Chaparral Steel Co.
Chaparral Steel Co.
300 Ward Road
Midlothian, Texas 76065–9651
Fax: (214) 775–6262
Public Subsidiary of Texas Industries, Inc.
Stock Exchanges: New York
Sales: $462.3 million
SICs: 3312 Blast Furnaces & Steel Mills
Named after the roadrunner that darts over the rolling hills of central Texas, Chaparral Steel Co. was one of the original mini–mills that revolutionized the U.S. steel industry in the 1970s. The company is known for its innovative management practices which, among other things, allows workers to set their own pay rate. This flexible management style—combined with an ongoing commitment to improved technology—made Chaparral the world’s lowest–cost producer of steel in 1992. Products are made from recycled scrap metal (Chaparral can shred an automobile in 18 seconds) and include large structural beams, reinforcing rods, special bar quality rounds, channels, and merchant quality rounds. Chaparral is considered a small- to mid-size steel producer, shipping over 1.4 tons annually to customers in the construction, defense, energy, automotive, railroad, and mobile home industries. Sales are primarily in North America, although they had begun expanding to Europe and Asia in the mid–1990s. Chaparral is 81 percent owned by Texas Industries Inc., a cement and construction concern, and is traded on the New York Stock Exchange.
Chaparral was incorporated in 1973 as a 50–50 joint venture between Texas Industries Inc. and Co-Steel International, of Canada. At that time, analysts were predicting the demise of the U.S. steel industry as European and Japanese mills began flooding the U.S. market shares with inexpensive steel. Encumbered by oversized operations and outdated technology, U.S. manufacturers were virtually unable to compete with the newer and more efficient foreign mills. One by one, factories began closing across the Northeast and Midwest.
Chaparral was founded under the “market mill” concept, a manufacturing/marketing strategy developed in the late 1960s as an alternative to large U.S. steel mills. Also known as mini-mills, these new operations were smaller, more efficient, and more specialized than traditional U.S. mills and were also quite flexible in responding to changing market demands.
Under the direction of chief executive officer Gordon Forward, a Canadian with a Ph.D. in metallurgy, Chaparral’s first steel beams rolled off the line in 1975. One of the major technological advancements at the new company was the continuous casting of all steel products, a process which greatly reduced the amount of power necessary to produce a ton of steel. Equally important to Chaparral’s low costs, however, was its innovative management philosophy. Operating, according to company literature, as a “classless corporation, [with] universal education and freedom to act,” Chaparral sought to make its employees, as well as the machinery, efficient.
Chaparral was founded without the traditional trappings of corporate hierarchies. Time cards, rigid lunch hours, and breaks were eliminated; employees took breaks when they felt it was necessary. Coffee was free, management dressed casually, and such executive perks as reserved parking spots were abolished, as were separate entrances for employee locker rooms and executive offices. In return for this freedom, workers were expected to become intellectually as well as physically involved with their jobs. “We figured if we could tap the egos of everyone in the company, we could move mountains,” Forward told Fortune magazine in 1992. Chaparral provided all employees with the opportunity for training in such varied subjects as electronics, credit history, and metallurgy. Bonuses and pay raises were commensurate with the skills an employee had acquired and the contributions he or she had made to the company.
During its first five years of operation, the company shipped about 2,500 tons of products (primarily reinforcement bars, carbon and alloy quality bars, and structural shapes) to customers within a 200-mile radius of its plant in Midlothian, Texas. Raw material was initially purchased pre-shredded from local scrap yards. However, by the late 1970s, the company had purchased its own automobile shredder, and in 1981 it acquired the Schwartz Iron & Metal Co., a local scrap metal concern, capable of processing 10,000 tons per year. That year, the company also underwent a $180 million expansion, boosting its production volume of billet (steel in intermediate stage of production) from 400,000 tons to one million tons annually, and of finished steel from 600,000 to 1.5 million tons. In addition, the company began manufacturing its core products in a wider variety of sizes, a move which allowed it to begin competing with major mills.
