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Unconventional Mettle

July 13, 2005
With a unique strategic vision and distinctive operating practices, Mittal Steel Co. NV is the leader in defining a truly global steel market. Only a few producers will survive, contends COO Malay Mukherjee. And China, he believes, won't be a market spoil

In an industry not noted for being creative or acting courageously, $22.2 billion Mittal Steel Co. NV is gambling boldly. Already the world's largest steel producer, Mittal is betting that its future depends upon being even bigger among a very small number of truly global steelmakers. Continued consolidation and globalization are absolutely in the steel industry's future, asserts chairman and CEO Lakshmi N. Mittal, a view that stands him in stark contrast to the not-so-distant-past, when nearly every nation believed it must have a steel mill and an airline to validate its existence.

Within 10 years, predicts Malay Mukherjee, Mittal Steel's COO, just a handful of global steel firms will exist, each pouring 80 to 90, perhaps 100, million metric tons of metal.

Mittal Steel, incorporated in the Netherlands and headquartered on London's song-celebrated Berkeley Square, is well on its way to reaching such levels, with shipments of about 60 million metric tons in 2005, including the output of the U.S.-based International Steel Group Inc. (ISG), which Mittal Steel acquired from investor Wilbur Ross in a $4.5 billion deal approved by shareholders on April 12. In addition to the U.S., where its assets include Inland Steel Co. facilities acquired in 1998, Mittal Steel operates in Canada, Mexico, Trinidad, France, Germany, the Czech Republic, Poland, Romania, Bosnia, Macedonia, Kazakhstan, Algeria and South Africa.

Mittal Steel Co. NV pours melt from blast furnaces and minimillsFormed in 2004 from publicly traded Ispat International NV and the privately held LNM Group Inc., Mittal Steel's global presence is already established -- although the 164,000-employee company does not yet have the brand identity or marquee value that U.S. Steel Corp. and Bethlehem Steel Corp. enjoyed during the U.S. steel industry's halcyon years in the mid-20th Century.

Admiration, Not Monopoly

"First and foremost, our vision is to become the most-admired steel company," says Mukherjee. "To become the most admired we definitely have to be an innovative company. We must have value-added products, a complete package for our clientele. We must have excellent human resources and industrial relations policies. We must have the full confidence [of] the investor community. And, most importantly, all stakeholders must believe that this is a company in which the future is theirs."

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Such statements, unfortunately, sound like so much boilerplate. Most C-Level executives in manufacturing companies around the world regularly tout their commitments to innovation, their customers, their workforces and their investors. And yet at Mittal Steel there is this difference: Neither its strategic vision nor its operating practices are formulaic, even as they include the predictable goal of being very profitable. "The very purpose of being in business is to have profit," Mukherjee says without apology. And, he believes, 10 years from now Mittal Steel will be the world's most profitable steel company.

But Mukherjee puts that bottom line in he context of a business world greatly changed from the past. "Once capital becomes global, you can't have industry remaining local," he observes. "Steel must become global," a reality, he says, that Lakshmi Mittal recognized "much" before other industry executives. The steel industry "is not [now] trying to meet the infrastructural need of a country the way it was perceived earlier," providing employment, providing products, and looking after a nation's defense requirements, continues Mukherjee. "Today it is a business. It is the same type of business if you have a refinery [or] an aluminum plant."

Mittal Steel acquires metal production and finishing facilities under the company's guiding principle that its assets must provide added value.Those things said, "There is a misconception in the market that we look at any acquisition," he states. The strategic truth, he insists, is that Mittal Steel looks "only at acquisitions which add value," those that through market consolidation benefit both suppliers and buyers. "There is no point in trying to create demand by additional supply," he asserts. In fact, tens of millions of tons of excess steel capacity continue to exist, despite some years of efforts by the U.S. and several other nations belonging to the Paris-based Organization for Economic Cooperation & Development to persuade countries to shut down their unneeded and inefficient plants.

At the same time he makes a case for continued industry consolidation, Mukherjee insists that Mittal Steel is not after market monopoly. "We want business to be played in a totally fair and independent manner. We do believe competition does give us the courage and the incentive to remain cost competitive, and that is required if you want to be efficient."

