Steel is an intermediate product. It is sold to people who make other things with it. Therefore, the nature and dynamics of steel-consuming industries are critical to understanding key drivers of steel companies and the industry as a whole. These outside market forces are unusually important for the directions and dynamics within steel, perhaps more so than if steel was a standalone industry.
For almost a 100 years, “the” key customer for steel has been the automotive industry. The auto–steel connection is so deeply embedded that it is fair to say that we would not have the auto or steel industry in the form that we have them, one without the other. For this reason, the chapter begins with a summary of some of the critical important developments and stages of automotive steel. The two industries co-evolved.
Developments of supply chains in automotive have led to new practices across manufacturing. In a simpler time, the price negotiations between U.S. Steel and GM used to determine the price of flat rolled for all of North American manufacturing. However, in recent years, the stretch out of auto supply chains has played a major part in transforming the steel industry. We look at the role of various agents along the supply chain.1
We also discuss the functioning of steel companies in local markets and the emergence of local steel economic clusters.
Does steel have a growth story? The future of the steel industry largely depends on the outlook for manufacturing in general. For some, steel is seen to be following the apparently inevitable decline of automotive and manufacturing in general.
Finally, because of the intimate linkages between steel producers and consuming industries, the industry is vulnerable to amplification of the normal business cycle swings that all businesses must manage. The so-called Bull Whip Effect (BWE) is considered in the context of the recent Great Recession. The latter is a special case of how outside market force impacts the industry.
The Auto Steel Story
Taken together, the steel and automotive industries constitute the largest manufacturing complex in the world. It is not possible to talk of one without the other. The basis of production economics in auto to this day turns on the all-steel auto body or “unibody” developed in the 1920s. Its linkages to auto manufacturing and assembly technology—a 75-year learning curve of skills, knowledge, and investment—is the fundamental reason why neither aluminum or plastic will replace steel in cars any time soon.
Henry Ford and E.S. Budd
The conventional wisdom of 20th-century business history states that the revolution at the Ford assembly line at Highland Park in 1913 gave rise to the mass production–consumption model of the modern industrial economy. Fordism is what academics call it.
The key was the introduction of the assembly line that reduced production time for a Model T from 12.5 h to 1.5 h. The resulting economies of scale allowed Henry Ford to reduce the price of the model T from $950 to $350 and facilitated his revolutionary offer to pay $5 per day to his auto workers so they could afford to buy his cars. The new mass consumer market was born.
In reality, Ford was more an innovator in outsourcing and logistics, not assembly production. The introduction of conveyors at Highland Park had their primary impact on the flow of components. They were not the primary pacers of production on the final assembly line. The pioneer of the mass production assembly line was not Henry Ford but E.S. Budd.
The paint stage had become the bottleneck of the new auto assembly lines. Converting from wood to steel bodies was Budd’s solution. It has remained the key determinant of the economics of auto production to this day, through the modern unibody design used by all producers of high-volume automobiles.
Until the early 1920s, most cars had wood or wood/steel composite bodies. The automobile body was basically a wooden frame with steel sheets tacked onto it. The steel was used on the body but not for the frame. Body construction was slow and costly.
In the first decade of the century, it was estimated that it took 106 days to produce a sedan body from the lumber pile to finished product. It now takes about 29 h. About 25% of that time was spent in the paint shop. Twenty-four operations were required to apply paint and varnish, involving 14 drying periods, each taking from six hours to a full day. There were literally acres of storage space at auto plants covered with automobile bodies in various stages of completion. Enamel required a baking temperature of 400°F, which was impossible for wood bodies. Lacquers were eventually developed that reduced drying time from 30 days to 3 days, but this was still not enough to keep up with demand.
Before being hired by Ford, Budd produced his first steel bodies for the Oakland motor car and then the first large introduction was for the Dodge brothers in 1915. Steel construction solved the fundamental bottleneck because unlike its wood predecessors the steel body could be completely dipped in enamel then baked dry, quickly.
