Nucor Corporation’s Decision on Entering the Flat Sheet Segment with CSP Technology

The Situation In 1986, flat sheet segment contained 52% of US total steel market1. Nucor Corporation, which is a steel minimill well-known for its leadership, efficient operation and well-structured compensation, is showing the interest in the flat sheet segment. At the same time, there are many new thin-slab casting technologies to help minimills enter the new market quickly and cost-efficiently.

One of them is from German firm, SMS Schloemann-Siemag, who has consistently introduced its unique technology, Compact Strip Production (CSP), to Nucor. As the chairman and chief executive officer (CEO) of Nucor, F. Kenneth Iverson has to make a decision on whether Nucor should go for CSP plant developed by SMS. The Issue The most salient issue than concerns Nucor and its management team right now is – What is the best strategy for Nucor to target the flat sheet segment?

Alternatives 1.

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Go for CSP plant: Obviously, the most important reason for Nucor to buy CSP technology is that Nucor could take advantage of the huge opportunity of entering flat-sheet market. As the pioneer of CSP application, Nucor would have 2 to 3 years head start to utilize its technology advantage in order to secure a desired market share. Consequently, CSP will help Nucor to achieve its long-term vision: to target the high end of flat-sheet market. The competition of the low end of flatsheet market is increasing due to the interest of many minimills and the low price products of overseas competitors.

Aiming at the high end segment is a wise strategy because the high end segment is expected to bring more profits and help Nucor to grow consistently in future. However, going for CSP plant option exposes many disadvantages as well. First of all, without expertise in flat-sheet products, Nucor will be not in a good position to compete fairly to expert players. Subsequently, Nucor will face difficulties in new plant operation and possibly be outpaced by integrated mills adopting CSP.

Secondly, the resource constraints will not favor CSP. Sharing resources between CSP and the joint venture with Yamato Kogyo might bring in a risk of not enough capital or even worse, bankruptcy. Last but not least, uncertainty of technology is another major concern. The possibility of new plant’s obsoleteness is there and Nucor clearly does not want to pay a huge sunk cost just because it is the pioneer.

Not to go for CSP plant

By not going for CSP, Nucor can apply wait-and-see strategy.

It allows Nucor more time to watchfully define the target market and wait for a matured and proven thin-slab casting technology. By that, Nucor will be able to avoid a huge sunk cost. Next, Nucor could utilize the resource on the joint venture with Yamato Kogyo. Hence, the risk of capital shortness will be eliminated. In the other hand, Nucor will let go a significant opportunity to capture some shares of flat-sheet market. It might not affect Nucor in short-term.

However, in the long-term, assuming many steel producers adopting successfully CSP or other thin-slab casting technologies, Nucor will be pushed to a bad position to compete over. Also, it will take even more time and resource for Nucor to catch up. Recommendation The first alternative is strongly recommended because of the following three reasons. First, even though money is an issue, it is not a big issue for Nucor. With $185 million in cash and short-term securities on hand together with the ability to issue corporate longterm bond2, Nucor is completed able to fund CSP with a strict financial management.

Secondly, CSP project is showing a good cashflow even in the case of CSP’s obsoleteness. Assuming that new CSP plant is operating at 100% capacity or 1 million ton per year, Nucor will get hold of 2. 76% of flat sheet market3, which is reasonable. From a simple projection4, new CSP plant is showing a positive cashflow with NPV = $141. 55 mil, IRR = 19%, and payback period = 4. 34 years. Thirdly, the argument that Nucor should not go to flat-sheet market because of its lacking experience is not convincing. Unless Nucor does not want to enter flat-sheet market, the earlier Nucor enter flat-sheet market, the faster it will learn and the better it will sustain in future.

SWOT analysis

• Strengths - Leadership Efficient operation Well-structured compensation Culture
• Weakness - Resource constraint No experience in flat sheet product
• Opportunities - Enter flat sheet market Pioneer in thin-slab casting technology
• Threats - Uncertainty about technology Competition, possibly be outpaced by integrated mills adopting CSP.

Porter five forces analysis

The threat of substitute products

• buyer propensity to substitute
• relative price performance of substitutes
• buyer switching costs
• perceived level of product differentiation

The threat of the entry of new competitors

• Existence of barriers to entry (patents, right, etc. )
• economies of product differences
• brand equity
• switching cost or sunk cost
• capital requirements
• access to distribution
• absolute cost advantages
• learning curve advantages
• expected retaliation by incumbents
• government policies.

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