ArcelorMittal USA creates high quality steel safely and sustainably in order to differentiate itself from its competitors
ArcelorMittal USA (AMUSA), the US division of the world’s largest producer of steel, seeks to produce high quality steel in a sustainable way, at the lowest cost possible. I believe that ArcelorMittal is an example of a company that has effectively aligned its operating and business models to create a competitive advantage over its competitors, which has allowed it to remain profitable (through 2014) despite a global supply glut in steel.
The Business Model
The business model of ArcelorMittal is to create high quality steel at the lowest cost possible in a manner that is safe and sustainable. A common misperception of steel is that all steel is the same. In fact, the different processing steps and combinations of alloys that are added can completely change the physical properties of the final product. Some of these different variations (called grades) can be extremely complicated and costly to make, and the producers who optimize their processes, upgrade their equipment, and invest in training their people are left in a position where they can sell grades that other producers cannot. AMUSA stays competitive by making the necessary investments to keep its product offering and processes world class. Additionally, it generates steel using a fully integrated process where it owns and controls every step of the production cycle: the mining and shipment of raw materials, iron production, steel production, hot rolling, and finishing (See below for a quick video outlining this process). This business model is extremely profitable during strong economic conditions (AM global was 29th on the global fortune 500 in 2007) but does very poorly during economic downturns (down to 108 as of start of 2015) as it often has to absorb massive fixed costs associated with its operations during periods where supply is greater than demand.
The Operating Model
ArcelorMittal USA seeks to generate more value from its assets than its competition through research and development, capital investments to improve its processes, and training its workforce into a highly knowledgeable and productive unit.
Research and Development: ArcelorMittal spends massive amounts of money on R&D to create an edge over other integrated producers such as US steel. It spends this money in two ways: to develop stronger/more durable products and to improve the production process. It has a research center in East Chicago, Indiana that has a dedicated staff of some of the best minds in the steel industry working on ways to give AMUSA a competitive edge. I personally witnessed our plant develop new complicated grades that were not possible a few years earlier simply through process improvements largely as a result of this R&D expenditure.
Capital Investment: AMUSA operates extremely capital intensive facilities. They are becoming increasingly automated with time in an effort to reduce the massive labor cost associate with operating in the US (the plant I worked in currently has a higher production capacity with 5,000 workers than it did with 50,000 workers 40 years ago). Additionally, AMUSA is spending a lot of money in technology upgrades to collect as much plant data as possible and provide it as meaningful feedback to operators and floor supervisors in real time to improve their decision making throughout their shifts.
People: ArcelorMittal USA has massive labor costs (the average hourly cost of one hourly employee is somewhere around $80 once benefits/overtime are considered), so employees are constantly trained and expected to take on greater responsibilities with time. While some of the operating models we have seen through the TOM course have operators that do one task over and over, AMUSA employees perform job functions with 20+ tasks and are often required to think on their feet and make decisions that have massive impact on the plant’s operations. To enable their employees to succeed, AMUSA invests heavily into high quality training programs and into the development of detailed procedures to assist employees with their job responsibilities.
The strong alignment between the operating model and the business model of ArcelorMittal USA has allowed the company to stay profitable over the past few years (the US division, not the global company) despite an awful economic climate for steel production. Currently, supply for steel far exceeds demand and steel companies all over the world, particularly the integrated steel producers with massive fixed costs such as ArcelorMittal, are suffering heavy losses. The more nimble “mini mill” model that depends less on iron ore prices and has lower shutdown/startup costs is much better suited to do well in this climate. Despite all of this, AMUSA’s focus on process, research, and its people have allowed it to execute its business strategy and stay profitable by differentiating itself through low cost processes and a world class product offering.
Student comments on ArcelorMittal USA
Great post! I had imagined that the steel industry is capital intensive, but was surprised that ArcelorMittal also invests massive money to employees as well. I’m especially surprised by its high average hourly cost! As you mentioned that economic situation is unfavourable for the steel industry, I noticed that recently there were some big consolidations in the industry. What kind of improvements are expected by these consolidation or scale merit?
Thanks for the post Scott and great job. I, as you said, was also under the misunderstanding that steel was a fully commoditized product. It was really interesting to learn about the different alloys, coatings, etc. I wonder, however, if the large capitalization strategy is more of a risk than an advantage for the company. If steel manufacturers can greatly benefit from process R&D and new product innovation, is a heavy-capitalized steel mill best positioned to implement these new advances or will AM be disadvantaged versus the mini-mill strategy that Nucor and others have adopted?