Budd had an early interest in press-formed sheet steel. The new Dodge cars had a significant advantage in weight, strength, safety, and durability. However, they required a radical departure in automotive manufacturing practices: it required the highest-quality steel sheet at the absolutely maximum width. Most forming operations were eliminated. The new approach required an unprecedented use of stamping machines. A stamping press is a metalworking machine tool used to shape or cut metal by changing its shape with a die. It also forced the development of new welding techniques.
The Budd body was put together by welding together four main subunits: the outer body shell, the inside frame, the seat supports, and the doors. These in turn, were each built up by the welding of many smaller parts.
By 1927, the Budd Company developed what we now call the unibody, a structure in which the strength factor was reversed since the outside steel rather than the inside frame provided rigidity and support. Actually there was little inside framing, since the side sills had become obsolete and the assembled body was attached directly to the chassis.
With a series of overlapping patents, Budd defined the pressing and welding techniques required to construct a car body from a three-dimensional “jigsaw” of sheet steel panels. The all-steel body gave some immediate and important product benefits: strength, stiffness, greater design freedom, suitability for painting, greater precision, enclosed car bodies; and was much better suited to continuous manufacturing techniques with a significant fall in unit costs under high-volume production.
Steel Changes Automotive
As stated, most early cars were made with wood frames and steel sheet exterior body panels. As a material, wood never fitted in with mass production auto manufacturing. Critical items such as the main pillar-post were intricate composites requiring dozens of specialized and time-consuming operations. It had to be cut from solid hardwood, and since it suspended the door and held locks and other hardware, it was honeycombed with indentations, holes, and notches, many of which were sheathed with metal. As a result, before 1935 and the introduction of the complete steel autobody, the assembly line was not widely used in automobile body construction. Assembly line methods could only be used if the wooden frame was eliminated and the body made entirely of steel. This would allow manufacturers to stamp out the various parts such as fenders, hood, and so on, in huge presses and then weld them together to form the body.
Following the Budd innovations, the all-steel body became the single most important element in vehicle design. The manufacturing processes required for all-steel bodies became the core investment for vehicle manufacturers. Even now, in contemporary high-volume car plants, it is the press shop, welding lines, and paint shop, all required as a direct result of using all-steel bodies, which account for the majority of investments required. Equally, for each model produced it is the tools and dies to make the body that account for the largest investments.
The 1920s had also seen the enhancement of automotive design and styling, facilitated by steel. The original design—a box sitting on wheels—had been little changed. Developments in aircraft design in World War I and the science of fluid mechanics stimulated interest in postwar auto design. The 1920s saw the experimental teardrop-shaped “dream cars,” mostly European such as the Tatra, embodying the latest airflow principles. Streamlined auto bodies became popular in the late 1920s and early 1930s when designers recommended more graceful lines for greater customer appeal in marketing. Headlights and fenders were the first items to be stylized. Designers and sheet mill technicians had to pool their skills to implement the designs.
Automotive Changes Steel
The feedback loops between automotive manufacturing and steel production methods were direct and immediate. Until the mid-1920s, wide sheet steel was produced in manual sheet mills. They consisted of two rolls placed on top of the other between which steel was passed and repassed until reduced to the desired thickness or gauge. As the sheet emerged from the rolls it was caught and pushed back over the top by a man at the back of the mill who was known as the catcher. The man at the front, the roller, took the steel with tongs and put it through the rolls again.2
Hand sheet mills first operated in the late 18th century and were little changed until introduction of the continuous sheet mill in the 1920s. In the hand mill, quality control was an art in the hands of the roller. Much more of the product lay in the mind and hand of the skilled worker than other steel products. Each pass of the steel required a manual adjustment of the rolls, which was dependent on the individual’s judgment.
The improvement in the manufacture of steel sheet between 1920 and 1924 was not in the rolling end but in various finishing practices after the sheets were rolled. Demand for sheet grew through the 1920s as well as quality expectations. A number of heat-treating practices, such as annealing and pickling, were developed so that sheet met the specifications of the users.
Between 1920 and 1925, demand for light flat rolled products increased from 5.7 to 8.2 million tons in the United States. Production for the auto industry itself grew from 2.2 to 4.3 million tons. In addition, there was rising demand from producers of tin cans and other containers, plus makers of furniture and appliances.
