Bethlehem Steel Corporation (1857-2003)

RIP

http://money.cnn.com/magazines/fortune/fortune_archive/2004/04/05/366339/index.htm

The Sinking Of Bethlehem Steel A hundred years ago one of the 500's legendary names
was born. Its decline and ultimate death took nearly half that long. A FORTUNE autopsy.

By Carol J. Loomis REPORTER ASSOCIATES Patricia Neering, Christopher Tkaczyk

April 5, 2004

(FORTUNE Magazine) If you call the main number of Bethlehem Steel, and cool your
mind while the polite, automated female voice on the other end tells you what to do if
you know the four-digit extension of the person you want, and how to key in a name if
you don't, and how to reach billing and accounts payable, you will finally hear this
chilling statement: "We have no one to answer questions."

That is what Bethlehem Steel has come to--this builder of 1,127 ships during World War
II and of the Golden Gate Bridge, this supplier of metal for every bridge and tunnel that
takes you from New Jersey into Manhattan, and for much of the skyline you see when
you get there, this munitions maker once called the Krupp of America, this mighty
symbol of industrial power through great sweeps of the 20th century. This pillar, in fact,
of the FORTUNE 500 when the list was begun: Bethlehem was then very near its top,
peaking at No. 8 in 1955.

And then it waned, dropping inexorably in rank, as U.S. industry in general grew and
Bethlehem stalled or only sputtered upward. Later, disaster arrived: 15 years of losses,
the first wiping out 1977, the others papering long stretches in the 1980s and 1990s. Even
then, the losses understated reality, because for years the company's books--in line with
practices throughout America--lowballed the costs of pensions and almost totally ignored
bountiful health-care promises that the company was making to retirees.

Bethlehem meanwhile kept falling on the 500 list, descending in 2002 to 440. But it was
by then in bankruptcy, ignominious, once-unimaginable bankruptcy. Next the finale: Last
year Bethlehem's assets--mainly six plants to be kept running--were bought by Wilbur
Ross's International Steel Group. With that, the steel artist formerly known as Bethlehem
disappeared into the land of no one to answer questions.

Had Bethlehem lived, it would have turned 100 this year. People die of old age;
companies normally don't. So this famous corporate death calls for an autopsy--a close
inspection of the afflictions that laid Bethlehem out on a steel slab. Was the demise of
this once proud and arrogant company inevitable, the unhappy result of its being in the
wrong industry at the wrong time, amid unremitting pressures on prices and unrelenting
increases in costs? Or could expert and aggressive management, not wedded to history,
have seen the handwriting on the wall and saved this company?
In this exercise of complete hindsight, one piece of autopsy evidence is a crowded
mortuary: More than 30 U.S. steel companies have gone bankrupt in the past few years.
But that limp lineup can't exactly explain away Bethlehem, because over the years it
wasn't just any steel company. It was Little Steel, a close second to Big Steel--variously
known as U.S. Steel (No. 3 on the first 500 list), USX, and to its competitors, always,
"the Corporation."

Mid-century, the two big rivals operated in a world where steel was king and where U.S.
Presidents tracked its every move. "As steel goes, so goes the nation," people said. On
Wall Street, investors even consulted an index of blast-furnace activity to get a line on
what the stock market might do.

Oh, well, that was another era. But if we are chronicling who died, Big Steel didn't. It had
its own diseases, including eight years of losses (one of them in 2003). But it diversified
big in the early 1980s by buying Marathon Oil, closed plants with relative judiciousness,
ran its finances conservatively--and somehow survived. Today, separated from Marathon
and back to its core business, U.S. Steel is much smaller but still No. 209 on the 500 list.

Furthermore, if proof is needed that a steel company could positively thrive in the 50
years of the 500, there's Nucor to examine. In 1954 it was a nonentity called Reo Motors,
soon to be renamed Nuclear Corp. of America and then Nucor. The company, which was
never unionized, swung into making steel in electric furnaces--"mini-mills" became the
tag--and began to prosper. This year Nucor is No. 297 on the 500, and a moneymaker, as
it has been all of its 25 years on the list.

