How National Steel Got So Bent Out Of Shape

The Japanese replace the CEO as the outlook darkens

Just two years ago, the Japanese owners of National Steel Corp. rocked the Rust Belt with a bold raid on a rival: They hired away the entire management team from the U.S. Steel Group's flagship plant in Gary, Ind., and put the six men in charge of the underperforming National, the country's fourth-biggest integrated steel company. The new team quickly went to work, hammering out accords with the union and taking steps to boost productivity. It seemed they just might produce the Mishawaka (Ind.) company's long-awaited turnaround.

Didn't happen. So, in mid-August, with earnings still lackluster, the Japanese yanked V. John Goodwin from his post as chief executive of the $2.7 billion steel outfit, replacing him with 67-year-old Chairman Osamu Sawaragi, an emissary from the Tokyo headquarters of NKK Corp., which has controlled National since 1984. Subsequently, at an Aug. 20 board meeting, Goodwin refused to stay on as chief operating officer and resigned.

MORE TO COME? His departure leaves National scrambling for leadership. Sawaragi, who speaks English through an interpreter, and acting chief operating officer John A. Maczuzak, who only joined the company in May, immediately began touring National's facilities. They hope to convince workers and managers that the company is in stable hands.

But the turmoil may not be over. Analysts figure other members of Goodwin's team may defect now that their leader is gone. Meanwhile, National is in the middle of hammering out new wage and pension agreements with the United Steelworkers. The union, which got along well with Goodwin, is now miffed that he was dumped. "It's not in the company's best interest to change top managers during contract negotiations," says Jack Parton, the union's district director for Illinois and Indiana.

In many ways, NKK has itself to blame for National's woes. In its eagerness to hire away U.S. Steel talent, the company put a clique of plant managers in charge of a complex corporation. Goodwin's team effectively boosted productivity but struggled at headquarters. The U.S. Steel managers battled with outsiders, Japanese and American alike, says one source close to the company. In two years, two chief financial officers came and went, rattling investors. And when NKK placed its own executives in Mishawaka, they could not penetrate Goodwin's inner circle. National's numbers also were disappointing. Although tonnage is up, the company lost $10.7 million in the first six months on sales that fell a fraction, to $1.4 billion.

Even in his area of expertise, operations, Goodwin was hamstrung by employment guarantees in the labor agreement the company had signed with the United Steelworkers shortly after NKK took control. National's rivals signed employment guarantees five years later--after slashing their hourly payrolls. As a result, National still employs 9,500 workers to produce its 6 million tons of steel a year. Minimill startup Steel Dynamics Inc., based in Butler, Ind., will soon be producing 2 million tons with a scant 300 employees.

The big problem is that Goodwin refocused National on producing high volumes of commodity-grade steel. The result is record tonnage, but low operating profits, barely $9 per ton, only one-sixth of AK Steel Corp.'s industry-leading total. Now, Maczuzak, 55, a U.S. Steel veteran, must figure out a way to shift production to higher-margin gauges of steel. The turnaround he faces, says Peter F. Marcus, steel analyst at PaineWebber Inc., "is hard as hell to do."

For National's Japanese owners, who have plowed $2 billion into the company over 10 years, the Mishawaka headaches show no signs of abating. While announced price hikes could boost earnings in the second half of the year, the respite will be temporary. Within a year, a spate of new minimills should sink prices, turning the steel market into a dogfight. For National to be ready, NKK has precious little time to clear up the management muddle in Mishawaka.

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