The continuous strip mill and the cold reduction mill, where thicknesses were further reduced, were the most revolutionary technologies in the steel industry in the first half of the 20th century. Between 1924 and 1940, 15 million tons of new hot strip capacity was added to the American industry.3
There was a radical change in stamping requirements. Stamping is where a sheet of steel is punched by heavy dies into designed forms that become components further along in the manufacturing process. The contours were rounded instead of square. The body was assembled from a relatively few stampings, which meant a requirement for extremely large sheets with good drawing qualities, the metal’s ability to be stretched.
In the 1930s there were few further technical improvements in the hot strip mill, but more importantly a huge expansion of capacity. The major new technical development in sheet mill operations was in cold reduction. After the hot mill, a long cold strip form was fed through a series of rolls at room temperature and reduced by 50–75% in thickness. This was crucial for the rapidly growing market for thin gauge sheet. It allowed production of sheet that was much thinner gauge than the capabilities of the hot strip mill. The initial appeal was to the container industry because the cold mill produced one-third less gauge variance between sheets than the hot mill and this was critical for the tin plate input to the high-speed, automated forming equipment now standard for can producers. Cold rolled sheet had much better surface qualities and more ductility so that sheets could be more easily formed into shapes that were required for automotive and appliance applications.
The Fisher Body division of GM introduced the all-steel roof or “turret top” in 1935. The innovation increased rigidity and strength, reduced vibrations, and allowed a lower center of gravity. One of the major barriers had been the unavailability of a stamping large enough to cover the whole top of the car in one single piece. Steel sheets were not available in suitable widths and machines did not exist to stamp large sections. The missing technology gap was the continuous wide strip mill.
Within the steel industry, the developments in auto design and manufacturing techniques required metallurgical qualities in sheet steel that would permit it to receive deep indentations without tearing or creating surface defects. The development of large presses also brought demand for larger sheets. The livelihoods of the steel companies, particularly in the early Depression period, depended on responding to the new demands of the auto industry. This often meant significant new investments in very tight times, just to stay in the game. By the mid-1930s, overall steel demand was down by 70% but light flat rolled steel accounted for 40% of steel shipments. Continuous hot strip mills and cold reduction mills were often built in tandem.
Companies experimenting with new techniques in cold reduction for tinplate found that several of these processes also applied to producing wide sheet for the auto industry. Cold reduction reduced the thickness of the steel by 80%, increasing proportionately its length. In order to take up the slack in the product flow, increased speed was required at each stage (stand) in the process. In mills of the early 1930s, the strip left the first stand at a speed of less than 300 feet per minute and the last stand at more than 4000 feet per minute. In order that the speeds were appropriately synchronized at each stand, it was necessary for each to have its own power source. Electric motors and controls provided the power and regulation necessary for the operation. The cold reduction process gave the sheet a fine smooth surface and changed the grain structure of the metal in such a manner that after reheating or annealing the steel could withstand the stress of forming and drawing operations without breaking or tearing.
The new continuous mills required 50% less capital for equivalent capacity and employed 200 fewer men. Productivity in the hand mills was 0.1 tons per man hour. In the new continuous mills it was 1.3 tons per man hour. High volume output, with consistent quality, married mass sheet steel production to the emerging new consumer society.
The Modern Auto–Steel Interface
The core automotive production technologies—stamping, welding, painting, machining—are heavily determined by the choice of product technology with the result that there is considerable per-unit cost advantage in large, centralized manufacturing plants that capture economies of scale. In turn, this means that the industry is capital intensive and highly concentrated, requiring very large investments both in the manufacturing system and in each new model design. A typical modern car plant with a two- or three-model capacity of 350,000 cars per annum will require an investment of at least US$2.5 bn, while each new model platform will require US$1 bn. This system of production and consumption system emerged to meet particular conditions. In the early days of the motor industry, in the “craft” phase of car manufacturing, manufacturers could only deliver customized vehicles in low volume and at high price. As a result, there were many small companies that could be classed as vehicle manufacturers—typically several hundred in each of the major industrialized countries. The business model was one of designing while manufacturing, passing on the resultant high costs to affluent consumers. Ford changed the business model by introducing mass assembly of more standardized vehicles at low unit prices, but crucially the vehicle body technology (the rudimentary steel chassis) employed was preindustrial in character. Hence, in this instance, the redefinition of the business model not only preceded the redefinition of the product and process technology, but also provided the framework within which the all-steel body made economic sense.
