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November 1, 2008

TIME TO LEAVE THE NEST

Alcoa's former soft-alloy extrusion business, now operated by a Norwegian company, and Alcan's former aluminum rolling operations, now part of an Indian company, were severed from their parents with similar customer-focused strategies in mind. Despite terrible markets, there are clear signs that the basic idea is working.

If ever you needed examples of how company cultures influence business outcomes, look no further than Novelis Inc., the aluminum rolling company owned by the Aditya Birla Group’s Hindalco copper and aluminum business, and Sapa North American Extrusions, part of Orkla ASA, a Norwegian conglomerate with interests in candy, snack foods, paint, specialty chemicals, solar and renewable energy, and investment management.

Novelis and Sapa have a great deal in common beyond their dependence on aluminum. For one thing, they originate from the same corporate family tree—Pittsburgh Reduction Co., the early 1900s pioneering aluminum manufacturing enterprise that later split into pieces and became known as Alcoa, based in the United States, and Alcan, based in Canada.

Both Novelis and Sapa were cast off by their parent companies. Novelis was Alcan’s aluminum rolling business, spun off to shareholders in January 2005 and sold to India’s Hindalco in 2007 after two embarrassing years during which the company, unable to get its books straight, had to restate its financial results due to accounting errors, was forced, repeatedly, to postpone quarterly and annual earnings releases and its first annual meeting, and fell into technical default on debt because of the delays. Its CEO, CFO and other financial officers were fired, and directors handed the business to Kumar Birla, chairman of his family’s Aditya Birla Group, for $6 billion, including $2.4 billion in debt.

Sapa was the soft-alloy extrusion business of Alcoa, an enterprise formed by the big aluminum company during years of aluminum acquisitions that often included an extrusion component. Never a priority for Alcoa, the big company merged its soft-alloy extrusion assets with Orkla’s Sapa Group, a global extruder, in June 2007, creating a venture 54% controlled by the Scandinavians and focused solely on building a stronger extrusion business based on valueadded, customized products and services.

But more than their circumstances, Novelis and Sapa shared a common strategy: the belief that by unshackling themselves from their parents’ focus on tons produced, they could move successfully into the business of customer satisfaction based on customized solutions to their product requirements.

Today, says Martha Brooks, president and chief operating officer, Novelis executives are free to “make [our] own decisions. We sit there with our capital plan and our strategy and we don’t compete with building a new smelter or a new power plant or anything else that Alcan wants to do.

“Our job used to be to put tons of metal into the market. Our job now is to create value for our customers.”

Says Jack Miller, president of Sapa, “What you get with decentralization is speed of decision-making and intimacy with your customers. What you get with centralized companies like Alcoa are efficiencies of scale. But in those environments, you tend to sell what you make. Our business philosophy now is to supply better solutions to our customer than anybody else.”

Sounds good, but how has it all worked out? Read on.

HOME AT LAST

Martha Finn Brooks, as a newly hatched Yale graduate in the early 1980s, had a fascination, nursed since sixth grade, with communism. “I couldn’t understand how it worked,” she recalls. “Our teacher taught us about communism. I raised my hand and asked, ‘Well, why do people work,’ and she never could answer the question.”

Photo taken by Michael Blackwell

So, characteristically, Martha Finn decided to learn for herself. She took a year of Mandarin in college and won an appointment with the Yale-China Association to teach English and rudiments of Western culture to students at Hunan Medical College in Changsha, China.

“I vividly remember one night being entertained by one of my students, who was in fact a brain surgeon, a very top-notch individual, at the pinnacle of his career,” she says. “He admitted to me that he was deeply, deeply jealous of his brother, who was a van driver. The brother made multiples more than the surgeon because he could barter away services, giving people rides around the city for cash on the side. You can’t really dispense a favor of brain surgery to someone who doesn’t need it.”

And the answer to her sixth-grade question about why people work under communism? “The answer is, they don’t,” she says. “It’s a whole other world.”

