Q&A: Can This Man Save American Steelmakers?
When he got an offer to head up Bethlehem Steel Corp. (BS ) last September, Robert "Steve" Miller Jr. was playing with model trains--his lifelong passion--at a rail show in Salt Lake City. Miller had every reason to take a pass. After years on the road, he had finally retired as Corporate America's consummate fix-it man, a reputation Miller cemented back in 1980 when he arranged the federal bailout of Chrysler Corp. (DCX ), where he was treasurer. Last January, Miller completed his final repair project--or so he thought--when he installed a new chief executive at Federal-Mogul Corp. (FMO ), a $6 billion auto-parts maker.
Well, it looks like Miller still loves a turnaround challenge. Instead of returning home to central Oregon after the September rail show, he jetted to New York to interview with Bethlehem's board. What he found was not just a storied steelmaker on the brink of failure but a bedrock industry in the late stages of a decades-long collapse. The next day, the nation's No. 3 steelmaker had a new chairman and CEO.
Since then, the 60-year-old Miller hasn't wasted a moment. In mid-October, he put Bethlehem into Chapter 11 bankruptcy. Then, in early December, he unveiled an ambitious three-part plan to galvanize the industry. Part one: Fold Bethlehem and every other American integrated steelmaker--those that melt raw iron ore to make steel, rather than recycle scrap--into U.S. Steel Corp. (X ) The gambit would form a titan that Miller contends could give industry giants in Europe and Asia a fairer fight. Next: Push the government to apply a 40% tariff against steel imports. And last: Use the proceeds from this tax to fund a federal takeover of the steel industry's multibillion-dollar retirement obligations.
The plans may "dovetail beautifully," as Miller says, but it remains to be seen whether he can pull off this hat trick. True, he has at least three other U.S. steelmakers in his corner, ready to merge. And the federal International Trade Commission (ITC) has found that U.S. steelmakers are being injured by imports. So far, though, it's not clear if a punitive tariff will result. Nor is Washington eager to assume the industry's retirement costs.
Miller was recently at Bethlehem's plant in Sparrows Point, Md., where he talked with BusinessWeek's Michael Arndt about the prospects for his plan to rescue both his company and the U.S. steel industry.
Q: Whose brainchild was the merger proposal?
A: The need for consolidation has been obvious to many people for a long time. A couple of things happened recently. One, after September 11, the economy--and the steel market in particular--went straight downhill. That has created a sense of urgency. It has also created an environment where government is more concerned about basic industries, such as steel, that are important to our national defense.
U.S. steel companies haven't consolidated into big conglomerates yet, as in Asia and Europe. Why not? Because we're all carrying these legacy burdens: the health-care obligations for all our retirees. We've shrunk, but our retired workforce hasn't gone away. And we've been shrinking because the more we strain to care for the retirees, the less capital we have to invest and grow. It's a vicious circle. That's why we told the government we're prepared to get married but we need you to pick up our retiree expenses.
Q: The U.S. gets by without manufacturing lots of key inputs. Why couldn't we simply stop making steel?
A: One of our big national worries is that we've become so dependent on oil from the Middle East. What happens if there's instability there? With steel you would have to worry that you might not be able to get it when you need it. And what about all the companies that are suppliers to the steel industry? Where are the engines of your economy if you let your basic industries go under?
Q: But if dozens of nations are competing to make steel--and to even subsidize the price --why wouldn't we want steel buyers in the U.S. to take advantage of the lowest prices?
A: You can't count on low prices forever. Besides, that's what trade laws are all about. If people are dumping steel at below the cost of production, then that's an unfair trade practice. Our trade law says we don't allow our industries to be destroyed by such practices.
Q: Why would one big American steelmaker compete any better than several smaller ones?
A: If we put together all the integrated steel companies, the new entity will have economies of scale. And if we could get relief from these retirement burdens, we would end up with a company that could go head-to-head with foreign rivals. I don't think we would have to keep relying on the government for assistance. Our problem now is that the industry is so highly fragmented. We're too fragile.
Q: If the tariffs are approved and the price of steel rises, won't your customers--machine makers like Caterpillar and car and appliance manufacturers--become less competitive?
A: Ask Caterpillar whether they'll be better off if the U.S. steel industry is destroyed in this process--whether they believe this great bargain they're getting from overseas will continue indefinitely. You have to decide whether you believe your prospects improve with a healthy American economy.
Q: Will Washington be willing to pick up the health-care costs of the industry's retirees and their dependents?
A: There are two processes under way. One is administrative: what President Bush does about imports. The second one, the legacy relief, requires congressional action. They're really two parts of the same plan. A tariff of 40% could generate $1 billion a year. And the legacy costs could come to about $1 billion a year. One part of the plan provides the funding for the second part. There is some political elegance in doing this in parallel.
Even if you don't buy this argument, you have to look at what it will cost this government if nothing is done. If Bethlehem goes under, our underfunded pension becomes a federal obligation. That's $2 billion. Multiply that across all the other steelmakers in the same boat, and it might actually cost the government far more to do nothing than to do what we're asking.
Q: How will you handle resistance to your plan from steel customers, foreign governments, and even the White House's free-trade wing?
A: The opposition to tariffs is quite vociferous, and Bush has a basic trade-liberalization objective. Nonetheless, the plight of the steel industry and its importance to the U.S. economy caused him to start a Section 201 trade investigation, which led to the ITC's findings of injury and remedy recommendations, including tariffs. I don't see how Bush can walk away from this problem and say: "What the hell, let the chips fall where they may." The Administration understands the urgency of this matter. We'll get some support. I don't know whether it will be a 40% tariff, but I also can't imagine that it will be zero.
Q: What happens if the government says "no"?
A: If the government refuses to do something about our legacy burden, the U.S. Steel deal is dead. Period. Then we go on to Plans B, C, and D. Working with a foreign steelmaker is an option. We also could be in a collection of joint ventures. No matter what, Bethlehem's going to look very different.
Q: Looking further afield, will global steel demand improve this year?
A: Things are going to continue to slide downhill through the first half, but then recover in the second half. I think we've seen significant inventory shrinkage in the system. Our customers that might have warehoused more steel when they were more confident have now shrunk down their safety stocks.
Q: How does this turnaround stack up against the other ones you've done?
A: Compare it to the Chrysler bailout 20 years ago. Everybody had given up on Chrysler, and we created something really great there. I'm looking to take those lessons and apply them here. This is much bigger than one company, though. It's an entire industry. I view this in very noble terms, as an important contribution that I can make to our economy.