14 19 83 78 2 3

Steel – by size

Small (10-49 employees) (12)* (85)* (3)*

Medium (50-249 empl.) (28)* (69)* (3)*

Large (250+ employees) (17)* (80)* (3)*

Steel – USA (2)* (8)* (97)* (88)* (1)* (4)*

Other sectors (EU-7)

Chemicals 26 23 69 71 5 5

Furniture 23 25 71 70 6 5

Base (100%)

Firms stating impact of

ICT on competition

(F4 = yes)

Firms stating impact of

ICT on competition

(F4 = yes)

N (2007, EU-7+USA) 112 112 112

Questionnaire reference F5a F5b F5c

Firms stating impact of

ICT on competition

(F4 = yes)

The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,

United Kingdom) and in the USA.

* = Percentage only indicative due to a small number of observations (N = 20-50).

Source: e-Business Survey 2007

4.4.2 Market structure and ICT diffusion

Increasing rivalry in the market might be another important factor that drives the adoption

of new technologies and innovation. Market rivalry may force companies to search for

new opportunities to cut costs by improving process efficiency or develop new products in

order to remain competitive. Firms may also seek to escape competition by securing a

monopoly position through innovation. Such a position might stem from a successful

innovation protected from imitating by means of a patent, a trademark, or a copyright.

Furthermore, just by being the first in the market, a firm may secure an unchallenged

position by building up the necessary capacity to enjoy substantial economies of scale, or

strategic know-how.

In the steel industry, the market structure is often characterised by a relatively small

number of suppliers as well as customers, i.e. a bilateral oligopoly. This applies for

example with regard to large steel companies supplying to automobile manufacturers.

Competition in the steel industry is fierce (see section 2.3). Steel enterprises often

introduce ICT and e-business applications driven by the need to retain and possibly

extend market shares by reducing process costs. The case studies in this report, all

referring to process cost reduction through ICT, support this view.

In order to investigate how strong the effect of market competition on the adoption of ICT

is, the following hypothesis was formulated:

Hypothesis M.1: Increasing rivalry in the steel market is a driver for the adoption of ICT.

The hypothesis was tested on the basis of the following data from the e-Business Survey

2007:

117


ICT and e-business in the steel industry

Question G8a: "Please describe the type of competition in your main market. Do

you agree that rivalry in the market is increasing" (Independent variable.)

Index on ICT endowment, based on several variables on ICT usage, including: the

use of LAN, WLAN, WWW, Intranet, Extranet, ERP, SCM, CRM, the use of the

internet to sell and buy goods and employing IT practitioners. (Dependent variable.)

Exhibit 4.4-5 reports the results of the regression. An analysis of the results leads to the

following conclusions:

Results for Hypothesis M.1:

Importance of increasing market rivalry for ICT usage not confirmed: The

hypothesised relevance of increasing market competition for the intensity of ICT adoption

was not confirmed. However, the result may have been different if the index of ICT

endowment as dependent variable had included ICT supporting production because ICT

plays a strategically important role in the steel industry’s production technologies. 108

Firm size is an advantage: Firms with less than 250 employees that perceive increasing

market rivalry have a significantly lower ICT endowment than firms with 250 or more

employees perceiving market rivalry.

Exhibit 4.4-5: Market rivalry and the intensity of ICT use

Independent variable a Coefficient Standard Error

Increasing rivalry (G8a) 0.311 0.322

Less than 249 employees (G2) -2.406*** 0.593

Firm founded before 1998 (Z2b) 0.080 0.366

Model diagnostics

N = 449

R-squared = 0.07

Note: OLS regression.

a

Codes in brackets refer to questions in e-Business Survey 2007. Dependent variables (index): A2, A3, A4,

A6, A7, B1 and B3

Significance levels: * 90%, ** 95%, *** 99%. Coefficients with no asterisk indicate no relationship.

Source: Sectoral e-Business Watch, DIW Berlin (2008)

As regards firms size, first of all this finding mirrors the generally smaller level of ICT use

in SMEs. However, one may go one step further and interpret the result of the regression

in a way that small companies that face increasing market rivalry do not respond to such

rivalry in a way that they seek a higher level of competitiveness through using more ICT.

It is insightful here to also compare SMEs perceiving increasing market rivalry and those

not perceiving increasing market rivalry. The result is that there are no differences

between the two groups. 109

4.4.3 ICT impact on market structure

Historically, distance to market and transportation cost limited the number of customers a

firm could reach. At the beginning of the internet era, a common believe was that ICT and

108 See the elaborations on production-related ICT applications in section 3.4.2 about internal

systems.

109 For example, 13.8% of the SMEs indicating increasing market rivalry reported to have an SCM

system versus 13.2% of the SMEs that did not report increasing market rivalry. (Not shown in

an Exhibit.)

118


ICT and e-business in the steel industry

e-commerce were to eliminate the limitations of location and enable firms to expand

regardless of geographical locations (Cairncross 1997).

One example of how ICT allows firms to expand their operations and change market

structure of existing markets, or create new ones, are entries of internet start-ups.

Amazon or eBay are already icons of e-commerce that changed the landscape of the

retailing industry. Though of a smaller magnitude, these effects hold for traditional shops

as well.