Autopsies of corporations may be harder to do than autopsies of people, because typically

there is a conspiracy of causes, rather than a single malady, that fells a company.
Bethlehem fits that mold. Its past 50 years were harshly invaded by competition from
foreign steel and the mini-mills; by substitute materials, such as aluminum and
prestressed concrete; and by onerous environmental costs.

But those are the usual suspects, and they won't get much attention here. The truth is that
Bethlehem did itself in. It was not fit enough to deal with the new competition nor
perceptive enough to sense its need for radical treatment.

It could not have happened to a more distinctive company. In its history, Bethlehem had
11 CEOs: Charles Michael Schwab, who founded the company in 1904 (and who is not
related to the stockbroker of the same first and last names); Eugene Gifford Grace; and
nine who followed Grace. Charlie Schwab, a charming bon vivant and risk taker, was a
legend in the steel business, and Grace became one as well. Tall, autocratic, yet hard
working, Grace took over steel operations for Schwab in 1913 and, amazingly, was still
running Bethlehem in the mid-1950s, when FORTUNE began the 500. It was Grace who
orchestrated Bethlehem's wartime heroics. Entering 1943, he promised President
Roosevelt a ship a day--and then actually beat that mark by 15 ships.
Grace's company was the heart, soul, and grime of the small city of Bethlehem, Pa.
(population today: about 72,000), from which it never moved. In this epitome of a
company town, whole families often worked for "the Steel," as it was called. Nepotism
was common among Bethlehem's legions of white-collar folks as well.

Bethlehem was also famously into golf, habitually building courses near all its plants,
even in Liberia when it undertook a joint venture there. Grace was a champion at golf,
and so were many other Bethlehem executives. That may not have been accident: A 1941
FORTUNE story about Bethlehem made the point that in recruiting college graduates it
wanted not only brains but also all-around excellence, including "a good physique."

The new hires were then sent through Bethlehem's celebrated "loop course" (named for a
round, or "loop," of golf), in which they were exposed to each part of the business before
taking on a permanent assignment. Alfred T. "Moose" Copeland, an ebullient 78-year-old
New Yorker who sold fabricated steel for Bethlehem, remembers the thrill of getting into
its loop course when he graduated from Princeton in 1949: "There wasn't any job I could
have acquired," he says, "that would have had more prestige."

The company even polished its image by employing attractive young women to lead
plant tours. These so-called escorts also did their part each workday morning by waiting
for a lookout on the plant roof to signal that Grace's motorcade was approaching. An
escort then made sure that the boss had an elevator to himself as he rode imperially to the
executive floor.

It is easy to mock the business style of that day and easy to say that it was abysmally
matched to the intense problems about to bear down on Bethlehem. But Grace's business
skill raises the question of whether he, had his career spanned a slightly later period,
could have bested the challenges. The probable answer is no: He ardently believed in
expansion, and the time to get bigger in steel was passing fast. His coping ability in any
case did not get tested, because he suffered a stroke in 1957 and largely turned operations
over to Bethlehem's president, Arthur Homer.

Grace, then over 80, continued for a little while to run meetings of Bethlehem's big
board, 21 men strong. These meetings were sometimes bizarre, according to Bethlehem
Steelmaker, an autobiography written many years later by Edmund Martin, who
succeeded Homer as CEO. Grace, reported Martin, would on occasion nod off to sleep.
The world then stopped: "Sometimes an hour would go by," wrote Martin. "We didn't
leave. We didn't continue with whatever business was being discussed. We just waited in
silence until he woke up and resumed the meeting as if nothing had happened."

