Investment

If operations determined the pace at which Nucor's productivity improved, investment defined the potential for such improvement. Nucor had invested steadily and heavily in upgrading its capacity, old as well as new: its Darlington plant, for example, had been thoroughly modernized three times since it was built in 1969. Since the early 1970s, Nucor had built or rebuilt at least one steelmaking or fabricating facility each year. Over that period, its investment levels averaged 2.9 times its depreciation charges, although that ratio had declined a bit since the early 1980s. The three largest integrated firms, USX, LTV and Bethlehem, averaged a ratio of 1.6 over the same period.

Nucor's heavy investment in facilities reflected its drive to embody technological advances. The company made a serious effort to monitor technological developments worldwide, particularly in Europe and, to a lesser extent, Japan: a metallurgist who reported directly to Iverson was responsible for scanning the scientific and engineering communities for new steel technologies. Nucor's own research was rather applied, and was conducted on the factory floor. While the Vulcraft division historically spent about $1 million annually on R& D, Nucor Steel had no dedicated R& D budget. Instead, it regarded capital equipment suppliers as its R& D labs, and treated the costs incurred while starting up a new plant or new equipment as its own process R& D investments.

Capital budgeting at Nucor was an informal, iterative process. Ideas for new investments were first evaluated at the organizational level at which they surfaced. The three senior officers, Iverscn, Aycock and Siegel, had to approve all capital expenditures greater than $40, 000 at Nucor's steel mills and $10, 000 at its fabrication facilities. Their level of involvement in the approval process depended, however, on the size and the radicality of the commitment being contemplated. Relatively small incremental projects were routinely approved if they appeared to satisfy the criteria described below. But to evaluate a commitment such as the thin-slab caster being considered in 1986, the three senior officers formed a task force to which other Nucor personnel were deputed as necessary.

According to CFO Siegel, " We have only a few decision criteria that- we use to reject capital projects. Will it perform technically as advertised? Will we be able to get the return on assets [ROA] that the vendor has advertised? And do previous capital expenditures constrain our ability to be 100% committed to the project under evaluation? " Most rejections were based on the first two criteria. The precise financial criteria applied tended to vary across projects. New plants were supposed to achieve a 25% ROA within five years of start-up, and projections about them were compared, whenever possible, to historical data on other plants. Investments in equipment at existing plants were evaluated on the basis of payback periods: longer payback schedules were allowed for investments that increased capacity than for those that reduced costs. The attention paid to previous capital commitments in making new ones reflected Nucor's policies of restricting its debt-to-capital ratio to less than 30% and not issuing new stock.

Nucor typically designed new plants as they were being built, with the intention of expanding them and in light of its informal rule of maintaining a ceiling of 500 employees per plant. New plants were located in rural areas with access to at least two railroads, low electricity rates and plentiful, water. Instead of relying on a turnkey contractor, as was common in the steel industry, Nucor acted as its own construction manager. Contracting with individual suppliers tended to be quick and informal and typically involved fixed-price contracts. Exceptions were occasionally made for new, untried equipment: Nucor then tried to build in performance incentives for its suppliers. '

Each construction project was managed by a core group of experienced engineers and operators drawn from other Nucor operations. A billboard at the entrance of each construction site proclaimed the number of days left until scheduled start-up. The farmers, clerks, students, and laborers hired locally to build plants were later retained to run them. These " veterans" might account for as much as 80% of each plant's eventual work force. During start-up, the core management grtfup worked side-by-side with them to forge close workplace relations and an intimate understanding of each plant's physical character. In the past, Nucor had been able to sta'rt up its steel mills within 18 months of groundbreaking, well below the norms for other minimills of comparable capacity.

Nucor had not built any new steel mills since 1981 but had agreed earlier in 1986 to form a 51%/49% joint venture with Yamato Kogyo, a Japanese steelmaker, to produce wide-flange beams, a heavy structural product, at a new plant at Blytheville, Arkansas. The Blytheville mill was to have ~ 650, 000 tons of capacity, equal to about one-fifth of the U.S. market for wide-flange beams, and was projected to cost $175 million. Nucor would contribute its plant construction and management skills and Yamato Kogyo its " beam blank" technology, which permitted steel to be cast much closer to the final shape. Nucor hoped that this venture, which it did not consider very risky, would help establish a strong foothold at the high-end of the construction market.

