Bethlehem Steel Corporation

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Bethlehem Steel Corporation

Bethlehem, Pennsylvania 18016
U.S.A.
(215) 694-2424
Fax: (215) 694-5743

Public Company
Incorporated: 1904
Employees: 29,600
Sales: $4.90 billion
Stock Exchanges: New York Midwest

Bethlehem Steel Corporation is the second-largest integrated steel producer in the United States, with control of supply sources, production, and distribution, from raw materials to products. The company manufactures and sells a wide variety of steel-mill products. The company also mines and sells coal and other raw materials. Bethlehem also is involved in the repair of ships and offshore-drilling-platform businesses, and in the manufacture of forgings, castings, railroad cars, and trackwork.

The company had its origin in 1857 as the Saucona Iron Company in South Bethlehem, Pennsylvania. Its primary business was the rolling of iron railroad rails. In 1899, after broadening the product line to include heavy forging for electric generators, tool steels for metal cutting, and armor plate for U.S. Navy ships, the company’s name was changed to the Bethlehem Steel Company.

Bethlehem Steel Corporation was incorporated in December 1904 by Charles M. Schwab, a former Andrew Carnegie disciple and first president of United States Steel Corporation (U.S. Steel). Schwab left U.S. Steel over difficulties that he felt inhibited his freedom to run the company properly. At its incorporation the company included Bethlehem Steel, a Cuban iron ore mine, and several shipbuilding concerns in California and Delaware. Schwab became president and chairman of the board.

Soon after the formation of the company, Schwab hired an electrical engineer, Eugene G. Grace, whose management skills allowed the more entrepreneurial Schwab the freedom he needed to plan the growth of the company. Together, the two men became the team that built Bethlehem from a small producer with an ingot capacity of less that 1% of the national total in 1905 to the world’s second-largest producer in fewer than 35 years.

In 1908 the two men staked the company’s future on a new type of mill invented by Henry Grey. It was capable of rolling a wide flange structural steel section that was stronger, lighter, and less expensive than the fabricated steel sections that were being used at the time. The gamble paid off for Bethlehem. The wide-flange section made it possible to build skyscrapers and modern cities.

In the years preceding World War I, the company acquired an interest in a Chilean iron ore mine with ore of a higher quality than available from the U.S. upper-Great Lakes region. As a result of the acquisition, the company built a fleet of ore carriers and entered the ocean transportation business. With the outbreak of the war, Bethlehem became a business of international scope, building warships for Great Britain at the company’s shipyards. Bethlehem also filled orders for guns and munitions, armor, and ordnance placed by the British, French, and Soviets. In the process of contributing to the Allied cause in Europe, Bethlehem created a financial base that would help in expanding the company’s steelmaking facilities.

Eugene Grace was named president of the company in 1916, with Schwab staying on as chairman of the board. In that same year, bolstered by wartime profits, Bethlehem acquired American Iron and Steel Manufacturing Company, Pennsylvania Steel Company, and Maryland Steel Company. In the years following World War I, the company continued its growth with the acquisition of Lackawanna Steel & Ordnance Company in 1922 and Midvale Steel and Ordnance Company, and Cambria Steel Company one year later. In the years preceding the Great Depression, the company boosted its steelmaking capacity to 8.5 million tons and employed over 60,000 people.

Bethlehem’s growth was tied to an incentive program from which its upper management profited handsomely. In 1929, Grace received a bonus in excess of $1.6 million; about 3.3% of earnings. The policy of paying out such large awards to its executives eventually caused problems. In early 1931, a group of stockholders filed suit against Schwab and 12 other officers of the company, charging that the bonus program constituted a misuse of company funds. The suit asked that a total of $36 million in bonuses distributed since 1911 be returned to the company’s coffers. The action resulted in the formation of the Protective Committee for Stockholders of Bethlehem Steel Corporation, a watchdog group that sought the elimination of the bonus program in its existing form. Though no funds were returned to the company, the suit was settled in July 1931, about six months after it was filed. The settlement resulted in a new policy that included the publication of executive bonuses in the company’s annual reports and a revised executive salary and bonus package. In subsequent years labor unions used the bonus issue in their demands for higher compensation and benefits for the rank-and-file steelworkers.