ICT offers existing firms possibilities to expand their market reach, which consequently

leads to market structure changes as well. This can be illustrated by the way ICT enables

companies to cross boundaries of their markets and industries. An example for blurring

lines between sectors and a possible thread for retailing comes from manufacturing firms

like Dell. This firm uses ICT to surpass the whole retailing sector and to sell their goods

directly to customers instead of depending on a network of retailers. Thus, in order to

assess the relationship between ICT and the changes of market structure, the following

hypothesis is formulated:

Hypothesis M.2: ICT endowment is positively correlated with a change of market share.

The hypothesis was tested with the following data from the e-Business Survey 2007:

Question G7: "Has the share of your company in this market increased, decreased,

or stayed roughly the same over the past 12 months" (Dependent variable.)

The explanatory variable controlling for a firm’s ICT endowment level is an index

composed of answers to the questions regarding the internet connection type, the use of

LAN, WLAN, WWW, Intranet, Extranet, ERP, SCM, CRM, the use of the internet to sell

and buy goods and employing IT practitioners. Exhibit 4.4-6 reports the results of the

regression. An analysis of the results leads to the following conclusion:

Result for Hypothesis M2: ICT effect on market share unclear.

The hypothesis that ICT enables firms to extend their market share was not confirmed.

This means that steel firms that are well-endowed with ICT may nevertheless not be able

to increase their market share, and firms with a small level of ICT use may nevertheless

be able to increase their market share. This result may indicate that the usage and

exploitation of ICT for gaining competitive advantages in the steel sector is limited.

Moreover, companies might have had difficulties to estimate their market share in the

interview.

Exhibit 4.4-6: The intensity of ICT use and change in the market share

Independent variable a Coefficient Standard Error

ICT endowment

(A2, A3, A4, A6, A7, B1, B3)

0.042 0.031

Firm founded before 1998 (Z2b) 0.044 0.231

Less than 249 employees (G2) -0.204 0.388

Model diagnostics

N = 411

R-squared = 0.04

Note: Ordered probit estimates. Reference groups: firms with >250 employees (reference group for firms with


ICT and e-business in the steel industry

This result is in line with findings from qualitative research for this report. In the steel

industry, the number of potential customers is limited and the products sold are not wellsuited

for online sales. ICT and e-business are rather used to support sales processes,

not to directly conduct transactions. This applies for example to the implementation of an

ERP system that enhanced order management at Farwest Steel (section 5.3) and the

implementation of the ESIDEL standard at CMC Coils Steel (section 5.9). Findings

indicate that ICT and e-business can hardly be used to open up new markets, to cross

boundaries of industries and markets and to increase the number of customers. The

unsuccessful attempt to establish an online sales platform by the former Arbed company

illustrates this view, see the case study about e-Arbed.com (section 5.8). A further

example is that no e-marketplace survived in the steel industry.

4.4.4 Overview of results on ICT and market structure

Summarising the results of the econometric testing of hypotheses on ICT and market

structure, the two hypotheses were not confirmed. The following table (Exhibit 4.4.7)

provides an overview of the results.

Exhibit 4.4-7: Results economic analysis ICT and market structure

Hypotheses

M.1 Increasing rivalry in the retail market is a

driver for the adoption of ICT.

M.2 ICT endowment is positively correlated

with a change of market share.

Not confirmed.

Not confirmed.

Result

No

No

4.5 ICT and the value chain

This section analyses ICT diffusion with respect to the retail industry’s value chain. It

focuses on the question whether ICT use affects the firms’ decisions regarding ‘make or

buy’, i.e. outsourcing decisions. This question is related to the effects of firm conduct on

industry structure – see Exhibit 4.5-1.

Exhibit 4.5-1: Scope of the analysis in Section 4.5

Structure Conduct Performance

Market / firm

characteristics

Section

4.5

ICT

adoption

ICT enabled

innovation

Performance

indicators (e.g.

profits)

Source: Sectoral e-Business Watch /DIW

Theoretical background

In light of the transaction cost theory, decreasing costs of search, evaluation and

monitoring of suppliers should lead to a shift away from firms and toward markets as a

form of organizing economic activity (Coase 1937, and Williamson, 1985). Consequently,

120


ICT and e-business in the steel industry

the expectations regarding the potential of ICT as technologies introducing innovative

ways of doing business, re-shaping firm boundaries and changing the constellations of

value chains were enormous (see, for example, Johnston et al., 1988, Johnston et al.,

1988a, Milgrom et al., 1990, Fulk et al., 1995). The availability of powerful and cheap ICT

was said to increase the attractiveness of markets (Malone et al., 1987 and Lucking-

Reiley et al., 2001). The authors of the move to the market paradigm argued that

companies would reduce their dependency on hierarchy and outsource business

activities.

