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Steel RICHARD J. FRUEHAN DANY A. CHEIJ DAVID M. VISLOSKY Carnegie Mellon University The U.S. steel industry is an interesting case study of competitiveness and innovation because of its recent history of near-economic collapse, followed by a rebirth fueled by a continuous drive for improvement (Ahlbrandt et al., 19961. By the 1980s, global competition, domestic labor disputes, and other factors had seriously undermined the foundations of the U.S. steel industry (Hoerr, 1988~. In response to these competitive and economic pressures, many of the industry's large, integrated steel producers successfully restructured their organizations and operations. Today, the industry is highly competitive and profitable. From the standpoint of R&D activities, the outcome has been somewhat sur- prising. Whereas R&D resources have decreased dramatically in the drive to cut costs, the U.S. steel industry's technology innovation performance as a whole has improved. Factors such as the effective management of R&D and technological resources; the acquisition of technology and innovative ideas from suppliers, cus- tomers, and competing steel producers; and collaborative research efforts have all created an environment that fosters improvements in production efficiency, tech- nological developments, economic prosperity, and global competitiveness. For the U.S. steel industry as a whole, R&D resources have been more effec- tively utilized in collaborative research efforts involving a number of companies, both domestic and foreign, their suppliers, and to a lesser degree, universities. These collaborations have contributed to the industry's innovative and economic performance, especially in the last decade. Still subject to global and domestic competitive pressures, the U.S. steel in- dustry is undergoing rapid changes even though research capabilities in the in- dustry have been greatly reduced (Fruehan and Uljon, 1995; Ahlbrandt et al., 75
76 U.S. INDUSTRYIN2000 1996. Thus there is a motivation within the industry to explore R&D activity and project management practices in the wake of economic downsizing and against the backdrop of competitive, economic, and technological challenges. This chapter documents the changes in the U.S. steel industry's production, productivity, profits, and R&D activities before, after, and during the industry' s restructuring period in the 1980s. It also examines the industry's development and acquisition of technology, and the various sources of innovations and tech- nology including in-house R&D, relationships with suppliers and customers, government funded R&D, and collaborative research with various partners. In addition, it discusses various facets of the industry's R&D activity, as well as other factors that may influence the industry's competitiveness. CHANGES IN INDUSTRY PERFORMANCE By the late 1980s, the U.S. steel industry seemed to be in irreversible decline. In the previous decade, half the workforce employed in the U.S. steel industry- some 250,000 workers lost their jobs, production of unfinished steel in the United States declined by more than 12 percent, and plant closures and downsiz- ing brought the U.S. industry's production capacity down 25 percent (Ahlbrandt et al., 1996~. Under severe financial pressures, research staff budgets for indus- try's internal R&D operations decreased by up to 75 percent throughout the 1980s (Dennis, 1991; Fruehan, 1996~. A National Academy of Engineering steel industry study conducted in 1985 concluded that the steel industry was no longer technologically progressive (Hannay and Steele, 1986~. The study found that of 28 process advances under development, only two direct reduction and continuous casting were likely to be adopted in the next five years. The lack of R&D activity in new process development was attributed to the high capital cost of the research and low esti- mates of return on investment. The study concluded that leadership in technol- ogy alone would not rescue the domestic steel industry from its economic slump. Other factors, such as foreign pressures on price, labor productivity, cost of raw materials, energy, labor, plant location in relation to markets, and future estimates of production overcapacity would be equally and in some cases more important determinants of future performance. The following section examines how the U.S. steel industry has responded and restructured itself in terms of production, productivity, and financial performance during the last two decades. iAs evidenced by the recent explosion of electric arc furnace-thin slab casting plants, and other recent technological advances including massive coal injection in the blast furnace, and the large production of ultra clean and interstitial free steels (Albrandt et al., 1996).
STEEL 77 Production and Market Share By the early 1980s, foreign competitors primarily in Europe and Japan- had made serious inroads into U.S. market share from sales of high-quality steel products. From a position of world dominance, U.S. steelmakers' share of the world steel market fell to approximately 10 percent because of foreign competi- tors' expanded capacity and their implementation of new and improved technolo- gies. By 1983, Japan's share of the world steel market had grown to 16 percent, making it the new world leader. Since then, Japanese growth has slowed and its market share has decreased. Meanwhile, U.S. producers have made a partial comeback thanks to the downsizing and restructuring of the integrated mills and the strong entrance of U.S. m~nim~ll operators. For the last 20 years, U.S. production capacity has exceeded the actual pro- duction of raw steel (see Figure 1~. This gap was largest in the early 1980s, when imports of raw steel also reached their highest point: 25 percent or more of the U.S. steel supply. In 1983, the gap between capacity and production was about 75 million tons. Recently, this gap has narrowed significantly; in 1996, it was less than 10 million tons. In comparison, world capacity has exceeded world produc- tion by more than 200 million tons for the last 15 years. The production gap has narrowed because the U.S. steel industry, especially the integrated producers, has improved its efficiency compared to a decade ago; now U.S. integrated producers are one of the lowest cost producers for their market. In addition, a larger ratio of capital investment per worker-hour has increased productivity. In steel product markets where m~nim~lls have competed with integrated pro- ducers, m~nim~lls have gained market share because their costs, and thus their prices, have been lower. Minimills' ability to produce many types of steel prod- ucts efficiently still exerts a constant pressure on the integrated producers. To ~ 60 140 120 100 80 60 - /~.,, ~d \ ~ ~\ ~1 I I 1 1 '! 'I I I I ' ~ I ~ 'l' I' 'I I ' I ' 1 Cr. Cal ~X ~To on x cr. cry cry _ _ _4 ~_ _ year FIGURE 1 U.S. raw steel production and capacity. Source: Cyert and Fruehan, 1996. | ~ U.S. capacity | ~ U.S. production |
78 30 25 o c' . _ ~ 20 Q 15 (a o <~ 10 U.S. INDUSTRYIN2000 ~ \/ - ~ .% ~ ~ , ~ ^\7 I- ,:\ ~ '\~ 1 O L I I I I I I I I I I I I I I I I I 1958 1962 1966 1970 1974 1978 1982 1986 1990 Bethlehem ----- Republic Inland National Nucor FIGURE 2 Labor-hours per ton produced: U.S. steel firms. Source: Lieberman arid Johnson (1995). USX Wheeling-Pittsburgh day, U.S. minimill producers such as Nucor rank among the most efficient steelmakers in the world (Fruehan et al., 1997~. Recently, integrated steel firms in developing countries such as Korea have become leaders in production efficiency. In fact, in 1996, the Korean firm POSCO was the world's most profitable integrated steelmaker and arguably the most efficient, at least until the recent economic crisis in Korea (Lieberman and Johnson, 1995~. Another developing country, Brazil, has also improved in pro- duction efficiency. With its low labor costs, it may soon become a major factor in the global steel market. Productivity The U.S. steel industry has made remarkable improvements in productivity in the past 15 years. The following section discusses the changes in three mea- sures of productivity labor, capital, and total factor productivity. The section is based heavily on a study of productivity in the steel industry performed by Lieberman and Johnson (1995~.
