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November 1, 2005

Running Ahead of Discontinuity

Wall Street has been hammering Alcoa, criticizing it for a "lack of clear business strategy" and a failure to diversify globally. Sales at the world's largest aluminum maker have doubled during the past 10 years but profits have not, falling by 6% a year. The company's stock trades at about where it was 5 years ago.

However, in 1999, Alain Belda, a Brazilian national and a lifetime Alcoa employee, took over as CEO and became chairman the following year. Some stock analysts now say that Alcoa is not the same company it was 5 years ago. Suddenly it seems, Alcoa is everywhere, expanding existing facilities, acquiring others, slashing costs, restructuring and realigning—in other words, globally diversifying and making some extremely clear strategic moves.

The company had the highest quarterly income and revenues in its history in the second quarter of this year. It has budgeted cost savings of $1.2 billion by the end of 2006, mainly through layoffs (an announced 6,500 jobs will be eliminated) and plant closings, and is acquiring new plants in Russia and expanding its low-cost alumina refinery in Australia. Its shares, which plunged 20% from a 52-week high in November 2004, to 23, are suddenly on many investors’ “buy” list.

Belda, 61, joined Alcoa’s Brazilian affiliate at the age of 25. He worked in finance and planning until being named president of Alcoa Aluminio in 1979. He later took over Latin American operations, became a corporate vice president in 1982—still under age 40—and executive vice president in 1994. He became vice chairman the following year.

He presides over one of the most globally diverse and internationally managed companies in the world. Half of Alcoa’s board is foreign-born, 40% of top management is non-American and another 10% has lived long periods abroad.


Q: YOU WILL CELEBRATE YOUR 37TH ANNIVERSARY WITH ALCOA NEXT YEAR. HOW HAS THE COMPANY CHANGED IN THAT TIME?

A: Over this time frame, I would say, Alcoa’s global reach and portfolio have grown substantially. Alcoa has been a global leader in aluminum since Day 1. In fact, we couldn’t have done it any other way. This is because, since our founding in 1888, we have had to reach far and wide to secure two of the most essential inputs of aluminum manufacturing, aluminum ore and affordable electricity.

Today we have operations in 43 countries versus 16 countries when I joined the company in 1969. And we continue to review and rebalance our portfolio to better focus on our core businesses, while also making progress on acquisitions that will enhance our competitive position.

Q: GIVEN YOUR LONGEVITY, DID YOU COME INTO THE CEO’S JOB WITH VERY CLEAR IDEAS OF WHAT YOU WANTED TO DO?

A: My role as the leader of Alcoa is to support by personal example the reputation and values of the organization and to serve our stakeholders. Alcoa aspires to be the best company in the world. A strategic imperative toward this goal is profitable growth and sustaining financial performance, while building for the future and delivering on all of Alcoa’s values.

In addition, one of my goals is to make Alcoa more of a customer-centric organization. Alcoa has amassed considerable experience with the Alcoa Business System, its systematic management tool that leads to productivity improvements. ABS begins with an understanding of customers’ requirements, identifies what is needed to meet them, and then empowers employees to eliminate waste and solve problems through continuous improvements in costs, quality and speed. For the customer, ABS provides exactly what is needed, when it’s needed, a key to making Alcoa the supplier of choice in almost any market.  

Q: YOU HAVE SPOKEN OF A “DISCONTINUITY FROM THE 1980S AND 1990S.” WHAT DID YOU MEAN?

A: In the 1950s following World War II, there was a huge jump in economic prosperity. Currently, we are in the midst of a market transformation that will make the economic growth in the decade ahead like the one in the 1950s. This was not the case in the period from 1980 to 1990.

Q: THE TWIN CONTRIBUTORS TO THE DISCONTINUITY YOU DESCRIBE—URBANIZATION IN THE BRICK (BRAZIL, RUSSIA, INDIA, CHINA, KOREA) COUNTRIES AND LABOR AND RESOURCE ARBITRAGE—WILL CREATE GROWTH BUT NOT IN THE WAYS OR THE PLACES IN WHICH WE HAVE SEEN IT IN THE PAST. HOW ARE YOU POSITIONING YOUR COMPANY TO TAKE ADVANTAGE OF THE NEW OPPORTUNITIES AND STAY AHEAD OF THE UPHEAVAL TO COME?

A: Speed, flexibility, market knowledge, effective alliances and acquisitions, and innovation will be critical success factors. Growth in these countries will initially be dominated by manufacturing that will come from infrastructure building, consumer purchases, transportation, energy, communications and long runs of commodity products. At Alcoa we see opportunities for infrastructure products such as rail cars, building and construction materials; signs, packaging products, small planes and boats; primary metals, extrusions and common alloy products. With economic volatility, political risk and conflicts are expected to increase so there should also be opportunities in the defense industry for combat vehicles, blast-proof containers and portable power. Fast deployment will require lighter equipment, and using lightweight materials, such as aluminum.

At Alcoa, we put the spotlight on innovation and developing the next business models, not only on new products, processes and services within the company. We identify novel segments and geographies, and quickly spot new competitors and partners, and establish global positions quickly through acquisitions, alliances and licensing.

Q: YOU ARE ONE YEAR INTO THE REALIGNMENT INTO SIX GLOBAL PLATFORMS. WHY DID YOU DO IT? WHAT ARE THE RESULTS TO DATE?