Findings of research for this report

Exhibit 4.5-2: Outsourcing ICT services

(2007)

Companies having

outsourced ICT

services

Weighting scheme: % of empl. % of firms

Steel – 2007 total (EU-7) 19 22

NACE 27.1: basic steel 13 26

NACE 27.2-3: hollow /

cold processed steel

37 23

NACE 27.51+52: casting 6 12

Steel – by size (EU-7)

Small (10-49 employees) 23

Medium (50-249 empl.) 19

Large (250+ employees) 24

Steel - USA 14 15

Other sectors (EU-7)

Chemicals 30 28

Furniture 24 21

Base (100%) All

N (2007, EU-7+USA) 449

Questionnaire reference E4

The survey was conducted in seven EU Member

States (Germany, France, Italy, Spain, Poland,

Sweden, United Kingdom) and in the USA.

In the e-Business Survey 2007, the

firms were asked whether they had, in

the past twelve months, outsourced any

ICT services to external service

providers which were previously

conducted in-house. 22% of the steel

firms (19% of employment) said they

had done so – see Exhibit 4.5-2. The

values by size class were similar, with

medium-sized firms (19%) reporting

lower shares than small (23%) and

large (24%) firms. Considering that ICT

activity tends to be less intense in small

companies, outsourcing appears to be

relatively more important for small

companies than for medium-sized and

large ones.

The propensity to outsource ICT

services in EU-7 steel firms was found

to be slightly larger than in US steel

firms (15%) and slightly smaller than in

the chemicals (28%) industry and

similar to furniture (21%).

Source: e-Business Survey 2007

One of the case studies conducted for this report mentioned outsourcing activities: At

Farwest Steel, US (section 5.3), the implementation of an ERP system as software-as-aservice

allowed to move tasks related to data base administration to the Oracle

corporation that provided the software.

Hypothesis testing

To test whether ICT leads to more market transactions in the analysed sector, the

following hypothesis was formulated:

Hypothesis V.1: ICT endowment in steel firms is positively correlated with outsourcing.

The hypothesis is tested on the basis of the following data from the e-Business Survey

2007:

121


ICT and e-business in the steel industry

Question G22: "Has your company outsourced any business activities in the past 12

months which were previously conducted in-house" (Dependent variable.)

Index on ICT endowment, composed of answers to the questions regarding the

internet connection type, the use of LAN, WLAN, WWW, Intranet, Extranet, ERP,

SCM, CRM, the use of the internet to sell and buy goods and employing IT

practitioners.

Exhibit 4.5-3 reports the results of the regression. An analysis of the results leads to the

following conclusion.

Results for Hypothesis V.1:

ICT intensity increases the propensity to outsource business activities: The more

advanced a company is in terms of ICT use, the more likely it is to have outsourced some

business activities in the past twelve months. This provides support to the hypothesis that

ICT and make-or-buy decisions are interrelated, although it is not possible to establish

the direction of this link. In other words, it is not possible to say whether the intense

usage of ICT drives outsourcing or the necessity to outsource activities is a driver to the

adoption of ICT.

Small firm size gives more flexibility: Among those companies with advanced ICT

endowment, SMEs are more likely to outsource business activities than large firms. This

contrasts findings from the e-Business Survey 2007 about ICT outsourcing (see Exhibit

4.5.2) which revealed that in general the level of ICT outsourcing in SMEs and large firms

is similar. The reason for the difference in findings may be that SMEs with advanced e-

business activity require much ICT support but cannot afford to employ many ICT

experts, so they outsource ICT support relatively more than large firms that in turn

employ relatively more ICT experts.

Exhibit 4.5-3: The intensity of ICT use and outsourcing

Independent variable a Coefficient Standard Error

ICT endowment

(A2, A3, A4, A6, A7, B1, B3)

0.063*** 0.024

Less than 249 employees (G2) 0.755* 0.402

Firm founded before 1998 (Z2b) 0.190 0.192

Model diagnostics

N = 405

R-squared = 0.09

Note: Probit estimates. Reference groups: firms with >250 employees (reference group for firms with


ICT and e-business in the steel industry

4.6 Summary of impact analysis

Findings for chapter 4 show that ICT and e-business have considerable impacts on the

steel industry. However, they did not change business in this industry fundamentally. The

analysis in this chapter was conducted along five types of impacts: productivity,

employment, innovation, market structure, and value chains. The following conclusions

were drawn from an econometric analysis, the e-Business Survey 2007, case studies

conducted for this report and literature evaluation:

Productivity: Results from other studies indicate that ICT-induced productivity

effects are relatively less pronounced in capital intensive, mature manufacturing

industries such as the steel industry. On the other hand, evidence from the e-

Business Survey shows that particularly the larger companies in the steel industries

have dynamically adopted ICT for a variety of purposes (see chapter 3). A growth

accounting analysis conducted for this report suggests that changes in the ICTcapital

stock accounted only for minor shares of overall value added growth in the

basic and fabricated metals industries. TFP growth was found to account for much

stronger contributions. Changes in ICT capital and non-ICT capital had about the

same importance for value added growth. However, ICT can be embedded in other

capital, so there may be a "hidden ICT-impact" which cannot be measured by

means of the data on ICT-investment available in the database. As regards labour

productivity, non-ICT capital intensity and the intermediate inputs intensity were

found to be the main components of labour productivity growth.