STEEL Labor Productivity 79 U.S. integrated producers have lagged behind their foreign competitors in terms of labor productivity since the 1960s. For almost two decades after 1964, U.S. integrated firms' labor productivity remained stagnant. However, labor pro- ductivity has been steadily improving among U.S. steelmakers. Notably, a stan- dard measure of labor productivity in the steel industry labor-hours per ton pro- duced shows U.S. performance increasing from a range of 7 to 14 labor-hours per ton in the early 1980s to approximately 5 labor-hours per ton a decade later (see Figure 2~. In contrast, the labor productivity of Japanese steelmakers has remained steady at about the current U.S. level of 5 labor-hours per ton since the early 1970s, with only small incremental gains. Improvements continued throughout the 1980s and the l990s. This is illus- trated in Figure 3, which shows the labor-hours per tonne for two major inte- grated producers, Bethlehem and U.S. Steel, and the largest scrap-based pro- ducer, Nucor. Although a standard measure, labor-hours per ton fails to account for differ- ences in the extent of diversification and vertical integration of firms; nor does the measure account for differences in steel "quality" and the extent of finishing operations. Also, different companies measure labor-hours differently, and is- sues such as contracting and outsourcing bias the statistics. For example, in Ja- pan over half of the nonprofessionals in a plant are contract workers, while in the United States this figure has increased as much as 25 percent in some plants. The total number of labor-hours per ton may be 20 percent higher in Japan and 10 percent higher in some U.S. plants. In non-union plants, the percentage of con- tract workers is generally lower, and in some cases zero. ° ~.: ~-A Q In b! O ,~ S ~) O Hi, I.. . .< .. ~ I. . ~i ~1411411 ~ '9 .~; ~ FIGURE 3 Labor productivity at leading U.S. steel firms. Note: Labor-hours per ton based on the metric tonne (lOOOkg). Source: Cyert and Fruehan (1996). Bethlehem U.S. Steel Nucor
80 60 50 40 Q 30 o to oo 20 10 ~ = ~ ~, . ~ ~ O 1 1 1 1 1 1 1 1 1 1 1 1 1 1957 1961 1965 1969 1973 1977 1981 U.S. INDUSTRYIN2000 l l / \ / \ /\ ~ ~/ , - / ,,',/ Ye 1 1 1 1 1985 1989 1993 Bethlehem ----- Republic Inland USX ~ National Wheeling-Pittsburgh -- - Nucor FIGURE 4 Value-added per worker-hour: U.S. steel firms. To account for this bias, labor productivity may also be calculated in terms of value-added per worker-hour (Lieberman and Johnson, 1995~. This measure ac- counts for employee effort and the use of capital.2 Using the value-added metric, Figure 4 shows that labor productivity for U.S. steel firms remained stagnant between 20 and 25 value-added dollars (1980 U.S. dollars) per worker-hour until the early 1980s and began rising through the early l990s to between 28 and 38 value-added dollars per worker-hour. In comparison with the labor-hours per ton, the trends for labor productivity show steady improvement since the early 1980s. In contrast, Japanese steelmakers show a dramatic increase in value-added per worker-hour, increasing almost ten-fold since the late 1950s, and ending at 38 to 48 value-added dollars per work-hour in the l990s. However, this dramatic increase is due in large part to the exclusion of workers who were dispatched to unconsolidated subsidiaries and the heavy outsourcing initiated by Japanese steel firms, both of which were common practices in Japan in the 1980s. 2Value-added is the difference between a firm's total sales and its purchases of raw materials and contracted services.
STEEL Capital Productivity 81 Before 1980, the capital intensity of U.S. steel firms, measured by capital investment per worker, grew very little. Because integrated steelmaking is a capital-intensive and competitive global industry, U.S. producers found it diffi- cult to earn the rates of return necessary to justify substantial new investment. In fact, no new integrated steel plants have been built in the United States in the last 35 years, and only recently has the industry invested in additional production capacity (Fruehan et al., 1997~. However, primarily because of the massive downsizing at U.S. steel firms in the 1980s, U.S. capital intensity grew substan- tially, from a fixed investment per worker that was below $70,000 in 1980 to over $100,000 in 1993 at all surviving U.S. firms except for Inland (see Figure 5~. Yet the U.S. investment per employee is less than half that invested by Japan and four times less than Korean firms in that same time period. These differences reflect slightly leaner staffing by Japan and Korean firms and also higher rates of plant and equipment investment in the case of Korea attributable in large part to heavy government subsidies to its steel industry, and in the Japanese case attributable in part to encouragement from the banking system (Fruehan et al., 1997~. Total Factor Productivity Total factor productivity, which is regarded as a more appropriate measure of overall efficiency in production plants, is a weighted average of labor produc- tivity and capital productivity. From the late 1950s to the l990s, the total factor 300 Lo 250 ~0 to co o In 200 150 100 50 J ~ ~ ~. ~ ~ ':' rid · ~ ~ ma- Bethlehem be-- Inland National Nucor · *' Republic - ~- USX --a- Wheeling-Pittsburgh -- _-- d~_~ . ---,,_. -or - -A r - 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 Year FIGURE 5 Fixed capital per employee: U.S. steel firms.