Automotive industry economics are dominated by the choice of production technology for the car body. The auto OEMs have two core competencies in design and manufacturing: vehicle bodies and engines. Virtually all contemporary cars are constructed from 250 to 350 steel panels, pressed then welded to create a “unitary” body structure, which is then painted. This approach demands high R&D and production investments, in particular, for the tools and facilities needed to press, weld, and paint steel panels. The high capital cost is offset by fast production rates and high total production volumes, which generate economies of scale. While this per unit cost advantage cannot be denied, the all-steel body demands high volumes to achieve low per-unit cost.
For the global automotive industry, model platforms strategies were the panacea of the 1990s, the perfect way to combine economies of scale, globalization, multibranding, and rapid rates of new product introduction. Components from one vehicle are used on another in a more comprehensive and structured manner. The “platform” refers to the vehicle body structure: the floorpan, front and rear bulkheads, and key items such as the suspension. Moreover, the commonality of components between apparently dissimilar models can be extended to include the “running gear,” that is, engine, transmission, brakes, and steering.4
By sharing components across several models, the vehicle manufacturers can achieve higher production volumes and drive down unit costs.
The production benefits of platform strategies essentially revolve around economies of scale and enhanced flexibility to switch between models. Hard steel tooling dies used to press steel panels into shape achieve maximum economies of scale at high output rates—typically 2 million units a year. Generic platform strategies allow this possibility to be exploited to the full. Moreover, with platforms the vehicle manufacturers can decide how to allocate tooling sets between manufacturing operations. In essence, this is a decision on whether multiple tools are used, or single tools, with parts shipped between plants. In turn, this means that the plants can be “loaded” more easily with longer production runs and fewer tool changes.
A different approach to platforms is notable: that embodied in the Fiat Multipla. This is essentially a modular steel space frame structure with nonstructural steel panels allowing key dimensions such as width and length to be adjusted easily. In addition, the technology has a breakeven point volume of only 40,000 vehicles per year.5
Advantages of the platform strategy include: manufacturers can offer “more car for the money” with higher levels of equipment, better materials, and so on. Differentiation between various brands in a multibrand structure is achieved in a variety of ways not just in terms of product appearance and performance, but also service, finance, and other packages.
The downside of platform strategies is the danger of reinforcing a tendency to oversupply the market. Platform strategies do not allow vehicle manufacturers to escape the need for high volumes to achieve low costs. They are a means to achieve such volumes. This presupposes the market’s ability to absorb production. It is for this reason that the Fiat Multipla steel space frame approach is strategically important for steel, because it represents a product design and production philosophy for much lower volumes.
Platform strategies will reinforce two important trends in steel supply to the auto industry: high-volume globalization and flexible supply. Competition from other materials for body parts will continue.
In general terms, platform strategies are conducive for steel, retaining key applications in vehicle body structures as long as the steel industry can meet the wider demands being made by the automotive industry. However, platforms will not result in elimination of competition from other materials.
The future of auto steel will be most impacted by the prospect of design and manufacture of cars moving beyond the steel unibody into space frame designs. This will open up a very different production and distribution model in the auto industry. It may facilitate a new round of materials competition in which plastic and aluminum components have a renewed opportunity as well as hybrid composite of steel and other materials in combination.6
Steel Clusters and Local Markets
For steel producers, there is a natural steel “cluster” of steel companies and their manufacturing customers who have to locate close by because the product itself, from BOF and EAF producers, have heavy transportation costs. The freight cost variable is the fundamental determinant for immediate cluster behavior in steel.
In this scenario, the steel mill is a hub and other businesses want to locate around it. There is also a segmentation of customers around the mills. For those using lower priced, commodity grades of steel, freight costs are the economic dividing line, but for those pursuing the higher priced, value-added grades, they need the steel mill’s technology and engineering talent.