Chaparral’s product line, however, was still not as diversified as the product lines of major mills. “We’re not trying to be all things to all people,” Jeffrey A. Werner, vice-president of marketing, told American Metals Market in 1982. “We’re still producing the same products. But with more sizes available, that gives us the ability to reach further. To what extent we’ll be a major factor [in the national steel market] is yet to be determined,” Werner observed, adding that the diversity of Chaparral’s new products took “some of the peaks and valleys out of the marketplace.”
With its improved capacity in place, the company began expanding its marketing efforts, opening regional offices in Kansas City, Detroit, Atlanta, Houston, and Los Angeles. Northwestern and Northeastern states were excluded from the expansion due to the high costs of shipping to these regions. Despite the company’s expansion, sales were down in 1982. High interest rates had created a depression in the building industry which in turn severely affected the steel industry and forced many steel makers to lay off thousands of employees. In mid-1982 Chaparral cut back steel production by 30 percent for several months, yet laid off no employees.
Chaparral’s marketing strategy during this economic downturn was to lower the overall cost of its products by eliminating freight charges from its bill. “Nobody can get a premium in this market today,” Werner told American Metals Market.”In this kind of market, people do all sorts of things they wouldn’t normally do,” he noted. In addition, the company reduced prices on reinforced bars from $250 a ton to $240 a ton, and merchant and structural steel prices by $15 per ton. Competition heated up as steel merchants continued to cut prices in order to get a greater share of the dwindling market. When Chaparral attempted to raise prices on merchant hot-rolled steel bars, competitors lowered theirs, so Chaparral had no choice but to follow suit.
By 1983, mini-mills like Chaparral accounted for one-fifth of the output of steel in the United States. Chaparral was the price leader in reinforced bars and one of the lowest-priced producers of steel in the world. The company could produce a (short) ton of steel in two man hours—slightly less that the 2.4 man hours required to produce the same amount at the most efficient Japanese steel mills and far less than the eight man hours required at most major U.S. steel mills.
Prices on the U.S. market remained depressed, however. In early 1984 the company filed a suit with the Office of the U.S. Trade Representative, accusing Polish and Norwegian manufacturers of selling their products in the United States at prices below cost. In response to the market, Chaparral lowered its prices again in October. Then in December 1984, Chaparral filed another dumping suit against Japan, Mexico, and several unnamed members of the European Economic Community.
In 1985, parent company Texas Industries bought Co-Steel’s 50 percent share in Chaparral for $42 million in cash, plus a contingent payment based on Chaparral’s performance due in 1990. Under Texas Industries, Chaparral began investigating the possibility of further expansion, believing that a diversified product base was essential to its survival. A section mill which had been under construction since 1983 was soon to be completed and was expected to increase production capacity by 700,000 tons. Caught between the need to expand further while simultaneously keeping costs low, Chaparral began a feasibility study into production of large structural beams. Its closest rival, Nucor Corporation, which operated four mini-mills across the United States, had recently entered into a joint venture with a Japanese firm to produce large flange beams, and Chaparral did not want to be left behind.
The company survived the recession due to its ability to keep costs low, and when the market picked up, Chaparral was on top. It sold 1.09 million tons of steel in 1986, earning a gross profit of $67 million on sales of $297 million. Fifty-five percent of products sold were medium and heavy structural steel, 30 percent were reinforcement bars, and 15 percent were carbon and alloy bars. Labor costs were reduced to between nine and ten percent of sales, far below the “traditional” industry figures of 40 percent. Energy costs were also reduced that year when the company installed a bottom-tapped furnace, designed to burn fuel more efficiently.
By 1987 Chaparral was the tenth largest steel producer in the United States, with a market that encompassed the United States and parts of Canada. In July of that year, the company made its first shipment to Western Europe, and by the end of 1988 Chaparral products were sold in most Western European countries. Capacity was boosted from 1.3 million tons to 1.5 million tons per year with the addition of a new horizontal continuous caster (said to be the only one in the United States at the time) and a ladle furnace, which allowed the company to produce a wider variety of steel grades.