82 U.S. INDUSTRYIN2000 productivity of U.S. steel firms rose about 50 percent (see Figure 6~. Currently the total factor productivity for Japan, Korea, and the United States is roughly equivalent. Interestingly, the steel industries in all three countries have shown very different trends in their capital and labor input, but they have each arrived at comparable efficiency levels in the last decade. Quality Improvement In addition to improving productivity, U.S. steel makers have also dramati- cally improved quality during the last fifteen years. Much of the improvement has stemmed from technological advances, such as secondary refining and continu- ous casting. But "working smarter," through training, continuing education, and quality control, has also been critical. One measure of quality improvements is customer acceptance. The U.S. steel industry's most critical customer has been the automotive industry. A decade ago, rejection rates for steel of poor quality at automotive companies were typi- cally three to six percent. Today, the rejection rates are about 0.5 percent a tenfold improvement. Other examples of quality improvements are the new steel grades and types, such as corrosion-resistant steels. Before these new grades existed, automobiles in the northern United States suffered extensive corrosion or o 180 oo ~ 160 . _ $ 140 ~120 a Q Q if a 60 ,~ 40 100 80 20 Bethlehem ----- Republic Inland USX National Wheeling-Pittsburgh - Nucor FIGURE 6 Total factor productivity: U.S. steel firms. I /\ I ~I \ \ I \ it= -N _~/~K ~ C~ ~ __ _ O 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1957 1961 1965 1969 1973 1977 1981 1 ~ \ 1985 1989 1993
STEEL 83 rust within five years. Today, automobiles that incorporate these new steel grades last fifteen years or longer before extensive corrosion and rust occurs. Further- more, steels are stronger, lighter, and more formable for specific applications and the production of complex products. A significant impetus for many of the quality improvements was the Japa- nese automobile producers located in the United States. They demanded higher quality steels than were previously produced, and they also required extensive quality control within steel production plants. Once it became clear that these high-quality steels could be produced, U.S. automotive firms and other industrial manufacturers soon demanded similar quality from the steel industry. New Products and Processes Steel production is continually evolving, and new innovative steel products are now in common use. Half the steel grades or types produced today did not exist fifteen years ago. Examples of these new steels include: . Corrosion Resistant Steels: The past decade has witnessed a significant improvement in the manufacture of steels with much higher corrosion resistance, especially through the development of new coating and galvanizing processes, as well as new methods of applying these coatings. . High Strength Low Alloy (HSLAJ Steels: These steels are much stronger than traditional steels and can reduce the amount of material required in their production, thus reducing the total weight of the steel. . Interstitial Free Steels: These steels can be formed into intricate shapes without flaws. They are used extensively for exposed applications in the automo- tive industry. The development of these new steels was primarily driven by customer de- mand (Fruehan et al., 1994~. However, new processes made it possible to pro- duce new steels with superior properties, and some of those products were devel- oped before market demand existed for them. New processes were generally developed to allow the production of better quality steel or to reduce the cost of production. The industry has also developed or implemented several major processes in the past decade. These are listed below: · Continuous Casting: Incremental improvements have led to methods that allow all grades of steel to be continuously cast, with fewer surface imperfections and cracks. Today, use of these methods is universal. · Secondary Refining: Improvements in a number of processes, including desulfurization, inclusion removal, and reheating, have significantly improved productivity and steel quality and have given steelmakers much greater control over the composition of their steel output.
84 U.S. INDUSTRYIN2000 · Vacuum Degassing: This process, which involves the treatment of steel in a vessel under a vacuum, has enabled the production of interstitial free steels and other special quality steels, which represent over one-fifth of the total U.S. production of steel. · Electrogalvanizing: New processes have been developed to improve the coating and, hence, the corrosion resistance of steels. . EAF High Productivity: A number of process improvements, including ultra high power furnaces, carbon and oxygen injection, and water-cooled panels, have doubled productivity and decreased electrical energy consumption by nearly one third. Financial Performance Some researchers have suggested that the competitive decline of the U.S. steel industry in the 1980s has resulted, in large part, from inferior management practices and low labor productivity. Specifically, managers of U.S. steel firms were criticized for promoting an incentive system that rewarded short-term suc- cess and failed to encourage capital investment in the new technology needed to compete globally. However, in the last decade, the U.S. steel industry has expe- rienced a steady turnaround in profitability and market share and has invested in additional production capacity. By the late 1980s, the economic performance of the U.S. steel industry, particularly its integrated sector, had improved signifi- cantly. Today, U.S. integrated producers have the highest profitability per ton of steel produced in the world. Some key aspects of industry financial performance are discussed in the next section, which is based primarily on a study by Baber and colleagues (Baber et al., 1993) (see Table 1~. However, it should be noted that their study extends only to 1993, and industry performance has improved substantially since then. Using return on assets3 (ROA) as a measure of profitability, Baber's study (see Figure 7) noted the following: · The steel industry is less profitable than other U.S. industrial firms. Mean accounting rates of return are 2.95 percent for steel, compared with 9.17 percent for all U.S. industrials. · The difference in profitability is attributed to the integrated steel firms, which have a mean return of 2.23 percent, far lower than the mean return of 8.09 percent for non-integrated steel firms. . Non-integrated firms that produce specialty steels are slightly more prof- itable than non-integrated carbon steel producers. · The financial performance of the integrated steel firms was worst from 1981-1986. 3RoA is determined from the product of asset turnover and profit margin.
