Kenneth C. Crowe
Kenneth Crowe

Fellowship Title:

The Japanese Turn Junk into Jobs in Auburn

Kenneth Crowe
October 25, 1975

Fellowship Year

(THE CONTEXT: Foreign investment in the United States is burgeoning, while public consciousness of this perennial phenomenon has been raised by the prospect of Middle Eastern oil money buying large pieces of American corporations and real estate. The traditional investors in the U.S. have been the Europeans, but in recent years, nouveau investors…the Japanese, the Arabs, the Iranians…have appeared on the American horizon. An understanding of the impact of foreign money and foreign ownership is obscured by a lack of knowledge. The following is an examination of a Japanese investment in the U.S.)

Everything that is attractive about foreign investment is present in the Japanese mini steel mill now under construction in Auburn, N.Y.: a new industry, new jobs, new capital, and the prospect of stimulating the American steel industry with competition and techniques designed to multiply productivity.

And besides all of the above, the Japanese were invited to Auburn by the local community which is hungry for jobs and industry with their implied promise of prosperity.

The Auburn Steel Co. Inc. is the first Japanese investment in steel production in the United States. The company is a joint venture of Ataka & Co., Japan’s ninth largest trading company, and Kyoei Steel Ltd., a medium-sized Japanese firm specializing in mini mills. The new mini mill, representing an estimated $36,500,000 investment, will eventually employ 250 workers and is designed to turnout 150,000 tons annually of concrete reinforcing bars and similar steel products for the construction industry. The raw material used in the process is scrap steel taken primarily from junked cars. A mini mill is an operation that produces less than 350,000 tons of steel a year. There are about 50 of them in the U.S.

Auburn Steel’s management is confident that its mill will outperform comparable American operations through the application of Japanese management and production techniques. “Generally speaking, the operational management (in the U.S.) is not so efficient,” a Japanese executive said.

The building of this “first” Japanese steel mill in a small, obscure city in the rolling hills of Central New York State, near Syracuse, is interpreted by some economists with expertise in Japanese multi-national business practices, as variously a symbol of corporate prestige for the companies involved and as a good will gesture from the Land of the Rising Sun.

The Source of Inspiration

The city’s energetic mayor, Paul Lattimore, who played a pivotal role in bringing the Japanese to Auburn, views the mill as the fulfillment of an idea that blossomed in his mind at 3 o’clock one cold winter’s morning five years ago. “The minute I wake up, I’m up,” Lattimore said. “This night I was reading in the Wall Street Journal about the world wide growth of mini mills. When I read it, I decided we ought to be able to build one here.”

The mayor is of the genre of politician forever scanning the horizons for a basic industry that could bring jobs, business and prosperity to his community. That propensity is magnified in Auburn by the city’s perennial high unemployment rate whose beginnings are traced by some back to 1948 when International Harvester Co. closed a farm machinery plant throwing 2,000 local residents out of work. In ensuing years, other major factories folded — as Auburn began suffering from what Associate Professor Yoshi Tsrumi of the Harvard Business School describes as “deindustrialization.”

Late in January, 1971, Lattimore told a reporter for the Auburn Citizen-Advertiser about his concept of the mini mill for Auburn. Through the Auburn Industrial Development Authority, which the mayor heads, the Battelle Memorial Institute was hired to conduct a feasibility study at a cost of $34,000. “I instructed Battelle to take the hard-nosed position of the investor,” Lattimore said, adding: “The conclusion was that it was feasible.” Lattimore arranged for the Commerce Department to distribute the Battelle study through commercial attaches in U.S. embassies overseas in the spring of 1972.

The mayor said that he decided against contacting U.S. steel companies to prevent them from bad-mouthing the project at the outset. “I had come to the conclusion that the domestic producers were not interested in this, and I was not going to let them kick it around,” Lattimore said. This is an interesting point since virtually all of the news stories about the Auburn mini mill report that the project was first offered to the domestic steelmakers who ignored it. Lattimore insisted that the proposal was sent only to foreign countries. “I wasn’t going to give them (domestic producers) the opportunity to cut the throat of this project,” he said.

Kyoei Steel Replies

Kyoei Steel of Osaka, Japan was the first company to reply to Lattimore — answering in a letter dated May 24, 1972. By coincidence, Lattimore already was preparing to travel to Japan to confer with an automobile manufacturer in hopes of attracting it to build in Auburn. He simply included a visit to Osaka in his itinerary. Back home in Auburn, Lattimore’s political opposition criticized the trip abroad as “junket” and a “scatterbrained” scheme. The skeptical attitude was supported by the failure of the mayor’s past efforts to deliver new industrial jobs to the city.

Lattimore liked what he saw in Osaka. “The Japanese mills were well-organized and orderly,” he said. “You could go into the Japanese mills in a cap and gown and come out as clean as you went in.” By mid-August, representatives from Ataka and Kyoei had visited Auburn giving Lattimore their commitment to build the mini mill.

