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March 1, 2013

Resilient Leadership

ATI Allegheny’s Richard Harshman on his company’s strengths in a constantly evolving marketplace

It's a chilly fall morning in Pittsburgh, Pennsylvania, and the Steelers just endured a brutal loss. Although suffering from a scratchy throat and a slug of disappoint- ment, ATI Allegheny Ludlum President, Chairman and CEO Richard Harshman is ready to talk about another passion: his 35 years at the same thriving company.

Harshman joined Teledyne Inc.'s internal audit department in 1978 (it merged with ATI in 1996), and has climbed the ranks through a variety of roles, including vice president of investor relations and chief financial officer. 

In 2011, Harshman was named to his current post. Since then, he has presided over the specialty metals firm, serving customers in more than 30 nations. ATI creates a variety of alloys, including titanium, nickel, stainless steel, zirconium and tungsten, and also produces castings, powder metals and tungsten-based products.

A dual attraction for technology and manufacturing guided Harshman’s early career and carried him into his leadership role today. Now, he says, working with the talent at ATI to manage changes in the industry and prepare for developments in key markets has become one of most satisfying challenges as CEO.

“A fundamental responsibility of a CEO is to gather knowledge from the management team and [employees] in the company, identify trends in global markets, and identify, develop and execute strategies that create value for customers, sustainable profitable growth for stockholders, and opportunities for employees,” he says.

Despite remaining loyal to the same company for more than three decades, Harshman has embraced plenty of internal change during his tenure. He has steered the company through unfavorable economic times more than once, but has managed his team with agility, taking advantage of innovative technologies to make ATI one of the top specialty metals producers in the world.

“We believe in positioning ATI to be diversified in terms of products and manufacturing competencies,” he says. “We don’t want to be a company that is a single metals business focused largely on one or two end markets. We believe in American manufacturing and we focus on global opportunities.”

ATI is unique because it has its own technology R&D that creates products to closely fit customer needs. How does this work?

We try to have a very deep and rich understanding of the markets, and of the customers in those markets in terms of what their technical challenges are today and what they will be in the future.

ATI has built strategic relationships with its customers and we have leading technology capabilities that allow us to look five to 10 years down the road to recognize what will be required. If you’re going to be a world leader in these high-end specialty metals, you have to be able to make things that others just don’t make, or at least make them better.

For instance, through these specialty metals technologies we have created products like ATI 718Plus® and the new titanium ATI 425® alloy. These kinds of alloys are really technology enablers. The ATI 718Plus alloy makes possible the next generation of more fuel-efficient jet engines that require higher operating temperatures and longer life cycles for rotating components. ATI 425 alloy is a high-strength titanium alloy that can more easily be made into parts than the more traditional high-strength titanium alloys.

Talk about the types of training you do with your employees to prepare and retain them in this research-driven culture.

The first thing that happens when somebody joins ATI is safety training. That’s very important in our business because the manufacturing plants and processes can be dangerous. Our fundamental objective is the health and safety of our workforce, and we have a world-class safety record, but we acknowledge that this is a never-ending journey.

Our employees who work in manufacturing facilities participate in detailed safety training that, depending upon the nature of the operation, can be either one or two weeks in length. And, only when there is a certain amount of awareness and competency achieved, do we allow them to begin working on the plant floor.

The rest [of ATI’s training and development] is a combined training and mentoring process, helping employees realize the best way to do their jobs. At the end of the day, though, in a business like ours, most of the training and the knowledge that happens is on-the-job. But that comes after employees go through the formal indoctrination process—which includes courses on safety, ethics, compliance initiatives and company values.

Looking back to 2012, what were your strongest and weakest markets?

Aerospace is a constant. That market has been strong and is growing. The only change in the last three years was in the second half of 2012, where I think some of the macroeconomic events and uncertainties impacted the aftermarket for jet engine replacement components. ATI’s focus on the aerospace market has historically been on the jet engine side where demand is higher than our airframe demand. In that engine market, we’re really focused on the higher performing, more demanding environment of rotating component materials or parts. As airplanes use more titanium and titanium alloys for aerostructures, the airframe side of the aerospace market provides growth opportunities for ATI.

The second half of 2012 was also challenging because the supply chains in most of our end markets were very cautious and reduced their typical orders. Fortunately, we didn’t see a lot of cancellations because the aerospace backlog is strong and market demand going forward remains strong. That appears true even though the level of profitability for the global airlines was less in 2012 than in 2011 due to the concerns about slower growth in China, and anemic and uneven growth in the United States and Europe.