STEEL TABLE 1 Summary of Financial Ratios (1971-1990) All Industrialsa Integrated Return on assets (ROA) 0.09 0.02 Net income/sales 0.05 -0.01 Capital expenditure growthb 0.10 0.04 aAll industrials is defined as the top 30 U.S. industrial firms. bMean growth rate represents a geometric average over the 1971-1990 time period. Note: Ratios are presented as mean values. Source: Baber et al. (1993). 0.16 -0.04 -0.08 -0.12 -0.16 85 Non-integrated 0.08 0.03 0.11 ------- Integrated firms Nonintegrated firms - U.S. industrial firms -0.2 72 73 74 75 76 77 78 79 80 81 82 83 84 85 FIGURE 7 Return on assets (ROA): U.S. steel firms. 0.06 0.04 0.02 o -0.02 0.04 0.06 0.08 0.10 ---U.S. industrial firms 1 1 1 1 1 FIGURE 8 Net income/sales: U.S. steel firms. Source: Baber et al. (1993). 1 1 1 1 1 1 1 1 1 1 1 86 87 88 89 90 0.12 Nonintegrated firms 0.14 0.16 0.18 0.20 0.22 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 1 1 1 1 1 1 1 1 1 1
86 TABLE 2 Profitability Ratio: Return on Assets (%) 1975-1993 U.S. INDUSTRYIN2000 Integrated Non-integrated S&P 500 firms All periods (1975-1993) -0.52 7.35 6.53 1975-1981 4.33 9.57 7.59 1981-1987 -6.81 5.06 6.59 1987-1993 0.10 7.04 5.27 Source: Fruehan et al. (1997). Although U.S. integrated steel producers have been generating a persistently lower return on assets than non-integrated producers and other industrial firms, the integrated firms have recently improved in profitability compared with the 1980s (Table 2~. This dramatic turnaround has occurred primarily because the industry has reduced its costs, increased production efficiency, and increased overall sales. However, the production costs of integrated steel producers for some prod- ucts are higher than the costs for non-integrated steel producers. Thus, integrated firms are unable to produce steel at costs that are less than prevailing prices, which adversely affects profits. Because the integrated steel industry entails highly capital intensive produc- tion, it is difficult to generate the necessary returns to adequately invest in capital improvements and new technology. The capital expenditure growth for U.S. integrated steelmakers is low and has been stagnant for the last three decades (see Figure 9~. In contrast, the rapid introduction of the minimill producers in the 1 1 10 9L 8: 7¢ 6: 5¢ 4 1 On ------- Integrated firms - Nonintegrated firms - U.S.industrialfirms l\ I \ I \ I \ I \ I \ I \Y,,' J / 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 / ~- 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 FIGURE 9 Capital expenditure growth. Source: Baber et al. (1993).
STEEL 87 1980s was accompanied by growth in capital spending by non-integrated carbon steel producers, which exceeds the integrated producers. Overall sales for the U.S. steel industry have risen steadily since the eco- nom~c decline in the early 1980s. Sales for integrated producers have grown from an average of $3.2 billion in 1986 to $4.8 billion in 1995 (see Figure 10~. In companson, overall sales for the most profitable m~nim~ll producer, Nucor, have risen from $0.8 billion in 1986 to $3.5 billion in 1995. These sales trends, com- bined with lower production costs and increased productivity, suggest a remark- able economic turnaround for the U.S. steel industry. Today, overall sales by all U.S. steel producers are about 3 percent higher than in 1996, continuing an up- ward trend in recent years, and totaling about $36 billion in 1997 (Pittsburgh Post Gazette, 1997~. CHANGES IN THE STRUCTURE OF INNOVATION PROCESSES R&D Structure and Operation The following review of changes in R&D expenditures, personnel, and re- search effort is based on two recent surveys of R&D activity in the global steel industry (Fruehan, 1994; Fruehan and Uljon, 1995~. R&D Expenditures Most large North American integrated steel producers spend only about 0.5 percent of sales on R&D activities; a number of other producers spend little or nothing (Fruehan et al., 1995) (see Figure 11~. In companson, the international 8 6 34 ff3 2 o l ~ ~ , l ~ ~ 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Bethlehem Inland Steel X National Nucor U.S. Steel FIGURE 10 Overall sales in billions for selected steel firms. aCurrent year dollars. Note: Selected firms surrogates for U.S. integrated steel industry except Nucor, the leading minimill producer. U.S. Steel data begins in 1991. Source: Compact disclosure (1997).
88 U.S. INDUSTRYIN2000 1.4 1.2 1 0.8 o 0.6 0.4 0.2 o f _ ~ 1980 1985 1990 1995 ~ Armco . ~Bethlehem Inland >< US Steel >< Weirton FIGURE 11 R&D expenditures as a percentage of sales for integrated producers. Note: Selected firms are surrogates for the U.S. integrated steel industry. There were no data avail- able for Weirton in 1980 and for Armco in 1995. Source: Fruehan and Uljon (1995). firms surveyed indicated that they spend about twice that amount on R&D activi- ties, or 1 percent of sales. R&D Personnel As the steel industry grappled with economic decline in the early 1980s, the average number of R&D personnel in integrated steel companies fell sharply, from 498 personnel in 1980 to 282 for the five major integrated producers in 1985, a 43 percent decline. A few of the largest integrated firms displaced as many as 60 to 90 percent of their R&D personnel since 1980 (see Figure 12~. This sharp drop was followed by a steady decline that continued into the l990s; between 1985 and 1995, the average number of R&D personnel dropped 46 per- cent. Whereas there was a large decrease in R&D personnel for integrated compa- nies since 1980, the percentage of workers in R&D increased from 0.6 percent to 1 percent of the total workforce.4 Minimill producers have always employed very few R&D personnel. Nucor had only four employees designated as R&D personnel in 1991. Although few in number, the R&D personnel in minimills has grown slightly from the mid-1980s to the present. Even while releasing large numbers of R&D personnel, U.S. steel firms retained more professional R&D staff (those with relevant college degrees) than non-degreed staff (see Figure 13~. 4Average percentages determined from the total employees in the four largest integrated producing firms: Bethlehem, Inland, National, and U.S. Steel.