Brooks has made a career of that whole other world. Although most Chinese of that time believed that “profit was an evil concept,” she helped local companies with their first contacts with Western customers. Her initial job with a U.S. company was with Cummins Inc., the maker of engines, electric power equipment and related gear. During a 16-year career there, she advanced through work on international deals, corporate strategy, European and Russian joint ventures, “anything that was unusual” in the Middle East and Africa, oversight of European distributors, responsibility for the Cummins truck and bus business in Europe, global sales and marketing and, finally, as vice president responsible for the business in a broad range of engine applications.

“Everything except the basic engineering,” she says. Not that the basic engineering wasn’t its own study. To absorb engineering concepts, she grilled colleagues at every opportunity about engineering programs, failure modes, quality improvement programs, technical specifications and the like. She took Cummins’s handson training and learned how to assemble and disassemble a diesel engine.

“You can’t be the leader of the troops and not understand exactly what the dynamics are,” she says.

Then, in 2002, Alcan named her president of its rolled products business in Asia and the Americas. “I was intrigued with the challenge of trying to bring a production- driven system more towards the customer,” she says. The job also made it possible to move from smalltown Indiana back to Cleveland, her childhood home, where her own children would have improved educational opportunities.

Brooks became chief operating officer of Novelis after the 2005 spin-off, survived through three CEOs, two of them interim bosses, and was named president and COO of the company, its senior executive position, after its purchase in 2007 by India’s Aditya Birla Group and Hindalco. Brooks holds a bachelor’s degree in economics and political science, and a master’s degree in public and private management, both from Yale University.

Novelis, meanwhile, has traveled a very difficult road. It was created during a period of high and rapidly rising aluminum costs and was saddled—in addition to inadequate books and $3 billion of debt bequeathed by Alcan—with fixed price contracts that bled red ink, $1 billion since 2005. Aluminum markets have turned sour with weak housing and commercial construction sectors and a downturn in transportation.

Now, with almost all those contracts renegotiated and aluminum prices plunging, results are improving.

The company now operates in 11 countries and four continents. Since 2005, it has increased global recycling capacity by 14%, and in 2007 recycled nearly 36 billion aluminum beverage cans, more than any other company. “Recycling a single aluminum can saves enough energy to power a television set for up to three hours,” says Brooks.

Forward caught up with Brooks at her company’s headquarters in the posh Buckhead section of Atlanta.

What were your impressions of Alcan’s rolled aluminum business when you joined it in 2002?
It was a highly, highly risk-averse organization. There was very little new blood or talent because they had learned to do more with less and hadn’t hired anyone for a long time. They were slow to adopt a new idea, and very focused on production, and excellent at it. The business model that had been successful for many, many years was, ‘Run it faster, produce more and you’ll make more money.’

But now it was reaching a point, at least in North America, where we had to think of a few new applications for rolled aluminum to take share from competitive materials.

There was not a lot of communication across the company to like-minded operations. The European business was run with a different management structure. We didn’t have common agendas for R&D or IT, so there was not a lot of collaboration among the pieces of the company.

We also had an organization with tremendous loyalty, hugely dedicated people with a lot of knowledge in their heads. There were controls, but not with a lot of visibility.

Does an organization like that provide an incoming manager with opportunities?
The opportunities were huge. One was the application of Six Sigma. I had just had three years of that at Cummins and saw some fabulous successes there with it when people thought they already were the engineering experts and knew everything there was to know about something.

You learn the lesson over and over again that if you bring people across disciplines, or slice the team differently from the way that a team normally works on a problem, you see things differently, and you get the courage to make change. You collect data from across a workflow … and you then push it farther down into the workforce.

It becomes a way of life. You become more data based, and much less based on tribal knowledge and folklore. And thankfully so because I don’t know how Novelis would have survived in the kind of cost inflation we’re seeing right now had we not done that. We’re easily earning $50 million to $70 million a year at the bottom line, aftertax improvement, because of the Six Sigma program.

What has been the impact of ownership by an Indian company?
The world became small. It helps you think about decisions from the perspective of every continent, and we quickly moved away from being an American-centric company to being a truly global company.

