Neor at a Crossvoats Paul Terdal PPMS25: Ostober 5, 1998av Tera ‘Nucor at a Crossroads Nneor ete Crossvends is cool vinimils, echieving consisteut profits and raintcining envisbe orks encounsered s seturated market. The entre stel industry is suffering fx cerbor of 1985, end Nucor faces 2s dilemma: while it has neon very succestfil with i's existing doetvty, thas significant overeap ‘otal 1S capacity alone ands at shout 133 million sons of srodhsion per oar, he masks ‘The market ia which Nucor h 79 alllion tons of szel in. 1986, caving over 69 millca tons of ied cepacty ccurenily operates, for Tow-end stmetral prodhc'ssoch os re-bar znd sire rod, is especilly saturated svi -pamerous sonal minis compering against exch other fora stagnant or swrnking ~aeket. Nncar's only ‘oppostanky for growth would seem tolbe to expand into roduetion of fat cheet metal ~ butshe ge ‘economies cf scale raquiced with current iecknclogy, end he very high excess capacity by the existing producers, sould se ly eption for continued growth eprearst0 1 liminate this pasitilty. Nucce’s ‘bec yoy risky favestent i now sacheclogy, aa uaproven thin-slub cast plant that would ~# enecessil ~ allow oto enter the market fr Fat sheet tel with low minim efit scale ane ow sarginal cost ‘of prosetion, inchs ease, ool examine she cost vantages ond nant fons’ ofthis option, anal ‘weigh she risks and advantages ef Scoring se frst eAopter ofthe naw rchnique, Cost Advantage: ‘Assuming thatthe tin-stub casting aechique works as expected, the cost acvnatage to Nucee willbe signfteam, Exhibs 124 end 128 cf he case present information on costs and profailty fr the production afhot end cold rolled chet as produced 2y the >roposed thin-snb canis and by the inengrated mils, which ove the cry cnet prodcers cf Fatsotled sel proces, Selected inform: inns been rspreduced inthe table belo for raference. Table 1: Consinstion Costs for Plt-Reiled Prodct Pinatst Typecrahsat: [Thine | vodernized — | 2s savinas inn Me ssh Mini orroled [1236 ‘Coubreited [£430 ‘Coyts inthis ble re in lars por ton ofeticpated chipmew Teval, Actual costs per ton of capeety exe lightly lover, ea it ie cssurned tha plants will cperte et 25% to 90% of fall capaci. ‘Table 2: Comparstive Operating Data for Mat oalled Poaduet Panis? “Thies tib Mini Modernind Tametenized inwegrstod Integrated a & ck ER. a Carper on Ssoa | 28309, S009 | s30009__| 703.00 Tovense gerion | $506 $0 | $390.50 sasis9 | $325.00 | £133.09 Profitesnmitsrion | $21.30] £0730] 85130 | $10350 | $231 50.00 Case, p22 *Case, p22 Cornpattive Sategies Faget ofStb sinioils tort ewer to cutting opty ee aie eee sndy tery venga nema of =msety sty uc meee and esis omg here es rofitcbilty, es presented inte 2. i seth eavings (rot-rolted or cold-rolled), Sines the omestic market coy 60% af grated ills are srevtveing 2 sill $225, 4 ‘The cast por ton of producing hot-rlted sheet in a thin. 5 savings aver the production cost in a modernized integrated rill and 2 25% savings aver the production cost in 2 ‘enmeemized integrsted mill, Thinslab minimills also eer sisnifieant cast savings when sradueing coll rolled sheet he cost 0° $283 per ton is 2 19% savings over the cost in x modernized integrated rill and a 239% savings over the cost fs en samestemized integrated rill ovrunataly, the quality of shest produced by minimils, which use scrap mata instead ef raw ion ov, is ls; this quality difference is reflected in these the quality roduced by the integrated arson et 1 he thin-slab infill and invograred ron. As noted in “able 2, Ld be $81.$0; cis is 269% rice, a Heted under revenue per tn. i into consideration and compare the neofit eant'bution mi hotrollad sheet produced in 2 ccahotelled sheot produced ina m0 asec ills, se rust ke stub minimal wo ined, integrsted rill and fully 226% bigher | For cold-rolled sect, the profit advantage remains ‘the expected profit Digher dha hs ‘shan che margin from an enmodemized integrated ri £5 strong; the expected profit from she minimill 9 S107, 50 per san is 1.9% 04 higher than that Som an uamodemized ‘sth che minimis but se reatce than that from 2 modernized intagratnd mill and 115 integrsted mil In summary the thinstab minim fers 2 signiftcant cost savings ever ict ms af ted mills, both in te cniry casts ana in forms oF operating costs andl prafitmnggin. This will zrovide Nucor witha significant ls which atready srovide Mat-rolted stool srodvets~ but twill competitive vantage aver the integrated ive avantage over Tong term, 25 will be very anny for competitors to céuplicste shia technetogy. oasibitiy: Aside fom the question of comp: hoses 9 proceed with construction ofa ALthe time of she ease (December 1985), ato Kogyo, a Japanese steelmaker, ive azvantage for Nucor sty inimill, 0 must considor the Gnancal Sibi ‘user has already committed itsalf to jolt venture vith ly $90 milli’, Given “he 3280 milion construction cost 7 he shin sta ‘ill esquire epproximate S104 095175 > Case, p11 ates thatthe Nucer il invest ion, shich fs $89.25 million or shout $90 Ta0ss Pages atsrol Tera Nucor at Crosseaads ini 2x wall as che expected sertp costs “or both veatres, Nucor would have ‘o spent $410 -ilion cover dee $ tn 1926, Nucor inetd $185 miltioa in ash, assuming all cash were committed tothe new peaject, Nucce woutd have 19 borrow $225 