STEEL 89 1200 1 000 800 600 400 200 o < . ~ \ i` ~\ ~ Armco . ~Bethlehem Inland X National U.S. Steel ; 1980 1985 1991 1995 FIGURE 12 R&D personnel in integrated firms. Note: Selected firms are surrogates for the U.S. integrated steel industry. There were no data avail- able for Armco or National in 1995. Source: Fruehan et al. (1995). ¢, 200 ~ 150 (~ ~ 00 O 50 O _ _ ~ ~ . - - - a_ __ __ __ 991 1995 year 1 Professional Staff FIGURE 13 Average professional and staff R&D personnel in integrated firms. Note: Average number represents R&D personnel at Bethlehem, Inland, National, and U.S. Steel. There were no data available for Inland in 1995. Source: Fruehan et al. (1995). About 40 percent of the professional R&D personnel at two of the largest inte- grated companies hold doctorate degrees. R&D Effort Even after the economic decline in the early 1980s and until the mid-199Os, R&D organizations at integrated firms concentrated on long-term, applied re- search, spending about three times more on that effort than on short-term research (see Figure 14~. That focus did not extend to fundamental research, however. Only one large integrated firm performed some fundamental research in 1991. Most firms abandoned their fundamental research to focus primarily on applied
go U.S. INDUSTRYIN2000 R&D and technical assistance projects. In contrast, non-integrated firms divided their effort evenly between long-term and short-term R&D and did not focus on fundamental research at all. By 1995, R&D effort at U.S. steel firms had shifted dramatically. Integrated producers focused over three times more effort on technical assistance and almost twice the effort on short-term, applied research than on long-term product and process research (see Figure 15~. Similarly, non-integrated firms devoted more than twice as much effort to short-term technical assistance as to long-term research. These changes represent not only a shift in the type of research conducted by R&D organizations in the steel industry but also a shift in the R&D organ~zation's technical objectives and their relationship with the production plants, suppliers, and customers. Because of budget and personnel constraints, the R&D organiza- tions at integrated firms had to focus primarily on the problems, requests, and requirements of the production plants and their suppliers and customers and spend less effort on risky and long-term research. R&D Structure and Operation As the steel industry has undergone substantial changes, so has the organiza- tion of R&D divisions within the steel industry (Vislosky, 1996; Vislosky,1998~. These changes can be categorized into three different business eras: (1) the de- cades before the 1980s, when the U.S. steel industry dominated the world market- place; (2) the early to mid-1980s, when the integrated steel industry experienced financial difficulties and was forced to cut back its R&D operations; and (3) the l990s, where the integrated steel firms have made a steady financial comeback to 60 50 40 30 20 10 O . rH~ . . j Short-term Long-term Long-term technical assistance technical assistance applied FIGURE 14 Average distribution of R&D effort by project type in 1991. Note: One integrated firm spent 11% effort on fundamental research. Note: For integrated firms, 8.3% of the effort is other research. Source: Fruehan (1994). Integrated Non-Integrated
STEEL 50 40 20 10 o | ~ Integrated Non-Integrated I ~ L ~ . 11 Short-term Long-term Long-term Other research process product Short-term technical assistance FIGURE 15 Average distribution of R&D effort by project type in l99S. Note: No firms conduct fundamental research. Source: Fruehan and Uljon (1995). 91 become profitable again, and non-integrated firms continue to enjoy seasonally strong profitability. Integrated Steel Firms In the 1960s and 1970s, integrated producers dominated the worldwide mar- ketplace for steel. Because of their large market share and control of prices, the integrated firms enjoyed large profit margins. As a result of this economic pros- perity, the R&D organizations within the firms enjoyed large budgets and free- dom to pursue many different types of relevant research. The R&D budget was funded by the firm, and the number of personnel remained relatively constant. The headquarters for R&D was centrally located, but the R&D organization ser- viced all business units and holdings of the firm. At the time, many of the inte- grated producers owned and operated not only the iron and steelmaking opera- tions, but also the raw material' s suppliers, and the process equipment producers. The R&D organization retained the skills and capability to service each of these separate business units and its unique needs. The R&D organizations were typically hierarchical in structure in which a research director, or in some cases a vice president of research, oversaw all R&D operations in the firm. Reporting to the director or vice president were the man- agers of each division. The divisions were organized by technology area, such as steelmaking, chemicals, and products. Sub-divisions existed to address specific process and product technologies within each area. In addition, there was usually a lab devoted to fundamental research. Since the R&D organizations were staffed by competent and skilled individuals trained in the various disciplines related to the steel firm's operations, most of the firm's research needs were performed in
92 U.S. INDUSTRYIN2000 house. In addition, rather than outsourcing research, U.S. steel firms actually sold some of their technology to other firms in the United States and abroad. Most R&D projects originated from within the R&D organization as sugges- tions and proposals by the research staff. The motivation behind new projects was often initiated from a competitor's activities, customer and plant requests, and improvements to products and processes. Most projects at any one time were ongoing from previous years, and new projects were introduced annually. These research projects consisted mainly of applied process and product research with an average life span of three years. In addition, the R&D organization serviced the various business units of the firm by providing technical service and address- ing short-term research problems. After the crisis of the 1980s, the R&D organization was considered an ex- pensive luxury in difficult financial times. The R&D organization was forced to sell its services to the rest of the firm, and research projects were funded by individual business units throughout the firm, such as production plants. In some cases, the research was still funded by the corporation, but the R&D organization was responsible for advocating its worth and the value of each project directly to the production units. Research objectives shifted to an opposite extreme: techni- cal assistance and problem-solving became the primary focus of the R&D organi- zation. Long-term applied research still took place but usually only if such re- search could directly benefit the customers and the production plants. In addition, the costs, time schedule, and results of applied research were always under scru- tiny by upper management, and immediate beneficial outcomes were expected from all research projects. This environment caused the integrated steel industry to focus on short-term gains and immediate results from research. R&D organizations were more in- clined to pursue less risky, incremental research projects that were of direct rel- evance to their customers and production plants. As a result, the integrated steel industry introduced very few new technological advances in its production pro- cesses, and product advances were more often incremental improvements rather than new products or processes. This cautious and incremental R&D environment continued throughout the 1980s. Only recently has the U.S. steel industry experienced a comeback in the global marketplace. As a result, the remaining R&D organizations in the industry have examined their current operations. Although small in terms of budget and personnel, these organizations are beginning to reexamine their role in the con- text of the firm by directly incorporating the corporate strategic plan, the firm's marketing plan, and input from the plants, suppliers and end-users into their own technical plan. In addition, these organizations are making efforts to pursue long- term, applied research. They are also entering into partnerships with competing firms and end-users. An example is the ultralight steel auto body partnership between Porsche Engineering Services and 15 steel firms (Porsche Engineering Services, Inc., 1995~.
