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November 1, 2010

Demands Innate to Humankind

Klaus Kleinfeld says the decision is in, and the clear-cut winner, barring catastrophe, is aluminum.

In his presentations to investors, Alcoa Chairman and CEO Klaus Kleinfeld leads off with a slide that projects what he believes is an inevitable 6% cumulative annual growth rate for global aluminum demand through 2020.

The forecast is based on the ongoing growth of the human population from 6.6 billion or so in 2006 to 7.9 billion in 2025 and, by 2050, to 9.1 billion souls. Despite the downward pressure on growth exerted by the groundswell of concern about global warming, the forecast suggests ongoing urbanization globally, reaching 60% of all people by 2030. Energy consumption is forecast to rise by 54% by 2025, and personal transport by 40% by 2030.

Will nothing slow the growth of aluminum use? No, says Kleinfeld.

“And I'll tell you why,” he says. “People all around the planet have the desire to remove barriers in their life. Once they make their first money, they want to get their own apartment, or a bigger one. Once they've achieved that, they probably want to have a bicycle. Once they've achieved that, they want to go for a motorcycle. Then they want to go for a car, or a refrigerator or an air conditioner. These are the demands of a kind that are innate to humankind.”

What's more, he says, aluminum is particularly well-suited to participate in this surge. The list of attributes in what Alcoa calls “the aluminum proposition” includes its light weight, high strength, durability, high recycle rates and such characteristics as the metal's conductivity, malleability and slow rates of corrosion. With all this on its side, demand for aluminum will grow, Kleinfeld says, from 39.2 million metric tons a year today to 73.0 million tons by 2020.

“These are things that play into our hand,” says Kleinfeld, who, of course, is smiling cheerfully as he says it.

Although his business career has not been without bumps in the road, Klaus Kleinfeld has had a lot to be cheerful about in his professional life. A native of Bremen, Germany, Kleinfeld as a young man thought he might have a career in academia. He holds a master's degree in business administration from the University of Go?ettingen, and a Ph.D. in strategic management from the University of Wu?rzburg, for example. But, Kleinfeld notes, after his father died when he was 10, “I always needed to earn more money; it was the aspect of earning a living as well as being confronted with interesting challenges that got me from academia into, at first, consulting.” The boy went to work at age 12, stocking shelves in a grocery store.

As an adult, Kleinfeld started his working life in information technology, writing code for mainframe computers. “I wrote for batch processing. The first computer that I worked on was one that had a kernel memory but no normal display,” he says. “It had a hexadecimal decoded light board where you literally had to decipher what the computer wanted to tell you by certain lamps being on or off.”

After several years in IT, Kleinfeld switched to the pharmaceutical industry with Ciba-Geigy in Switzerland, where he was a product manager for sensory neurosystem drugs, such as antidepressants. Among other things, Kleinfeld served as the link between research and development of pharmaceuticals over their development cycle—“a super fun job, because you had to understand the medicine behind it as well as the consumer preference.” That focus on customer requirements has stuck with Kleinfeld ever since.

Kleinfeld joined his first long-term professional home, Siemens AG (2009 sales, ?76.7 billion), the Munich-based capital goods conglomerate, in 1987, starting in international marketing and analysis. In his Siemens years, Kleinfeld became a business restructuring expert, working in a variety of turnarounds, leading, at different points, the company's Siemens Corp. operations in the United States and its medical businesses. He built Siemens's capacity as a multidisciplinary consultant from near zero into a larger business. And, in January 2005, he was named chairman of the management board, in effect CEO of the entire international enterprise.

Kleinfeld's involvement in Alcoa, the world's largest aluminum company, began when he was named a director in 2003. He was named president and chief operating officer in October 2007, not long after he left Siemens, and he became Alcoa's CEO in May 2008. He added the title of chairman this April when his predecessor, Alain Belda, retired.

Alcoa suffered in the recession like all other aluminum companies. Its net loss in 2009 was $1.15 billion; the company returned to profitability in this year's second quarter, but not before workforce reductions of 10,500, the sale of four businesses, a 50% capital expenditure cut, salary and hiring freezes and a drop of 18% in smelting output.

Even so, Kleinfeld continues to build Alcoa's position in a number of the world's growth areas. Alcoa and Aluminum Corporation of China agreed to explore ways to expand their commercial relationships. The company agreed to cooperate with the People's Government of Henan Province in China to establish primary and fabricated aluminum projects. Alcoa began operations last year at the Juruti mine, a bauxite property in Brazil and celebrated its 45th anniversary in that nation this year. In September last year, Kleinfeld became chairman of the U.S.-Russia Business Council, and earlier this year, Alcoa and United Shipbuilding Corporation, of Saint Petersburg, Russia, signed a memorandum of understanding to work to build the Russian shipbuilding market.