Our Indian colleagues are very detail oriented. We like to get 80% of the information, make a decision and move, and if we make a mistake, we’ll fix it later. We value speed. Our Indian colleagues cause us to think through things very carefully as we go running off.

I think it has made us better. We’re getting our old speed back, but we’re much more data-oriented as we think through how to explain a major strategic move to someone who is highly, highly detail-oriented and wants 100% of the facts before moving.

The Aditya Birla Group has invested a lot of trust in us. We are largely left to run as an independent business. Mr. (Kumar) Birla, our chairman, has been very careful not to impose all of the Indian methods and structures on us. But we talk a lot, and we have begun sharing people and processes. The best process wins. For example, this year our parent company will participate in our strategic planning process because they didn’t have one like it. On the other hand, we didn’t have a very well-developed talent management system, and they have hugely sophisticated talent management.

We are moving … into their methodology, and we’ll access their software and methodology for assessing competencies and moving leaders around. Whenever I have an open spot, my first question to them is, ‘Who do you have in your group that can come and join us?’

We are learning more and more about India every day and how that market will develop. In the very near future, the very first aluminum can plants are going to open there. There weren’t any of these before. There are other opportunities as well in architectural products and automotive. We are going to have a lot of fun together developing the market for rolled products.

What other opportunities did you see at Novelis?
Another thing we’ve done is really drive the concept of innovation. It’s a very difficult thing for an industry like ours, where throughput is so critical, to have time to experiment. It’s hard to dare to experiment with a piece of equipment that we rely on for hundreds of tons of output per day.

The success we’re most proud of is Novelis Fusion, where we combine two or three alloy layers during an ingot casting process. The ingot is then rolled into a sheet product with different alloys on the inside and the outside. The surface performs one function, and the inside layer performs another. So you might want the surface to be soft, so you can bend it and have no cracks. Or you might want it to have an antimicrobial additive, or have anti-corrosion features on one side. The internal layer you might want to be hard, to support weight or strain.

That’s our most important innovation so far. But in our R&D system we have more than 50 products under development, such as water-based zero emission coatings, alloys that are easy to recycle, and a blow-forming manufacturing process for aluminum bottles.

How long did it take to develop Fusion?
We began in 2002 and announced it in 2006. By 2004, we’d finally gotten the courage to make the first significant investment. Even though we could make it in the lab, our own people kept saying that it would be impossible to commercialize. We had a big internal fight to even bring this to market.

But we finally made the decision to put the capacity in the ground, and now we can make Novelis Fusion in Asia, North America, South America and Europe.

We had competing ideas about how to make a brazing sheet product. The traditional means of combining alloys through mechanical roll-bonding was expensive and limiting. Attacking the problem at the molten metal stage seemed impossible to the metallurgists because you couldn’t maintain the liquid alloys in distinct layers.

The breakthrough came when we were able to successfully hold both alloys at a stage somewhere between the liquid and solid states while they formed a perfect metallurgical bond. Once we figured out how to do it in the lab, we then had to bet real money putting it into production.

We also didn’t really have a sales force set up to work far enough upstream with our customers. We had been order takers, right? Doing the same thing for a long time. So this was a different deal for us.

We had some failures along the way when our people made up different recipes that were either too difficult to cast or couldn’t be rolled. But the more people who engage in trying to perfect the innovation, the more exciting it is.

Take a door. It has been very difficult to meet the formability requirements with traditional aluminum sheet. It had to be hard enough that it didn’t ding, but soft enough that you can fold it over on itself, do very deep drawing of the part, and not have microscopic fissures which will later corrode.

With Fusion, we use a soft alloy on the outside and a super hard alloy on the inside, and the customer can produce a part that couldn’t be made from aluminum before. Four European automakers have been in trials to do this, and one, a leading producer of luxury automobiles, is in active production using Fusion now.

You get a couple of car customers going after it, and pretty soon they’re all going after it. We see it as a bit of a breakthrough because we can both down-gauge, and use less material, and still make parts that perform well.

