The Institute of Cost Accountants of India
Mittal Steel (renamed as Arcelor Mittal after merger with Arcelor) is the largest steel producer in the world. It has marketed 42.1 million tonnes of steel and earned revenues worth USD 28 billion in 2005. Its operating income and net income has been USD 4.7 billion and USD 3.4 billion respectively in 2005. It has operations in 14 countries across four continents. Its production capacity was increased from 20 million tonnes in 2002 to 70 million tonnes in 2005. Its main products are flat steel products, coated steel, tubes and pipes. The number of employees working in this group is 320000. All these milestones have been achieved due to Mittal's successful business strategies, cost reduction measures and knowledge management. In this article author attempts to present a case study and narrates a success story of Mittal Steel's business strategy on turnarounds, cost competitiveness and knowledge management. Lakshi Niwas Mittal (LNM) started a rod mill in Indonesia in 1976. Mittal Steel was formed as Ispat International in 1978 It is a public limited company although Mittal family owns 88% of its shares. The family is known for its steel business more than 60 years when Mohan Mittal, father of LNM started a scrap metal business and gradually built that as one of the leading steel plant in the name of Ispat Industries in India. In 1995, Mittal Steel separated from Ispat Industries following disagreements with his father. Mittal Steel A Success Story of Turnarounds and Cost Competitiveness CMA (Dr. Subhash Chandra Das Former Director (Finance) HPC Ltd. and Guest Faculty, University of Calcutta, Kolkata "Our strategy is to be a low cost, high margin, high quality producer on a global basis. With this in mind we will continue to remain vigilant in terms of growth opportunities. .Our aim is to become the world's most admired steel institution and therefore we must excel in every area and every aspect of our business." Lakshmi Niwas Mittal, Chairman and CEO, Mittal Steel ase study 20 The Institute of Cost Accountants of India www.icmai.in Since late 1980s LNM acquired many steel plants across the globe and turned them around. In 1989 Mittal Steel took over on lease and later on in 1994 acquired Caribbean Ispat from the Government of Trinidad and Tobago. In 1992, the company acquired Sibalsa. In 1994, the company acquired Sidbec Dosco. In 1995, the company acquired Hamburger Stahlwerke, which formed Ispat International Ltd. and Ispat Shipping, and also bought Karmet Steel of Temirtau, Kazakhstan. In 1997, the company acquired Walzdraht Hochfeld GmbH and Stahlwerk Ruhrort. In 1997, the company went public as Ispat International NV. In 1998, the company acquired Inland Steel Company. In 1999, the company acquired Unimetal. In 2001, the company acquired ALFASID and Sidex. In 2002, it bought a majority stake in Iscor. In 2003, the company acquired Nowa Huta. In 2004, the company acquired Polskie Huty Stali, BH Steel, and certain Macedonian facilities from Balkan Steel. In 2005, the company acquired International Steel Group. In the same year, the company acquired Kryvorizhstal. In 2005, Mittal Steel announced an investment of USD 9 billion in Jharkhand, India. In 2006, the company merged with Arcelor (renamed as Arcelor Mittal) after much controversy and announced investment for a 12 million tonne capacity steel plant in Odisha, India. LNM's turnaround model is simple. He buys a sick company, puts it to a team of his own efficient managers, usually old executives from SAIL and from his acquired company, focuses main attention on financial and marketing side, makes fresh capital investments for augmentation of production capacity and quality, cuts costs relentlessly and injects knowledge management programme into the company. As mentioned before, LNM's acquisitions of companies are followed by vigorous cost control measures in order to reduce operating costs and ensure cost competitiveness to win over in marketing. The costs are mainly controlled by using low cost raw materials such as DRI and producing steel through the DRI electric arc furnace continuous casting method. Use of DRI as raw material in place of steel scrap has reduced input costs for the plants substantially. In 1996, for example, the cost of DRI was USD 95 per tonne as compared to USD 155 per tonne of steel scrap and USD 125 per tonne of pig iron. In 1998 Mittal Steel became the largest producer and user of DRI in the world, thereby recognised as one of the lowest cost steel producers in the world. Mittal has also been successful in reducing the costs in the acquired mills by down sizing the workforce. In 1988 at Ispat Inland (USA) the salaried workforce was laid off by 17% which resulted a saving of USD 22 million per annum. With a view to reducing the procurement costs of plant materials, LNM redirects purchases of all plants to Europe. The purchase orders of the entire group are placed from a common base located in Europe. Therefore, the bulk orders for global requirements has benefitted Mittal in achieving large scale economy in procurement as also better bargaining capacity from the suppliers. Besides, the average fixed costs at 28% of the total costs in the year 2000 came down to 20% in 2005. In Mexico plant, the fixed cost was reduced to the extent of 8% Mittal steel has a proven record in successful turning around the sick mills in various countries using their own resources and expertise, assisted by the company's proven knowledge integration programme. The Knowledge Management Programme (KMP) was introduced in all Mittal's mills in the mid 1990s. The programme uses the depth and breadth of knowledge within the group and ensures that the systems are in place for sharing it in order keep improving the organisations. Mittal steel is using best practice of knowledge sharing to improve