Squeezing More Toothpaste Out of the Tube

squeezing more toothpastE
out of the tube

Seeking to calm the waters stirred by his hostile bid for Arcelor, Lakshmi Mittal has been traveling to European capitals to reassure government officials that his intentions are honorable. Additionally, his son, Aditya, has guided European business reporters on a tour of the former Bethlehem Steel mill at Burns Harbor, Ind.

Both father and son present themselves as disciplined and skilled managers whose commitments to safeguarding jobs and production are foremost on their minds. Despite the fact that Arcelor makes more money making higher quality steel than Mittal does, the father-and-son team make the case that the synergies accruing from a merger – the quid pro quo of Mittal’s “best practices” and “continuous improvement” management system – would bequeath many benefits to Arcelor and to western Europe’s economy.

For example, in explaining how he might save an Arcelor mill in Belgium slated for future closure, Mittal told the Financial Times, “If you have a bigger company, you have more ideas, more synergies, and more opportunities.” And in an interview with the London Daily Telegraph published on March 19, Mittal reiterated:

That is what Mittal Steel/Arcelor is all about. We have promised there will be no job cuts and to continue to invest money and strengthen research and development.

These statements are at variance with Mittal Steel’s record in the U.S. The company has reduced employment at the mills that it purchased International Steel Group (ISG) in April 2005. In addition to fewer jobs, capital expenditures have been reduced, a proposed expansion plan shelved, and several departments reduced in size.



Behind the Throne Four of the senior Mittal officers (top left, clockwise): Ashok Aranha, director of materials and information technology; Malay Mukherjee, chief operating officer; Sam Chakrabarti, director of projects; and B.C. Agarwal, executive vice president for finance and corporate controller.

Equally ominous, the company’s “continuous improvement” practices have proven to be a means of extracting money from the mills by demanding continuous cost cutting. After purchasing ISG, Mittal tasked management at each mill to come up with millions of dollars of savings per month. The Sparrows Point mill, for example, came up with a package of temporary layoffs and cost cuts that saved Mittal Steel $4 million in June 2005 and $6.8 million in July. (1)

Mills were ranked according to their cost reductions, and orders were diverted, whenever feasible, to those properties with the lowest costs. Coming on the heels of radical cost cutting by ISG, this campaign has produced panicked efforts by mill superintendents and general foremen to pare inventory and crew schedules to the bone.

“We have problems constantly, shortage of materials to run,” one employee reported. “Example: running on an order-to-order basis, our cold-sheet mill is constantly losing turns every week due to lack of hot-band steel to supply us. This is despite a full order book.”

The brute emphasis on squeezing costs raises questions about the long-term viability of the mills. Weakened by the lachrymose management of now-defunct Bethlehem Steel, then run through the bankruptcy ringer by Robert Steve Miller, who sold the assets on the cheap to Wilbur Ross, who flipped the properties to Mittal – the properties owned by Mittal demand better treatment.

Not only have scores of managers left the company since the ISG takeover a year ago, taking with them hundreds of years of steelmaking experience, many key personnel are smarting under Mittal’s unilateral change in their incentive plan, which slashed mid-level management pay by $25,000 to $40,000 a year, beginning in January. (2)

There is little long-term planning. Sophisticated rolling equipment (which Lakshmi Mittal publicly touts as equal or superior to Arcelor’s equipment) is operated to achieve short-term profit targets with little provision for long-term maintenance or renewal.

Insiders say a cult-like conformity characterizes the corporate culture. “Lakshmi Mittal is very difficult to meet with,” confided a manager who has since left the company. “He won’t listen to anything you have to say unless it agrees 100 percent with what he wants to hear. If it’s not what he wants to hear, he asks you to say it again.”

Any executive who pushes for more resources than allotted from “London” – meaning the Berkeley Square offices where Mittal holds sway with such loyalists as Chief Operating Officer Malay Mukherjee and Chief of Information Technology Ashok Aranha – is deemed a cry baby who is no longer “an effective manager.” (3)

Aditya Mittal

Aditya is a chip off the old block. He has worked for his father since he was 22 and, now 30, is president and chief financial officer of the company. At a meeting with Aditya last December, a group of U.S. managers presented a report that projected a sizable profit at one mill. “What am I going to do with it?” Aditya asked, shoving the report back across the table.