STEEL Non-Integrated Steel Firms 93 Very few non-integrated firms have any formal R&D organization. Most of these firms have small research groups that provide technical assistance to the plants. The non-integrated producers were much less affected by the economic downturn in the U.S. steel industry in the early 1980s. In fact, the non-integrated producers actually contributed to the economic woes of the integrated producers by acquiring some of their market share in high-quality, complex steel products. Sources of Innovation The various internal sources of innovation that affect a firm's overall innova- tive process are examined below. The firm's own R&D laboratories and joint ventures between companies, both domestic and international, are discussed first. Then the discussion shifts to innovations originating with suppliers and turns to university contributions to industrial innovation. Steel Company's In-house R&D Laboratories One of the main sources of innovation in the steel industry remains a firm's own internal R&D labs. This has remained the case despite the major cutbacks in in-house R&D activities that most integrated steel firms went through in the mid to late 1980s. These cutbacks have resulted in smaller numbers of available man- hours that can be devoted to general innovative research that has a higher prob- ability of yielding breakthrough innovations. Instead, most of the internal effort has been devoted to research that can result in incremental improvements to ex- isting innovations. In addition, most researchers at firms' central research centers have taken on the role of technical consultants to the firms' various steel-produc- ing plants. For example, researchers may be asked to help the engineers at a plant solve a technical problem that affects the way a machine functions or the quality of its output. Conversely, a plant engineer may contact the company' s research center and ask them to perform a research experiment, such as a study of the effect of adding a certain amount of an alloy to a grade of steel. Joint Ventures with Other Steel Companies Most U.S. steel firms have joint ventures or general technology agreements (GTA) with other domestic producers. Examples of major joint ventures are listed in Table 3. The joint ventures between Inland Steel and Nippon Steel involved state-of- the-art facilities. Although they helped reduce the cost and time of production, they do not justify the high capital investment that was required. Also, there has been little innovation spillover to other areas of the firms. The USS-Kobe plant is
94 TABLE 3 Examples of Joint Ventures in the U.S. Steel Industry U.S. INDUSTRYIN2000 Company Venture Partners Activity Inland INTEK Nippon Steel Cold rolled sheet INKOTE Nippon Steel Coated sheet USX USS-Kobe Loran Kobe Steel plant UPL POSCO Finishing plant LTV Tnco Steel Sum~tomo/Bntish Steel Steel plant Source: Fruehan and Vislosky (1997). virtually an independent company and in many ways does not perform as well as other USS plants. The USX venture with POSCO has not led to major innovation in USX itself. The Trico plant began operations only in 1997, and its impact is difficult to assess. The best example of general technology agreements is the GTA between Inland Steel and Nippon Steel. Nippon Steel had as many as 100 engineers teach- ing Inland Steel engineers how to improve the quality of their automotive steels. Their primary focus was on the Japanese auto transplants. Sumitomo Metals also has long-term agreements with LTV Steel, and other U.S. companies have rea- sonably successful agreements with Japanese companies. Joint agreements with companies in countries other than Japan have been less productive. The best example of joint research agreements is the agreement between USS and Bethlehem Steel. About 5 to 10 percent of both companies' research is devoted to selected joint projects. This program has been considered suc- cessful and has led to innovations in casting. Other arrangements, such as those on strip casting projects between a number of companies, have been unsuccess- ful (Fruehan and Vislosky, 1997~. To date, joint ventures with foreign produc- ers have had limited innovation spillover to other parts of the company. GTAs have been successful when focused on a specific task, whereas the general ex- changes have not led to significant innovation. Innovations by Suppliers Suppliers of technology to the steel industry have been a major source of innovation (Fruehan et al., 1994~. The best-known example the SMS thin slab caster has caused a revolution in steelmaking. Other examples include innova- tions in EAF steelmaking, continuous casting, and finishing. With the decrease in steel industry research, technology suppliers must continue to take major re- sponsibility for equipment innovations. Joint developments with U.S. firms are extensive and are generally viewed as successful (Dennis, 1991~.
STEEL University Contribution to Innovation 95 Universities have not aimed their research to make a major innovation but rather to develop the basic knowledge to aid the steel and steel supply companies in their activities. The two major research consortiums are at the Colorado School of Mines (steel rolling and finishing research) and Carnegie Mellon University (ironmaking, steelmaking and casting). These centers receive nearly all their funding from the steel industry, with each center having over 20 industrial part- ners. Furthermore, the center at Carnegie Mellon is international with about ten foreign firms participating. While it is difficult to show that university research alone has produced any major innovations, it is clear that it has provided the fundamental understanding that has supported new innovations. Universities also contribute to innovation through consulting activities between industry engineers and individual profes- sors. This exchange of ideas, although less formal than contacts through the steel centers described above, is nevertheless important. It provides a means for uni- versity professors to share results and insights from their research projects that might be of use to industry engineers. Universities also contribute through the transfer of knowledge. When young graduates or more seasoned academics join a steel firm, they bring a fresh perspective and greater creativity. To help quantify the role of universities and other sources of innovation, a recent Sloan Study project devised a measure a count of article citations of patents relating to specific innovations. Preliminary results show that university- authored articles accounted for close to 20 percent of article citations in patents issued for interstitial free steel and about 30 percent of article citations in patents relating to direct ironmaking (Cheij, 1997~. Future Directions of Innovation The gap between the steel industry's technical needs and its R&D resources remains an area of concern. This gap is evident in the study of R&D activity described above. In the study, several potential major new technologies were identified. The companies surveyed were asked which of the new technologies were critical to them and whether they had a related research program. Between one-half and three-quarters of respondents indicated that the technologies were important, but typically less than 35 percent of those indicated that they had a related research program on a given technology (see Figure 16~. To address this gap, and to offset project costs, steel producers may be required to participate in collaborative efforts with competitors, customers, and suppliers.
96 U.S. INDUSTRYIN2000 Strip casting processes Improved slab casting New processes to separate scrap Processes for scrap substitutes New melting processes Recycle/treatment of waste oxides Radical improvements in steelmaking New/lmproved coke-making Advances in the blast furnace New ironmaking r. Important | |Cl Current | 0 20 40 60 80 100 FIGURE 16 Important and current technology areas. Note: Percentage of respondents from Fruehan and Uljon (1995) survey. Respondents include 28 domestic and international steel firms. Source: Fruehan and Uljon (1995). OTHER FACTORS INFLUENCING COMPETITIVENESS AND INNOVATION Technological innovation is only one factor that influences competitiveness. The impact of the major factors on both the competitiveness and innovation of U.S. steel firms is summarized in Table 4. Only two factors have had a high TABLE 4 Relative Impact of Factors other than R&D on Competitiveness and Innovation Competitiveness Innovation Minimills Customers Human resources Education and training Trade issues Foreign investment Regulatory policy Government support of R&D L Internationally funded R&D L H H H M H M H H H L H L M M Ha Mb aGovernment funded R&D has had a major effect in Japan and Europe, but a medium effect in the United States. bInternational funding has had a minor effect in the United States and Japan, but a high one in Europe. Note: H = high, M = medium, and L = low. Source: Fruehan and Vislosky (1997).