Both Kyoei and Ataka are based in Osaka. While Kyoei had the technical background for the mini mill, Ataka as a trading company had the financial ties and the marketing experience needed for the venture. The closest organization in the American experience to the Japanese trading company is the conglomerate, although a trading company is both a conglomerate and more. As the title indicates, a trading company buys and sells goods, in Japan and around the world, usually specializing in specific products. Ataka’s specialty is metals.

A Vintage Year

By coincidence, 1972 was a vintage year for a community to be approaching the Japanese to welcome an investment in the U.S. Dr. Gary Saxonhouse, associate professor of economics at the University of Michigan, explained why. Saxonhouse said, “They (Ataka and Kyoei) decided to make this investment at a crisis in Japanese-U.S. relations. Japan had a tremendous balance of payments in its favor…There was a great sense in Japan that because of political overtones there was a chance that U.S. markets were going to be closed (to the Japanese). There was a tremendous fear in the U.S. that the Japanese were ten feet tall and Japanese workers were going to take over U.S. jobs.” Saxonhouse, who specializes in Japanese economics, said that no one took this more seriously than the top executives of Nippon Steel, who are active in promoting smooth economic relations between the two countries through various international businessmen’s groups.

Saxonhouse said that every August there are Cabinet level meetings between the U.S. and Japanese governments to discuss their relations. Prior to the governmental sessions, Japanese and American businessmen gather to discuss problems at their level. “At these meetings (in the summer of ’72), the American businessmen were calling for Japanese investments in this country,” Saxonhouse said to help even the balance of payments situation. Against that background, Saxonhouse said: “I think they viewed this plant in Auburn as a good will gesture by the Japanese steel industry.”

Nippon Steel is the largest steel company in the world, bigger even than U.S. Steel. While there is no evidence that Nippon Steel is participating in the Auburn Steel mini mill, the name of the giant steelmaker flows through the background of the deal. Both Ataka and Kyoei have close ties to Nippon Steel. Kyoei is supplied with steel billets for its Japanese mini mills by Nippon — and is in a joint venture with Nippon in the Sudan. Ataka at one time was Nippon’s sole agent in the U.S., and continues to market the company’s products here. When Mayor Lattimore visited Kyoei’s headquarters in Osaka in June, 1972, Ken Matsumoto, a young executive from Nippon Steel, was provided to serve as his interpreter. Matsumoto, 40, a graduate of Swarthmore College, moved about a year and a half ago from Nippon Steel to Kyoei to help manage Auburn Steel.

Prof. Tsrumi of Harvard, who concentrates on multi-national corporations, said that he researched the Nippon Steel relationship and was satisfied that the company doesn’t have an equity interest in Auburn Steel. “They (Nippon and Kyoei) have a supplier and contractor relationship…It is a cordial relationship,” Tsrumi said. The economist said that Kyoei being a medium-sized firm didn’t have the managerial skills needed for operating in the United States so Nippon Steel probably was approached with a request for Matsumoto’s services.

Tsrumi said of Ataka’s interest in the Auburn Steel venture: “It’s a fashionable thing (for a trading company) to have some manufacturing thing going in the U.S. or elsewhere. They are not viewing this investment (from the point of view of) a pure economic entity.” He added that having the “first” Japanese steel mill in the U.S. must have been attractive to Kyoei too.

The Political Plus

Tsrumi said that Auburn would be low on his list of places to locate a mini steel mill, noting that the city didn’t offer any unusually inviting incentives, while wages and taxes for the area are higher than the South’s. “The one advantage that Auburn had to offer,” Tsrumi said, “was that the city was ready to welcome any kind of an industry. That’s a political plus.”

A Japanese executive affiliated with the investors said that before Kyoei even heard of Auburn, the company in 1972 had been conducting feasibility studies with the thought of locating a mini mill in the Southwest or on the West Coast. “One day they received information from the American embassy’s commercial attache that Auburn was interested in a mini steel mill. That idea was buttressed by the Battelle Memorial Institute study,” the executive said resulting in the firm’s attention being focused on Auburn. Kyoei already had mini mill projects underway in Thailand, the Sudan, Brazil and Indonesia. Ataka is also involved in the Brazilian mini mill. He said Ataka was brought into the Auburn deal because “Kyoei wasn’t financially strong enough so they looked for a partner in the trading companies with financial ties.”

The Japanese have installed an American management team at Auburn Steel in keeping with a conscious effort to meld into the community with as little friction as possible. James J. Crawford, a vice president of Ataka America Inc. (Ataka’s U.S. subsidiary), said: “It’s an American operation. We didn’t want that image of the ugly American or the ugly Japanese.” Crawford, who works in New York City, is Auburn Steel’s only American director. Two of the mini mill’s Japanese directors, Matsumoto and Yoshihiro Yasuda., who is also the treasurer, work at Auburn watching the monetary operations for the parent companies. The only other Japanese on the premises is an engineer. Other technicians will be brought from Japan for brief periods to train the American workers, now numbering 109, in Japanese procedures.