Innovation: In the steel industry, ICT impact appears to be mainly on process

innovation, not on product innovation. Many case studies conducted for this report

confirm that ICT can be considered as an enabler of innovation and positively

impact on firm performance, even if the impact cannot always be measured

concretely. As regards ICT as a possible driver of innovation, firstly, employing IT

practitioners significantly increases steel firms’ propensity to use ICT to develop

new products and services. Secondly, the use of applications and practices that

support the electronic exchange of information between companies positively

affects the likelihood of conducting ICT-enabled innovations. As regards impacts,

firstly, the analysis found that ICT-enabled output is positively related with turnover

increase irrespective of firm size and age. Secondly, ICT software is an important

driver of organisational changes, while hardware apparently is not.

Market structure: In the steel industry, the number of potential customers is limited

and the products sold are not well-suited for online sales. ICT and e-business are

rather used to support, not execute, sales processes. As regards market structure

as a possible driver of ICT adoption, the hypothesised relevance of increasing

market competition for the intensity of ICT adoption was not confirmed. Findings

also indicate that, as regards impacts of ICT, ICT and e-business can hardly be

used to open up new markets, to cross boundaries of industries and markets and to

increase the number of customers. In other words, ICT appears to have little impact

on the steel market’s structure.

Value chains: As regards outsourcing, the general expectations regarding the

potential of ICT to change value chains were enormous. The econometric analysis

found that ICT intensity indeed increased the propensity to outsource business

activities. The Farwest Steel case study (see section 5.3) may confirm this.

The following table (Exhibit 4.6-1) shows an overview of all hypotheses and results in

123


ICT and e-business in the steel industry

brief. Five of the nine hypotheses were confirmed, four were rejected. The hypotheses

about innovation were confirmed in all sectors included in the SeBW 200/8, i.e.

chemicals, furniture, retail, transport/logistics and banking. However, for the hypotheses

about market structure and value chains the results differ largely by industry. 110

Exhibit 4.6-1: Overview of results of the econometric analysis for the steel industry

Hypotheses

P.1 ICT-capital investment has become a main element in value added growth and

productivity growth in the steel industry, while other capital inputs summarised as

non-ICT-capital have diminished in their respective importance.

P.2 TFP growth in the steel industry has accelerated together with increased

investment in ICT-capital.

P.3 ICT and high- and medium-skilled labour had a positive impact on labour

productivity growth.

I.1 Steel firms characterised by a higher share of employees with a university degree

are more likely to conduct ICT-enabled innovations, in comparison with their peergroup

in the same sector.

I.2 Steel firms that use ICT applications to exchange information or collaborate with

business partners are more likely to introduce ICT enabled innovations, compared

with their peer-group in the same sector.

Result

I.3 ICT-enabled innovations are correlated with steel firms’ turnover. Yes

no

no

no

(Yes)

I.4 ICT use in steel firms is positively correlated with organisational changes. (yes)

M.1 Increasing rivalry in the retail market is a driver for the adoption of ICT. No

M.2 ICT endowment is positively correlated with a change of market share. No

V.1 ICT endowment in steel firms is positively correlated with outsourcing. Yes

Yes

110 See section 2.4 of the SeBW 2007/8 report about ICT impacts, European Commission (2008f).

124


ICT and e-business in the steel industry

5 Case studies

Introduction and overview

This report presents ten case studies of exemplary e-business practice in the steel

industry. References to these case studies are provided in appropriate sections of

chapters 3, 4 and 6. Exhibit 5-1 provides an overview of the case studies and their topics.

The case studies represent some of the largest and most important steel companies in

Europe and in the world.

Exhibit 5-1: Case studies and business examples presented in this report

Case Company / project Country Firm size Topic(s)

1 Electronic sourcing at

ThyssenKrupp

2 Enterprise resource

planning at Śrem iron

foundry

3 Enterprise resource

planning at Farwest

Steel

4 Internal e-business

systems at

TenarisDalmine

5 e-Business platform

development at

Baosteel

6 Customer platform at

Corus IJmuiden

7 Electronic warehouse

management at

ArcelorMittal Gent

8 Electronic supply and

sales at e-Arbed.com

9 ESIDEL standard use at

CMC Coil Steels

10 Basic e-business use at

the Patina foundry

Germany Large Example of an online sourcing

platform

Poland

Example of the benefits and

challenges of introducing an SAP ERP

system

USA Large Example of the benefits and

implications of implementing an Oracle

ERP system

Italy Large Example of benefits of an internal

system for environment, health and

safety management

China Large Development of electronic

communication platforms to enhance

business processes with customers

Netherlands Large

Example of an extended e-business

platform for e-communication with key

customers

Belgium Large Enhancing distribution and logistics by

facilitating the overview of steel

products in stock

Large

Example of an online market place for

steel products that was terminated for

various reasons

Australia Large Using the ESIDEL standard in the

Australian steel industry and

perspectives for Europe

Hungary

Mediumsized

Luxembourg

Mediumsized

Source: Sectoral e-Business Watch (2007)

Example of a medium-sized foundry

with small-scale ICT use that does not

face a need to sophisticate its e-

business practice

The case studies were selected to illustrate and validate topics dealt with in chapters 3

and 4 of this report, i.e. current main e-business topics in the steel industry and impacts

of e-business in the sector:

Sourcing: One case study, electronic sourcing at ThyssenKrupp, Germany,

highlights the benefits and challenges of the procurement side of e-business. It is

particularly relevant for the hypotheses related to productivity, firm performance and

value chains in chapter 4.

