Ukraine steel makers: Taking a page from history's survival manual

Ukraine steel makers: Taking a page from history's survival manual

What Ukraine's steel makers can learn from the past experiences of Germany and the US.

  • min read


Ukraine steel makers: Taking a page from history's survival manual

For Ukraine steel producers—hit by margin declines of more than 80 percent in 2009, order books measured in weeks and no lasting rebound likely through 2010—the situation is shaping up as a classic case of only the strongest surviving. But that doesn't necessarily mean the biggest. Rather, it means those that create the best strategy to weather the current crisis—and emerge stronger than before.

While a host of factors is working to improve the situation—everything from the  Hryvna devaluation to corporate cost-cutting initiatives to salary and capacity reductions—there is a challenging road ahead. Even as they struggle to improve their medium-term cost position, producers need to worry about likely changes in subsidy policy by the Chinese government or a possible devaluation of the rouble. And since Ukraine's steel makers supply mostly lower-end, low-value products compared with their world rivals, plummeting demand is likely to hasten the industry's consolidation.  Companies that emerge will be those that build a new business model, and in a hurry. The key elements of such a new model entail investments in higher quality (therefore higher-value) products, new and more flexible capabilities and closer ties with ever more-demanding customers.

The trouble is, instead of strategically changing their way of doing business, most Ukraine players are primarily dealing with the devastating downturn by cutting costs. It's the right move, but given the circumstances is not sustainable.

To see the future of Ukraine's steel industry—and what it will take to come out on top—consider what happened during the rapid consolidation of the steel industry in Germany in the 1990s.  ThyssenKrupp emerged as a survivor and it is thriving. The reason? Through its focus on specialty products it is able to generate up to 35 percent more revenue per ton than Arcelor-Mittal, the world's largest steel company. Similar changes happened in the U.S. U.S. Steel, once the "sick man" of that country's steel industry, jumped to a leadership role in USA by developing higher-margin products for key customers, creating newer technologies, and by strategically slashing operating costs and redundant capabilities.

Ukrainian steel companies looking to replicate this success in the face of the growing crisis should focus their efforts on three areas:

The first strategic task is to integrate production facilities to ensure quality. In the early 1990s, USX-U.S. Steel boosted productivity by closing four of its seven plants. The moves paid off by 1993 when the company was the lowest-cost fully integrated steel producer in the United States. U.S. Steel also worked to bring its quality up to par with foreign competitors, especially the Japanese, by forging joint ventures with such companies as Kobe Steel—and by upgrading its facilities to industry benchmark standards.

The second entails aligning these integrated operations on the right customers. This is accomplished by improving key account management and developing value-added products. Just 15 years ago, Germany's Thyssen announced a 994 million (DM) loss. Yet by 1995—after a merger with Krupp's stainless steel division—that new entity had become the largest stainless producer in the world and the irreplaceable partner of German and foreign car producers, with revenues for the unit, alone, of 4.5 billion DM.

The final way is by attacking high costs at their root by streamlining organizational structures and managing operating complexity. In the 1990s, Wilbur L. Ross Jr., a buyer of distressed assets, purchased America's bankrupt LTV Steel. He combined it with Bethlehem and other old-line companies, creating International Steel Group. He also revamped these organizations, taking Bethlehem, for example, from eight layers of management to three. Ross then sold International Steel to the Indian entrepreneur Lakshmi Mittal for $4.5 billion in 2005.

If the past is any guide, this is how today's winners will also emerge. For Ukraine steel executives, it's time to apply history's lessons.


Ready to talk?

We work with ambitious leaders who want to define the future, not hide from it. Together, we achieve extraordinary outcomes.