milion to finance the sroject. Since low (G42 illicn), the total long term debt it sndertak this project would roach $267 niltsn, This 1% of Nucoe's markat capitalization 915796 million, avery reazonable dabt load that Nucor skould have 20 ciffcaly Gnarcing. veor's debt was relsvely mount ‘Toesnluste this sroject more eamglotly, we need to consider the net srezent value of he profet, fa stvia enlightened sesumptions, aged on the data in tho ene: ccloulating thi (©The filial favestment willbe $310 milion, ever three years; of thi S75 million wil be spent in 1587, {$590 milion in 1958, end $45 millica in 1989. These figures are estimsred from the da on page 14 is nacessary to make ‘cr both eapitel projects, and by the note shat shese expenstinues sill nclude both she $220 million for (6 plant and $30 million oa stat up-osts, The $30 milion ‘a working captl is needed to Keep the stant operational but is not cons:med 's operations, and so'has been neglected. ‘© Thecash ow, once cpecsiora, ill be $78 million por year. Exhibit 12 cn page 22 ofthe snse ntiipetes shipment cf $00,000 tons of hot-olled sheet and 250,000 tons of cold rolled sheet per year; 17.50, respec is ouggests 578 million per year with profit contribution par fon 2781.50 end fi, © Thoccah flaw Degins in 1990, sree years afer project intistion. The case notes fen che riypicl maize ef this at fe sakes about 18 months to bid » typical miniill fom grouratberaing to stetyp. Ci project, 2 ail essume 26 months. © Thecash flow will continue nachanged for 10 years, znd will shen stop. The case notes shat nies exe typically fil or cn enti’pated 10 year lifespan (page ), and suggests that he new teehnalegy might bocorse obsolete fn 10-12 years. ‘There risk to this assumption, ashe ease notes that competitors wil Lkoly build similar chins cinilsithia hnoe years and that his cout raise the price of srmp fiom about £100 por om rechge profits from 578 million >er yea io about $4 milion ser vex, T ve discount rate fs 12%, The case notes thatthe 1986 A-rted corporate Sond rate is 9.4175 (eage 22), and tat is probably che rate that Nuccr ill pay to service its deb, sines project Site is highas S140 per ton, Given sendy volzmes, this vould ually to cause onftstont camage t> Nucor to fore it iat baakriptsy. However, his investment Ss somewhat risky and so the effective discount seus 2° cused to aecom for Nucor’s own concerns tout project allure, The 12% figure vas chosen to reflect this cde ish, althosgh i is somewhat acbitary eral could be emiied more closet. (C2yen those easumpnions, we can Covelep « net zroseat value equation of the Porm: ‘Case, pI notes $100 milion in 1987, 5250 milla in 1938, yn $40 mien fn 1989 for SO milton total ever hres yews if purses both projects simultsnecusly The Sratagies Toes Pages orsPal Terdal Nucor st Cras h Cos NPY = fgg Hee +S, Ver ee Cae Clare lay Inserting the Figures from the assumptions shove, have (al fignes are in millions Zoos}: 5819045, $78 S78 78 Mere Se uae ah ay 2) NPV~ S115 million, {Ho the net prevent valuo.6°shis neat is $115 million ~= very respecte ele the assumptions listed shove, [nthe next ssction, we will enalyis the potential risks and bonsfts more ling roti, se losaly end qolittvely. Analysis ena Risks: ‘The tochnological risk inhereat inthis project is very signifcant, Resesrchers have attempted similar ‘echnelagy, withoct soesess, since the midsninetecnth century. As of December 1928, when Nucce sonst make e decision, the tshnology is been oiled aly on a smal ele in controlled Isborstary ven s0,enly 99% ofthe casts are environment, producing just 12 tans st 2 time fora rere seven mint svecessful filly 10% experience "breskout,” requiring: production grade system must be zne tn operate 24 hours e day witha success rate cfs least 9594, There nificant dowstime. To 8 veces fu, 2 is also strong possibilty hat the tchrology sill prove ose! raking te investrent worthless. Nucor has been tasting rival technology, she Hazelewt easter, which te within 10-12 years, or sooner, could cancsivubly prove suocessfl in the none term frre 2s el ‘There are also signiffesnt compesitive risks, Tile Nucor sill hve = vo to three year head tat chooses to adggt the thinsta technology, i-vill not own the rights to this techy end obligated fo share she rests with is competitors, even “he point of zllowing them to tou ad spect the rev plant end Ica from Nuser's experiences, he method is sveceseil at Nucor, copied seccessflly through oat he indhstry. [Naser rast clso consior he financial risks, The compery -*ould ‘erm deb (a toil dab fond of $257 million, inching existing debt end the joint venture) shan it bs ever taken enbbafore, "hile en investment 23310 millon in an snproven eschaclegy might ‘considerate comcera, ths risks is mitigated somershat hy the fact cha the rew plant will ave value even if ics, caly £90 millioa fs forthe new technique; ifthe part Sil, king on eansienstly more long ll bee enue for ie ails: of is pease a ile converted into traditional min-mill, This $90 million rsk could be mitigsted farther if Nusornegeriaes pense mete contingent payment plan with the pipplier whereby Nucce pays significant deposit np Font and pays the ttalanes only fhe technology fe croven fo be soceessfil, * Casa, p12 ‘Competitive Suatagies ToIns/08 Pageaaes