Internal systems: Two case studies deal with an Enterprise Resource Planning

(ERP) system that improved business processes: one about the Srem iron foundry,

125


ICT and e-business in the steel industry

Poland, and one about Farwest Steel, US. Both are particularly relevant for

productivity-related hypotheses in chapter 4. A further case study about Tenaris

deals with the use of an internal systems for managing health, security and

environmental issues.

Sales side: Three case studies deal with sales-side applications: The case of

Baosteel, China, is an example of e-business platforms for communication with

customers. It is particularly relevant for the hypotheses about productivity,

employment and innovation in chapter 4. ArcelorMittal Gent, Belgium, is an

example of electronic warehouse management to improve logistics that provides

insights for the hypotheses about productivity and innovation. Corus IJmuiden,

Netherlands, is a case study about a platform for e-communication with customers

that shows how such a platform can improve productivity.

Intermediation: Two case studies are about joint procurement and sales-side

issues: e-Arbed.com is an example of an online market place, particularly relevant

for hypotheses related to innovation and market structure. The case of CMC Coil

Steels illustrates the use of the ESIDEL standard in Australia and lessons to be

learned for Europe. It is particularly relevant for issues of productivity and

innovation.

Finally, the case of the Patina foundry in Hungary represents a medium-sized firm that

uses basic ICTs to enhance its business processes and that does not feel pressure to

sophisticate its e-business practice. This is not a special topic in chapter 3 but an issue

across various of the topics analysed.

The case studies were also selected in a way that they cover a wide spectrum of

countries. Since steel business is international, case studies were also collected from

several continents – Europe, Asia, America and Australia. The focus of the selected

cases is on large companies because they are most important for international

competitiveness of the European steel industry. However, since most of the steel

companies are small and medium-sized, it was deliberately sought to include SME

experiences.

126


ICT and e-business in the steel industry

5.1 Electronic sourcing at ThyssenKrupp Steel, Germany

Abstract

ThyssenKrupp is the tenth-largest producer of steel in the world and the largest in

Germany. In 2000, ThyssenKrupp Steel introduced a platform for electronic tendering

of goods. Suppliers have to register and place their offer in the platform and are

selected by price and fulfilment of specified requirements. Within one and a half years,

gains from reduced prices and process enhancement amounted to a two-digit million

sum of euros. Suppliers also appreciate the platform because it provides a transparent

tendering and selection process. Due to its success, the system was expanded and

integrated into the “ThyssenKrupp Strategic Sourcing” system in 2005. It is open to

suppliers from anywhere in the world and available in English, German, French,

Spanish, and Italian. While e-procurement proved to be beneficial, production goods

such as iron ore will continue to be purchased offline in long-term business

relationships.

Case study fact sheet

Full name of the company:

Location (headquarters):

Main business activity:

Year of foundation:

ThyssenKrupp Steel AG

Duisburg, Germany

Quality flat steel production and related services

1811 (Krupp foundry), 1891 (Thyssen steel plant)

Number of employees: 30,647 (world-wide, financial year 2005/06)

Turnover in last financial year: 10.7 billion euros (financial year 2005/06)

Primary customers:

Most significant geographic market:

Main e-business applications studied:

Broad spectrum of customers in steel-processing;

focus on automotive industries

World-wide distribution, focus on Germany

e-Procurement platform

5.1.1 Background and objectives

ThyssenKrupp is the tenth-largest producer of steel in the world and the largest in

Germany. The ThyssenKrupp Steel AG is the largest operative unit of the ThyssenKrupp

trust with headquarters located in the city of Duisburg in Northwest Germany. 111 The

company produces and sells quality flat steel to a broad spectrum of customers in steelprocessing

industries, with a focus on automotive business. ThyssenKrupp Steel focuses

distribution on “attractive markets in the triad of Europe, America and Asia” 112 .

ThyssenKrupp Steel is heavily investing in e-business. In 2000, ThyssenKrupp Steel

introduced an internet platform with the technical term W3AS for electronic tendering of

goods to be procured. 113 Potential suppliers have to register and place their offer in it

online. The winning bidders are selected by price and fulfilment of specified requirements.

Facing increasing international competition, the primary objective of the system was to

realise efficiency gains and reduce purchasing costs. ThyssenKrupp Steel considered the

111 The other units of the ThyssenKrupp trust are stainless, technologies, elevators, and services.

112 See market description at http://www.thyssenkrupp-steel.com/en/portraet/maerkte/.

113 W3AS means “WWW-basiertes Ausschreibungssystem”, i.e. world-wide web based tendering

system.

127


ICT and e-business in the steel industry

introduction of e-tendering as “important, actually indispensable”, as stated in an internal

brochure of 2003.

e-Procurement is one of five principal e-business applications at ThyssenKrupp Steel.

There are also applications for online transport services tendering, for electronic sales of

steel products, for electronic list pricing, and for electronic data interchange. 114 Among

these, the sourcing system is the most important one in terms of number of users,

number and value of goods traded, and costs saved.