The steel-manufacturing cluster phenomenon is the site of traditional connections between mills and heavy manufacturers such as automotive and appliance fabricators often in a specific regional location like the Midwest.
Engineering and process improvement stories abound in the history of interaction between the integrated steel mills and the original equipment manufacturers (OEMs). Many relate to basic metallurgy, because so much of the final steel product attribute set is determined by the original metallurgical and processing parameters in the melt shop of the steel mill. This is where producer–user interaction has been closest.
Historical patterns of supply are evolving in accordance with changes in advanced manufacturing in general. The heart of the issue goes to the model of the auto industry supply chain, the lead customer for steel and the reference point for modern lean production.
We use hundreds of thousands of tons of flat-rolled steel.
The auto OEM Resale programme dominates. In most cases, OEMs purchase the steel, seeking bulk pricing from the steel mills and distribute the steel to the Tier 1 parts suppliers. From the mid-1990s this changed how we do our business with the steel industry.
There are two channels of steel supply: Resale is 65%, Non-ReSale is 35%.
Tier 1 Auto Supplier Executive
This new approach to manufacturing and supply has created different and not always welcome relations between management of the Tier 1 suppliers, the top auto parts producers and management of the steel mill.
On the ReSale, we get involved with logistics, quality, etc. Everything but the purchase transaction. The relationship with the Mills is good but not as good as if we had the whole transaction in our hands. He who pays the piper … The system dilutes our relationship and leverage with the Mills. On Non-Resale steel we have the service centres between us and the Mills.
Tier 1 Auto Supplier Executive
Nonetheless, as R&D responsibility has devolved from the auto OEMs to the Tier 1 suppliers, they feel the need and have the desire to establish more developmental relationships with the mills in the future.
For advanced parts manufacturers, technical interaction is the most important factor particularly for HSLA or Dual Phase steels. We work on very specific applications. There is no recourse if they are out of spec. The steels are prototyped from the design stage forward, which specifies certain grades of steel e.g. for certain stiffness characteristics. This is the importance of locally sourced steel.
We want to work directly with Mills on R&D, cost reductions and moving new grades to reduce costs.
Tier 1 Auto Supplier Executive
It seems that there is a substantial future for steel mills within their natural economic cluster, although there is a relationship rebuilding job to be done to work through the complex issues in the new manufacturing supply chains in order to be able to take advantage of it.
Postindustrial Steel: Is Pittsburgh Still There?
Virtually all public policy shops and policymakers at all levels of government now use economic clusters as their policy framework. The reference point for this major policy shift was the work of Michael Porter of Harvard Business School in his 1985 book Competitive Advantage. Porter’s insight and argument were that competitive advantage did not flow to countries or to firms but to groups of firms (producers, customers, suppliers). The clear implication is that location matters in economics and economic policies.
There is a Steel Technology Cluster. It is composed of the steel producers and their suppliers of material and professional services (engineering, logistics).
To illustrate the importance of clusters, consider that contrary to many news reports and conventional wisdom, the steel story is not over in Pittsburgh. The conventional wisdom is that while the steel industry has lost its mills, the jobs have been replaced with health sector jobs at the University of Pittsburgh Medical Center.7
Although Pittsburgh lost most of its direct steelmaking capacity from the 1980s onward, it did not lose its steelmaking expertise.8 The importance of this for jobs will be explained in some detail.
The Steel Technology Cluster is made up of firms that provide a diverse array of products and services as part of the supply chain of the steel industry. This supply chain can be divided into four main components:
1.Production equipment used by steel mills;
2.Engineering services that assist mills in the selection, design, and upgrading of that equipment;
3.Parts and supplies needed to keep that equipment operational; and
4.Raw material inputs to the production process.
Estimates of total employment in the Steel Technology Cluster around Pittsburgh are well over 12,000 people, with an average wage of $56,000. This represents a 50% increase over the average regional wage of $36,051 and a 10% increase over the current average wage for Iron and Steel Mills in the region of $51,000 in the past.
Contrary to the assumption about the disappearance of steel, the intermediate suppliers of goods and services to the steel industry have managed to not only survive the loss of steelmaking capacity in the region, but also transition successfully into an integral part of the global steel supply chain.
