U.S. Steel Tries Tech AlchemyBy Mel Duvall | Posted 2002-06-17 Email Print
The biggest American steelmaker would have the worldand the Bush administration, which is trying to save the company with fresh tariffs on products of foreign rivalsbelieve it is one of the most efficient producers around. Is it?
U.S. Steel thought it knew what it was doing. Then, Ford Motor Company said USS ranked dead last in performance among its chief suppliers. But now the biggest American steelmaker would have the worldand the Bush administration, which is trying to save the company with fresh tariffs on products of foreign rivalsbelieve it is one of the most efficient producers around. Is it?
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In the summer of 1996, U.S. Steel got a wake-up call. Ford Motor Co., one of its three biggest commercial customers, was threatening to end its 70-year relationship with the largest steel maker in North America over a series of foul-ups involving ready-to-stamp steel.
Massive coils of finished steel, ready to be turned into the shells of automobiles at Ford's facilities, were showing up without notice.
The fiasco reinforced U.S. Steel's ranking as dead last among Ford's suppliers in delivering on promises. "We were put on warning. Unless we did something fast, we were in danger of losing Ford's business,'' says Chief Information Officer Gene Trudell. "It was that serious."
The crisis forced U.S. Steel to adopt a bunker mentality. Where six years ago, individual businesses and factories controlled their own information infrastructures, the biggest steelmaker now has deposited the vast majority of its computing power in a fenced, low-rise Pittsburgh compound. The company also has led the steel industry in deploying new digital systems for interacting with suppliers and fulfilling the orders of buyers such as Ford, General Motors and General Electric. Now, U.S. Steel can track an individual slab of steel as it comes out of a casting facility in Gary, Ind., and follow it all the way to the customer's door. Not only does the steelmaker deliver the finished product when the carmaker wants it, it can confirm it made the delivery as ordered.
U.S. Steel's transformation from technology laggard to technology leader was so thorough and rapid that Ford named it supplier of the year just two years after the wake-up call. But the $6.4 billion-a-year maker of the steel that undergirds the North American construction, automaking and appliance industries is hardly out of the woods. Its chairman, Thomas Usher, has been at the forefront of calling for protection from foreign imports. On average, the company last year lagged behind its toughest competition, Korean steelmaker POSCO, by an average of $68 a ton in overall costs.
Its biggest disadvantage? Labor costs. That accounted for $66 of the difference. Part is due to the higher cost of union labor. But the biggest portionupwards of $40 a toncomes from health care benefits paid to retirees. That's $40 a ton POSCO doesn't worry about.
As a result, even with the 30% tariffs on imports of flat-rolled steel products imposed by the Bush administration in March, U.S. Steel's costs still exceed those of its prime foreign competitors, including POSCO and Arcelor of Europe.
Daniel Ikenson, a senior trade policy analyst with the Cato Institute, a Washington, D.C., think tank, says U.S. Steel is certainly one of the more efficient American steel companies. But it now lacks the size or scale to compete with foreign counterparts. U.S. Steel has the capacity to produce about 14 million tons of steel per year, ranking it about 10th in the world. That's less than one-third of the production capacity of Arcelor, the world's largest producer, and less than half the capacity of Korea's POSCO or Nippon Steel of Japan.
"U.S. Steel's biggest problem is it doesn't have the same economies of scale that its foreign competitors have," says Ikenson. His solution: consolidation of steelmakers into larger, more efficient players. Not bailouts.
But even at its current size, U.S. Steel is not inefficient. Indeed, World Steel Dynamics, a statistical service, estimates U.S. Steel takes just three hours of a person's time to produce a ton of steel. That's well below the 4.8 hours used in South Koreaand the 34 in India.
Through the mid- and late-1990s, U.S. Steel in fact improved its systems to the point where it thinks it can run a profitable business peddling logistics of steel manufacturing and distribution to its domestic competitors.
That new-found expertise last year led to the creation of Straightline, a new division that sells steel products directly to smaller customers, much like Dell Computer bypasses distributors to sell directly to individuals and small businesses. Another sales and services subsidiary, USX Engineers and Consultants, markets order fulfillment and supply chain management software not just to other steel companies, such as Inland Steel and National Steel, but aluminum makers and companies in other similar fields (See "Profiting from Information Technology" at www.baselinemag.com/uec).
Developing technology is one of U.S. Steel's key methods of beating back domestic innovators like Nucor, that use scrap steel as low-cost raw material for its mini-mills. That forces U.S Steel to transform coal and iron ore into higher-grade products for automakers, skyscraper-builders and the like. Only if it can deliver premium products efficiently will it earn a profit against competitors with lower raw material and labor costs. In effect, U.S. Steel's main weapon at this juncture in its struggle for survival is no longer integration, but information.
"Our competitive edge is not the equipment or the facilities," Trudell says, "it's the data we wrap around everything."