Great post! As you described, my understanding of the Arcelor Mittal merger was that Mittal (the scale) met Arcelor (the R&D) and that together they formed a unique ultra performing giant – offering the full range of steel. However I still have difficulties to perceive how such vision fits in today’s environment characterized by oversupply, low costs producers and new high tech materials. Especially as the production process is highly energy intensive and polluting. Could you maybe provide some more color on the perspectives of the steel market overall? e.g what is the split between the commoditized part of the business and the High Grade part, how it evolved over time? Do you believe the current crisis to be structural or cyclical?
On the existing model itself, since this is such a cyclical business, has AM envisaged to develop an hybrid model? e.g Mini-mill + large plants?. to prevent exposure to major economic swings. Are AM competitive advantages really scalable?
Finally do you have any idea why the group fails outside the US?
Many thanks again for the post, great company with a clearly aligned model – my only concern would be the purpose of the model and the mission statement of the company having in mind the future of this industry: is it still relevant given new environmental challenges ahead (cf COP 21)?
Really interesting post, Scott. I am impressed that AMUSA is able to maintain profitability while maintaining living wage rates and R&D. I assume there is a stable leadership team in place who is able to continually invest in people and product to keep to maintain the innovative edge. Would love to know more about the innovation process for AMUSA and how they are able to be more efficient than the competition in developing new, better alloys. Simply spending more money on R&D does not necessarily mean more innovation, so they must be doing something right along the innovation funnel!
Great post. I had 2 observations:
1. Technology is changing a lot of industries. I am curious to know how the data collection and analytics piece that you mentioned in your article is changing ArcelorMittal’s operations and the industry as a whole?
2. You mentioned that inspite of the increasing automation, steel industry still remains labour intensive with labour being a significant cost. I wonder how in the future ArcelorMittal will try to compete with steel companies based in low cost manufacturing locations (like India, China etc.) like Tata Steel, specially once these companies are able to achieve the same quality standards as ArcelorMittal.
Outstanding explanation of the business and operating models utilized by AMUSA. However, given my own background, I can’t help but to identify a few issues that I think are prevalent throughout the steel industry:
1) How does AMUSA expect to compete with the low-cost steel that is being heavily imported from China? It seems like the glut of steel being produced at much lower cost by state-owned enterprises in China (with questionably low labor costs and considerably lower safety standards) is disrupting the domestic market for steel, which already has excess supply due to over-capacity.
2) What is AMUSA doing to maintain its innovative edge? You gave a great description of the high-end (ergo, high margin) steel grades that are being developed, but these R&D efforts are prevalent throughout the steel making landscape. How can AMUSA do this better than other steel makers, who are all competing for the same R&D resources, metallurgists, I.P., steel consultants, etc.?
3) You mentioned that AMUSA is using a fully integrated process, to include mining and shipment of the raw materials, i.e. iron ore. However, at Nucor I saw that vertical integration was questionable in its ability to actually increase profits. Namely, by vertically integrating how can one grow profit margins at all links in the value chain? It’s essentially pushing and pulling in both directions.
4) Ultimately the mini-mill has proven to be considerably more nimble and cost effective than blast furnaces, although with the rise of scrap and electricity prices that cost advantage is shrinking. Regardless, even US Steel is now converting it’s Fairfield, AL plant to EAFs after decades of employing blast furnaces. Furthermore, although many can see the writing on the wall in terms of automation replacing massive labor forces, this is an option that all competitors will eventually take advantage of. What can AMUSA do to maintain an advantage given that scrap-fed EAFs are simply a cheaper way to produce steel in a price-driven market?
Great insights and fantastic description of the operating model.
Great post, Scott! I especially enjoyed the insight into how ArcelorMittal leverages R&D to make both process improvements and improvements in the quality of the overall process in order to stay relevant in an extremely competitive environment. I wonder if there is a disconnect between the automation-related capital expenditures made by AccelorMittal and the investments that the firm makes in its people. Do employees perceive automation as a threat to their jobs and does that have a negative effect on their efforts to invest in recruiting and retaining the high quality employees necessary to complete the varied and complex tasks required of ArcelorMittal employees? In a situation in which ArcelorMittal has to repond to increased pressure from foreign competitors, which of these initiatives will be the first to go?