5.1.2 e-Business activity

Sequence of system implementation

The W3AS e-tendering platform was developed by autinform 115 , a German systems

developing company, in co-operation with ThyssenKrupp. The objective was to create a

system that is very simple and intuitively to operate, integrated into the existing SAP

Enterprise Resource Planning system, and welcomed by both buyers and suppliers.

Scanning the market for e-tendering platforms and their integration with SAP systems,

ThyssenKrupp did not find any adequate existing solution. The development of the

system was started in early 2000 by the ThyssenKrupp departments for material business

and informatics. The system was implemented in October 2000 and can be accessed at

http://w3as.thyssen-krupp-stahl.com. Two functions were added later on: an auction

function as well as, in 2002, functions for purchasing services. The service purchasing

function allows the ThyssenKrupp managers to specify services needed and to confirm

service fulfilment, and it allows the service providers to describe how the service was

fulfilled. In order to make the system known to potential tenderers, ThyssenKrupp Steel

launched an information campaign that targeted internet pages, search engines, relevant

magazines, and all current suppliers.

The W3AS system was very successful – it was awarded the first prize of a trust-wide

innovation contest in 2003. After triggering the establishment of tendering platforms in

other parts of the ThyssenKrupp trust in 2004, the W3AS system and the other systems

were merged to the new, trust-wide “ThyssenKrupp Strategic Sourcing” system

(https://sourcing.thyssenkrupp.info) in 2005 – see the homepage in Exhibit 1. In this

system, buyers from all segments of the ThyssenKrupp trust can place calls for tender. It

is open to suppliers from anywhere in the world and available in English, German,

French, Spanish, and Italian.

Today, all buyers in the ThyssenKrupp Steel material business department use the

sourcing system. In the world-wide ThyssenKrupp trust, around 550 buyers use the e-

sourcing system, around 7,110 suppliers are registered, between 1,000 and 1,400 calls

for tenders are placed per month, and the system has around 15,000 accesses per

month. In financial year 2005/06, the value of goods tendered was around one billion

euros. A trust-wide team meets regularly to exchange experiences and plan

developments of the system. In a relaunch of the system that is planned for end of March

2008, all ThyssenKrupp trust companies world-wide that do not yet use the system are

supposed to be included as well.

114 Access to these applications through http://www.thyssenkrupp-steel.com/en/ebusiness/.

115 See http://www.autinform.de.

128


ICT and e-business in the steel industry

Exhibit 5.1-1: Homepage of the ThyssenKrupp e-sourcing platform

Source: https://sourcing.thyssenkrupp.info/lvportal/language.dolanguage=en, 15 August 2007.

Operative aims of the system

The operative aim was to purchase all kinds of inputs through the tendering platform, and

this right from the start:

Auxiliary goods such as paints and tools,

operating supply items such as lubricating oil,

spare parts for all kinds of production machines,

furnishing goods for production and office spaces such as desks and computers,

production facilities and related maintenance services.

Only production materials, including iron ore, are not purchased through the online

sourcing platform. Production materials are usually purchased in long-term contracts and

business relationships which are not suited to procurement through the internet.

Tender functions

The system offers “open” and “closed” tenders. Open tenders are directed towards all

129


ICT and e-business in the steel industry

potential suppliers that search for tenders in the internet. All suppliers that want to place

tenders need to register and enter their offers online. They can modify their offers up to

the tender deadline. Closed tenders are only directed towards pre-selected groups of

suppliers. They are the exception from the rule of open tender practice. In the case of

closed tenders, pre-selected suppliers receive an e-mail informing them about new

tenders. The system includes a supplier database that allows ThyssenKrupp to invite

particular companies to bid in a call for tender, for example those fulfilling certain

certifications.

The buyer defines a deadline for providing tenders. After this deadline the system

generates an automatic comparison of offers and a ranking of tenderers. The procurer

can then select the most suitable supplier, if need be after further negotiation. The buyer

may also trigger an internet-based auction process, for example with the three cheapest

tenderers. In this case, which can only be applied when the goods can be very well

defined, the tender is automatically awarded to the cheapest supplier. Finally, the offers

received through the internet are transmitted to the SAP system by clicking one button.

Registered suppliers are informed by automatic e-mails about new calls for tender so that

they do not have to check for new calls again and again. Suppliers can change their

profile online, for example by including new certificates or new products offered.

5.1.3 Impact

ThyssenKrupp offered the autinform company its business expertise for developing a

prototype tendering system that autinform could easily adjust and sell to other

companies. 116 In return, ThyssenKrupp paid only a small amount of money for the

system. As the system was easy to operate, costs for training and support were negligibly

low. Thus, gains from reduced prices and otherwise improved purchasing conditions as

well as process enhancement outperformed the implementation costs of the system

within one month. ThyssenKrupp realised the following benefits from the e-tendering

system:

Overall cost reduction. Within one and half a year after introducing the system, it

saved ThyssenKrupp Steel a two-digit million sum of euros. Financial success was

approved by internal controlling as well as an external consulting firm. Today,

according to the materials business department, a calculation of costs saved in

comparison to a fictive situation without the e-tendering system is not possible any

more.