The development of the Steel Technology Cluster arose from the process of deverticalization of the steel industry. It has had two main effects on the role of intermediate suppliers. First, they have expanded their role in the supply chain to include services as well as products, such as the bundling of material handling with the supply of raw materials. Second, they have developed a network of relationships with each other in order to coordinate the supply of products and services to a global (rather than local) industry. Although geographic proximity to the customer is no longer as critical to the suppliers, geographic proximity to other suppliers has risen in importance.
Industrial clusters in a globalized economy do not subsist as islands in themselves. They exist in a series of nested scales. The Steel Technology Cluster is embedded in a larger Materials and Manufacturing cluster.
The economic performance of industrial clusters is traditionally measured by their relative export performance. On this basis, the steel industry has historically performed very well compared to other manufacturing industries.
Analytically and policy-wise, the economic performance of clusters has been strongly correlated with the phenomena of interfirm knowledge flows as well as the impact of high skilled and specialized local labor pools.
Recent academic work has drawn attention to the importance of “relational rents” as a more important factor than relative export success in examining the impact of industrial clusters. Rents as defined by economists are levels above competitive market levels of profitability. In the cluster context, these are gains beyond that reflected in traditional trade statistics.9
The classic case of relational rents in the academic literature is that of Toyota and its interaction with its suppliers. The network economics of the OEM–supplier agents generates significant rents that are then shared by the firms within the network.
Future research may examine the phenomenon of relational rents in the steel technology and material and manufacturing clusters as their most important economic impact.
New Global Steel Manufacturing
The steel-manufacturing cluster phenomenon is the site of traditional connections between mills and heavy manufacturers.
Historical patterns of supply are evolving in accordance with changes in advanced manufacturing in general.
Herrigel argues that manufacturing, in this case steel manufacturing, has a bright future, in the sense that it is irreplaceable given our consumption needs and the high recyclability of the material. Steel will be manufactured somewhere. However, it faces great challenges. Two factors will determine the viability of that future path.
In 10 years, we will not be making the classic distinction we conventionally make between goods production and services in the economy. Industrial production will only be seen as viable if it satisfies human needs and does not excessively impair the physical environment. We are all familiar with the exhortation for our industries to become more efficient in order to boost productivity, become more competitive, and sustain a high wage economy. All this is true.
It also means that manufacturing companies will increasingly resemble service companies instead of classic industrial commodity producers. As some steel companies used to say, they don’t sell steel, they sell solutions. Understanding, leveraging, and taking advantage of the information content and design potential in the steel—its basis in advance metallurgy—will be key to how the steel industry manages its future. The critical success factor will be its fundamental capacities to innovate and its skills and human resource capabilities. Therefore, examination of innovation in the steel industry is a key theme in this book.
New Collaborative Supply Chains
A supply chain is a system of organizations, people, technology, activities, information, and resources involved in moving a product or service from supplier to customer. Supply chain activities transform natural resources, raw materials, and components into a finished product that is delivered to the end customer. In sophisticated supply chain systems, used products may reenter the supply chain at any point where residual value is recyclable. Supply chains link value chains.
Incorporating supply chain dynamics successfully leads to a new kind of competition in the global market where competition is no longer of the company versus company form but rather takes on a supply chain versus supply chain form.
There is often confusion over the terms supply chain and logistics. It is now generally accepted that the term Logistics applies to activities within one company/organization involving distribution of product whereas the term supply chain also encompasses manufacturing and procurement and therefore has a much broader focus as it involves multiple enterprises, including suppliers, manufacturers, and retailers, working together to meet a customer need for a product or service.
Value Chain
The value chain, also known as value chain analysis, is a concept from business management that was first described and popularized by Michael Porter.
A value chain is a chain of activities for a firm operating in a specific industry. The business unit is the appropriate level for construction of a value chain, not the divisional level or corporate level. Products pass through all activities of the chain in order, and at each activity the product gains some value. The chain of activities gives the products more added value than the sum of added values of all activities.
The value-chain concept has been extended beyond individual firms. It can apply to whole supply chains and distribution networks. The delivery of a mix of products and services to the end customer will mobilize different economic factors. The industry-wide synchronized interactions of those local value chains create an extended value chain, sometimes global in extent.