Forward spoke with Kleinfeld in his offices along Park Avenue in New York City.

You have been responsible for a very wide range of businesses during your career. How do you learn these businesses quickly?

Listening is very, very important. Listening to people in the company, and especially to customers. I have a kind of grid that I go through as checkpoints of strategic analysis that covers the industry, company, its people, customers and competitors.

And then you obviously develop over time some fundamental principles of your style, what you believe in and what sets a company that's great apart from a company that's good. Those things include a high-performance culture, people management, rigorous differentiation and a values foundation, in such things as ethics and safety. Then there's the need for a great team. Nobody is perfect, but a team can be.

What might e an example of an Alcoa product that demonstrates listening to the customer?

In the main, you have to understand that there's really, in principle, just two ways to add value for a customer. You help the customer lower their costs, or you help them to increase their prices or sales volume. You must make certain that your customers have better performance, because if they do, the likelihood is high that they will also grant you some part of their additional profits. The more you can affect the positive the higher the likelihood that you are better off.

But you have to understand the customer in depth, and that means the value and structure of what they do and, very often, also the customer's own customers. You must create value in the chain.

Take the automotive industry. New CAFE (corporate average fuel economy) regulations were put in place. Those regulations and the requirements for emission reductions are really severe. So now automotive companies are struggling and looking for ways to cope.

There are really only three principal ways to do it. One of those is light weighting, and we know for a fact that we can take about 10% of weight down from a vehicle by replacing existing parts with aluminum. That 10% in weight equals a 7% reduction in greenhouse gas emissions. That's massive. Absolutely massive.

Here's another example. Right in the middle of the economic crisis we introduced a product that responds to the need to increase the speed of innovation and is not a commodity product. It's a truck wheel (the LvL ONE). It is lighter than any other wheel, and stronger. It is also extremely easy to clean. So you can save fuel with it, and it looks unbelievably good. Ask any trucker, and they will tell you they want those Alcoa wheels.

So by understanding your customers, you can determine what gives you the best value, what helps them reduce cost or gives them a leg up so they can charge more, sell more or have a service that they can charge for.

Are you concerned about competitive materials, such as composites in aerospace?

Let's start with the aerospace industry. There are two things there. The interesting thing is that given the broad range of our product portfolio, there is no airplane that has more Alcoa material on it, aluminum structures of all kinds, than the Boeing 787. We are No. 1 in turbine fan blades. The 787 is very fastener intense (787,000 titanium fasteners per aircraft), and we are No. 1 when it comes to aerospace fasteners.

So that's the first thing. The second thing about aluminum usage in aerospace is this: The experience with composites in aerospace in recent years has increased substantially. That experience has left experts to believe that aluminum has much more of a future in this industry than anyone may have thought three years ago. Part of it is certainly due to innovation in the aluminum industry. In that regard, Alcoa is a clear No. 1 with aerospace applications such as advanced aluminum-lithium alloys.

So the key point is that even if manufacturers go with a lot of composites, there's a lot of aluminum, a lot of Alcoa, in the plane. That's true of the 787, and it's true of the A350.

Why is sustainability one of your core business strategies?

There are two reasons. One is that it's a core value. We want to do good for the environment. We want to be a very safe place for our employees. We want to give back to our communities and be a good citizen.

The second thing is the nature of the material itself. The good news about aluminum is that it is 100% recyclable, infinitely recyclable. It is a miracle metal.

We have to find solutions for greenhouse gas emissions, and we are doing so. We have doubled production volumes since 1990 and reduced our GHG emissions by 40% at the same time.

How about North America's regulatory position with regard to greenhouse gases?

The level playing field is critical. If EPA regulations lead to good U.S. plants shutting down and not-so-good ones opening up in Asia, the world is going to end up with more greenhouse gases and we will end up with fewer jobs. This is not a solution; nobody wins.

To what extent do China and Asia influence your business?

One way to answer that is to look at our industry. When you look at production volumes in aluminum this year, we estimate the total will be around 38 or 39 million tons. In the last projection I saw from China, they will produce 16 to 17 million tons. That alone shows you the magnitude of China in our market. You can also compare the economic growth rate of China with that of the rest of the world.

China is and will be an important player. Now, the United States continues to be the largest marketplace in the world, so I would absolutely not share in any doomsday scenarios on that. I very much believe that there is no other nation on this planet that has the renewing powers that the U.S. has. That's been proven throughout the whole history of this nation.

I also believe that the foundation, the American dream, still exists. I can give you many, many examples of new businesses being formed today in highly exciting areas like new materials and enamel science, for instance. In the life sciences and clean technology areas. The American model is very, very much alive. As usual, it's in our hands to accept the new competition on this planet and take it in the good competitive spirit that this nation has always shown, live with it and do good. I think we can.