Why, you ask, would an outside director put up with this madness? There were no
outside directors then, nor had there been for many years. It took Ed Martin to bring in a
few outsiders, in 1965. But only in the early 1980s did a new director, "Reg" Jones of
General Electric, lead a reformation in which outsiders gained the majority of the board.
Well before that revamping, Art Homer did something more drastic: He lowered
executive pay. Schwab had believed heartily in incentive compensation, and Bethlehem's
executives proceeded to become famous for raking it in. Grace was for a while the best-
paid executive in the U.S., making, for example, $1,624,000 in 1929. That was a mind-
boggling figure for the time and even in today's high-comp world would be pay--
expressed in current dollars of $17.5 million--that most CEOs would consider
respectable. By the 1950s, Grace had conferred with himself and decided to earn much
less. But in 1956 he was again the highest-paid executive, with earnings just over
$700,000. Other Bethlehem executives scored too: In Business Week's survey of pay for
1957, nine out of the top 12 earners were from Bethlehem.

A 1959 shareholder suit then rocked this luxury yacht, noting piercingly that this pay had
been set by a board including only insiders. CEO Homer buckled, moving to a less-
rewarding formula for determining bonuses, and Bethlehem's crew went south on the pay
list.

That is also a pretty good description of what this whole prideful company, run by these
richly compensated men, was doing at the time. A strong case can be made that in the
very early years of FORTUNE's 500--say, the period from 1955 through 1965--
Bethlehem's eventual fate was sealed. Some books about steel describe its glory days as
extending into the 1960s, but the industry's financial results refute that. Instead, a bitter
war between revenues and costs had developed by the '60s, and the biggest victim it left
on the battlefield was that critical measure of profitability: return on equity.

Not that you could possibly have known its importance by what Bethlehem was telling its
shareholders. For this article, this writer browsed through the last 50 years of Bethlehem's
annual reports and for a long spell searched in vain for ROE statistics or even an
acknowledgment that Bethlehem knew what ROE was. Finally, in the 1971 report,
Stewart Cort, a sales and marketing type who succeeded Martin as CEO, spoke in his
chairman's letter of a "difficult" year and said, "Our net income was far from satisfactory,
representing a return of only 7.1% on stockholders' equity."

The fact is that for 16 years, beginning in 1958, Bethlehem never came close to the 500's
ROE, which for those years averaged 11.2%. Bethlehem consistently did no better than a
single-digit return and sank down to 4.6% one year. Overall, its ROE averaged a mere
7.5%, almost four percentage points less than that of the 500. That's a huge inferiority,
signaling a company that was in deep trouble. Grown-up businesses generating ROEs
like that are the kind that investors want to run from, as fast as possible.

That point is made in a story often told by Jack Welch, who in his General Electric career
got a call from a Pan Am executive asking whether GE might be interested in buying Pan
Am's hotel subsidiary, Intercontinental. Welch, who knew bad from good when he saw it,
said, "You're selling the wrong business. You should be selling the airline."

"We can't," said the Pan Am executive. "That's our business."

Confronted with what was happening to its business those many years ago, Bethlehem
should have been tirelessly trying to unload its steel plants on some buyer. But of course
that wasn't going to happen, wasn't even going to be thought about, probably couldn't
have been carried out if it was thought about. Today Walter Williams, 75, one of four
former Bethlehem CEOs FORTUNE interviewed (he was No. 6 in the nine who followed
Grace), says ruefully that the course of events at the company, and throughout most of
the country's integrated steel industry, seems to have been almost inevitable: "We were
all stuck with our basic steelmaking--just too much to write off and too much to shut
down."