What do you see ahead for the energy sector, especially in light of an uncertain regulatory environment?

The electrical energy market has always been a big one for us, both from the standpoint of generation and distribution, whether it be gas-fired, land-based turbines, coal-fired plants, nuclear energy, solar or wind. Those markets will continue to require the kind of products that we make, and as the world economies begin to recover and grow again, the demand for those products is expected to return to high levels.

But, at the same time, there is a bit of uncertainty right now. Are the solar and wind components going to be manufactured in the United States or in some other country? We like the long-term prospects for renewables, but we aren’t exactly sure what the market will look like and we remain cautious at least for the time being.

Nuclear demand slowed quite a bit in 2012 due to nuclear reactors in Japan being shut down after the Fukushima event. On the other hand, we have seen an increase in demand for spent nuclear fuel processing—getting it out of water into dry storage. We are seeing this growth in developing countries, though, and not so much in the United States.

On the electrical energy distribution side, we’re one of a handful of producers in the world of grain-oriented electrical steel for the core of power transformers. While it is a challenging market today, in the future, with a rebound in housing construction and a rebound in energy consumption as the U.S. and European economies recover, the demand for those products will also recover.

ATI also has a growing medical products division. Will that continue?

A dual attraction for technology and manufacturing guided Harshman's

early career and carried him into his leadership role today.

It’s a growing market because of world- wide aging populations, as well as the need and desire for quality of life for middle-aged and older people. That requires quite a bit of the kind of specialty metals that we make. The demand for new machines is highest in Europe and the United States right now, but we expect long-term growth in developing economies, as well.

What types of medical products does ATI manufacture?

We are a major supplier of titanium and zirconium cobalt-chrome alloys to the global implant market, such as for knee and hip prostheses. Very few businesses in the world have the ability make these products.

Another market has been for the new version of MRI equipment. We make a niobium-titanium alloy for super-conducting wire essential for these machines. Like the titanium, zirconium and cobalt-chrome alloys, there are very few companies in the world that have the technology and manufacturing capabilities to make this superconducting wire product.

OK. Then where do you see the major market strengths this year?

Barring some global economic collapse, I expect the aerospace market to remain strong with record backlogs, new airplanes and new airframe and jet technologies that will require more than ever the kind of specialty metals products that ATI makes.

Shale gas and shale oil are also game changers. Demand for the technologies of directional and horizontal drilling require more specialty metals that we make, not only in the traditional milled product forms, but also in the castings and forgings that ATI is now able to produce. Our expectation is that demand from our key end markets should grow at or above global GDP, at least over the next five to seven years. The need for new technology and who provides value-creating ideas within the supply chain will determine which companies are more successful than others.

 

Do you consider the pending conflict minerals rules to be a problem?

From ATI’s perspective it’s not a significant problem, primarily because the final rules that the U.S. Securities Exchange Commission (SEC) put in place exclude scrap. We buy a lot of scrap for manufacturing our alloy systems.

The bigger issue is that the conflict minerals rule came out of the Dodd-Frank regulation. (Read “The Conflict Over Conflict Minerals”) This is surprising, because Dodd-Frank deals with the banking industry. When amendments are added to very complex bills late in the process, there is a higher risk of unintended consequences because people really don’t understand the ramifications of these regulations.

I think the SEC ended up doing the best it could under the circumstances, since Congress essentially passed the regulatory writing of the conflict minerals rule to them. The SEC asked for input from the industry and we were active in that through the various trade associations, including MSCI.

What other potential regulations concern you?

Regulations and general uncertainty surrounding energy are very important to us. If we are transitioning away from coal in the United States, what are we going to use? Sure, there is uncer- tainty about the environmental issues with coal. However, you can’t be against coal, nuclear and natural gas and have a viable economy. We are good with all three options from a business standpoint. But the uncertainty about which one holds everybody back.

 

You have been in the industry for more than three decades. What lessons do you see from the significant changes you’ve experienced?

Change has been constant. The pace of change is much quicker today than it’s ever been. The markets that we serve are more global than ever before and our competitors are more globally capable than ever before. To be successful, we must have a driving desire to improve the speed at which our company gets better. We must use change to our advantage by being a relentless innovator in everything we do. If we don’t, we’ll start falling behind.