US Steel industry decline and management failure

The broader management-failure case the continuous-casting story illustrates. Tom names Kim — the future Harvard Business School dean — as having defended the decision in retrospect, framing this as evidence that "business managers can rationalize stupidity."

There were also some big changes in the industry. They used to make steel — and you'll find this when I talk about casting — by pouring it into an ingot mold. Then in the 1960s some people, Voest-Alpine I think it was, in Austria, decided to see if they could continuously cast steel. People had been continuously casting gold and silver and copper for several decades, but steel melts at a higher temperature, and Voest-Alpine decided in the '50s and '60s to try to develop a continuous caster for steel — much bigger market. In the '60s they actually would sell you a unit. But the "rocket scientists" as I used to call them, who were hired into the steel industry after World War II — remember I told you, after World War II the United States had bombed out all the competition, that's one of those externalities — and we had seventy-five percent of the world's steel market in the mid '60s. When these guys were the middle-level managers, they and the upper managers decided not to put in continuous casting in most US steel mills when they were building a new casting shop.

Steel companies' profitability suffered for thirty years not because steel was obsolete but because productivity gains commoditized the product. Wall Street misread this as backwardness. Some management was backward.

To a certain extent steel companies have been consolidating into some huge conglomerates, mostly because their profitability was so bad. Why was their profitability bad for the last thirty years? Because their productivity was so good. They had improved their productivity so dramatically that they almost drove themselves out of business competing with each other. Wall Street, those people over at that side of campus, can't figure these things out. Steel wasn't an ancient material that was no longer useful — they thought they were just an unprofitable backward industry. Maybe some of their management was backwards, but it's still an important material. And there was this guy [Mittal] in India who just started buying up steel companies for a song, and now ArcelorMittal is probably the second largest steel company in the world, and he's making billions. Actually starting to lose some billions right now.

Workforce halved 1980–1990 while output held at 100 million tons/year; Wall Street read it as death, Tom reads it as a 4–5%/year productivity gain doubling output per worker. Edgar Speer's *Iron Age* claim ("the Japanese are not using anything we don't know about") used as the canonical exemplar of denial.

They're going to keep making steel, they will dump it on the world market. We do have a steel glut, an overcapacity in the world. When you have a productivity curve that has gone like that, what happens to your manufacturing capacity? You've got excess manufacturing capacity. Over the decade of the 1980s, when everybody thought the U.S. steel industry was hitting the toilet — that's what Wall Street thought — they were doubling their productivity. I've got the data that shows we were consuming a hundred million tons of steel each year in the United States. The workforce went from half a million employees to 250,000 employees. What does that say about productivity? The productivity doubled. It went up by four or five percent in a year for ten years. And the only industry that had a higher productivity growth rate in the United States was the mining industry, which has an even lower self-esteem on Wall Street, right?

U.S. and Bethlehem Steel sold obsolete plants to third-world buyers who then dismantled and re-exported steel back to the U.S. at lower labor rates. Washington misread productivity-driven employment loss as industry death.

The new steel mills were very productive, and what happened in the 1980s — employment in the steel industry dropped from a half million people to 250,000 people. Not because it was a dying industry, but because between the BOF process that really took over in the 60s and continuous casting that took over in the 70s, the steel industry doubled its productivity within a 20-year time frame. We have an excess of steel mills in the world. What did the steel companies in the United States do? U.S. Steel, Bethlehem Steel — they'd sell one of their old plants to some third-world country, and they wouldn't realize that ten years later that third-world country would have dismantled that plant weighing thousands of tons, shipped it to their country, and they would be shipping steel back into the United States with their little labor rates, killing the U.S. steel companies in the marketplace.