The 1920s were years of growth for Bethlehem. In the early years of the Great Depression, the company weathered the economic storm and continued to improve its production plants and introduce new products. The Depression caught up with Bethlehem in September 1931 when the company posted a quarterly loss for the first time since 1909. In the face of a stagnant economy and an eroding demand for steel products, the company had overexpanded and was forced to shut down many of its facilities, including a newly constructed jumbo-size open hearth at the Sparrows Point, Maryland, plant. Bethlehem, along with other major steel producers, struggled through the Depression. Help arrived with President Franklin D. Roosevelt’s New Deal and the National Industrial Recovery Act of 1933. The government suspended antitrust laws, and the steel industry established codes approved by the National Recovery Administration providing for labor reform, workers rights to organize, minimum wages, and maximum work hours. In December 1933, Bethlehem reported a modest net profit in excess of $600,000 after nine quarters totaling more than $30 million in losses.

During the 1930s, Bethlehem acquired steelmaking plants in Los Angeles and San Francisco, California, and Seattle, Washington. McClintic-Marshall, a large fabricator and builder of bridges, was also purchased, enabling Bethlehem to participate in the construction San Francisco’s Golden Gate Bridge. Through this subsidiary, Bethlehem was also involved in the construction of other large bridges and notable buildings, including Rockefeller Plaza; and the Waldorf Astoria Hotel in New York City; the Chicago Merchandise Mart; and the U.S. Supreme Court Building in Washington, D.C.

During the mid-1930s, Bethlehem went through an expensive retooling. With the largest capital expenditure since before the Depression, in 1937 and 1938 the company spent approximately $20 million on the construction of a continuous strip and tin-plate mill at Sparrows Point. A primary reason for the new project was beer. After six years of research and development, the American Can Company had produced a coated tin can suitable for packaging beer and the tin-plate market exploded.

Charles M. Schwab died in September 1939, leaving Bethlehem under the tight controls of Eugene Grace. With U.S. involvement in World War II imminent, Grace geared the company’s entire capacity toward war production. Furnaces, shops, and mills worked around the clock producing armor plate for ships, structural steel for defense plants, munitions, and aircraft engines. Between 1941 and 1944, Grace pushed production at Bethlehem to 101% of usual capacity. During the war, the company’s 15 shipyards produced over 1,100 ships, including aircraft carriers, destroyers, heavy cruisers, and cargo ships. In 1943 alone, the company built 380 vessels.

During World War II, from 1940 to 1945, Bethlehem produced over 73 million tons of steel. This total represented almost one-third of the armor plate and gun forgings used by the United States in the war. Prior to U.S. entrance into the war, the company’s gross sales were $135 million. In 1945, sales topped $1.33 billion, with more than 300,000 employees. Bethlehem became a global giant in the steel industry.

In December 1945, six years after the death of Charles Schwab, Grace was elected the company’s chairman. Arthur B. Homer, director of the Bethlehem’s wartime shipbuilding program, became president.

With war’s end, the global demand for steel was even greater than during the conflict. Consumer demands for new cars and household goods, along with the massive amounts of structural steel needed to rebuild war-torn economies, resulted in further expansion. Bethlehem built new furnaces and mills at many of its plants, and by 1950 was producing 23 million tons annually. The nature of the company’s shipbuilding business began to change as Bethlehem produced larger, longer cargo ships. Forerunners to today’s supertankers, the new line of ships produced by Bethlehem cost less per unit, carried more tonnage, and were able to cruise at speeds 30% faster than their prewar predecessors. More iron ore was delivered in less time. In

1957, Bethlehem’s peak postwar production year, the company made more than 19 million tons of steel, and earned $190 million on sales of $2.6 billion. At the close of the decade, Bethlehem’s full-time postwar employee roster stood at 165,000.

In 1960, the United States imported more steel than it exported for the first time in the American steel industry’s history. This situation was a harbinger. The deterioration of Bethlehem’s enterprises, as well as those of other U.S. steel manufacturers, can be traced to several major factors. High wages, foreign competition, and the enormous costs of environmental clean-up of the lands and waters around the company’s many production plants cut deeply into the company’s profits and cash reserves. In addition, decades of unlimited growth, expansion, and profits had made Bethlehem’s leadership complacent. Antitrust and price fixing suits against several U.S. steel giants including Bethlehem followed. Throughout the 1960s and 1970s company leaders believed that procedures could continue as they had been for over a half century without change in processes or structure.

