Cash, Technology Pumped Into Ailing U.S. Firm : Japanese Help National Steel Corp.

PITTSBURGH —  A life-support system is hooked up to the National Steel Corp., one of the wounded American steel producers straining to survive the industry’s bloodletting.

Made in Japan, the life-support system is pumping a stream of cash, credit and new technology and work attitudes into National in the hope that the American steel-maker can become a leading supplier of advanced steel products for the auto industry and other customers.

The heart of this support system is Japan’s second-largest steel company, Nippon Kokan K.K. (NKK), one of the world’s most advanced producers, whose annual output is more than twice National’s.

Last year NKK purchased a half-interest in National Steel for about $300 million, becoming the American company’s full partner, an investment that both sides regard as a risk, given the grim realities of steel competition.

Center of Network

But if the partnership succeeds, National Steel will become the center of an expanding Japanese commercial network in the Midwest that will include not only NKK, but also two of Japan’s giant trading companies, Marubeni Corp. and Mitsubishi Corp. and some of the leading banks in Japan.

All will be sharing the risk that faces National and the other steel producers--a risk, ironically, that is sharpened by pressures of low-cost foreign steel on National’s profits.

National Intergroup Inc.--the parent company of National Steel--lost $13 million in the first nine months of this year and isn’t likely to make a profit for the year.

With steel prices down sharply during 1985 and competition increasing from imports and products that substitute for steel, the industry must reduce costs dramatically, said Howard M. Love, chairman of National Intergroup.

“If we have another year like 1985, it isn’t going to be just the lenders, it’s going to be the owners who’re going to take a hard look at that business and wonder whether or not it’s worth investing additional funding in,” Love said.

Why has NKK shouldered half of that risk? The explanation lies in its sense of the interlocked destinies of the two rival economic superpowers, America and Japan, said Susuke Doi, who moved from NKK to become executive vice president and a director of National Steel.

“We think we can make National Steel a viable, strong, good company,” Doi said in an interview. “This is the basic concept for us. We need to have a good steel industry in the U.S. to have a very strong economy (here). The world economy, and particularly the Japanese economy, is so dependent upon the United States. So if the U.S. hasn’t a strong economy, it’s a big problem for us.”

Balanced Strategy

National’s dependence upon the Japanese connection arises from the American steel company’s finely balanced strategy for survival.

For almost 50 years, steel was the business of National. But by 1980, it became clear to Love that much of the company’s steel facilities were too old, inefficient and outmoded.

Without dramatic changes, National couldn’t remain competitive in a market under increasing attack from low-priced imports, Love said.

“You have to look at your place in the industry and within business in general, because you’re competing for capital and people,” Love said. “You have to ask, Do you continue to put money into businesses that aren’t paying back? That doesn’t take a master’s degree.”

So National stepped up its diversification efforts outside the steel industry, sold its Weirton, W.Va., steel plant to the employees, shut down other facilities and circled the wagons around its three most modern steel plants.

After a bid by U.S. Steel Corp. to buy the entire company fell through in 1984, Love sold the half-interest in National Steel to NKK.

The strategy requires National Steel to concentrate on high-quality products that would be least exposed to foreign and U.S. competition, and, it hopes, less vulnerable to competing materials like the new plastic skins designed for automotive bodies and foodstuff containers.

Requires Big Investment

That requires a heavy investment in new steel-making facilities--as much as $1.2 billion by the end of the decade. But to limit their risk, National Intergroup and NKK agreed that the steel company would not get more capital from either company. It would have to survive on its own cash and what it could borrow from outsiders.

“Their (NKK’s) investment was buying half the steel company and neither of us is putting in any more than that. So the capital (investment) plan has to sink or swim on the cash flow of the steel company itself,” Love said.

When it came to financing, National’s Japanese connection was a large part of the answer, Love explains.

Marubeni and Mitsubishi, the two trading companies, are arranging a major share of the debt financing for the two principal facilities in National’s plans.

One is an electrogalvanizing line to produce high-quality coated steel, scheduled to start operation in January. The other is a continuous caster--a fast, efficient, economic steel-making process, so far only on the drawing board.

The loans will come primarily from NKK’s traditional banks in Japan.

“They are both close to NKK,” said Doi of Marubeni and Mitsubishi. “Without good past and present relations, this kind of arrangement is not possible. They must be believing our ability to carry out our commitment to National.”

Although the financing is still being arranged, the interest rates on the loans will be well below what American banks could offer, Doi and Love said. “We are aiming for single digit,” Doi said.

Banks Still ‘Reeling’

“I don’t think U.S. banks could touch the interest rates,” Love said. “After all, our banks are still reeling” from bankruptcies in the steel business and heavy losses in other sectors.

NKK the owner is NKK the middleman for Japanese banks. And NKK wears still another hat. It is also NKK the supplier, helping to build and operate the $110-million electrogalvanizing line--a huge structure filling a refurbished mill at National’s Great Lakes plant near Detroit.

Although National and NKK have had a technology-sharing agreement for a decade, National concluded it could not get the full advantage of NKK’s expertise in electrogalvanizing techniques without a full partnership, says Robert D. McBride, president of National Steel.

NKK makes about 3 million tons of steel a year through electrogalvanizing, an advanced process that deposits atoms of zinc or other alloys on steel to protect it from rust and corrosion.

The result is a more uniform, higher-quality finish than other processes produce. “Their technology and processes and products . . . are beyond where we are at the present time,” said McBride.

“Don’t forget, there are jobs being created in Japan because NKK’s doing the engineering and some of the construction work on (components for) the galvanizing line itself,” added Love.

The Japanese connection continues even after the steel leaves National’s electrogalvanizing line.

McBride said that the requirements of the auto industry for the highest-quality steel are going to cause a revolutionary change in the distribution and preparation of steel for the industry.

Industry Wants Sheets

Steel leaves the galvanizing line in massive coils. But what the auto industry wants are sheets cut to order, called blanks, that can be fed into giant presses and stamped to make fenders, hoods and other car body shapes.

The issue is, Who will bear the expense of preparing the steel blanks and storing them until they are needed in the car plants? The higher the quality of the steel, the greater the expense of storage, where climate control and clean conditions are a must. In the cost-obsessed worlds of steel and auto manufacturing, that expense is crucial.

The auto companies, which have embraced the Japanese tactic of “just-in-time” delivery, are unwilling to store the steel coils or blanks. And National doesn’t have the money to spend to build modern storage facilities, McBride said.

Traditionally, this task falls to steel service centers, small and mid-sized companies that surround the steel plants. They are the next target of the Japanese, McBride predicts.

“The Japanese are moving into the service-center business. I think we’ll see that business go through a structural change, as the (auto) suppliers have. They’re going to have to upgrade their facilities and performance if they’re going to compete with the Japanese.”

In the front ranks will be National’s new allies, Marubeni and Mitsubishi, who will be buying and building their way into the service-center field, according to the National executives.