It is often commented that the majority of steels in a recently purchased automobile did not even exist 10 years ago. This stands in contrast to the public misperception that steel is an obsolete smokestack industry. On the contrary, as this book argues, innovation and new steels are a constant in the new steel industry. As one steel executive has said publicly, “This is not your grandfather’s steel industry.”
Innovation in steel is a complex process. It is sometimes driven by steel producers and sometimes the steel companies are pulled by their customers. Other times it comes from outside third-party sources. Some examples of each of these innovation paths are outlined in the following examples.
Auto Steel
This is the classic case of Customer Pull innovation. The quality and manufacturing process revolution symbolized, but not exclusively restricted to Toyota-ism, was a revolution not only in production processes but also for material inputs. It was the Transplant Japanese auto companies locating in North America during the 1970s that force-fed steel innovation into the operations of auto-oriented steel makers, particularly with galvanizing lines.
The tipping point and the driver [ for dual phase steel ] were the Japanese Transplants. The Japanese mills had developed it. The auto companies insisted on it, forced it on the domestic companies, otherwise they would have gone to foreign producers.
Ex-Steel Company Executive
The steel companies built on these innovations but they were dragged into the game by the transplants. It is not clear that North America would have had as innovative a modern steel industry in the 1980s and 1990s if it had not been for the Japanese auto companies. As a result, R&D expenditures in the past 20 years have been led by auto-related steels. This was the leading user market and that was where the best profit margins were found for integrated steel producers.
Manufacturing
In the coming years, producer-push innovation may provide an opportunity for steel producers to increase advanced manufacturing customers. Having put such tremendous resources into auto steels in the past decade, there may be major opportunities for applying the new metallurgical processes and products to non-auto manufacturing uses.
There are extremely poor technical capacities in manufacturing in terms of understanding and applying the new steels. The stampers let Toyota and the steel companies do all the work. Stampers just work on cost and yields from processing. There is no development. Their margins are so precarious.
Steel Executive
Many public policy shops are now advocating a rebuilding of manufacturing capacity as part of the post-Recession, and more sustainable economy. Nonautomotive application of auto steels could be a big contributor to this rejuvenated productivity and sustainability story.
Construction Steel
New applications of flat-rolled steel are a major emerging story. In this case, third parties outside the steel industry may be the key innovators. In the case of new coated and painted steels, it is the paint companies that are the lead innovators.
Construction is not like the auto side of things which always is talking about Grades, micro-structures, etc. In this case, it is the paint manufacturers who are the source of innovation. The paint suppliers push innovation at the steel producers, companies such as Valve Spar, PPG, Becker Coating.
The paint guys call on us more than do the steel mills. We get incentives to utilize their new products then we push the steel companies.
Manufacturing Executive
This story is currently being played out in the mid-West. In manufacturing and construction, coatings are the key innovation. The steel producers supply the substrates.
Similarly, in the energy-rich western North America there is an exciting steel manufacturing story emerging around welding technology. Steel fabricators for energy projects are to some extent playing a similar role as the Japanese auto companies in the East. It is innovation in welding technology blended with new metallurgy that is changing the key determinant—welding—in steel fabrication. Again, like paints in construction, it is welding in fabrication that is driving new steel applications from outside the traditional industry.
As steel producers become more deeply integrated into supply chains, they become subject to new dynamics of production scheduling and inventory management risks. Steel supply chains have stretched out downstream as increasingly steel shipments have shifted from being primarily an interface between primary producers and original equipment manufacturers (OEMs), for example, U.S. Steel–GM, to where a majority of shipments, in the order of 70% are shipments from mills to service centers to manufacturing customers who themselves are embedded in complex supply chains either as Tier 1, Tier 2, Tier 3 suppliers to OEMs or manufacturer to wholesaler to retailer to final consumer. The complexity of steel operations management issues increases on a rising scale.
The financial risks are also increasing where traditional margin pressures and high fixed cost of mill operations of steel-producing companies are exacerbated by steel companies becoming the holders of the residual financial risks for the whole supply chain.
Does Steel Have a Growth Story?