Unable to cope with that calamity in any way, Bethlehem's bosses just dug their hole
deeper, all the while contending with a set of impossible economics. The single piece of
good news for the company as it burrowed was a gain in productivity--that is, reductions
in the man-hours required to make a ton of steel. But this progress was impeded by both
anachronistic work rules that the United Steelworkers of America defended tenaciously
and capital expenditure needs that exceeded what Bethlehem could afford. Meanwhile the
company's per-head employment costs rose irrepressibly, not only because of the
steelworkers' tough demands but also because Bethlehem regularly extended whatever
benefits labor won to its white-collar battalions. The last huge burden for both company
and industry was extreme softness in prices because of the new competition. (Right now,
steel prices are very strong; had they moved up earlier, Bethlehem's life might have been
prolonged, but not likely saved.)

Foreign steel, of course, enraged Bethlehem and the integrated industry, which believed it
to be unfairly priced. The mini-mills initially bothered the industry much less, because it
saw the new ventures as little more than annoying gnats, buzzing around making
inconsequential niche products like reinforcing bars. But these producers then moved up
the food chain, first beginning to make plate and then structural products. That hit
Bethlehem where it literally lived--in Bethlehem, Pa., site of the company's big but
antiquated structural steel mill. This plant, which was for years sentimentally kept on life
support, was finally and mournfully closed in 1995.

A few statistics show the brutality of steel's overall economics. A Purchasing magazine
index of hot-rolled steel sheet prices shows them rising in the 1954--2003 period by a
dismal 220%. In contrast, the consumer price index increased by 540%. And steel wages?
According to the American Iron & Steel Institute, the average wage was up by more than
900%.

Knowing these disparities might make Schwab and Grace turn over in their graves,
though Grace did get an early taste of union power. He was forced in 1941 to let the
steelworkers union into the company. Thereafter, Bethlehem, typically joining in
industrywide bargaining, grimly settled into triennial negotiations in which the union
worked unbendingly at keeping the maximum number of its members employed at the
highest possible pay. That vault in wages shows how well the union succeeded. Worse--
this is an industry in which that word is persistently relevant--the industry let itself be
locked into work rules and narrow job descriptions that protected workers whom
automation and efficiency should have made superfluous.

The point is driven home stunningly by the contract changes that International Steel
Group wrung from the steelworkers for those six Bethlehem plants it began operating in
2003. ISG's CEO, Wilbur Ross, who characterizes Bethlehem's contract as "terrible," got
the union to allow the cutting of job categories in his plants from 32 to five! As just one
example, there is no longer a job category called electrician, which means that when a
light bulb needs changing, a machine operator doesn't have to call such a specialist in
(perhaps from the far reaches of a plant) but can screw in a new bulb himself.

The ultimate error was the steel industry's approach to pension and health benefits. The
history here is revealing. From World War II on, wage and price controls intermittently
slowed wage increases. Written into the contracts as offsets, though, were a long string of
benefit improvements. These took up their role as company killers.

Management, however, originally viewed its benefit promises as benign compared to

wage increases calling for immediate cash. Health costs were modest for many decades
and, besides, were normally pay-as-you-go. That is, few companies during this era
bothered to fund health benefits in advance by putting money into a trust for employees.
Until the 1990s, when new accounting rules came in, pay-as-you-go also meant that
companies were not accruing expenses for what they would eventually have to pay
retirees. Corporations were thus left oblivious to true costs and real earnings.

Pension plans, in contrast to health and insurance plans, were normally funded and
eventually had to be. But before that requirement took hold, companies had wide latitude
as to how much, if anything, they would contribute in any given year. Consequently, a lot
of the pain related to pensions could be pushed into the future if that's the way
management wanted it.

David Roderick, 79, who ran U.S. Steel in the 1980s, says in fact that differences in
pension strategy between his company and Bethlehem significantly contributed to the
fact that U.S. Steel survived ("We were never even remotely threatened with
bankruptcy") and Bethlehem didn't. U.S. Steel's strategy decades ago was to aggressively
make contributions to its pension fund, book these as the deductible expenses they were,
and exit with a reduced tax bill. Bethlehem took the approach that its cash could better be
used for modernization of its plants. Bethlehem, Roderick says, even used the difference
between its strategy and U.S. Steel's as a selling point, telling its customers that
Bethlehem was investing to improve its products whereas Big Steel wasn't.

