The Roemer Report August 1986
Inside the Steel Shakeout
The steel industry and trucking have been key economic partners for most of this century. So, the recent filing for bankruptcy law protection by LTV Corp., the nation's second largest steelmaker, is bound to shake up many major outfits in our industry. What's happening in the American steel industry? Basically, all the domestic producers and their unions are being placed on a crash diet. Moreover, the evidence suggests some simply won't survive the ordeal. America's biggest steel companies have belatedly taken off their rose colored glasses and taken a cold look at their future. It's not a pretty picture. What they see is: (1) higher steel import levels, (2) slow growth in demand, (3) excess production capacity, and (4) an economy that no longer relies heavily on its product. The day of the big integrated steel company is just about over.
A HARD LOOK AT LABOR COSTS: LTV Corp. will probably get in bankruptcy what it could never gain before…relief from its labor costs. Nobody can look with any satisfaction on the beleaguered state of many blue collar households. However, the real picture can be distorted by lumping steelworkers and autoworkers in with all other blue collar workers in this country. Some of steel's key problems are not related to labor costs--old technology, over-capacity, inconsistent quality, etc. Still, there is no disputing the fact that its total labor costs are a big part of its problems. The statistics and realities that follow should resonate with trucking executives who have had to claw their way into today's deregulated environment.
THE NUMBERS: A Gary Shi11i ng is one of the best economists around. He correctly forecasted a coming era of disinflation and its economic impact long before others moved in to look at what is now reality. Shilling's research as reported in The Wall Street Journal, shows that compensation for production workers in the steel industry is a whopping 67% above the U.S. market rate for non-union workers with similar skills. In effect, steel companies are paying their workers two-thirds more than the rates that other American workers are willing to work for. Why? Because for years, says Shilling, domestic steel was essentially a cartel with practically no foreign competition. There should be some familiar points here for truckers. The fact is that this cartel mentality really dies hard.
Shilling points out that the premium that steelworkers were paid over market rates actually rose from 50% in 1972 to 67% in 1977 and remained at that level through last year. Incidentally, the auto industry pays 66% more than the so-called market rate. Today's reality is that there is simply no way to pass these costs through the system. During the past four years America's eight largest steel producers have lost a staggering $8 billion. Still, they seem unable to get their costs down to a level that insures profitability.
SOME IDEAS ON THE INSURANCE CRISIS: The U.S. Chamber of Commerce has reported that nearly 20% of its members were not able to renew their liability insurance last year. Another 40% reported cost increases ranging from 100% to 500%. Here's another item. The number of prod uct liability claims filed in federal district courts reportedly jumped nearly 760% from 1974 to 1985. Here's a five-point tort reform program advocated by Heritage Foundation attorney James Gattuso:
Tighten up the legal definition of fault in determining liability. A defendant's perceived wealth should not be a primary factor in determining liability. (2) Clean up the rules of joint and several liability. Those injured by their own negligence should not be able to nail a "deep pocket." (3) Put limits on non-economic damages. (4) Amend the tort laws so that punitive damages go to the court or another entity. If the pur pose is to punish rather than to compensate, this only makes sense. (5) Have the losing parties in lawsuits pay the legal fees of the winners. Mattuso believes that the cur rent crisis in tort law should essentially be handled at the state level.
THE ULTIMATE LAW OF DISTRIBUTION: Question: Name the primary factor behind the rapid emergence of Tennessee and the Carolinas as manufacturing meccas? Answer: Distribu tion costs. Quietly and with no fanfare, the population center of America has slowly shifted toward the Southwest. This is a strategic trend for trucking executives who are seeking to plan for the future. The Census Bureau defines the nation's population center as the point on an imaginary flat map of the U.S. where it would balance if equal weight were given to each U.S. resident. In 1980, the census put this point across the Mississippi for the first time, lodging it in DeSoto, Missouri. Last year it moved another 20 miles west-southwest of DeSoto. A little imagination suggests the freight market is following the same path.
A NATIONAL TRUCK DRIVER'S LICENSE? ATA is supporting such legislation. Part of the idea is to rein in some of the unsafe operators spawned by deregulation. Senator John Danforth of Missouri has already introduced legislation calling for such a national license. The idea is to replace the current state-by-state licensing process. The Department of Transportation is also working on a national licensing proposal along the lines of ATA's. It would bar truck drivers from having a driver's license from more than one state.
HOW CHANGEMAKERS CAN BUILD YOUR OUTFIT: Company innovators are first and foremost "changemakers." Whatever their particular mission, they are, by definition, part of a much broader mission: helping the mature company reach new levels of competitiveness. In other words, they challenge the status guo…and in so doing, they work for a new, more agile company culture. For example, changemakers redefine the concept of team work. Traditional team spirit--"pulling together for the good of the company"--focuses inside the firm. Changemaking teamwork looks outside the organization…at its output…at its role as a provider of goods and/or services. The company's market is not static. Thus the organization must constantly update its goals and refocus its teamwork. Inno vators make great "team creators." By sharing ownership of their ideas and gathering needed support, they build more than new products or services. They build internal enthusiasm and purpose, the foundations of a vital company culture.
KEEPING A LID ON OIL COSTS: Oil costs are a key part of both the trucking cost struc ture and its freight prospects. We thought you would be interested in this "big pic ture" assessment of oil costs. As of mid-July, world oil prices are down again... approaching the all-time lows we saw in early April. This is a better than 60% cut from the $28-a-barrel price tag last fall. And few signs point to a dramatic price revival. True, the oil giants have been "out cold" long enough to come to. All pro ducers--OPEC and non-OPEC--are clamoring for a cost solution. But most analysts feel a sudden price jump now would be premature, even in OPEC's anxious eyes. While it would pump up oil companies' cash flow and investors’ confidence, it would also refuel the competitive thunder of other energy sources…and OPEC isn't ready for the fight. Ana lysts predict that price fluxes hinge on the "Gulf gambit"--a power move by Kuwait and Saudi Arabia, OPEC's most powerful members. The two nations recently reversed their positions on price versus production. Formerly, they called for production cuts to stabilize high prices. Now they say lower prices will finance higher production levels. Oil experts insist that OPEC's recovery is stalled without a stamp of approval from Kuwait and Saudi Arabia. If that's true, count on this fall forecast: continued "cool and comfortable" oil prices.