Steelmakers profit with a different tack

Industry: Innovative manufacturing and putting bosses and employees on a more equal footing are helping some steel companies buck the trend and earn a profit.

March 31, 2002|By Kristine Henry | Kristine Henry,SUN STAFF

Despite the meltdown in the U.S. steel industry that has bankrupted 32 producers, a handful of steelmakers managed to post surprising profits last year and are poised to reap the gains when markets bounce back.

A number of business factors are working in these companies' favor -- along with less tangible dynamics such as corporate culture that experts say also play a significant role.

Nucor Corp., the country's second-largest producer, is by far the most profitable steelmaker in the country, earning more than $100 million last year while others lost several times that amount. Bethlehem Steel Corp. had the biggest shortfall, with a loss of nearly $2 billion, or $594 million without special charges. Its shares are trading at less than 50 cents.

"People ask me how to classify the economic philosophy at Nucor, and they want a grandiose explanation of why we do well. It's capitalism, it's capitalism in its most simple form," said John J. Ferriola, executive vice president at Nucor. "We look for money-hungry people."

That's part of it, but the relatively young Nucor has some powerful other advantages over old-line producers, including:

A more flexible steelmaking process.

Technologically advanced equipment.

Wage structures that reward hard work.

A benefit package that does not include pensions or health care benefits for retirees.

Aside from differences in steelmaking procedures and compensation, there are other underlying factors that some say are just as important to Nucor's success.

Jim Collins, who studied both Nucor and Bethlehem for his book Good to Great -- which details why some companies become wildly successful -- said different cultures are the secret.

"One of the key things you see at any great company is much more discipline, egalitarianism and a lower sense of classes," Collins said in an interview. "At mediocre companies, a focus on higher and lower classes runs rampant."

As an example, he pointed to Bethlehem's 21-story headquarters tower, built in 1972.

According to author John Strohmeyer, author of Crisis in Bethlehem, the tower was constructed in the shape of a cross to create more corner offices for company executives. Lavish golf courses and executive dining rooms were also the norm. As the company's fortunes have fallen, much of the tower is now leased to other firms, although 250 Bethlehem executives and support staff remain.

By comparison, Nucor has about 45 people at its headquarters -- 1 1/2 floors of rented space in a nondescript four-story office building in Charlotte, N.C. The company's "executive dining room" is a Chinese restaurant across the street.

"We all answer our own phones, and I do all my own filing and typing," said Ferriola, who worked at Bethlehem for 18 years before going to Nucor in 1991. "Everybody's office on this floor is the same size, from the newest payroll clerk to me."

On the verge of bankruptcy in 1964, Nucor changed from a nuclear instruments company to a steel joist manufacturer, naming F. Kenneth Iverson its president. Iverson eventually decided to transform the company into a steel producer -- but one with a culture unlike anything of its competitors.

The company's Web site explains Nucor's philosophy: "Nucor takes an egalitarian approach to providing benefits to its employees. That is, the upper levels of management do not enjoy better insurance programs, vacation schedules, or holidays. ... Senior executives do not enjoy traditional prerequisites such as company cars, corporate jets, executive dining rooms or executive parking places."

Nucor also wants employees to think creatively -- even if their ideas are not successful.

"We get a little annoyed if you fail the same way three or four times," Ferriola said. "But one of Ken Iverson's favorite things to say when he was considering a promotion was, `I'm not sure he's the guy; I can't think of one real failure he's had.'"

Nucor is the most successful of the minimills, scaled-down operations that began springing up around the country several decades ago. They use a different steelmaking process -- scrap metal is their raw material -- and typically operate with nonunion labor. Not all have been successful, but they have proved to be major competition to so-called integrated producers -- those that make steel from iron ore, such as Bethlehem.

"In general, minimills have been able to get through this very severe market better than average integrated mills," said Christopher Plummer, managing director of consulting firm Metal Strategies Inc. of West Chester, Pa. "That's primarily because they have a lower and more flexible cost structure."

Nucor, whose shares are trading in the $60s, saw its profit fall 63 percent last year as the recession and imports depressed prices and demand. But it recorded a positive $113 million -- head and shoulders above the big integrated companies. The top domestic company, integrated United States Steel Corp. of Pittsburgh, lost $218 million, after a loss of $21 million in 2000.

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