The shocked officers resubmitted the report and projected an additional $33 million in profit through draconian cost cutting. “This will do for now,” Aditya said coolly.

When Lakshmi Mittal first announced his takeover of ISG in October 2004, he said much the same thing that he is now telling European ministers and business reporters. The merger would result in a solid future for U.S. steelworkers and communities by creating financial benefits from joint purchasing, supply-chain improvements, and revenue enhancements.

Mittal said that he expected his “new North American business to grow” and was “looking forward to working with Rodney Mott,” the much-admired CEO of ISG who was slated to become CEO of Mittal USA. ISG Chairman Wilbur Ross and CEO Mott were explicit about the benefits of the merger. A ringing endorsement of the takeover came from Leo Gerard, president of the United Steelworkers of America (USWA), which had a major stake in the deal. (4)

Here’s what they had to say:

There’s none of the facilities being targeted at all for reduction or shutdown. We’re really excited about the opportunity to grow now that we have a strong partner working with us. —Wilbur Ross, Oct. 2004

We’re looking for opportunities to increase capacity. —Rodney Mott, Oct. 2004

We have secured the commitment to maintain and grow steelmaking and finishing capacity in North America. —Leo Gerard, Oct. 2004

The takeover was not only significant from an American perspective. It represented a watershed event for the London mogul. ISG was the biggest steel company in North America, and its acquisition by Mittal propelled his collection of Third World and ex-Soviet-bloc mills past Arcelor. The steel mogul rejoiced in his newfound role as the world’s No. 1 steelmaker by volume.


Lou Schorsch	Rodney Mott

Despite longstanding problems with innovation, such U.S. mills as Burns Harbor and Indiana Harbor were major players in North American steel production, holding major contracts with General Motors, Ford, and appliance makers. By buying ISG, Mittal gained control of four of the five major U.S. steel facilities on the Great Lakes. The takeover was rubberstamped by the anti-trust division of the U.S. Department of Justice and the Committee on Foreign Investments in the U.S. (CIFUS), the same group that was attacked in Congress for its shoddy investigation of the proposed Dubai Ports takeover. (A year ago, not a single member of Congress questioned Mittal’s purchase of steel assets on national-security grounds, even though the ISG plants at Coatesville and Conshohocken produce steel for military applications.)

On April 15, 2005, Mittal announced the takeover had been completed and that ISG properties would henceforth be operated under the name of Mittal Steel USA. “The integration process will begin immediately, and we will do our very best to make the transition seamless,” Lakshmi Mittal said in a company press release.

But the transition was anything but seamless. A day before the merger, Rodney Mott, 53, announced his resignation. Mott had more than 30 years of steel experience, including as a top manager at mini-mill innovator Nucor Corp. He was universally considered the brains behind ISG’s excellent operating results in 2003 and 2004. He said that his resignation was for personal reasons, but later told Andrea Holecek, a business reporter at the Northwest Indiana Times, that he was uneasy about the corporate culture at Mittal and unsure whether the merger would work.

Lou Schorsch, 55, replaced Mott. His background was in consulting; he was a principal in McKinsey & Co.’s metal practice for 15 years and, briefly, head of an e-commerce company before he was named Inland Steel’s CEO in 2003. Six senior ISG executives resigned in the following weeks. They were V. John Goodwin, chief operating officer and former general manager of U.S. Steel’s Gary Works; Leonard M. Anthony, chief financial officer, with 25 years in the industry; Lonnie A. Arnett, controller, with 35 years in accounting; Jerome V. Nelson, vice president for sales and marketing, a former sales manager at Nucor; Gordon C. Spelich, vice president for business development, another Nucor alumni; and Karen A. Smith, vice president for human resources, with 28 years of experience.

The exodus left Mittal USA with Inland Steel managers, who were quickly promoted to senior positions at Mittal, and two ISG managers. John C. Mang stayed on as Operations West regional director until he abruptly resigned in January 2006. William A. Brake was Mittal’s Operations East regional director and then assumed Mang’s old position in a company reorganization. Two plant managers have also left the company: John C. Lefler, general manager of Sparrows Point, departed in March 2006, and William McKenzie, general manager of Weirton, in August 2005.

