The Formula: Efficiency + Knowing The Market = Success

 

Just as engineers and scientists frustrated with large electronics companies formed the numerous spinoffs that now dot California's Silicon Valley, many of the leaders of today's entrepreneurial revival in the industrial heartland are themselves disgruntled or displaced former employees of major steel companies. Newport Steel Corp. president Cliff Borland, for instance, had spent nearly 20 years within the supposedly secure confines of Big Steel until his employer, Interlake Inc., the billion-dollar conglomerate based just outside of Chicago, shut down the Kentucky mill where Borland served as manager.

"It was either become an entrepreneur or go out on the job market -- which isn't exactly great for a steel guy these days," Borland recalls, sitting in his austere offices located in Newport, Ky., a seamy industrial district better known as Cincinnati's friendly, across-the-river redlight district. "I didn't even think about the possibility of starting something new until the axe fell. I didn't even dream it. I didn't know about entrepreneurs until I became one."

If Borland, 45, wasn't well versed in the ways of entrepreneurism, he quickly proved his expertise in running a steel company. For years he had been suggesting to Interlake that it drop Newport's unprofitable rolling mill, which produced flat sheets of steel for consumer goods, and concentrate instead on its more lucrative tubular products line. Now, with three other managers, he sought to build a new company incorporating his often-disregarded ideas.

"We believed we could make a go of it where Interlake couldn't," the perennially cheerful, round-faced Borland recalls. "There's a formula that allows you to make money if you're efficient and you know your markets, even in bad times. This is a formula that works for companies like Nucor, and I knew it could work for us."

With the aid of Glen Mayfield, a Cincinnati financial consultant, and David Collins, a nationally recognized management buyout specialist working out of Blyth Eastman Paine Webber Inc.'s Boston offices, Borland was able to piece together a $44 million financial package to save the company. By April 15, 1981, after eight months of hard negotiations, Interlake agreed to the buyout, allowing Borland and his new management team to bring the Newport plant back into operation.

Borland, once in command and no longer faced with resistance from Chicago, streamlined the operation. He reduced secretarial and management staff to the bare minimum while completely eliminating the facility's outdated, unprofitable, rolled-products division. Having convinced the local chapter of the United Steelworkers union that his "lean and mean" approach was vastly preferable to closing the facility permanently, Borland cut the total payroll from a high of 1,100 employees before the shutdown to about 400. He also negotiated a wage rate $5 to $6 below the levels used in the major-company steel mills.

Taken together, these strategies allowed Newport to capitalize on an increase in tube demand from the oil industry and make a substantial profit in 1981-82, the company's first full year of independent operation.

Although Newport, like just about everyone else in the steel industry, suffered losses last year as a result of the sharpest drop in steel demand since the Great Depression, Borland -- and his financial backers -- remain almost serenely confident about the company's long-term prospects.

Orders have been picking up lately, and Borland's lead bank, Security Pacific Credit Corp., is now working on a $50 million loan package for the purchase of a new pipe mill, which would expand Newport's pipe-making capacity from 180,000 to more than 500,000 tons. This improvement, Borland believes, will further aid Newport in its quest to become the first minimill to challenge seriously U.S. Steel Corp. and other majors in the lucrative pipe business.

A similar sort of strategy is paying off in Marion, Ohio, a small community near Columbus, where an investment group, led by veteran steel manager James Conway, has taken over a discarded steel mill and turned it into a profitable operation in the midst of the current slump. Founded by the Pollak steel family of Cincinnati, the Marion facility was one of the more profitable and up-to-date steel mills in the Midwest until it was taken over in 1970 by Armco, a conglomerate based in Middletown, Ohio.

In what now seems a stupendous leap of illogic, Armco chose to run the Marion plant through its steel division headquarters in Kansas City. Cut off from local market conditions, the company lost the ability to serve its long-established customers adequately. With sales plummeting, the conglomerate felt compelled to close the plant in November 1981.

But a consortium of Columbus-based businessmen believed the mill could be turned around. Forming the new Marion Steel Co., with Conway as president, the investment group reopened the plant in February 1982. Even as the company bled money for its first few months, a major effort was mounted to woo back local customers. By cutting shipping costs, reducing administrative staff, and implementing new work rules, it started breaking even by September. Conway now expects to produce more than 200,000 tons of steel in 1983 -- twice the 1981 level -- with the same number of workers, which will allow the company to turn a small profit.

"We don't have the same sort of problems the big integrated companies impose. The problem before was a big company environment, with a big company administrative structure to support," explains Conway. "We're down-to-earth people here. Everybody in the plant is two steps from my office. We can run it lean, make decisions on a day-to-day basis. We know our customers, their needs, on a personal basis. That's one of the big reasons we're seeing black now. I wouldn't be caught dead running one of those big integrated mills today."

Yet despite these successes, the "second wave" Midwest steel entrepreneurs still face formidable odds. Steel is recovering only slowly from the recession, and many of the giant companies remain formidable producers. Engaged in what one veteran steel executive calls "a game of extremely high stakes poker," entrepreneurs like Conway, Continental's Tom Sigler, and Newport's Cliff Borland are betting their companies on the hunch they can outlast the giants until better times come.

"I'm optimistic this industry will come back. Maybe not everyone in it -- but the strong and the efficient will survive," believes Borland. "Maybe that's what recessions are for, weeding out the weak and lame. What's going to shock people is when they find out who the weak and lame really are."