Bethlehem did pour major amounts of money--$7.2 billion in the 1960s and 1970s--into
modernizing old plants and building a new integrated mill in Indiana, Burns Harbor.
There even came a glorious time, in late 1973 and much of 1974, when demand for steel
surged, ROE leaped upward, and the investments looked very wise. But that was one of
steel's false springs, the greenest of several that came along and briefly, if fraudulently,
lifted the hopes of all. By 1975 the industry was again flattened, and was in fact moving
into a new and prolonged era of closing plants.

Lewis Foy, Bethlehem's CEO in the late 1970s, described the company's past capital
expenditures, heavy though these were, as "far short of our requirements." He then put
his mouth where his money wasn't by closing some outmoded capacity in 1977 and
booking $791 million in nonrecurring charges that gave Bethlehem its first loss since
1933. Of the total charge, $483 million was for pension costs and other termination
benefits due both workers in the affected plants and thousands of white-collar people
shoved out as well.

This huge amount, $483 million, drove home the terrible fix Bethlehem was in: Every
time it closed a plant, it accelerated the retirement of longtime workers, rang up a bill for
shutdown benefits, and put new burdens on a pension plan that by the 1970s the company
acknowledged was underfunded. Bethlehem couldn't just ignore this weakness either: It
had to build up the pension plan and, leaving aside any outside capital it could bring in,
finance this repair work with money it was currently generating. What Bethlehem had
here was simply a demographic nightmare, in which an ever-shrinking number of active
employees were charged with making profits sufficient to support the present and future
of an ever-growing number of retirees and dependents.

Bethelehem's tumbling employment numbers tell the story: Head count peaked at
167,000 in 1957 and by the mid-1980s was down, gulpingly, to 35,000. And at that point
(though this certainly wasn't the end of it) Bethlehem had 70,000 retirees and dependents!
It also had a pension plan that it judged underfunded by more than $1 billion. The
company was meanwhile feeling the great rise in medical costs that walloped the 1980s.
And for its medical promises to retirees, Bethlehem had no funding at all. None.

What it had instead was this colossal burden called "legacy" costs. Legacies are usually
good when they come from a kindly spinster aunt. They are colossally bad when they are
handed down by corporate hierarchies that both overpromise and fail to plan for the day
that payment comes due.

From 1980 on, Bethlehem had five CEOs who, on the one hand, agonized about the
legacy costs they inherited and, on the other, created new ones by plant closings and
layoffs and even by labor settlements that added to the benefit burden. It was a never-
ending, expanding mess. Lewis Kaden, a Davis Polk & Wardwell partner who joined
Bethlehem's board in 1994 (indeed, as a representative of the steelworkers) has the
perfect mental picture: "Bethlehem," he says, "was like an old man carrying bags of rocks
on his back, with the man getting ever frailer and the rocks getting ever heavier." Carry
that thought a bit further: It was the old man himself who bent to pick up the rocks he
was loading into his bag.

Once in a while Bethlehem's brass seemed to recognize that those rocks meant ruination.
As early as the mid-1980s, the board considered putting Bethlehem into bankruptcy. But
then one of those false springs came along, and pretty soon the company was successfully
selling new issues of common stock. In fact, during the 1980s and 1990s, Bethlehem
raised nearly $1 billion with equity offerings (that, among other things, provided money
for its pension fund). Clearly speculators never die.

In the 1990s there were other signs of premonition, evident in the company's moving to
annuitize a large portion of the supplemental retirement benefits scheduled to go to top
company executives. That meant Bethlehem's general credit no longer stood behind these
pension promises, but that one or more insurance companies--well paid for assuming the
obligation, you can be sure--instead became liable for eventually paying up. The
executives thus moved themselves largely out of the line of fire.