Procurement cost reduction was achieved due to enhanced market transparency,

i.e. an improved knowledge of “who can offer what” that led to an increased number

of suppliers, and improved purchasing conditions. Better purchasing conditions

include mainly reduced prices for goods purchased and enhanced payment

conditions. The online sourcing system saves ThyssenKrupp procurement costs on

a small one-digit percentage level per year which sounds little but is considerable.

Process cost reduction: In the past, ThyssenKrupp employees placed inquiries for

goods in the SAP system. Staff in the material business department then printed the

inquiries, signed them and sent them – with or without product specification – to

116 The autinform company meanwhile offers the W3AS system that was developed for

ThyssenKrupp steel as a standard solution, named “myBusiness”. It is also used by, for

example, German rail (Deutsche Bahn) and EON Ruhrgas.

130


ICT and e-business in the steel industry

potential suppliers, often by normal mail. Offers coming in by paper mail had to be

transcribed into the computer system. This process was much more labourintensive

than today’s electronic processes. Furthermore, the online sourcing

system reduced the overall time from calling for tenders to confirming order

fulfilment.

Supplier satisfaction and thus improved value chains: The assessments from

suppliers were also positive because the suppliers are automatically informed about

new calls for tender. This means that the suppliers do not have to find out about

tenders by phone calls to the many different parts of the ThyssenKrupp trust as in

the past and that they cannot be neglected – deliberately or not – by a buyer

looking for tenders.

Image enhancement: The online sourcing system is a symbol of modern

technology applied in a company that is commonly perceived as operating in an old

and dusty industry. Such new technology improves ThyssenKrupp’s investor

relations as well as the ability to attract young, high potential employees.

Within and outside ThyssenKrupp Steel there have been no serious difficulties in using

and accepting the system. “We cannot think of doing without the online sourcing system”,

say Silke Rauhut and André-Thorsten Hebel, managers of the material business

department.

5.1.4 Lessons learned

The representatives of the ThyssenKrupp Steel material business department mention

the following principal success factors of the system:

Acceptance: Focusing on acceptance of both buyers and suppliers to minimise

internal and external opposition against systems introduction. One needs people

“taking care of convincing others that it really works”, as Silke Rauhut says.

According to ThyssenKrupp Steel, the main barriers to introduce such a system are

psychological, to change the minds of the people involved. Common arguments

against it include “our firm is too small”, “we do already have something like that”,

and “this does not suit our organisational structure”. After successfully operating an

online sourcing system at ThyssenKrupp Steel, opponents in other parts of the trust

in other locations lacked arguments to avoid the introduction of such a system.

Simplicity: Developing a system that is easy to use and that works without media

breaks. A low level of training required is important for introducing the system to

other companies within the trust.

Open tenders: Making open tenders the rule and closed-shop tenders the

exception so that market transparency and the number of suppliers can really

increase.

Having gained experience with an online sourcing system for eight years, the main lesson

learned by ThyssenKrupp is that “it also works electronically, it works even better, quicker

and at lower cost, and it works with all types of goods and services”, as procurement

manager Silke Rauhut says.

131


ICT and e-business in the steel industry

5.1.5 References

Research for this case study was conducted by Stefan Lilischkis, empirica GmbH; on

behalf of the Sectoral e-Business Watch. Sources and references:

Interview with André-Thorsten Hebel, Head Procurement Team Auxiliary and

Operating Supply Items, and Silke Rauhut, Controlling Coordinator, both Material

Business Department, and Michael Hetkamp, Sales Industries, ThyssenKrupp

Steel AG, 16 August 2007.

Business case description W3AS at ThyssenKrupp Steel, by autinform, 2002.

E-Purchasing bei ThyssenKrupp Stahl durch das internetbasierte Online-

Ausschreibungssystem W3AS. In: Forum 2003 (internal paper).

ThyssenKrupp Steel AG homepage, August 2007:

̶ Facts and figures (http://www.thyssenkrupp-steel.com/en/portraet/organisation/

zahlen_fakten.jsp).

̶ Portrait (http://www.thyssenkrupp-steel.com/en/portraet/)

̶ e-Business (http://www.thyssenkrupp-steel.com/en/ebusiness/)

ThyssenKrupp. In: Wikipedia, August 2007

(http://de.wikipedia.org/wiki/ThyssenKrupp).

132


ICT and e-business in the steel industry

5.2 Enterprise resource planning at Śrem iron foundry, Poland

Abstract

Located in the city of Śrem in Poland, Odlewnia Żeliwa Śrem (OZS, Srem Iron

Foundry), is one of the three largest iron foundries in Poland. It produces around

50,000 castings per year and employs about 1,450 people. Over the past twenty years,

OZS has been confronted with a number of challenges. It had to undertake drastic

restructuring measures, making overdue investments and improving business process

efficiency. The implementation of an Enterprise Resource Planning (ERP) system,

which started in January 2000, was one of the important decisions on the way to

restructuring the company. The new system had two strategic impacts on the company.