A: The realignment emphasizes Alcoa’s much-valued focus on the customer. We realigned the company along six global platforms (aerospace, automotive, commercial transportation, building and construction, packaging and consumer, aluminum and alumina) to better serve customers and increase the ability to capture efficiencies. Since then, we announced a restructuring that will eliminate approximately $195 million from our cost base when fully implemented. Our businesses are now better able to capture efficiencies and market opportunities. For example, our flat-rolled products business has now implemented a growth program to support the aerospace market where we will expand capacity at a number of rolled products plants globally in order to handle orders.

Q: AS A LIFELONG EMPLOYEE, HOW PAINFUL IS THE COST CUTTING YOU’RE CURRENTLY UNDERTAKING—THE LAYOFFS AND THE PLANT CLOSINGS? 

A: It was a very difficult, but necessary decision. Optimizing productivity of our assets and resources is the only option we have to continue to be successful in the market. Responding to customers’ demands—and making those customers more competitive and being more competitive ourselves—is the only option to preserving jobs in the countries where we operate.

Consistent with our values, as this restructuring is taking place, we will do our best to minimize the impact on Alcoans and the communities where we operate. We will treat everyone with respect and dignity as we take the necessary steps to continue to strengthen our competitiveness and secure our future in a global marketplace.  

Q: OF THE MANY EXTERNAL FACTORS THAT AFFECT THE ALUMINUM INDUSTRY, THREE ARE CURRENTLY PARAMOUNT: ENERGY COSTS, CURRENCY AND THE COST OF RAW MATERIALS. WHICH OF THE THREE IS THE MOST PRESSING? AND WHY?

A: These are all significant factors that affect the aluminum industry. We have been successfully managing through cost pressures, as well as investing for the long term. And we will continue to do so. We continue to focus on cost reductions to offset raw material costs.

Currently, record high oil prices are maintaining high resin prices so that, although we have strong demand in our consumer packaging area, this segment could be negatively impacted.

Electricity is an essential ingredient to making aluminum. To be profitable, we need to secure power at dependable and economical rates. Key to an investment in smelting is securing long-term access to power at economical prices. Our newest smelter is being built in Iceland, where there’s an abundance of clean, sustainable hydropower. In the U.S., we make 25% of our own power.

Q: WHY HAS THE ALUMINUM INDUSTRY GLOBALIZED SO EASILY, WHILE THE STEEL INDUSTRY HAS NOT?

A: You’ll need to ask the folks in the steel industry about its globalization strategy. As I said earlier, aluminum manufacturing requires raw materials, specifically bauxite. The need to find bauxite ore has taken us beyond the U.S. to fields in South America, Australia, the Caribbean and Africa. And the demand for affordable power has made us experts in shipping millions of tons of material over the world’s oceans to smelters built where power is available at dependable and economical rates.

Aluminum has only been produced commercially for 146 years and is still a very young metal. Mankind has been using copper, lead and tin for thousands of years and yet today more aluminum is produced than all other non-ferrous metals combined. Aluminum is a material that lends itself to improving world living standards and developing a better and sustainable world environment.

Q: DO YOU THINK THAT, AS PREDICTED, ONE-QUARTER OF EUROPEAN SMELTERS WILL ACTUALLY SHUT DOWN BY THE END OF THIS YEAR? 

A: I think the biggest determining factor will be the ability to find long-term, globally competitive power supplies. That said we are not much for predictions.

Q: ALCOA IS PURSUING A STRATEGY OF BOTH EXPANSION AND ACQUISITION. WHY EXPAND AT A TIME WHEN YOU ARE TRYING TO CUT COSTS?

A: All of our efforts at Alcoa are to position the company to be successful for years to come and to continue our leadership position in the aluminum industry for generations to come. We are committed to our key financial goals:  profitable growth and cost savings. We will continue to focus on organic and acquisition growth, as we are uniquely situated in our industry to drive organic growth. And we will be opportunistic for profitable growth of both kinds—organic and acquisition. Being the low-cost producer is essential and we are investing and taking steps to ensure that is us.

Q: HOW HAS ALCOA WON SO MUCH MARKET SHARE IN AEROSPACE, WHERE 95% OF EVERYTHING FLYING HAS A PROPRIETARY ALCOA ALLOY ON IT?

A: I can proudly say that for more than 100 years Alcoa has provided leading edge technology and solutions that have significantly advanced each generation of new aircraft to a higher level of performance and reliability. We work with our customers to develop new technologies focused on making aircraft more efficient, reliable and cost-effective to operate over its life cycle. Our capabilities continue to reduce the costs and weight of airframe structures and deliver increased engine efficiencies.

Alcoa products are literally used from nose to tail on the new Airbus A380 aircraft, including one million Alcoa Huck brand lock bolt fasteners. Over the years, we’ve expanded our aerospace presence in fasteners and propulsion through businesses such as Alcoa Fastening Systems and Alcoa Howmet Castings. We derive a significant amount of revenue from these two areas. Volumes across our aerospace portfolio are strong and we expect to see continued strength in this market.

Q: DO YOU DRIVE A FERRARI?

A: No, but I have been to the Ferrari plant and I am quite familiar with them. The technologies in that automobile are incredible—and we use it to show other manufacturers what is possible. It’s a great show piece for us.