Are there other applications for Fusion?
Yes, there are numerous opportunities. For example, it’s going to be fun for architectural parts as well. It’s the same logic. You can have an anti-corrosion surface on the outside and then a much stronger alloy on the inside. You can down-gauge it and get the same strength and a better surface finish.

What impact has your independence from Alcan had?
We make our own decisions. I think about my markets and customer base, and nothing else. Alcan had very little appetite for more manufacturing in Europe. They wanted to reduce capacity. But we see growth in the European can market, and we can put in capacity in very short order. We don’t have to wait for a normal annual planning cycle.

Let me give you an illustration. It took just a few months to expand our plant at Nachterstedt, Germany. A competitor withdrew from the can end sheet market, and it left one of our beverage can customers in a bind. We squeezed out more production from existing facilities in the short term and began work on a $17.2 million expansion. We’ll have it up and running in less than a 12-month period. At Alcan, once we said we want to do something, they might have not wanted to proceed, and we would have had to wait in any case for the right time in the budget cycle.

Choosing to move forward with Fusion as we have, choosing to move forward all over the world with recycling with additional capacity on every continent … if you are part of an aluminum company that bases its life on making and selling more metal, recycling may not be so important. But for us, recycling is part of our management philosophy, and we want to use more recycled material every year. We’re at 31% recycled material now. It was in the mid-20s when we were spun off. The more metal we can secure directly back from our customers and consumers, the happier we are.

We also have customer-innovation days all over the world. We invite people from our customer base, and some that are not our customers, to present some technology, learning or training. You get people from different industries who aren’t competitors to see how they are using the material, and it creates ideas for new ways to use rolled aluminum. That’s something we never did in the Alcan days.

Any other ideas you can mention?
We’re doing work on a variety of surface finishes and new coatings that do different work. One is an antigraffiti surface that cleans up better. Another is luminescent. You put it inside a tunnel, and if the electricity goes out, it will glow for eight or nine hours. It’s a safety measure. There are others. One is a superreflective sheet. Another replicates stainless steel but without the fingerprints.

Another thing we’re doing is sharing best practices. We have value to be released by making it easy for our leaders to learn from other parts of Novelis to really ratchet up our performance. As we invent something or a process in one place, we’re getting better at calling the other seven facilities that have a similar issue to tell them how a problem was solved. That’s the ultimate, when your organization proactively pushes ideas out to like facilities. Or when leaders in one area call those in another to ask whether they’ve had the same problem and, if so, how they solved it. That’s when the network starts singing and a lot of good things happen.

In an economic environment like this, how have you adjusted your expectations and planning?
I don’t think there are too many people who could have foreseen the kind of movements we’ve had with price inflation. We were used to such a steady environment, and we knew that if there was a problem, we could always beat it with productivity. But you can’t beat these kinds of numbers with productivity.

As for this economic environment, no one can forecast the future. None of us have lived through this. We can’t predict what’s going to happen right now. We don’t have any direct issues ourselves with our debt structure or anything else, but what I can’t know is what’s going to happen with all my customers and their customers, and how they are going to respond.

Look at the automakers. How do they keep on making cars when nobody’s buying them? They are an important portion of our portfolio. So it’s nice to be in businesses like foil because while they may decline, they are not going to go down 40% or 50%.

I do know that aluminum cans continue to grow in Asia and South America, where disposable income is growing, and in Europe because aluminum is taking share from steel. If you look in the cooler and see all the different forms of aluminum packaging on the market today, you can see that innovation also help keep us steady in this market.

In terms of recycling, aluminum cans present a cultural and political issue. In those cultures where people have a very high sense of social responsibility, like Switzerland, we get a 95% recycling rate. They don’t need a deposit tax. They just know it’s the right thing to do. The Japanese do the same thing.

In places where there is an economic value to the metal, places like Brazil, you get a high 90s recycle rate. There are 150,000 people that make their living recycling aluminum cans there. Drop a can on the street and check your watch, and in no more than 90 seconds, someone will pick it up.