And yet Bethlehem's CEOs, though they wore out the word "difficult" when summarizing
their years in annual reports, never seemed to give up. Sure, Walt Williams retired in
1992, feeling after six years in the job "totally disappointed, totally disillusioned, and
worn out." But his successor, Curtis H. "Hank" Barnette, introduced a brave new slogan:
"Our vision is clear--to be the premier steel company." And his successor, Duane
Dunham, came in talking about new strategies that will "ensure our long-term success."

Even Robert S. "Steve" Miller, the restructuring expert whom the board hauled in as CEO
on Sept. 20, 2001, took on his job optimistically: "I did not come here," he said upon
arriving, "to put this company into bankruptcy." But within weeks, on Oct. 15, he did
exactly that.

And the frail, old man, lugging his rocks? After Miller himself had made some head-
count cuts, there were--though it's almost unimaginable--11,500 active employees and
120,000 retirees and dependents.

As 2002 ended, the company was also showing--we are now measuring its "legacy"--that
the value of its pension fund was $3.7 billion and that trailing along was an unfunded
obligation of $2.9 billion. In other words, by Bethlehem's actuarial figuring, the company
was that much shy of having enough to ultimately pay all its pensioners and their covered
dependents. When the Pension Benefit Guaranty Corp. (PBGC) took over the fund--the
biggest it has ever assumed--and figured liabilities on a more conservative basis, it upped
the unfunded obligation to $4.3 billion. But by its rules, the PBGC will cover only $3.6
billion. So that's the bill this agency (which is financed by assessments levied on all
companies having defined-benefit plans) expects to shoulder.

As things work with the PBGC, it will pay a maximum of $44,386 this year to each
Bethlehem pensioner. In addition, the executives who did the annuity hop will be getting
a second check from some insurance company. Nobody, though, will be paying that other
part of the legacy: the health and insurance benefits that Bethlehem promised and didn't
fund. Created cavalierly in a succession of union contracts, this "obligation" amounted at
year-end 2002 to a mountainous $3.1 billion. That's simply a promise that evaporated into
thin air.
You may reasonably ask whether the steelworkers should not have, for their own long-
term benefit, eased off on Bethlehem way back when. One answer is that unions don't
care for "givebacks." Another point, says director Kaden, is that were the union to have
done that, it would have been making sacrifices not shared by other interested parties,
such as stockholders or creditors. As it was, bankruptcy creamed everyone. The
shareholders got nothing, the creditors got very little, and the workers, at the least, got
stripped of their health benefits.

It is also apparent that Leo Gerard, president of the steelworkers, was ready by
bankruptcy time to be shed of Bethlehem. Trying to pull something from the ashes, Steve
Miller proposed reorganization plans whereby Bethlehem's plants would be freed from
the work rules that had stood in the way of efficiency. Gerard rejected Miller's ideas,
preferring to do his retailoring of the work rules with ISG's Ross. Gerard thinks
Bethlehem could not have overcome the bloat in its management nor tolerated his union
members becoming working partners on the plant floor, as is the scheme at ISG. Ross
himself doubts that Bethlehem's bureaucracy could ever have learned what lean
management is about. At his shop, he says, there are three layers of management between
CEO and factory floor--at Bethlehem, there were eight.

FORTUNE asked Ross and a number of other informed people whether they thought
some really great businessman--say, a Jack Welch--could have come into Bethlehem
maybe 40 or 50 years ago and saved this company. All thought the question intriguing,
but unanswerable.

So we asked Jack Welch himself. As a buyer of steel at GE, he knew Bethlehem. So, how
about it, Jack--could you have done it? He immediately responded that he wouldn't dream
of being so "presumptuous" as to think so. Then he puzzled a while longer and finally
said simply, "I don't think Christ could have done it." Amen.