Auburn Steel is a small beginning for the Japanese in the American steel scene. The mini mill’s annual capacity of 150,000 tons or so of reinforcing bars is insignificant measured against the domestic steel industry’s output of 5,135,000 tons of reinforcing bars in 1974, which was an atrocious year for the construction industry. But in this small beginning, the Japanese intend to set a pace of efficiency and production that will outperform American mini mills.

The Analogy of the Farmer

The Japanese executive used the analogy of how farmers in his homeland increase their yield to explain how the Japanese draw maximum results from what they have at hand. In Japan, the farmer increases the productivity of the land by taking out every weed on his limited number of acres and by watering intensely. The U.S. farmer in contrast can expand his production by expanding the number of acres planted — an option rarely open to the Japanese.

Turning specifically to steel, the Japanese executive said: “Let’s take heats (which is the melting of the scrap in the mill and refining it to a specified quality). The average number of heats in the U.S. is six to eight (per day). In Japan it is 12. In this country, the mini steel mill can survive on six to eight heats. In Japan you cannot.”

The executive said that Auburn Steel would achieve a production rate of 100 to 110 percent of capacity by shaving precious minutes from each step of the steel-making process. Among the time-saving devices he cited is the analysis of the quality of the steel in the furnace by human eye and judgement instead of by laboratory analysis. He said, too, that the Japanese also stress preventive maintenance.

“You can still run a company, still make a profit and still enjoy life — with waste,” the Japanese executive said. The implication was clear that the Japanese steelmakers, like their farmers, work harder and more carefully with their limited resources to out-produce the softer, wasteful Americans. “Generally speaking, the operational management (in the U.S.) is not so efficient,” he said.

Whether the Japanese attitudes towards production and team spirit can be instilled at Auburn Steel remains to be seen since the mill is still in the process of being completed. At present, scrap is being processed into billets, which at Auburn are steel bars 30 feet long, four inches square, weighing 1620 pounds. The billets are being stockpiled until Auburn’s rolling mill is ready to begin turning out reinforcing bars in mid-1976.

At the outset, the Auburn mini steel mill was expected to cost $18,000,000 with construction costs fully covered by a $20,500,000 bond issue floated by the Auburn Industrial Development Authority. Inflation and the redesign of the original plans have pushed the cost to an estimated $32,500,000. The Japanese investors are supplying the $12,000,000 difference between the bond issue and the actual cost. The parents also have provided the new company with $4-million in operating capital.

Crawford said that the mill will draw scrap steel from dealers in Pittsburgh, Rochester and Syracuse. Most of the scrap will come from junked automobiles — which is a positive factor in helping to clear the countryside of ugly wrecks through the recycling of an unnatural resource. The market for Auburn Steel’s reinforcing bars, to be sold under the name Austeel, will be construction projects in a 400-mile radius around Auburn reaching down to New York City and across populous New England. Bethlehem Steel is said to be Austeel’s major competitor for this market. The mill was conceived before the depression hit the construction industry. He said: “When we first went in (back in 1972) you could not get rebar (reinforcing bar). You couldn’t buy it for love or money. Now they’re giving it away.” Crawford is hopeful that the situation will change with the upswing in the economy.

The breakdown of ownership in Auburn Steel is Kyoei, 40 percent; Ataka & Co., 30 percent; and Ataka America, 30 percent. Crawford said Ataka’s 60 percent interest was split between the parent and its American subsidiary for tax reasons which, he said, were too complicated to explain.

Both Ataka and Kyoei are considering the possibility of building additional mini steel mills elsewhere in the U.S. A delegation from Stockton, Calif., visited Auburn recently to inspect the mini mill there. Stockton is one of the sites being considered by Kyoei — so Auburn Steel might well be just the beginning of a Japanese-American steel industry.

Some Conclusions:

In his testimony before the House Subcommittee on Foreign Economic Policy in early 1974, Peter M. Flanigan, then assistant to the President for International Economic Affairs, summed up the positive view of foreign investment: “…it creates jobs in particular sectors, tends to increase wages and productivity, brings new technology, provides a new source of competition and at least in the short run, has positive balance of payments effects.” The Japanese investment at Auburn, N.Y., fits neatly into the definition of a positive foreign investment in the United States.

Received in New York on October 24, 1975.

©1975 Kenneth C. Crowe 

Kenneth C. Crowe is an Alicia Patterson Foundation award winner on leave from Newsday. His fellowship subject is the investment and movement of foreign funds into the U.S., especially OPEC nations’ oil monies. This article may be published with credit to Mr. Crowe, Newsday, and the Alicia Patterson Foundation.

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