For many observers, steel as an industry in North America will be flat or declining in the coming decade, depending on one’s view of the auto industry and whether auto leads the downtrend in manufacturing as a whole.
There will always be an industry for high end products like auto at the 12–13 million vehicle level. But auto demand and therefore manufacturing demand will fall in the future. The high end with ULSAB will always be there but what of the rest?
In the future North America will have 85–90 MTs of production and 130 MTS of consumption. The leaders will be high end auto plus oil and gas pipelines
Steel Consultant
In the conventional view, some regions may do somewhat better depending on demand for steel related to energy projects.
In a different scenario, there are two factors that might bend the
flat/declining line in a more optimistic direction.
First, there is room for the development of nonautomotive applications for the new auto steels into other areas of manufacturing. This could mean an increase of 5% in steel demand. This will require a change in steel customers’ attitudes away from simply regarding steel as a low-cost commodity. This would also mean manufacturing, retooling, and retraining required to apply the new steels.
Second, a set of policies might significantly facilitate the penetration of flat-rolled steels into residential construction and also other buildings and storage facilities. A more active building code and trades training policies would be critical. Optimists believe that the construction market for flat-rolled steel could be a major new growth opportunity beyond the existing market in rebar and beams and theoretically could result in a 20% market growth over time, equal to the auto share now.
Construction is the elephant in the room. They could do Dual Phase for lighter stronger applications in construction skins. If steel penetrates construction it will have a much greater impact on volumes than further work in auto. Materials competition is the key strategic issue. The steel companies don’t see it.
Unless they can break into construction then 5–6 mills will go down over the next five years.
Ex-Steel Company Executive
If neither of these new growth dynamics occur, then the industry will be important but on a slow retreat into the future.
Steel Supply Chains and the Amplification of Business Cycles
The Bull Whip Effect (BWE) is the amplification of demand variation through a supply chain. It says that as variation in consumer demand increases, demand variation will increase at each subsequent upstream supply echelon, from retailers to wholesalers, manufacturers and their suppliers. The presence of a BWE causes increased uncertainty for managers, thus often leading to increased cost and reduced inventory management performance.
The original studies on the BWE in steel examined the dynamics between steel mills, service centers, and auto industry parts manufacturers.10 An inherent systems risk was identified as demand variance increased back up the supply chain. The root of the problem was identified as the combination of the rolling schedules of the producing mills plus the discount policies of the service centers. Attempts have been made to manage this better through demand smoothing and in concrete terms, moving to vendor-managed inventories whereby the service centers take over this supply management function for their manufacturing customers. However, in the longer term this has turned the service centers effectively into working capital suppliers to manufacturers, a very different business model from what was originally intended.
Recent analysis of the 2007–2009 Recession in the United States has identified a good case for BWE factors present with the final impacts being most felt upstream by manufacturers and by implication suggesting new challenges for the steel supply chain.11 The authors posited that increased demand variation due to the recession will be greatest from wholesalers to manufacturers, second most from retailers to wholesalers and least from consumers to wholesalers. Because inventory levels will also be subject to the same forces of variation, the authors further posited that inventories will vary most within manufacturers, second most with wholesalers, and least with retailers.
For 2007–2009, retailers appear to have attempted to buffer themselves from demand variability by smoothing orders and inventory. Conversely, wholesalers reacted most aggressively but seemed to have lost control of their inventories. Manufacturers, at the end of the chain, suffered the biggest impact as the amplified demand variability of manufacturers’ inventories increased by 147%.
The BWE effect is not just of interest to operations managers and academics. The dots connect at the macroeconomic level.
As noted elsewhere, excluding food and energy, about 80% of consumer products have steel in them. The big picture connection is this: the retail revolution in supply chains has been more fully implemented in North America than in any other economic region. Inventory management and lean production norms are imbedded in management. It means that the new system was unusually sensitive to external shocks in the global economy. It is reasonable to posit that BWE in the retail-manufacturing customer base for North American steel producers was a major contributing factor to the 2008–2009 downturn in NAFTA steel being greater than in any other steel-producing region of the global steel industry.
Outside market forces have been and continue to be determinative of steel business cycles and foundational for the industry’s future growth.