FEEDBACK cloomis@fortunemail.com

http://www.fundinguniverse.com/company-histories/Bethlehem-Steel-Corporation-
Company-History.html

Bethlehem Steel Corporation

Address:
1170 Eighth Avenue
Bethlehem, Pennsylvania 18016-7699
U.S.A.

Telephone: (610) 694-2424

Fax: (610) 694-6920
http://www.bethsteel.com
Statistics:
Public Company
Incorporated: 1904
Employees: 15,600
Sales: $4.63 billion (1997)
Stock Exchanges: New York
Ticker Symbol: BS
SICs: 3312 Blast Furnaces & Steel Mills; 3731 Ship Building & Repairing; 3443
Fabricated Plate Work-Boiler Shops; 3317 Steel Pipe & Tubes

Company History:

Bethlehem Steel Corporation is the second largest steel producer in the United States,
with control of supply sources, production, and distribution, from raw materials to a wide
variety of steel mill products. Also a long-time repairer of ships and offshore drilling
platform businesses and manufacturer of forgings and castings, Bethlehem had curtailed
many of these activities during the late 1990s. The company is the nation's number one
supplier of steel to the domestic construction industry, as well as a major supplier for
railroads and automobile companies. It manufactures almost ten million tons of steel
annually, a tenth of the nation's supply.

Early Years of Rapid Growth

The company began operations in 1857 as the Saucona Iron Company in South
Bethlehem, Pennsylvania. Its primary business was the rolling of iron railroad rails. In
1899, after broadening the product line to include heavy forging for electric generators,
tool steels for metal cutting, and armor plate for U.S. Navy ships, the company's name
was changed to the Bethlehem Steel Company.

Bethlehem Steel was incorporated in December 1904 by Charles M. Schwab, a former

Andrew Carnegie disciple and first president of United States Steel Corporation (U.S.
Steel). Schwab left U.S. Steel over difficulties that he felt inhibited his freedom to run
that company properly. At its incorporation the company included Bethlehem Steel, a
Cuban iron ore mine, and several shipbuilding concerns in California and Delaware.
Schwab became president and chairman of the board.

Soon after the formation of the company, Schwab hired an electrical engineer, Eugene G.
Grace, whose management skills allowed the more entrepreneurial Schwab the freedom
he needed to plan the growth of the company. Together, the two men became the team
that built Bethlehem from a small producer with an ingot capacity of less that one percent
of the national total in 1905 to the world's second-largest producer in fewer than 35 years.

In 1908 the two men staked the company's future on a new type of mill invented by
Henry Grey. It was capable of rolling a wide flange structural steel section that was
stronger, lighter, and less expensive than the fabricated steel sections that were being
used at the time. The gamble paid off for Bethlehem. The wide-flange section made it
possible to build skyscrapers and modern cities.

In the years preceding World War I, the company acquired an interest in a Chilean iron
ore mine with ore of a higher quality than available from the U.S. upper Great Lakes
region. As a result of the acquisition, the company built a fleet of ore carriers and entered
the ocean transportation business. With the outbreak of the war, Bethlehem became a
business of international scope, building warships for Great Britain at the company's
shipyards. Bethlehem also filled orders for guns and munitions, armor, and ordnance
placed by the British, French, and Russian governments. In the process of contributing to
the Allied cause in Europe, Bethlehem created a financial base that would help in
expanding the company's steelmaking facilities.

Grace was named president of the company in 1916, with Schwab staying on as chairman
of the board. In that same year, bolstered by wartime profits, Bethlehem acquired
American Iron and Steel Manufacturing Company, Pennsylvania Steel Company, and
Maryland Steel Company. In the years following World War I, the company continued its
growth with the acquisition of Lackawanna Steel & Ordnance Company, Midvale Steel
and Ordnance Company, and Cambria Steel Company. In the years preceding the Great
Depression, the company boosted its steelmaking capacity to 8.5 million tons and
employed more than 60,000 people.

