Armco Steel continuous casting decision

1968 — Armco installs ingot casters when continuous casting was available, on grounds of "no risk." Tom's emblematic example of risk-aversion in mid-1960s US steel management.

So what happened to the US steel industry? In 1968 when Armco Steel put in new casting facilities, and they could have put in a continuous caster, what did they put in? Ingot casting, because there was no risk. The Japanese were putting in continuous casters and they were beating your socks off with productivity. They went from six hours a ton to one and a half hours a ton because of the productivity increase of using continuous casting. When Bethlehem Steel built the world's last steel mill built by a company, in the 1960s — from '65 through '70, took them about five years to build it, probably about a five or six billion dollar investment, just about bankrupt the second largest steel company in the world, Bethlehem Steel — they put in ingot casters. Both these companies in the mid '70s took out their ingot casters and put in continuous casters at the cost of a few hundred million dollars, because all of a sudden they realized what they should have known ten years before — that continuous casting was the way to go.

Mid-1960s decision to install ingot casting (65% yield) over continuous casting (97% yield); ripped out and replaced five years later. Tom's case-in-chief for HBS risk-aversion catastrophe.

The reason he could take his family down to Disney World is because he was being paid this big honorarium to talk to the AISI presidents. I said, what are you telling them about steel? Here's someone who really doesn't know a whole lot about steel. He says, well, I was telling them how do you make decisions in the steel industry. I said, well, how do you make decisions? He says, for example, in the 1960s, Armco Steel was putting in a brand new steel melting facility, and they had to decide whether to do ingot casting or continuous casting. I talked about yield before — ingot casting was 65% yield and continuous casting was 97% yield. This was the mid-60s, and continuous casting had been around for about five or ten years in Europe, just a new thing. Armco decided to go with ingot casting. They were going to put in a couple-hundred-million-dollar facility, and they decided to go with ingot casting. I said, so you're telling me that was a bad decision? He said, oh no, that was a good decision.

Like Bethlehem at Burns Harbor, Armco built ingot casting when continuous casting was emerging; both companies had to rip it out within ten years.

Bethlehem Steel put in ingot casting at Burns Harbor, even though continuous casting was sort of coming along, because they didn't want to take the risk. Armco Steel did the same thing — they didn't want to take the risk. Within 10 years of putting in the billion-dollar facility — today's billion dollars, it was only a couple hundred million back then — they had to rip it out and put in a continuous caster. Why? Because of the buy-to-fly ratio, to use the Air Force terminology. The ratio of hot metal poured to product shipped, if you go back to ingot casting, is about sixty-five percent. A third of it is what we call home scrap — you've got to cut off the top of the ingot, re-melt it, send it back through the process, recycle it. With continuous casting, try ninety-seven percent of what you pour is what you sell. At that level of increased productivity — that is worth billions of dollars in profit. But the big integrated companies didn't think anyone could touch them, and they didn't worry about things.

Around 1980, Armco decided to install ingot casting, then within three years (and a couple hundred million dollars) had to convert to continuous casting. Yield difference: 65% ingot → 95% continuous.

And he was explaining to them about this dilemma: should they put in ingot casting versus continuous casting, which is something I haven't brought up yet. Ingot casting versus continuous casting was a process in 1970 that was absolutely obvious. You could go from 65% yield to 95% yield on your steel. Does it take a genius to know which one you would rather have? But for Armco Steel, it's a dilemma. For a businessman it's a dilemma. Armco Steel decided to put in ingot casting, and three years later, after they built it — takes about three years to build the plant and invested a couple hundred million dollars — they decided they were going to have to put in continuous casting. Anyone with a brain would have known before, but Kim said he was defending this dilemma. He was telling these managers how difficult this decision was. Well, of course you tell them that — they're paying your consulting fee, and you're not going to tell them they're idiots. My problem in my profession is I will tell them they're idiots. But in fact they were idiots. Kim became Dean, and here I am lecturing to you, but at least I have my integrity. I'd rather be lecturing, believe me, than sitting in those meetings.

§30. BOP process variations and the Sparrows Point pulpit [100:45]