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Revival of U.S. steel industry offers lessons for automakers
11.26.2008 | -- admin

A few years ago, an industry whose history and mythology were indelible parts of the U.S. identity was dying. The great steel mills of Pennsylvania and the Midwest had literally built the United States, but the twin burdens of competition and self-inflicted wounds had brought them to the edge of extinction.

Slabs of steel cut in a plant that was operated by International Steel in Cleveland. (Ron Schwane/The Associated Press, 2004)

If they were allowed to go under, their partisans warned, the consequences would ripple through the economy at a cost too high to bear. The old saying, "As steel goes, so goes the nation," was as much a threat as a boast.

The Detroit automakers are using the same argument as they seek a $25 billion bailout from Congress. "What happens in the automotive industry affects each and every one of us," a General Motors Web site declares, warning that the consequences of a shutdown would be "devastating."

Yet steel's savior was not the government bailouts it ardently sought but exactly what it tried so long to avoid: bankruptcy. Only when the companies failed were they successfully slimmed down and retooled into smaller but profitable ventures. As debate continues over what, if anything, should be done for GM, Ford and Chrysler, the steel industry may offer a model.

The steel and auto industries are both capital-intensive enterprises that peaked a half-century ago and have been intermittently embattled ever since. Both secured peace with their unions by vastly expanding benefits, a bargain that eventually hobbled them. Both had entrenched layers of management that believed - despite all evidence - they could wish away change.

There are also key differences. Steel is essentially a straightforward commodity industry: The companies compete on price. Auto sales are often ruled by consumer perceptions. This has been a problem for Detroit. Many of its customers long ago fled for Toyota and Honda, and a bankruptcy would scare away many more.

The steel industry was beginning its long stumble when it turned to Washington for help in the late 1970s. The Carter administration responded by committing $300 million in loan guarantees to five struggling companies. Nearly a third of the funds went to help Wisconsin Steel, a Chicago outfit that had been around since the 1870s.

Thanks to a strike at a key customer, Wisconsin Steel promptly went under. The company locked its gates one winter day without even bothering to notify its 3,000 employees that their wages were history.

So was most of the government's money.

Despite this fiasco, Jimmy Carter's successors tried to deliver on demands for relief. In 1984, Ronald Reagan imposed import quotas to stem the tide of cheap foreign steel. In 1999, Bill Clinton guaranteed $1 billion in loans to beleaguered producers, and the following year imposed punitive tariffs on some imports.

It was never enough, particularly after the rise of low-cost mini-mills. By late 2001, their industry reeling, the steel makers wanted more from Washington: further protection from imports, pressure on other countries to reduce their steel-making capacity, and billions of taxpayer dollars to relieve the burden of their employees' retirement costs.

They got a temporary tariff from President George W. Bush, but not much more. And so the steel industry - what was left of it - shuddered and collapsed.

Bethlehem Steel, whose steel was used in Hoover Dam, the Chrysler Building and the George Washington Bridge, filed for bankruptcy in October 2001. It was followed by National Steel, Weirton Steel, Georgetown Steel and many others. The pain was great.

And necessary, some say. "If the steel companies had gotten all they wanted in terms of loan guarantees and import quotas, they would never have gotten better," said Richard Fruehan, director of the Sloan Study on Competitiveness in the Steel Industry. "The bankruptcies forced their hand."

Over the decades, the companies had shed employees to stay afloat. Soon, retirees greatly outnumbered the actual workers. At Bethlehem, the ratio was six retirees for every worker. All these retirees had good pensions and good health care plans, which they thought were guaranteed. But these costs were a tremendous weight on the companies.

Bankruptcy changed the rules, allowing the steel makers to unload billions of dollars in pension obligations onto the government's Pension Benefit Guaranty and to cut more than 200,000 workers from their supposedly guaranteed medical care.

The failures also allowed for the renegotiation of labor contracts, something Wilbur Ross Jr., a specialist in distressed assets, realized when he began looking at the moribund industry. The only bidder for the bankrupt LTV Steel, he proceeded to buy Bethlehem and other old-line companies, putting them together as International Steel Group. He cut more employees and revamped work rules, taking Bethlehem, for example, from eight layers of management to three.

Steel's turnaround was dramatic. The 17 leading companies went from a combined loss of $1.1 billion in 2003 to an after-tax profit of $6.6 billion in 2004, according to an analysis done for an industry trade group. Ross sold International Steel to the Indian entrepreneur Lakshmi Mittal for $4.5 billion in 2005, earning a tremendous return.

Thanks to all of steel's tribulations and consolidations - and a world economy that was booming until recently - the industry is relatively healthy.

If only the car companies could get to this sweet spot. They assert they are chopping operating costs but need a lifeline in the form of the $25 billion in loans. GM, the weakest of the three, says that without the money it will soon run out of cash to operate. Chrysler says it would not be far behind.

The history of government bailouts, so often littered with disappointment, had a great success with a car company. Chrysler used its $1.5 billion in government loan guarantees in the early 1980s to stabilize itself and improve its product. The loans were paid off, with interest. That is a precedent the industry might be happy to discuss, as long as you did not ask why Chrysler is once again pleading for government help.

In a GM bankruptcy, the number of product lines would be reduced, the management replaced and the investors wiped out. The enormous costs of its retirees could be offloaded. It would be painful, just as it was with steel, but in the end someone could come in and pick up the pieces. Perhaps it would be one of the foreign carmakers, looking to expand. Perhaps it would be a distressed assets specialist, like Wilbur Ross.

Not so fast, Ross said. He doesn't dispute that the auto companies are as bloated as the steel companies were, and certainly doesn't think they should get a blank check. But he thinks the consequences of what he calls free-fall bankruptcies - ones without any government role - could be disastrous.

GM would drag hundreds of suppliers down with it, and they would all have trouble getting back up again.

Furthermore, it is a tremendously problematic time. The final collapse of the steel industry came when the economy was relatively healthy and could absorb the blow. The current economy is the weakest in decades.

"Bankruptcy will be a total mess, and may not produce anything of value at the end of it," Ross said. Instead, he would like to see a 90-day government loan to keep GM afloat on the condition that all the stakeholders - including employees, management, bondholders - agree on a restructuring. The government would be there essentially to crack heads and make sure everyone made concessions.

This, however, would give the government ultimate responsibility for the death of GM, should that come to pass. "The government would have to have the fortitude to say, 'We're not going to keep pumping in money,' and mean it," Ross said.

 
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