The Mittal operating philosophy is called the Continuous Improvement and Knowledge Management Program (CIKMP). It involves approval of sales contracts, purchases, production schedules, finance, marketing, etc., up a chain of command, and detailed assessment of monthly savings that have been instituted by each mill based on benchmarks established by upper management in London.

In discussing CIKMP, Malay Mukherjee noted a year ago that “integration of ISG into the operating culture of Mittal Steel will include identifying, analyzing, and capturing the various synergies arising out of optimum asset utilization; examination and appropriate allocation of product mix and grades; and the rationalization and improvement of customer service.”

CIKMP is a very different beast from the racehorse model that Rodney Mott had devised to spur on his troops. A cocky, hands-on operating man, Mott liked to tell his subordinates, “I don’t know whether I hate IT or HR more,” referring to Information Technology and Human Resources. What Mott really hated was bureaucracy. Adopting the philosophy of his longtime employer, Nucor, Mott eliminated layers of management at former Bethlehem Steel and let each plant have full responsibility for its performance and results.

Plant management handled the core functions of accounting, purchasing, engineering, customer service, and human resources. Union workers were welcomed on management teams to make suggestions and jointly solve production problems. The contrast between ISG and Beth Steel was startling. Nobody could joke anymore that “the general manager has to call up Martin Tower [the corporate headquarters in Bethlehem, Pa.] to take a leak.”

But most significantly, Mott shoveled huge pay to workers for productivity improvements. Incentive calculations and profit-sharing bonuses boosted blue-collar paychecks by 25 percent and more. “I’m making more money than I ever did under Bethlehem,” was a common refrain – and high praise – a year ago.

At the same time, ISG eliminated nearly a third of the former Bethlehem workforce through its 2003 collective-bargaining contract with the USWA. The agreement allowed Mott to reduce job classifications from 32 to five, institute flexible work rules, and hire outside contractors for non-core and surge work.

Mott’s “production model” was fundamentally at odds with Mittal’s “best pricing model.” Mott wanted to make steel and add more production, but Mittal wanted to keep prices as high as possible, which meant throttling back managers who were volume-centric. The culture clash between Mott and Mittal was probably inevitable, especially when steel demand and prices started dropping in early 2005.

Schorsch is not an operating man and appears ready to bend to the system of command and control that the Mittal family requires. At ISG headquarters in Richfield, Ohio, a suburb of Cleveland, staff never numbered more than 65. Today 212 employees reportedly work on two floors of an office tower in Chicago, the sleek new headquarters of Mittal USA that is generously subsidized by the taxpayers of Illinois. (5)

Rodney Mott, meanwhile, has returned to the industry as the new president and CEO of Stelco. Coming out of receivership, the Ontario, Canada, steelmaker has been riven by turbulent labor-management relations. Last time around, Mott won the respect of a union workforce and improved productivity. Stelco competes with Mittal USA in several North American markets, most notably in the automotive sector. It will be interesting to see what Mott does with his new job, and how the Mittal group reacts.

Notes

Baltimore Sun, August 21, 2005.

First reported in Northwest Indiana Times, Feb. 16, 2006.

Although Mittal Steel Co. is incorporated in Netherlands and maintains a staff of about 150 at Rotterdam, all key operating decisions are made by a group of about 50 senior managers and assistants at the Berkeley Square offices.

Under the collective-bargaining agreement signed between the USWA and Wilbur Ross, the union had the right of first refusal to purchase ISG. Gerard declined to exercise the option when Lakshmi Mittal offered to buy ISG, thus paving the way for the acquisition.

Mittal Steel won $9.5 million in tax incentives and grants to relocate in downtown Chicago. The state of Illinois offered the company income-tax credits for 10 years and kicked in a grant for office renovations and other improvements totaling $7.5 million. The city of Chicago sweetened the deal by providing $2 million from its “Central Loop Tax Increment Financing District” to help pay for furniture, fixtures, and equipment for the new digs. Mittal Steel signed an 11-year lease for 53,000-square-feet of space at the new office tower. Previously, management was located in the former Inland Steel plant building in East Chicago, Ind. From Merrillsville (Ind.) Post-Tribune, Oct. 8, 2005, and a Mittal company release.