In places like the U.S., you have radically different recycling rates depending on whether the consumer has to make a deposit. In places with no deposit, the recycling rate is in the 20s and 30s. Where we have a deposit, it’s 80% or more. But throwing away aluminum cans has got to stop, because the value of those cans is as much as $2 billion every year.

GROWTH DURING DIFFICULT DAYS

Photo by Mark Portland

Jack Miller, president of Sapa North America Extrusions Inc., has been in the aluminum business for 28 years, most of it spent responsible for rolling mills, extrusion plants and businesses of Alcoa in based Tennessee, Virginia, Wales, Hungary and Switzerland, with far-flung travels to remote outposts of the empire. At one time, he was general manager of Alcoa’s European Extrusions and End Products businesses.

“We had a great time in every new place we lived,” he says of his family. “Each move was as tearful as the original time we left Tennessee.” But over time, he noticed that his casual conversations with colleagues about the business were more pointed.

“You’d sit around having a cup of coffee with somebody, and you’d say, ‘You know what I’d do if I was in charge? You know what we aren’t doing right?’”

So when Sweden-based Sapa Group (pronounced Saw-puh) asked him in 2007 if he would like to run its North American extrusion business, he saw it as a “once-in-a-lifetime opportunity to actually go out and implement those ideas.”

Boiled down, Miller saw three things that he wanted to change immediately about Alcoa’s former soft-alloy extrusion operations in North America, a $1.3 billion-insales enterprise with 11 plants, including one in Monterrey, Mexico, and another in the Netherlands. In addition to custom and fabricated products, the Sapa facilities make aluminum pipe and tube in standard sizes and shapes, rod and bar, heat exchangers, extrusions with value-added functionality for automotive and heavy truck applications, and parts for HVAC and other industrial customers—about 600 million pounds of product annually.

First, Miller wanted to decentralize the business so that each extrusion plant could respond to customers with immediate decisions based on a detailed knowledge of their needs and requirements. Second, he was determined to deploy world-class technology because “world-class solutions require world-class technology.” Finally, he was determined to “engage 100% of the workforce” on behalf of the customer.

“You pay too much for people to only get arms and legs,” says Miller. “You need to make sure they bring their heads and hearts to work to focus on providing better solutions to the customer. It all ties together.”

As with any company that makes metals, Alcoa built efficiency with long production runs of each product. That had carried over into the culture of Sapa.

“If you make round tube, you sell that on a centralized basis,” Miller says. “We made round tube with wall thicknesses in assorted sizes, we made these window shapes, we made other things, and that’s what we sold. But that’s not the same as trying to understand what the customers wanted and making and selling those things. If you make custom shapes, you must work closely with the customer.”

In other words, Miller, consistent with the strategic inclinations of the Sapa and Orkla Groups, wanted to transform the company’s culture. To a surprising degree, he has begun to do so. Sapa serves customers with orders as small as 500 pounds. Even at its plant in Portland, Oregon, it maintains a “library” of 37,000 dies—the carefully shaped thick steel disks that softened aluminum is forced through to produce an extruded shape. At any given time, 8,000 of those dies may be in active use.

Miller, a native of Wheeling, West Virginia, was recruited by Alcoa directly out of college, holds a bachelor of science degree in mechanical engineering from West Virginia University and an MBA from the University of Tennessee. Forward spoke with him at his office in Pittsburgh.

Under your new system, do your plants have the authority to act on customer requests on their own?
Yes, they do. They have to if they are going to provide solutions for customers. In a centralized system, decisions are made at the top. If you’re working with a customer, trying to determine whether to invest to make the product they want, it takes you three or four months to make that decision because of all the steps you have to go through to make it.

By the time you actually say yes, they’ve either gone to somebody else, who is already making it for them, or they’ve gone bankrupt or changed their mind. You can’t take that length of time to make decisions.

I think the biggest single problem that faces America today is its dependence on foreign oil. Cars are going to have to be lighter; alternative fuels will grow in importance. Solar energy is incredibly exciting. We need to be out there helping people make cars lighter, developing solar power and improving public transport. And to do that, you have to be close to the customer.

