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#3' 2005 print version

SEVERSTAL TAUGHT AMERICANS EFFICIENCY
On the wave of favorable market conditions Russian steel companies have got notably rich. As is estimated, last year they have saved up between $5 billion and $7 billion. Using the financial potential, these companies have been building up their expansion abroad and have been ever actively involved in buying stakes, shares, bonds and other securities that provide an access to managing foreign enterprises. The Severstal Group is considered to be Russia’s favorite in this race.



Yury Adno

T
he Russian business’ activity in acquiring enterprises abroad is causing the ambiguous reaction. The state authorities and public are expressing the growing concern over the capital’s outflow from the country as investments in buying foreign companies are regarded as one of the legal ways “to withdraw money” from the national economy. Independent analysts consider such investments not quite defensible and sufficiently risky, since, as a rule, the subject of auctioning are enterprises, which are burdened with considerable debts and are not had sufficient competitive advantages.
The Severstal Group’s acquisition of the American bankrupt company Rouge Inc. may serve as a typical example. Rouge Steel, its daughter company, is placed fifth in the US by steel making having capacities for producing 2.6 million tons of steel and for rolling over 4 million tons of steel year-on-year. Its specialization is to make automobile body sheet, particularly, for Ford’s plant in Detroit. In the opinion of experts, by buying this enterprise Severstal ran serious risks. It joined the business environment with the absolutely different rules of the game and had to win over the trust of American consumers that have a rather unflattering opinion of the Russian business. Simultaneously, it was to not only get engaged in bringing Rouge Steel out of bankruptcy but also to adapt itself to one of the world’s most complicated legislative systems, establish relations with the influential American labor unions and the enterprise’s personnel.
It is obvious that by acquiring Rouge Steel Severstal hoped to get a number of strategic advantages. As analysts believe, not just one but at once several objectives are pursued in cases like this:
- an expansion of sales markets and, among other things, by overcoming protectionist barriers;
- a diversification of activity or business consolidation through specializing in a comparatively narrow segment;
- an improvement of the company’s competitiveness on the world market, etc.
Its own crisis management experience in combination with the organizational system of the American business as well as point investments made it possible for the team of Russian and American managers to succeed. By the middle of 2004 the enterprise, which was named Severstal North America (SNA), became profitable. This result provided Severstal with a breakthrough in several directions at once. The aggregate volume of the steel production in the Severstal Group reached 12.8 million tons with the turnover of $6.4 billion and net profit of $1.34 billion. That put the holding among leaders of Russian steel companies. With buying a American automobile body sheet-making plant Severstal secured an access to the latest technologies, which can be successfully used at Russian enterprises. But the most important thing probably was the following: avoiding trade barriers Russian steelmakers got a grip on one of the largest and prestigious markets of rolled products.
This same way Severstal Group penetrated the European market as well by buying in February 2005 ãîäà a stake (62%) in the bankrupt Italian company Luccini S.p.A. for 450 million euros. As is known, the steel industry in Western Europe has been experiencing problems with iron ore and coke, has having to pay too much for labor and has been facing tough ecological restraints. By experts’ estimates, the cooperation of Luccini and Severstal will let the Italian company significantly raise its products’ competitiveness.
That is not to say that all transnational projects are a success to the Severstal Group. In particular, it failed to win the tender for the Dunaferr Hungarian integrated mill, the talks on acquiring Canada’s Stelco were also a failure. The bargaining over Ukraine’s Kryvorozhstal ended in a scandal last year. Nevertheless, the Russian leader does not limit its expansionist ambitions. At present, Turkey’s Erdemir (Eregli Demir Celik) and Mexico’s AHMSA happen to be in the sphere of the Severstal Group’s interests.
The management of the Severstal Group is quite satisfied with results of this strategy. Vadim Makhov, the deputy general director of the company, single out several positive moments at once.
First, by buying a plant in the USA Severstal managed to establish a partnership relationship with the leading automobile corporations Ford, General Motors, Chrysler. Now the European division of these corporations are also gladly buying automobile body sheet from Severstal North America. And following the acquisition of Luccini the Severstal Group also fixed its place on the market of automobile components as well (axes, shafts, gears, etc.).
Second, the possession of foreign assets reduces the Severstal Group’s dependence on fluctuations of world prices for steel and allows it to avoid the negative impact of protectionism.
Third, the experience of crisis management measures gained at Severstal’s Russian plants was used when managing. Among these measures were technologies of optimal planning, budgeting, strategic planning, motivation, etc. It turned out that developments by Russian managers could be successfully used in a country of the classic capitalism! In just a year the labor productivity at Severstal North America increased 17%, while production costs went down. If in 2003 losses of Rouge Steel amounted to $92 million, in 2005 (?) the company Severstal North America ended up the year with $20.5 million in profit.
Fourth, against the background of a sharper competition on the world’s market and the ongoing consolidation in the steel industry the company avoided the danger of being absorbed. In the words of Vadim Makhov, the company needs to grow today so as to secure its independence on the market tomorrow. Severstal Group is not just increasing its assets and building up capacities but the company is also offering its own model of the efficient business restructuring.
Besides everything else, the acquisition of foreign assets by Russian steel companies serves one more important purpose: to strengthen Russia’s image as well as the image of the Russian business in the world. This policy has nothing to do in common with the "capital outflow" trend. On the contrary, it proves the enormous potential of the country’s national economy in the conditions of its ever increasing international integration. It is obvious that competitive advantages of Russian companies based, mainly, on comparatively low prime cost of production have been weakening every year. That is why the Russian management should be prepared to switch to competition in other aspect: on the basis of technologies, products and more efficient business-making. There is only one way possible to achieve it quickly and comparatively painlessly: to lend methods of production, marketing and management culture of world leaders, i.e. simply "to buy" all this in the West in "the-ready-for-use" form along with plants.
However, it does not make sense to exaggerate too much international ambitions of Russian steelmakers. The domestic market still remains their priority. And Vadim Makhov specially stresses this point. In his words, after having received the access to American and European progressive technologies, the Severstal Group first of all used them in Russia and sharply increased production of automobile parts, particularly sheet for the Russian motor-car making. Today, this company is the main supplier of steel products to all Russian largest motor-vehicle plants, such VAZ (36% of the total metal consumption), ZIL (69%), GAZ (61%), UAZ (82%). And Severstal’s cold-rolled coils account for 67% of its products.


Transnational projects by Severstal Group ( from 2003 to 2005)
Company, country Capacity, Size of stake,% Stake value
Million tons of steel
Rouge Industries Inc., the US 2.6 100 $285 million
Luccini S. p. A., Italy 3.5 62 430 million euros
Erdemir, Turkey * 4.9 46,12 1,500-1,700 million euros
Kryvorozhstal, Ukraine * 7.1 93,02 up to $2.500 million
AHMSA, Mexico ** 3.7 40 –
Stelco, Canada *** 5.5 – –
Notes: * - a tender’s participation is planned; ** - the question is being considered; *** - the deal failed. 

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