May 1, 2006

Are You Ready for the Global Shakeout?

Get ready: It’s happening. What already has played out in many other industries across the board—think oil, automotive, tire and computer—recently has begun to take place in the metals world.

We’re beginning to see the emergence of a handful of major companies set to become massive global leaders in the metals industry. Until a few years ago, the industry comprised multiple companies differing in size and revenue. This has all begun to change, just as it did in other sectors.

Look to the computer sector for an example. Think of the type of computer you use each day at the office or at home. Likely, it’s made by Dell Inc. or Hewlett-Packard, the two major players in the PC world. Other companies—Apple Computer Inc., Toshiba Corp., Sony Corp., etc.—exist and may thrive, but focus on smaller niche categories. Consumers typically choose these companies’ products based on a particular personal preference
or specific need that only these companies can meet.

In the aircraft industry, global giants Boeing and Airbus produce the majority of the world’s large airplanes, while several niche companies produce smaller planes. The tire industry also evolved from a group of regional competitors into three dominant global players: Bridgestone, Goodyear and Michelin. The list of industries that have consolidated goes on and on.

The metals industry still is a ways away from these extremes, though. Take Mittal Steel Co., for instance. It currently is the largest steel manufacturer in the world, but controls only 6% of the world’s capacity. Compared to others, the steel industry remains highly fragmented. But if Mittal succeeds in its bid to acquire Arcelor SA, the world’s second-largest steel company, together they will represent about 11% of world capacity.


If the industry is regional in characteristics (many specialty metals, for instance, are not global), consolidation will occur, but regionally. In this case, you’ll find two or three leaders in the United States, two or three in the European market and two or three in Japan, plus a large number of smaller, niche players—each of them in at least one of three roles: They offer a unique technology that no one else does, they listen carefully to what their customers want and customize their products for them, or they’re just plain cheap.

Whether consolidation happens on a global or regional level, there is still ample room for smaller companies. Those worried about being eaten up by the “big guys” must focus on how to differentiate themselves from the rest to compete.

Focus on technology. Smaller companies can succeed by focusing on developing unique technologies or products that the bigger players do not offer. It’s a matter of companies keeping their eyes and ears open, and incorporating new, distinctive elements into products.

Focus on the customer. Smaller companies can compete with the larger global players by focusing on the customer. To truly listen to the customer’s needs, a company must know more than just who its target audience is. The company must know about its customers’ needs and work schedules. Knowing your customers on a personal level allows you to better understand their unique requirements. The personal touch, while important, is only a beginning; it must reflect a genuine desire to serve the customer’s needs. All of this requires both a technical system to keep data up-to-date and a
corporate climate in which customers come first.

Focus on price. Smaller companies also can choose to compete on price. They must ensure that their operation is as efficient and cost-effective as possible. Smaller companies can be efficient in handling special requests less expensively than larger competitors. They may be able to handle smaller orders at a lower cost. Often, they are better positioned to serve their local markets at a more competitive price.

Consolidation also can occur on a lower tier. Perhaps, a smaller company has a goal of being No. 1 in Florida or No. 1 in the housing industry. This can lead to smaller consolidations and partnerships in specific niches.

Consolidation on both the global and regional levels means positive changes for the metals industry. When an industry is highly fragmented and too many companies are delivering the same service, there is the risk of destructive competition—products become very inexpensive for the consumer and companies don’t make money. In the short term, customers get what they want at a lower price, but in the long term, investments are not dedicated to developing newer, better technologies.

For a long time in the steel industry, too many players in the core were driving prices down. In turn, companies weren’t making money and weren’t investing in new product development. That chain of events leads to products that are old and tired, and it doesn’t meet the long-term needs of the customer. But consolidation has brought discipline to the market, where prices have increased, more products are being developed and, for the first time in a while, companies can make a reasonable return.

Quite simply, the metals industry is in a time of transition, and we must ready ourselves for it. Those that are prepared will do well and prosper; those that aren’t will either shrink or be bought. But globalization shouldn’t be thought of as merely a threat. In fact, if business strategies are properly set and companies adequately prime themselves, it can provide a tremendous opportunity to turn an industry into an attractive, thriving one.

Dr. Fariborz Ghadar is the William A. Schreyer professor of global management politics at the
Smeal College of Business at Pennsylvania State University and founding director of the Center for Global Business Studies.