It’s not just about making decisions quicker. This is where the whole organization wakes up every day thinking about how to make the processes run better, how to make better products for the customer and how to develop new applications for them. We don’t have to compete with smelters or rolling mills or other businesses for capital. We focus solely on what things we can do with extrusions.

Can you provide an example of this type of thinking in action at Sapa?
A lighting manufacturer wants to convert North America to LED lights because they’re more efficient than anything else on the market. But LED lights have thermal management issues. The customer came to us with the design for an LED light fixture for street lamps and gasoline stations and asked if we could make it.

We worked closely with our die manufacturers in Europe and our technology center in Sweden and helped them change the design of the profile so that, first, we could eliminate unnecessary support struts so that we could extrude it, and second, it would have the thermal characteristics they were looking for. They liked the design and the prototype and have now told us to go ahead with production. We went from concept to production runs in three months.

Photo Courtesy of Stefan Berg/Sapa

Are there other examples?
A maker of truck parts asked us to produce a motor housing for a hybrid engine. We developed a solution that requires extruding six individual pieces that we can friction stir weld together. There will be no seams. The customer will do bench testing this year and road testing in the new year. Again, from idea to samples to make engines from took three months.

Under our old system, we wouldn’t have worked with this customer. We would have told them that we don’t make that part, we don’t today have friction stir welding capability. Under our new system, our plant in Morris, Illinois, has already ordered the special fabricating equipment to get into production of the LED lights with reduced cycle time and higher quantities. They told me that they had done this—we still have controls—but this is within their approval limit. You have to trust that you have good business people in place.

For another customer that needed big flat panels, we changed the technology we use on one of our large presses, and that allowed us to move from making 12- inch- and 13-inch-wide profiles to go out to 24 inches. For profiles that are welded together to produce those big flat panels, you cut the number of welds in half. The panel is lighter because you don’t have the additional thickness along the welds. Weld time is cut and productivity is up.

This was another case where the dies and the press technology have come from Europe.

Have these difficult times affected Orkla’s commitment to the business?
No. Our capital spending is significantly more than we did before, more than double what it was with Alcoa. We have spent a lot of money modernizing facilities, handling equipment, controls, run out equipment, packing lines. We haven’t changed any plans, and we haven’t slammed on the brakes on any capital improvement projects or discretionary spending. If it is a good investment, we should go ahead in good or bad times. If it is a cost, we shouldn’t do it at all.

You’ve described customer situations in which the resources of the home country have been useful. Has that generally been the case?
They have been huge. Sapa has a technical center in Finspång, Sweden. They are into deeper technical research, such as corrosion analysis, alloy development work, thermal management analysis and other technologies. Under Alcoa, very little if any of their recent R&D work was on alloy development for extrusions.

Sapa also has an engineering group based in Vetlanda, Sweden. We lean on them for help improving our processes. For example, they have helped us with press optimization systems so that the presses run faster and smoother. Press productivity has improved 13% to 15%.

We have also created an innovation center in Portland, Oregon, to work with customers and develop their applications.

Market conditions for extruders have been terrible, the worst in 30 years as some see it. How has that affected Sapa?
It’s a tough market. A third of the extrusion market is in building and construction, and another third is transportation. Both are way down. The last third is what we call the “miscellaneous” category, such as service centers, industrial and commercial applications. 2006 was the peak of the cycle. This year the overall market will be down 25% from that peak year.

It is incredibly difficult to forecast. For instance, the trailer manufacturers association was forecasting a slight increase in build rate for next year, for instance. Now they’ve gone back to forecasting a decrease. But overall, I expect next year to be about the same as this year. We haven’t changed our basic strategy. It’s going to be tough for a while, but we’re not going to change our plan.

Remember, aluminum is right for the times. At the end of the day, when you’re done with your product, it’s fully recycled. It’s good for today, and it’s why we need to focus on selling solutions. We’re still viewing this as a tremendous growth business.