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Turnaround time

Dec 31, 2014 | 07:00 PM |


When Klaus Kleinfeld joined Alcoa Inc. in 2007, he couldn’t have foreseen that the company would soon be plunged into one of the most unset-
tling periods the aluminum industry had ever seen.

The company posted record revenue of $30.7 billion for 2007, while income and cash from operations also were at all-time highs. But by the end of 2008 the world had been hit by the worst financial crisis since the 1930s depression, and the price of aluminum more than halved from about $3,200 per tonne in late summer 2008 to $1,100 in January 2009.

"Every $100 (drop) meant $250 million less profits for us, so the bottom was falling out at record speed," Kleinfeld said. "I have been blessed to have had the opportunity to do many turnarounds in my life, but never had I seen the balance sheet erode that fast." Taking the necessary steps to curtail or close capacity was expensive and reduced Alcoa’s cash further.

Fast-forward to 2015 and Alcoa has been dramatically revamped since Kleinfeld took over as chief executive officer in May 2008, to the extent that it no longer calls itself an aluminum company.

Rebranded a lightweight multi-materials technology, engineering and manufacturing company, Alcoa has significantly boosted its share in growth markets like aerospace and automotive, using technology to develop next-generation alloys. It has simultaneously opted to cut costs in its traditional upstream aluminum business, sell capacity it no longer wants and curtail high-cost production lines.

It’s a process that Kleinfeld said began before the global economic downturn severely crimped demand from key consuming markets like automotive, aerospace and construction. "This is not a strategy borne out of need—this is a strategy borne out of opportunity," he said. "Alcoa’s transformation came more out of the opportunity of seeing what we could do with what we had, and which elements were missing but necessary to make the whole company swing."

When the downturn hit, Alcoa rapidly designed a turnaround program focused entirely on cash and assigning additional roles to each senior leader. "It worked. By the end of 2009 we were able to sign a contract in Saudi Arabia with Ma’aden (Saudi Arabian Mining Co.) to build the world’s lowest-cost aluminum facility," said Kleinfeld, who added the title of Alcoa chairman in 2010.

It was an impressively swift turnaround, particularly considering Kleinfeld’s expertise did not lie in metals.

Kleinfeld’s passion and enthusiasm had attracted the attention of former Alcoa chief executive Alain Belda after the pair worked together at the Partnership for New York City. Belda recruited Kleinfeld to the Alcoa board over a lunch at the Four Seasons, and approached him to be his eventual successor when Kleinfeld left a 21-year career at German engineering and technology services firm Siemens AG. The attraction of being an industrialist in an international environment—along with his family’s love of New York—sealed the deal.

Bremen, Germany-born Kleinfeld, who had been chief executive officer of Siemens before he joined Alcoa, initially was the U.S. metals and mining company’s president and chief operating officer. Kleinfeld may not have been down a mine at that point, but his education—a master’s degree in business administration from the University of Gottingen and a doctorate in strategic management from the University of Wurzburg—stood him in good stead at Alcoa. So too did his wealth of experience in multiple businesses, ranging from consumer goods, pharmaceuticals, telecommunication, information technology, industrial automation, power generation, medical equipment and transportation.

"Most of those businesses had unique challenges from innovation to manufacturing, marketing to logistics, software to hardware. This gives you a broad perspective for a magnitude of challenges. It trains your judgment and you learn to stay calm under fire," he said. "I have worked in
different countries and international environment from the earliest days of my career. I love working with people and building high-performance teams—that gives
me energy."

Energy and composure were just what were needed as Kleinfeld threw himself into the challenge of transforming Alcoa. "When I arrived at Alcoa in late 2007 I started immediately—because I didn’t know the businesses well—to undertake a strategic review," he said. "I was convinced by early 2008 that I had a wonderful hidden gem in the engineered products and solutions business. I was convinced there were very interesting pockets of greatness inside the rolling business in regards to differentiation, and I was also convinced I had a legacy issue on the upstream side."

The economic downturn slowed down efforts to change the company’s business, however. The share price of Alcoa, then the world’s largest aluminum producer, collapsed from a peak of $47 in July 2007 to below $5 in 2009. It has since recovered to around $17.

"We had the true north idea all the time but we had the slowdown hold us back and slow us down. With this gone, we are now coming to a speed that I envision to be the normal speed," Kleinfeld said.

That speed has stepped up a gear as a result of a solid boost in demand for aluminum sheet from the automotive sector, which consultant Ducker Worldwide LLC estimates will rise eleven-fold between 2012 and 2025 on a content-per-vehicle basis.

Supplying the automotive sector is not new for Alcoa: the company has always been at the forefront of technology for that industry. Alcoa partnered with Audi AG more than three decades ago to jointly develop the all-aluminum spaceframe body structure introduced on the first Audi A8, which made its commercial debut in the early 1990s. More recently, aluminum consumption in the automotive sector has been given a significant boost by Ford Motor Co., whose aluminum-intensive F-150 pickup truck started full-scale production in Dearborn, Mich., in November, with Alcoa a key supplier.

And the firm wowed the market in December when it unveiled its new Micromill technology that it says not only increases the formability and strength of aluminum alloys for automotive applications but reduces the time it takes to turn molten metal into coil to just 20 minutes vs. around 20 days by a traditional rolling mill.