STEEL 97 impact on both competitiveness and innovation minimills and customers. Most of the other factors that have had a high impact on competitiveness have had a low impact on innovative capacity, or vice versa. This suggests that all the fac- tors mentioned below are important. Minimills. Minimills have been a tremendous source of innovation, includ- ing innovations in technology, management, and human resources. This is due in part to their flexibility in process, management, and labor relations. In general, minimills have not originated technological concepts, but they have implemented, adapted, and optimized processes effectively. The classic example is thin slab casting, which was developed in Germany but successfully commercialized in the United States. Other areas in which minimills are leaders in innovation in- clude scrap substitutes and electric furnace improvements. Minimills have also contributed to improved competitiveness by reducing steel costs and forcing the integrated industry to restructure by closing inefficient plants and concentrating on high-quality steels. Customers. Customers, particularly in the automotive industry, have been a source of both competitiveness and innovation. Spurred by the Japanese auto transplants, foreign and domestic auto producers placed a significant amount of competitive pressure on steelmakers to improve quality. At the same time, cus- tomers also became a source of innovation. Steel producers worked with the auto industry to improve the quality of existing steels and to develop new and im- proved steels. An example of this collaboration is the optimization of the produc- tion of corrosion-resistant steels and their use. Human Resources. Workers' productivity has increased by nearly 300 per- cent in the past decade, as discussed earlier. These gains have been achieved not only through new technologies but also through innovative human resources prac- tices, reducing labor costs by over $100 per ton, 25 percent of the total cost of production. Thus, labor considerations have been a driver for technological change, but rarely have they contributed to innovation. When new technologies are introduced in union facilities, it is usually neces- sary to negotiate new agreements on working conditions and standards. Of the 20 million tons of new capacity currently being built in the United States from 1990- 2000, virtually none is in union plants. Labor represents 10-15 percent of the total costs of steel production in existing plants, and less than 10 percent in new plants. Therefore, there is only room for small improvements in this area. Education and Training. Education and training of workers in the steel in- dustry is continually evolving to keep up with and respond to new technological innovations that are changing the industry. Approximately three-quarters of the steel industry's on-thejob training is associated with new and emerging tech
98 U.S. INDUSTRYIN2000 nologies. Through such training workers will be better equipped to handle new machinery and to produce higher quality steel. Trade Issues. Trade, particularly unfair trade, has been a major competitive factor in the United States. In general, the steel industry is profitable when capac- ity utilization rates are over 90 percent and unprofitable when they are below 80 percent. Imports have averaged about 18-20 percent during the last decade but have exceeded 25 percent in the past. When imports are high, capacity utilization may decrease, resulting in poor financial performance and fewer resources avail- able for innovation. Imports depend largely on exchange rates and relative production require- ments in the United States and abroad. Import sources are shifting from Europe and Japan to developing countries. Imports generally result from the inability of domestic producers to fill all the country's needs or from overproduction in the exporting countries. Currently, the U.S. industry is the low-cost producer for its domestic market. Foreign Investment. Foreign companies, especially Japanese companies, have invested heavily in the U.S. steel industry. In particular, Nippon Kokan owns much of National Steel, Nippon Steel has invested in Inland Steel, and much of AK Steel (Armco) was at one time largely owned by Kawasaki Steel. Much was expected in terms of technology transfer from Japan. However, these investments proved to be poor and little technological innovation resulted. In fact, these companies have done more poorly than similar integrated companies. Soon after Kawasaki Steel sold its interest in AK Steel, AK became very profit- able under U.S. management. Whereas Japanese investment in the U.S. auto industry has been highly successful, its investment in the steel industry has been a relative failure in terms of both profits and innovation.5 Regulatory Policy. Regulatory policy to protect the environment has been a major driver of technological innovation, especially in ironmaking, including the elimination of cokemaking and the recycling of waste. In 1997, in response to concerns about global warming, some of the largest U.S. steel firms formed a coalition with the American Institute of Iron and Steelmaking to present a volun- tary industry plan to cut emissions of greenhouse gases by 10 percent from 1990 levels by the year 2010 (Pittsburgh Post Gazette, 1997~. In return, industry offi- cials requested that the government provide more federal investment in R&D as well as tax incentives for development of new energy-efficient technologies. Thus, environmental concerns strongly influence the types of R&D projects pur- sued by the steel industry. 5The reasons for this failure are the subject of a new research project in the Sloan Steel Industry Study.
STEEL 99 Government Support of R&D. The federal government, particularly through the Department of Energy, has provided a significant stimulus to technological innovation. DOE committed about $95 million for R&D projects in the steel industry through fiscal year 1994 (Cyert and Fruehan, 1996~. In particular, gov- ernment funding of programs in direct ironmaking and process control have been effective, in part because the government has not attempted to manage the pro- grams. The results of government support are beginning to have some impact on competitiveness, but their full effect may not be fully realized for ten years or more in the U.S. Elsewhere, especially in Europe and Japan, government funding has been much greater and has had more effect on innovation. In Japan, MITI has sponsored many large "National Projects." In Europe, governments have also funded individual projects and institutes devoted to steel. Internationally Funded R&D. There has been surprisingly little international funding for R&D. Individual companies have engaged in technology exchanges, but there has been little actual joint research or development. Regionally funded R&D has been extensive, particularly within the European Union (EU). For many years, steel companies in countries in the EU have been taxed on each ton of steel produced. The tax has funded a range of R&D activities, from fundamental uni- versity and institute research to major commercial demonstration projects, such as coal injection into blast furnaces. The EU program has been reasonably suc- cessful and will continue to be so. The American Iron and Steel Institute carries out research sponsored by U.S., Canadian, and Mexican companies, but the pro- gram is voluntary and much smaller than the EU program. One major international program has been launched in response to the "Part- nership for a New Generation of Vehicles." More than 20 companies from Japan, Europe, and America are funding work to develop a more fuel-efficient, steel- based automobile, the Ultra Light Steel Body Program (Porsche Engineering Ser- vices, 1995~. LINKS BETWEEN THE INNOVATION PROCESS AND INDUSTRY PERFORMANCE Some analysts argue that an investment in R&D takes five to ten years to begin to yield a substantial return and that the U.S. industry is currently benefit- ing from previous R&D. This argument is only partially true. Ten years have elapsed since the major R&D restructuring of the 1980s and the industry is doing better than anytime in recent history. Technological innovation alone does not determine a firm's competitiveness. Other factors including competitors' actions and customer demand, human re- sources, trade issues, capital availability, market selection, foreign investment, regulatory policies, and funding sources have as great, if not a greater, impact on competitiveness in the U.S. industry.