Nevertheless, Nucor-Yamato only targeted another non-flat niche, and one that it would share with another minimill, Chaparral, and perhaps several others. Iverson thought that a major expansion of Nucor's steelmaking capacity would require it to enter the flat sheet segment. Several barriers had prevented minimills from penetrating this segment in the past.. Economies of scale pushed optimal capacity for a " greenfield" plant as high as three million tons per year and investment costs toward the $2 billion mark. High quality steel from Japan and Canada and cheap imports from newly industrializing countries were competitive threats at the high and low ends of this segment respectively, as was the 60% domestic capacity utilization rate. Given these constraints, Iverson was unwilling to enter the flat sheet segment with conventional steelmaking technology. Thin-slab casting looked, however, as if it might permit efficient entry on a much smaller scale.

Thin-Slab Casting '

The idea of casting molten steel directly into a thin, continuous ribbon can be traced back to Sir Henry Bessemer, who built and patented a machine for that purpose in 1857. But when Bessemer attempted to operate his machine, it was bedeviled by " breakouts": partially solidified strands of steel would rupture and molten metal at nearly 3, 000° F would gush through the machinery, causing fires and, after cooling, welding it into a solid mass of steel. Breakouts were particularly likely to afflict attempts to cast steel in thin shapes because such shapes had a higher ratio of surface area to volume, increasing friction between the casting mold and the steel poured through it. As a result, for another century, molten steel continued to be batch-cast into ingots, typically about two feet thick, that were cooled and stored before being reheated and rolled into thinner shapes.

Continuous casting, which began to be commercialized in the late 1950s, marked an important step toward the goal Bessemer had set because it permitted molten steel to be cast into slabs that were only eight to ten inches thick. The efficiency of this process continued to be constrained, however, by the need to reheat slabs, the multiple rolling stands required to crush them hundredfold into flat sheet one-tenth of an inch thick, and the fact that slabs could only be processed one by one. Steelmakers continued, therefore, to hunt for better casting technologies. About 30 research programs on directly casting steel into sheet were being pursued around the world in 1986, but none were projected to yield a commercially viable process before the turn of the century. This projection fueled interest in the idea of casting thin slabs two or fewer inches thick to shrink the production chain from liquid steel to flat sheet by reducing reheating and rolling costs compared to conventional continuous casting.

The Hazelett caster was regarded as the most promising approach to thin-slab casting in the early 1980s, and was being tested at five pilot plants in 1986. Its design dated back to the 1950s and involved pouring molten steel between parallel water-cooled conveyor belts spaced one inch apart. The skin of the molten steel was supposed to solidify upon contact with the belts, which would then peel away from it, yielding a slab one inch thick. This twin-belt design assumed that high casting speeds, required for thin-slab casting to process tonnages comparable to conventional casting, could not be achieved with conventional fixed molds. But in trying to solve the problem of casting speed, it created new ones: the conveyor belts were very expensive and needed to be changed frequently, resulting in considerable down-time; steel poured between the belts was subject to turbulence, which marred product quality or, even worse, led to breakouts; and the large number of moving parts complicated breakout clean-ups and increased maintenance costs.

While experiments with Hazelett casters were yielding mixed results, SMS of West Germany, a leading designer of conventional casting and rolling equipment, began to promote another thin-slab casting technology that it called Compact Strip Production (CSP). CSP was less ambitious than Hazelett casting: casting slabs that were two inches thick based on just one major departure from conventional casting – the use of a lens-shaped rather than a rectangular mold. SMS set up a stationary device in 1984 to test the new mold and, encouraged by the results, spent $7 million in 1985 to build a pilot plant. Armed with data on the performance of this pilot operation, which was reported to experience breakouts only one out of every 10 casts, SMS began to promote CSP to as many steelmakers as possible. More than 100 companies sent engineers or executives to observe SMS's pilot thin-slab caster in operation. None of them, however, had yet contracted with SMS to commercialize CSP.

SMS's preliminary design for a commercial CSP installation envisaged a plant with 800, 000-1 million tons of flat-rolling capacity at a capital cost of about $300-$400 per ton. Some of the predicted savings relative to conventional casting pertained to the casting operation, and some were based on the assumption that thin slabs would require only four rolling stands to be crushed into flat sheet instead of the 7-10 that were the norm for thicker slabs at integrated mills (see Exhibit 10). CSP was also supposed to lead to labor and energy savings and higher yields that would reduce operating costs below those of U.S. integrated mills, to the same level as state-of-the-art German ones (see Exhibit 11).

These were, of course, just projections. Because of space constraints, SMS's pilot thin-slab casting plant ran only seven minutes at a time and produced only 12 tons per charge. It did not, as a result, offer much of a basis for predicting the wear and tear that would result from continuous operation or how that might affect product quality. Continuous operation was important because the casting and rolling stages had to be coupled to handle thin slabs more than 100 feet long. Since a stoppage at any point could shut down the entire production process, its components had to operate with more than 96% reliability to be cost-effective. In addition the cost effectiveness of the CSP design was sensitive to scrap prices.