"Ford has given us a wonderful opportunity at a very early point in time in the U.S., and we did the same thing 20 years ago or more with Audi to help it develop the first full aluminum car as a luxury vehicle. Micromill solidifies this process for the next century," Kleinfeld said.

The continuous Micromill process, which allows the mill to shift product mix and transition to different alloys without ever stopping a cast, has been successfully tested on a strategic development customer and others at a pilot plant in San Antonio. Kleinfeld said Alcoa is now going through the qualification process for the technology with original equipment manufacturers (OEMs), and could see approvals come as early as 2015.

"We said we had to get new aluminum materials invented and we wanted to break the sound barrier that has so far kept everyone from achieving that. To do this, we really needed to have a breakthrough in the manufacturing process," he said. "Everyone loves a car. I, too, want to have a future car that is safer, lighter, consumes less fuel, is cool, good-looking and stylish (Kleinfeld drives an all-aluminum Mercedes SL550), and that’s what we get to here. We are breaking the paradigm, and really moving from one paradigm to another."

The company is extremely confident in the future success of the product—"we wouldn’t have gone out there, shown this to a number of OEMs and successfully shipped them material for product trials if we didn’t have buy-in"—and says to "stay tuned" for future announcements.

Other OEMs have remained tight-lipped on the potential for increased use of aluminum, but it’s clear that the automotive industry is looking seriously at the idea.

Most recently, a proposed joint-venture between Japanese firms Kobe Steel Ltd. and Toyota Tsusho Corp. to produce automotive aluminum sheet in the United States marked the first step in the Toyota Camry’s four-year transition to the metal by 2018. The Camry has been the best-selling car in the United States for 11 of the past 12 years, according to Toyota’s website.

Kleinfeld said the new Micromill technology will allow its customers in the automotive sector to "redefine the boundaries of vehicle design," which is continuously innovating and changing. "Our philosophy is to have the customer at the table for every discussion we have in-house. Everything we do, we want to make sure our customer can win better in their marketplace through this," he said. "We can really shine best when we have deep partnerships with customers at a very early point in time, like what you see in the aerospace industry and recently in automotive with the F-150. That’s the continuation of this."

The extra demand has maxed out Alcoa’s existing production capacity for the automotive sector. "Our production facilities are fully booked, but the reason we have not put new capacity into the marketplace at this point in time is because we already have two automotive expansions—Davenport (Iowa), which is ramping up, and Tennessee, which comes on line in 2015," Kleinfeld said.

No further decision has been made on production capacity since the San Antonio pilot facility got up and running—"it’s honestly too early to say what we will do after this"—but Kleinfeld said the company is committed to creating cutting-edge, highly differentiated materials.

Kleinfeld said automotive is just one of several eggs in Alcoa’s basket, noting the growth in its aerospace business with the expansion at its Lafayette and LaPorte, Ind., and Hampton, Va., facilities, as well as the acquisition of Firth Rixson Ltd., a Sheffield, England-based manufacturer of aerospace jet engine components. These operations focus on products made from lightweight materials like aluminum-lithium alloys, nickel-based superalloys and titanium, tapping into a combination of technological knowledge and a deep customer understanding.

It’s a different story for the company’s traditional upstream business, however. The "fix, sell or close" program has seen Alcoa cut its high-cost smelting capacity by 28 percent since 2007, equivalent to 1.2 million tonnes. It also has sold its stake in the Jamaica Aluminum Co. (Jamalco) bauxite and alumina complex and is evaluating other projects, like its Suriname Aluminum Co. LLC (Suralco) joint venture in Paranam, Suriname.

Kleinfeld said that while the company is on track with the program, more adjustments are planned. "We’ve made extremely good progress but we said very clearly where we want to be," he said.

It’s not just curtailing and closing, however. Alcoa’s joint venture in Saudi Arabia is the world’s lowest-cost complex in smelting, rolling and refining, for instance, while the company successfully renegotiated the power contract at its three smelters in Quebec, securing their competitiveness for years to come. "That’s a lot of good stuff we’ve done, from closing to renegotiating to changing the setup," Kleinfeld said.

But don’t expect any expansions to Alcoa’s upstream business for the time being. "There may be a better time in the future, but I don’t think the (aluminum) pricing level is where it should be, so we’re not looking at expansions," Kleinfeld said.

The company’s philosophy is focused on securing maximum shareholder returns from its different businesses, he told AMM. "We look at every business—and I mean at a deeper level than just primary or rolling—and ask ourselves very consciously the question, is there a better owner of that business that can profitably grow this business in a better fashion? The measure for this is how our competitors in that space perform. That’s when we came out with our three-year targets, which we turned into one-year targets. We’ve been very transparent in communicating what we are doing in these businesses. Most people would conclude that we’ve added an enormous amount of value to the firm."

Part of that value comes also from the Alcoa Advantage, which has driven productivity improvements to the tune of $1 billion annually, almost half of it from procurement.

Kleinfeld said Alcoa benefits from increased competitiveness by leveraging five company-wide levers: technology innovation, customer relationships, purchasing power, operating systems and talent. It’s a clear intention that these pillars will continue to drive Alcoa’s philosophy in the future.

"Our company invented this industry and has constantly reshaped itself, and we will continue to use our creativity, our knowledge, our business sense to grow the aluminum industry, and be even more successful as a player in it," Kleinfeld told a 2008 conference call.

His message of reinvention and transformation remains just as relevant to the company’s strategy today. 



 

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