First, OZS was able to organise its business processes efficiently, which led to

substantial reduction of inventory costs and increased utilisation of production

capacities. Second, due to increased transparency of operation, the firm was able to

improve business processes and management practices.

Case study fact sheet

Full name of the company:

Location (headquarters / main branches):

No. of employees: 1,450

Main business activity:

Primary customers:

Year of foundation: 1964

Turnover in last financial year (€):

Most significant market area:

Main e-business applications studied:

Odlewnia Żeliwa Śrem

Śrem, Poland

Manufacture of iron castings

Shipbuilding, automotive and mining companies

n.a.

Poland and Western European countries

ERP, ICT and e-business impacts on work

processes

5.2.1 Background and objectives

Odlewnia Żeliwa Śrem (Śrem Iron Foundry, or OZS) is one of the three largest iron

foundries in Poland. Located in the city of Śrem in central Poland, OZS supplies iron

castings, mainly for the shipbuilding, automotive and mining industries. Its yearly

production volume amounts to around 50,000 castings. Nearly half of the output is

exported to Germany, the Netherlands, France, the UK, and Scandinavian countries. In

the Polish cast iron market, the company has a market share of 9 %. OZS employs about

1,450 people in the following production departments: central melting plant, training

foundry, foundries for heavy, medium and light castings, pattern shop and castings

roughing department.

Like the whole of the Polish steel industry, OZS has been confronted with a number of

substantial challenges over the past 20 years. Globalisation forced OZS to restructure its

operations. Joining the EU removed trade barriers and exposed OZS to increased foreign

competition. Furthermore, privatised in 1999, OZS faced additional pressure to increase

productivity by restructuring its operations and reducing employment. Consequently,

compared to the employment level in the eighties, the firm reduced the number of

employees by nearly a half.

In order to adapt to the new business environment, the company had to improve its

133


ICT and e-business in the steel industry

performance. At the operational level, OZS had to make overdue investments to increase

process efficiency, mainly in steelmaking and distribution. OZS was one of the first Polish

steelmakers, that considered the deployment of an integrated ICT system to support

production as crucial to move forward. In 2000, the firm began to implement an ERP

system.

5.2.2 e-Business activities

Following the example of companies from other manufacturing industries which were

more advanced in optimising their operational efficiency, OZS turned to ICT as a source

of competitive advantage and a tool to increase productivity. According to Mr Andrzej

Kulig, IT manager at the Śrem Iron Foundry, ”the firm felt a pressure from competitors to

improve by deploying modern ICT applications, integrating the management of the firm. It

was afraid of staying behind the competitors and eventually loosing its solid position in

the market.”

Considering that the firm had obsolete isolated ICT tools that supported some business

functions, it decided to implement an application that would consolidate all information

related to production activities. In early 2000, the company launched an ERP

implementation project with the main objective to improve the efficiency of production

management.

System selection

The principal challenge for the company management was that there was no other

project of similar scale and scope conducted in the Polish steel sector. The company had

to combine its own process know-how and ICT expertise to define the requirements of an

ICT infrastructure and applications supporting company management. Therefore, before

choosing a systems provider, OZS spent considerable time specifying its requirements,

evaluating offers and eventually selecting an appropriate solution. OZS produces a wide

variety of products ranging from small castings produced in series to large castings

produced only once. Thus, the main requirement was that the new system needed to

support a wide range of production process models.

OZS chose an ERP system by SAP. According to Mr Andrzej Kulig, ”the reason why we

selected this application was that nearly all our customers in Western Europe use it. This

system is a standard solution in the industries we supply, for example the automotive and

machinery industries. Thus, we wanted to comply with their standards and requirements.

In addition, it is viewed as a very stable and reliable application. Lastly, the system was

appropriate to facilitate the complexity of production of a large variety of products, which

was the main requirement.”

In December 1999, the company signed a contract with BCC, a local SAP systems

provider, for implementation services and delivery of the hardware. The contract also

included the implementation of applications from Microsoft Office and Sun OpenOffice as

well as Windows NT 4.0/2000, Novell NetWare 5.0, and Linux operating systems for the

network. Additionally, system functionalities were extended to product development by

implementing tools for computer-aided design and manufacturing from the ICT provider

Unigraphics and a computer-aided engineering application by Magmasoft.

134


ICT and e-business in the steel industry

Implementation phases

System implementation began in early 2000. After creating a prototype version of the

application, first tests of functionalities and systems integration took place. At the end of

2000, the team launched the system.

One of the most important steps during the implementation of the production module was

to sort out the production data and feed it into the system’s database. Before, all

databases existed only in paper form. Thus, stocktaking and verification of existing data

alone took altogether seven months, much more than initially planned. This step was,

however, critical for the project, as this data was to be used for all subsequent automatic

operations. After verification, the data was entered into the database. The team had to

feed the database with 8,000 technological specifications, nearly 30,000 material codes

and over 10,000 material specifications.

Nearly a year after project inception, the system was being prepared to go live. At this

time, the entering of master data was reaching an end as well. Over the entire year, the

team had spent considerable effort and resources on user training. As it turned out later,

this proved to be one of the major success factors of the project.

In January 2001, the firm began to operate the following modules: financial accounting,

controllin