Worthington Steel Doubles Down on Auto Industry

Division president says future for specialty steel producer still appears to be in vehicles.

Mark Russell's training as an attorney told him not to panic when Chrysler and General Motors filed for bankruptcy in 2009. Russell is president of Worthington Steel, the steel processing arm of $1.9 billion Worthington Industries Inc. based in Columbus, Ohio.

His company's primary customer is the auto industry, which uses Worthington's specialty steel for applications such as transmission, body and suspension parts. When the North American auto industry crisis hit, Russell says Worthington faced a tough decision.

"We had to ask ourselves, 'Is this the end of all things? Do we have to fold our tent and go away or do we believe it's going to come back?'" Russell recalls.

Russell knew from years as a corporate attorney that bankruptcy didn't necessarily mean the end of GM and Chrysler. "They were encumbered with some horrible union contracts, and they weren't very efficient, especially compared to transplants with nonunion labor and their very flexible systems," he says. "But they have some great products and great facilities and assets. And in bankruptcy, those don't disappear."

Not only did Worthington Steel decide to continue supplying the auto industry, the company made additional investments in niche steel-processing markets, including the February 2010 acquisition of Gibraltar Steel's strip steel assets. The company also started diversifying within the auto industry and outside the sector into the agricultural and energy areas.

The diversification strategy has yielded limited success, says Russell. But the resurgence of the auto industry and the strategic acquisitions have strengthened the company's competitive position. Worthington Industries reported on Jan. 5 its steel processing net sales in the second quarter rose 41% to $95.1 million over the year-earlier period. The largest increases came in higher value-added products in the auto segment related to the Gibraltar strip steel acquisition, the company says.
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Here, Russell expands on his company's growth strategy and how the auto industry and newer markets play into the company's future.

IW: Was there a light bulb that went off that made you decide to stay in the auto industry?

Russell: After the July 4 holiday [in 2009] companies said we stopped buying materials and parts for these bankrupt companies back in April and we don't have any parts -- we don't have any steel, we don't have any plastic. The supply chain is empty, and they're going to make cars and we're in trouble. So everyone in our position started a mad scramble until the middle of last year trying to catch up. And the timing of that was perfect for us to talk about acquiring Gibraltar Steel. We were able to buy them at the very bottom just as volume was starting to come on strong.

IW: So how has Worthington diversified to protect itself from future collapse?

Russell: The first prong is to diversify ourselves within automotive. We want to do business with more than just our heritage Detroit Three. We have had a focus for years on developing business with the Japanese domestic and have had very limited success in replicating our Detroit Three relationships because we have those relationships directly with the automotive companies. In the Japanese case they have a keiretsu model of sourcing where they want to control everything, and since they don't control us they don't fit the model. So we have had to do all of our business with them indirectly. And we have built indirect business with Nissan, Toyota and Honda. We have substantial business going with Honda, but that was difficult to do because the way you sell with an American company doesn't work with a Japanese company.

IW: How were you able to break in there?

Russell: Through subs. You're not going to sell directly to them because you're not in the keiretsu, but you can sell to somebody who is in the keiretsu. In the case of Honda we have broken through and we are a direct supplier now.

IW: How were able to convince them to go directly through you?

Russell: That actually was a success of Gibraltar. When the Japanese first came they had no choice but to partner with local suppliers, and their master plan was to adopt them into the keiretsu over time. So that's how they chose to do business with Gibraltar. Gibraltar maintained that relationship, and when we acquired Gibraltar we got into a much stronger position with Honda.

IW: What were some of the other diversification opportunities?

Russell: The other internal diversification considers the European and Korean domestics and then the Chinese who will be here. And we have different strategies with each. So we are trying hard to build up our business with Mercedes in Alabama, BMW in South Carolina and Volkswagen in Chattanooga, Tenn.

The other for us is to diversify overall. Our two biggest targets were energy and agriculture. We've had very limited success at that.

IW: Why just limited success?

Russell: They're more competitive. We found it easier to grow in automotive in our niche than it is to grow in that agricultural equipment market. I think that's because they have less specialty steel applications. In energy I would give us almost a zero because energy is highly commoditized, and the only success we've had is in the few niches that exist there for flat-rolled steel, which happen to be stainless. We have a stainless rolling operation on the west coast and we have some business with refineries. The other thing is nobody has built a new refinery in the United States in years, so it's all maintenance, repair and overhaul stuff.

IW: So do you still see potential in the energy market?

Russell: There is but on R&D side. There are beginning R&D type efforts there. There are people trying to replace straight section tubular with continuous coil pipes. That is, take something that's put together like Legos but in this case pieces of pipe that are welded together. They're trying to replace that with something that's continuous. The analogy is in railroading you go from sections of rail to continuously welded rail that can be laid down in one continuous rail. It's a step change in efficiency and people are trying to do that, and we've been working with them because they need a special steel to do that, but they haven't gotten any traction commercially.

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