Sales in 1987 rose 7.3 percent to $318 million, and operating profits jumped to $42.5 million. According to Robert D. Rogers, president of Texas Industries, these results were achieved in a market that was only average for structural products and declining for bar products. Productivity increased slightly that year, to 1.6 man hours per ton of steel, compared to an international industry average of six man hours per ton.
In June 1988, Chaparral made an initial public offering of 5.4 million shares. Securities analysts applauded Chaparral’s timing, noting that prices of stocks in the steel industry were climbing while the rest of the market remained sluggish. Proceeds were used to pay a $75 million debt owed to Texas Industries. With its ever-expanding product line, Chaparral sought to expand its market base as well. In 1989 it began marketing large structural beams to the booming Mexican construction industry and also began selling products in Japan. Sales leapt from $376 million in 1988 to $451 million the following year. That year the company also obtained financing to begin construction of a $60 million large section mill which would allow it to produce a 24-inch structural beam. The company’s flexible management policy was also beginning to pay off during this time; several Chaparral employees developed a modified caster which allowed Chaparral to produce large structural beams five times faster than traditional methods, and at a cost believed to be the lowest in the world.
The U.S. construction industry entered a lull in the early 1990s. Despite Chaparral’s attempt to offset its low domestic demand by doubling its overseas shipments, net income in 1990 plummeted over 50 percent to $24 million on sales of $404 million. The company continued to push for a greater share of the U.S. market and became the first domestic mill to introduce a new grade of wide-flange steel beams that met the specifications set by the construction industry. While the introduction allowed Chaparral to significantly undercut market prices, it also raised the ire of its competitors who accused Chaparral of “disrupting an industry-wide effort to introduce the product in an orderly manner,” when engineers and construction companies voiced their confusion about the strength of dual-certified beams.
By 1992 Chaparral was profitable again, with net income of $7 million on $416 million in sales. The following year, however, the company posted a $2 million loss due to an unusual combination of adverse market conditions. Both the domestic and overseas markets remained sluggish while prices of natural gas, scrap metal, and electrode reached an unprecedented high. In an effort to control costs, the company cut its on–site contract work force by 250. Sales that year grew 3.8 percent to $420.2 million, but the company was not able to turn a profit.
Another way Chaparral cut costs was to reduce shipping expenses by focusing on markets closer to its manufacturing operations. In December 1993, the company entered a marketing agreement with the Mexican steel company Altos Hornos de Mexico SA de CV (Ahmas). Under the agreement, Ahmas would serve as the sole representative for Chaparral’s small and mid-size steel beams in Mexico and Chaparral would serve as the exclusive U.S. agent for Ahmas’s wide-flange beams. The agreement placed Chaparral in a strong position to benefit from Mexico’s then-booming construction industry and also set the groundwork for a potential increase in sales once the North American Free Trade Agreement revoked the ten percent tariff on goods flowing between the United States and Mexico. Due to this and other cost-cutting measures, Chaparral fared considerably better in 1994, posting a net income of $11.9 million on record sales of $462 million.
In its first 20 years of production, Chaparral earned a reputation as one of the most efficient steel mills in the world. The steel market was a highly cyclical one, yet Chaparral survived its storms through a combination of innovative management and aggressive marketing. Its flexible management style combined with such cost-saving innovations as a $60,000 employeedeveloped machine that does a better job than a similar $250,000 machine, resulted in a highly efficient and motivated work force. In the mid-1990s Chaparral was a lean, efficient mill well poised to weather almost any downturn in the turbulent U.S. steel industry.
“American Steel: Resurrection,” The Economist, April 2, 1983, p. 75.
Dumaine, Brian, “Chaparral Steel: Unleash Workers and Cut Costs,”Fortune, May 18, 1992, p. 88.
Kantrow, Alan M., “Wide-Open Management at Chaparral Steel,”Harvard Business Review, May 1986, p. 96.