Management By Dissection

In the pursuit of efficiency, however, Mittal Steel writes its own operating rules. For example, it employs multiple means of production, including mini-mills and vertically integrated facilities, as it turns out hot- and cold-rolled steel, wire rod, coated steel, and tubes and pipes for the world's auto, appliance, machinery and construction industries. For example, it disdains the concept of a "best plant," a single model for others to emulate, and instead emphasizes the exchange of best practices and processes among all its facilities. "One plant may be very good in its iron making. That knowledge gets transferred over the entire organization. One plant may be very good with its refractory production [and] that is what gets transferred," says Mukherjee. "You dissect every part of an operation in order to understand what should get benchmarked and how that knowledge should get transferred." Nor does Mittal Steel always operate facilities at maximum capacity. For instance, as it was trying to turn around Inland Steel during the early years of this decade -- a period during which 37 U.S. steel firms went bankrupt -- Mittal Steel opted to sacrifice a bit of blast-furnace productivity to take economic advantage of lower-priced and lower-grade raw materials. "You don't necessarily have to have the best coke [or] the best iron ore for all times," stresses Mukherjee. "We could take a hit on productivity. There was no point in keeping up the production at 99% of capacity." The payoff: "Over the past three years, Inland Steel has had the best operating results amongst all the integrated units," he reports.

At A Glance: Mittal Steel Co. NV
2004 Change From 2003
Shipments 42.1 million metric tons +53%
Revenues $22.2 billion +132%
Operating Income $6.1 billion +373%
Net Income $4.7 billion +298%
Source: Mittal Steel Co. NV. Figures are for calendar year 2004 and do not include the acquisition of International Steel Group Inc.
Although some of the workers now being laid off in the wake of the ISG acquisition might doubt his characterization of the situation, Mukherjee insists that during 2000 and 2001, as the pace of steel industry bankruptcies rose, union leaders and members worked with management to find ways and means of making the former Inland Steel stronger. "Whatever was achieved at Inland was not only a management exercise, it was a joint exercise," he says. "The shop floor had a big role to play in all the success that was achieved." As it was upgrading technology at Inland, Mittal Steel also was investing in raising the level of workers' skills by investing in training and development.

Yet, as the company acquires steel-making facilities, not only in the U.S. but in such other places as Poland, the Czech Republic and China, workforces sooner or later are likely to be reduced. To achieve the efficiency it seeks, Mukherjee says management must ask such critical questions as, "Do you need two men to do this work? Do they interfere with each other? Could one man do this?" But, he emphasizes, reducing workforces is not a matter of dismissing 200 workers. "It's a much more detailed exercise than that. You look at every single individual, his job, his skill level [and] what is it that is lacking and what is required for improving productivity. And if one man is going to be better [than another] to do the work and he needs a skill set improvement, you do that skill-set improvement for him."

China Strategy

Like many other manufacturers in many other industries, Mittal Steel is moving into China, a country whose developing economy is an unusual mix of capitalism and socialism. China is the world's largest steel-producing nation and its largest steel consuming country, a distinction that the People's Republic is likely to keep for several years to come. Efficiency is another matter, however. Indeed, Mittal Steel believes its technical production support, procurement assistance, sales and marketing support, and management knowledge sharing over the long term will benefit all the shareholders of Hunan Valin Steel Tube & Wire Co. Ltd., an 8.5 million-metric-ton steelmaker in which it is gaining a 37.17% stake. "Strategically, this is a key acquisition for Mittal Steel Co., as it provides us with out first production platform in the world's fastest growing steel market," Lakshmi Mittal said on Jan. 14, the day the share-purchase agreement was announced. "We are confident that demand for steel in China will remain strong, and this acquisition is very much intended as a first step toward a more significant production presence in [the] country." During the past three years, steel consumption in China has been growing about 20% annually, a figure that could fall to a still-respectable real-GDP-matching 7% to 8% during the next five to 10 years. "We do believe, however, that the steel industry in China will become more business-oriented than production-oriented," says COO Mukherjee. "The Chinese government is aware [of the issue] and since last year . . . [it has been saying] that growth must be coupled with efficiency and cost effectiveness. Last year, 14 million tons of capacity was shut down." That raises the question whether Chinese steel, as the domestic industry becomes less fragmented and product quality rises in response to consumer demand, will disrupt world markets -- as Chinese textiles and apparel allegedly have already done. China "will not become a disruptive force," contends Mukherjee. "It will not become a major exporter," he asserts. "Sending steel to Toyota in the U.S. is not going to be."

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