After years of focusing on cost-cutting they and their counterparts in the Netherlands were taking a lead in grappling with the much-discussed but little acted upon need for consolidation in a worldwide industry that was suffering from overcapacity and, as a result, having to contend with prices hovering close to all-time lows.
For workers at plants such as Llanwern and Ebbw Vale the deal that created the company now known as Corus in October 1999 always looked like it would bring bleak news. After all, much of the rationale for it revolved around further cost reductions for which read job cuts. And there was a not altogether misguided perception that the absence of works councils in the UK made closing down British plants easier than doing the same to those in the Netherlands and elsewhere in Continental Europe.
But investors who originally welcomed the plans to cut costs by nearly 200 million a year have also started to see the darker side. Those savings have yet to materialise, though Sir Brian Moffat, the companys chairman, was predicting in March that there would be savings worth 150 million by the end of 2001 and 250 million by 2003.
In the meantime, the company spent the year 2000 losing 1million a day and including the 1.03 billion charge for a restructuring effort that includes the loss of 6,000 jobs announced the previous month lost a total of 1.152 billion for the 15 months to December. Far from being a new beginning for the company, the early months of this merger were producing figures that were reminiscent of the bad old days of the early 1980s. Then, the still state-owned British Steel Corporation was also regularly losing 1million a day andin the year to March 1980 lost 1.8 billion, an achievement that earned it a place in the Guinness Book of Records as the biggest-ever loss-maker anywhere in the world.
And the figures were just the latest in a string of setbacks. The steady stream of job losses that emerged during 2000 might have been expected as part of the effort to rationalise production in the combined entity. But observers were not prepared for the lack of improvements in performance that should have gone with this blood-letting. So it became almost inevitable that the company should shortly before last Christmas call a halt to the experiment of having two chief executives and demand the resignations of John Bryant and Fokko van Duyne, veterans of the steel industry with 35 and 30 years experience respectively.
Not only was the event itself somewhat embarrassing for the company, the manner of it was unusual for the frank comments that emanated from the smart headquarters in Londons West End. A spokesman said: The board felt it necessary to address a lack of progress and leadership since the merger.
And if that were not bad enough, the Lex column of the Financial Times seized on the announcement declaring it the first good news investors have heard in months. Pointing out that, Two-headed dogs belong in mythology, not in investors portfolios, the column added, The former heads of British Steel and Hoogovens pussy-footed around all year while Coruss losses mounted and its shares plunged 60 per cent from their January high. The strong pound/weak euro might be the principal cause of the companys distress. But Messrs Bryant and van Duynes failure to do anything about it comes a close second.
So, what could the hapless duo have done to make things turn out differently? Many commentators share the FTs view that most of the immediate problems stem from the fact that there were two people in the top job. Though there is a general belief that modern leadership is a multi-faceted role, there is little support among either theorists or practitioners for actually sharing the position. Patrick Walsh, an analyst with the City institution, Williams de Broe, says, You cant have two heads facing in different directions. Its a recipe for indecisiveness.
And Ken Hughes, an analyst at Credit Lyonnais, adds that the lack of decisiveness means that the merged company shied away from making the difficult decisions that might have put it in a better position. What they should have done from day one is take some capacity out, which is what they have just started to do, he says.
Instead, adds Bill Weinstein, professor of international business at Henley Management College and a longtime adviser to the former British Steel, executives seem to have spent a lot of time not upsetting each other. They felt they had to follow the textbook on inter-cultural management.
The extensive efforts to ensure that the cultural issues were dealt with is also puzzling to other observers. They point out that the examples of Unilever and Shell and, to a lesser extent, Reed Elsevier the publishing giant created through merger that has had its share of problems suggest that Anglo-Dutch combinations can work reasonably easily.
As a result of these distractions, Corus has lost its advantage of being an early mover in the long overdue consolidation of the steel industry. Instead, it is relegated to hoping for some gains from the planned link-up between Usinor of France, Arbed of Luxembourg and Aceralia of Spain announced in February. An early sign of this came when Corus shares received a welcome fillip on the day the three-way merger was announced, jumping 5%.
But even a merger of this scale is a small step. The combined group would have a total output of about 46 million tonnes of crude steel. But this represents only 6% of the total global production of around 800 million tonnes. Indeed, so fragmented is the industry that the top 10 steel producers in the world combined only account for a quarter of the market.
Not only does this have a detrimental effect on the steel companies economics, it also puts them in a weak position with regard to both their suppliers and their main customers, the large automobile companies. Both ends of the supply chain have consolidated extensively in recent years, leaving steel squeezed in the middle, point out analysts.