Bethlehem’s leaders did not engage in product research, innovation, or reorganization. The company, like its competitors, relied on continual price increases to protect profits. These policies allowed opportunities for entrance into the U.S. market by Japanese and other foreign steelmakers, who rebuilt their steel industries after World War II and captured the competitive edge worldwide. This new competition, a shrinking domestic market, and the expansion of steel substitutes such as aluminum and plastics, created a still-existent threat to Bethlehem’s future.

Following Grace’s death in 1960, Arthur B. Homer, the company’s new chairman, committed the company to a $3 billion modernization and expansion program. The old mentality still prevailed as the company pushed to produce more tonnage. Bigger still seemed to be better.

Two important factors permitted Bethlehem to sustain its business and expansion through the early 1970s. First, pressure was brought to bear on the U.S. government to limit the amount of foreign steel allowed into the country. Early in 1969, the State Department persuaded Japanese and European steel producers voluntarily to cut their imports to the United States by 25%. The second factor that helped sustain Bethlehem during the 1970s was the Vietnam War, which stimulated production in all sectors of the U.S. economy. Bethlehem again pushed for more production and higher steel prices. After the price of steel rose steeply in 1969, the administration of President Richard Nixon instituted price controls on steel in August 1971.

The company faced growing competition from mini-mills. These small operations challenged the premise that the steel business had to be huge and integrated to survive. Using scrap metal melted down in electric furnaces, the small operations were capable of producing simple iron and steel products at a much lower cost than the large steelmakers. In light of increased competition, the company chose to grow with the construction of a huge blast furnace at Sparrows Point. Named Big L, it was built at a cost of $275 million. The furnace began operations three years after the end of the early-1970s boom years and one year after the company had shown a net operating loss of over $448 million. Bethlehem Steel was in trouble.

Drastic action was needed to save the company. In 1980, Donald Trautlein, Bethlehem’s controller, was named chairman. Trautlein began to cut away at the company’s cost of doing business. The company possessed outmoded production plants, steep labor costs, rising foreign and domestic competition, and eroding profits at a time when the steel industry was experiencing the worst downturn in over 50 years. Trautlein had other problems as well. He knew little about the business of steelmaking; he felt that most of Bethlehem’s problems were due to external forces beyond the company’s control. Trautlein chose first to diversify, then to remain exclusively in the steel business, and then began a diversification that was not completed.

The company’s new chairman began cutting costs at the top. Salaries were cut by 20% over a four-year period. Lump-sum retirement packages were offered to employees over the age of 55; vacations were cut back; and by the fall of 1982, 13 upper-echelon executives had taken early retirement. These measures were accompanied by mass firings and layoffs. Further cutbacks eliminated such perquisites as company limousines and drivers, security forces for executives’ homes, and a fleet of jet airplanes. By 1984, the number of Bethlehem employees had shrunk almost 50%. Trautlein replaced some of the executive-level positions made vacant with professional managers who had little or no experience in the steel business; many positions were left unfilled.

The company also began the liquidation of some subsidiaries. During the 1980s, 11 of the company’s operations were sold. In that same period, Bethlehem began to consolidate many of its steelmaking operations by closing marginal facilities and modernizing aging plants. The company closed its west-coast steel plants, scaled back shipbuilding operations, and in 1983, steelmaking was discontinued at the Lackawanna plant.

Between 1982 and 1985, the company posted losses of $1.9 billion. Under pressure and criticism, Donald Trautlein resigned in 1986. He was replaced by the company’s president, Walter F. Williams, who had more than 30 years of experience in the business. Williams was faced with a downward momentum that was not going to be easy to reverse. The company’s stock hovered around to an all-time low of $4 per share.

Williams instituted a campaign to improve and revitalize Bethlehem’s basic steel business. He began by selling off the assets that were not related to steel. He smoothed relations with both customers and suppliers and persuaded bankers to stay with the company. Slowly, Williams’s program began to make a difference. For the year ending December 31, 1987, the company reported over $174 million in profits compared to a net loss of over $150 million the previous year. In 1988, the company increased its sales volume another 18% over 1987 sales figures, and reported record earnings of over $400 million. Two important problems were solved in 1989. First, a 50-month labor contract that included cost-of-living increases and profit sharing was signed with the United Steelworkers. Second, the U.S. government’s steel-trade-liberalization program with other countries extended voluntary restraint arrangements previously negotiated with other countries by the Reagan Administration.

In 1990 and 1991 Bethlehem worked at increasing its market share in products that produced higher profit margins. Further, the company focused on modernization, development of high-technology production methods, and increased research and development into new products and processes.