00 U.S. INDUSTRYIN2000 Nevertheless, there are dramatic examples of technology innovation that clearly affect competitiveness. In particular, the use of thin-slab casting tech- niques by Nucor and other minimill producers, and other quality improvement innovations that have been implemented by a number of major integrated compa- nies to produce the highest quality steel at the lowest cost, have allowed both types of steel producers to achieve higher levels of productivity and profitability in recent years. Although new innovations do affect competitiveness in the steel industry, there is no obvious trend between the industry's in-house R&D spending and its economic performance. R&D spending at the major integrated firms decreased drastically in the mid-1980s shortly before these firms began making their great- est increases in productivity, followed by increases in profitability. The minimill producers have had little or no in-house R&D and yet have performed well during this same period. It could be argued that the minimills are living off the research of others. In contrast, it is not clear whether major international firms such as Nippon Steel, Usinor, and POSCO have had good financial performance because of their relatively large investment in R&D, or if they were able to invest heavily in R&D because of good financial performance. Again, the question of how R&D spending is related to economic performance is not obvious in the global steel industry. The improved economic performance of the U.S. steel industry may be due more to the effective use of R&D resources, capabilities, and the organization and less to the investment in R&D. When the integrated firms restructured their operations and reorganized their in-house R&D to cut costs and improve produc- tivity, they lost a large part of their R&D capability and skills. However, the R&D organization became more efficient and focused more directly on produc- tion and issues relevant to customers. The in-house R&D organizations formed tighter relationships with production plants, suppliers, and customers. The acqui- sition of new technology innovations came more from other sources, including particular suppliers and foreign steel producers. The "not-invented-here" syn- drome, which sometimes neglected advances made outside one's own company, that had prevailed prior to the 1980s disappeared almost completely. Today, the R&D organizations of integrated producers remain relatively small and few. However, they are leading the integrated steel industry to sustain a competitive advantage through new process and product innovations that will provide high- quality steel products at the lowest production costs. In contrast, minimill producers have always effectively utilized innovations developed elsewhere. The U.S. minimills became international leaders in the commercialization of a series of processes that led to the development of continu- ous steel processing. This process improved the conversion time of raw materials to finished products from several months to ten hours or less. As such, the minimill sector has achieved astounding production efficiency and high profit- ability in the last two decades. The minimill industry's effective adoption and
STEEL 101 commercialization of innovations from other sources has been a large determi- nant of its competitiveness and economic success. For the U.S. steel industry as a whole, R&D resources have been more effec- tively utilized, even as R&D resources have decreased dramatically. SUMMARY AND CONCLUSIONS The U.S. steel industry has made a remarkable comeback in its competitive- ness. By restructuring, massively downsizing operations, closing inefficient plants, and making strategic investments in new plants and technologies, the U.S. steel industry has achieved healthy and growing profitability and productivity. Although a number of different factors discussed in this paper have contributed to the industry's turnaround, the development or acquisition of new innovations, and the efficient implementation of these innovations, played a significant role. With these innovations, the U.S. steel industry has again become competitive with the best producers in the world. Nevertheless, the industry faces, in some cases, a unique set of economic drivers different from those of its competitors. In the future the industry cannot rely completely on technologies developed else- where. In the next decade, the U.S. steel industry may need to rely more on its own innovation or invest more in collaborative developments to continue to im- prove its competitive position. REFERENCES Ahlbrandt, R., R. J. Fruehan, and F. Giarratani. (1996). The Renaissance of American Steel. New York: Oxford University Press. Baber, W.R., Y. Ijiri, and S.H. Kang. (1993). Financial Analyses of the US, Japanese, and Korean Steel Industries: An Investigation of the Determinants of Global Competitiveness. Working pa- per prepared as part of the steel project, 'Competitiveness in the Global Steel Industry', funded by the Alfred. P. Sloan Foundation and the American Iron and Steel Institute, Carnegie Mellon University. Cheij, D. A. (1997). Case studies conducted as part of the steel project, 'The Economic Impact of University Research in Science and Technology on the Steel Industry,' sponsored by the Alfred P. Sloan Foundation, Carnegie Mellon University. Cyert, R. M., and R. J. Fruehan. (1996). The Basic Steel Industry, Meeting the Challenge: U.S. Indus- try Faces the 21st Century. Final report for the Office of Technology Policy sponsored by the Sloan Steel Industry Competitiveness Study, Carnegie Mellon University, December 1996. Dennis, W. E. (1991). Lessons from a Decade of Collaborative Research. AISI Ironmaking Confer- ence Proceedings 50:3-10. Fruehan, R. J. (1994). Survey conducted as part of the steel project, 'Competitiveness in the Global Steel Industry,' sponsored by the Sloan Steel Industry Competitiveness Study, Carnegie Mellon University, January 1994. Fruehan, R. J., H. W. Paxton, and L. Giarrantani. (1994). A Vision of the Future Steel Industry. Prepared for the U.S. Department of Energy, sponsored by the Sloan Steel Industry Competi- tiveness Study, Carnegie Mellon University, December 1994. Fruehan, R. J. (1996). Manufacturing Quarterly. (April 1-7):11.
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