To this extent, then, the management of Corus has not been alone. There has been a general lack of will to tackle the problems of an industry that in the US in particular has almost totally lost favour with investors. Indeed, the countrys industry publication, Iron Age/New Steel, has recently carried articles repeatedly calling for companies to take action to stem the decline. One such article read: The future of steel belongs to bold, imaginative men and women who care about serving the customer, know how to lead people, use the internet, choose investments in technology and ventures wisely, execute projects on time and within budget, and earn a reputation for financial prudence that persuades investors to risk their money with them.
Many of these attributes are also felt to be lacking in the operations that make up Corus. Indeed, the day before presenting the latest results, Moffat the companys non-executive chairman who is acting as chief executive while the search goes on for a permanent replacement for the two departed heads was criticised by the House of Commons trade and industry committee for having a strategy that offered no hope of survival. Adding its voice to the view that the company had failed to make the decisions that would have delivered the efficiencies promised by the merger, it said the weak euro and strong pound had created only a short-term problem and that a large, well-managed company could have been expected to weather the fluctuations.
It could be pointed out that part of this criticism might be regarded as a little disingenuous in that fear of the political fallout of large-scale job losses is likely to have been a factor behind the lack of decisiveness in taking out production capacity. In addition, much of that overcapacity can be blamed on various political decisions to build or keep open more plants than were actually needed to meet demand hence encouraging the export trend that has proved so ruinous of late. Indeed, it is certainly true that Coruss currency problems have been exacerbated by its continued high levels of exports, which were often carried out it is understood at lower margins than domestic sales.
Moffat, a former chief executive of British Steel, has also been criticised for being primarily a cost-cutter and not using the financial benefits produced to greater advantage. Nor can this charge be laid at his door alone. Weinstein says that the company has a long history of not using the good years to be more aggressive about pursuing exciting opportunities.
He acknowledges that the challenges facing an industry which although its products remain widely used has effectively become a commodity supplier are so immense that they would stretch the most talented of executives. But he also points out the problems for, first, British Steel and, now, Corus have been made worse by a lack of visionary leadership.
This is not to say that the organisation has been unaware of the need to do things differently. For example, before the merger, British Steel began a project with Nottingham Trent Business School under which high-powered managers were sent out to different parts of the business for 18 months at a time with a view to bringing about changes of various sorts. The areas covered ranged from processes to market focus, and Chris Prince, the schools director of post-graduate and corporate programmes, felt the initiative which involved a diploma in transformation management showed a great deal of foresight.
Likewise, Peter Nelson, Coruss manager of transformation capability development, who was involved in creating the Nottingham Trent project, has said that the company realised that it had to come up with a follow-up to its international reputation as a cost-cutter. It knew it had to do business differently and had to get away from being stuck in the past in parts.
Observers also note that the company has not been entirely bereft of talented managers. In fact it was quite well stocked. However, there does seem to have been a tendency for some of the brightest stars to leave. And this has been attributed to a combination of the rigidities that are a hangover from British Steels days as a publicly-owned company and of the macho culture epitomised by senior executives of the past. The most notable of these were Sir Ian MacGregor and Bob Scholey, respectively the chairman and chief executive who, by 1988, when they floated it for 2.5 billion, had made the company the lowest-cost steelmaker in the world. According to David Bowens book on British industry in the 1980s, Shaking the Iron Universe, Scholey was known as Black Bob, because of his helmet and sharp tongue, while MacGregor was the no-nonsense banker brought in by the Thatcher government to sort out the industry.
As problems in other steel companies around the world demonstrate, energising and being innovative in such a mature industry can be difficult. But it is not impossible.
In the US, Nucor, Chaparral Steel and other operators of mini-mills, as opposed to the high-volume integrated plants typically run by Corus and other large players, have shown that there can be profits in specialisation. And with the right approach to management, even more traditional operations can be turned around.
For example, AK Steel was reckoned to be the worst steel company in the world in 1992. But by the end of the decade the team headed by Thomas Graham had turned it around and it retains a reputation for being well-managed and fleet of foot. Closer to home, AvestaPolarit, the large stainless steel operation recently created by the merger of Avesta Sheffield and the stainless operations of the Finnish company, Outokumpu Steel in which Corus has a significant stake, appears to be doing well on the back of a mini-mill-type focus on costs, innovation and the customer.
Corus will, however, only be able to emulate such businesses if it defies the odds and attracts a chief executive with a strong vision of a profitable future and the determination to drive through the radical action required to make this a reality.
If that looks a long shot, there is always the prospect of taking part in any consolidation process that follows the three-way merger already announced. But, while Moffat used the latest results to indicate the companys willingness to look at such a deal, the companys problems are so well-known and reckoned to be so deep that it is by no means clear who would want to share them.
Roger Trapp is managing editor of The Independent