Bethlehem's growth was tied to an incentive program from which its upper management
profited handsomely. In 1929 Grace received a bonus in excess of $1.6 million, or about
3.3 percent of earnings. The policy of paying out such large awards to its executives
eventually caused problems. In early 1931 a group of stockholders filed suit against
Schwab and 12 other officers of the company, charging that the bonus program
constituted a misuse of company funds. The suit asked that a total of $36 million in
bonuses distributed since 1911 be returned to the company's coffers. The action resulted
in the formation of the Protective Committee for Stockholders of Bethlehem Steel
Corporation, a watchdog group that sought the elimination of the bonus program in its
existing form. Though no funds were returned to the company, the suit was settled in July
1931, about six months after it was filed. The settlement resulted in a new policy that
included the publication of executive bonuses in the company's annual reports and a
revised executive salary and bonus package. In subsequent years labor unions used the
bonus issue in their demands for higher compensation and benefits for the rank-and-file
steelworkers.

Depression Struggles and Wartime Demand

The 1920s were years of growth for Bethlehem. In the early years of the Great
Depression, the company weathered the economic storm and continued to improve its
production plants and introduce new products. The Depression caught up with Bethlehem
in September 1931 when the company posted a quarterly loss for the first time since
1909. In the face of a stagnant economy and an eroding demand for steel products, the
company had overexpanded and was forced to shut down many of its facilities, including
a newly constructed, jumbo-sized open hearth at the Sparrows Point, Maryland, plant.
Bethlehem, along with other major steel producers, struggled through the Depression.
Help arrived with President Franklin D. Roosevelt's New Deal and the National Industrial
Recovery Act of 1933. The government suspended antitrust laws, and the steel industry
established codes approved by the National Recovery Administration providing for labor
reform, workers rights to organize, minimum wages, and maximum work hours. In
December 1933 Bethlehem reported a modest net profit in excess of $600,000 after nine
quarters totaling more than $30 million in losses.

During the 1930s Bethlehem acquired steelmaking plants in Los Angeles and San
Francisco, California, and Seattle, Washington. McClintic-Marshall, a large fabricator
and builder of bridges, was also purchased, enabling Bethlehem to participate in the
construction of San Francisco's Golden Gate Bridge. Through this subsidiary, Bethlehem
was also involved in the construction of other large bridges and notable buildings,
including Rockefeller Plaza and the Waldorf Astoria Hotel in New York City; the
Chicago Merchandise Mart; and the U.S. Supreme Court Building in Washington, D.C.

During the mid-1930s Bethlehem went through an expensive retooling. With the largest
capital expenditure since before the Depression, the company spent approximately $20
million on the construction of a continuous strip and tin-plate mill at Sparrows Point. A
primary reason for the new project was beer. After six years of research and
development, the American Can Company had produced a coated tin can suitable for
packaging beer, and the tin-plate market exploded.

Schwab died in September 1939, leaving Bethlehem under the tight controls of Grace.
With U.S. involvement in World War II imminent, Grace geared the company's entire
capacity toward war production. Furnaces, shops, and mills worked around the clock
producing armor plate for ships and structural steel for defense plants, munitions, and
aircraft engines. Between 1941 and 1944 Grace pushed production at Bethlehem to 101
percent of usual capacity. During the war, the company's 15 shipyards produced more
than 1,100 ships, including aircraft carriers, destroyers, heavy cruisers, and cargo ships.
In 1943 alone the company built 380 vessels.

During World War II, from 1940 to 1945, Bethlehem produced more than 73 million tons
of steel. This total represented almost one-third of the armor plate and gun forgings used
by the United States in the war. Prior to the U.S. entrance into the war, the company's
gross sales were $135 million. In 1945 sales topped $1.33 billion, with more than
300,000 employees. Bethlehem became a global giant in the steel industry. In December
1945, six years after the death of Schwab, Grace was elected the company's chairman.
Arthur B. Homer, director of the Bethlehem's wartime ship building program, became
president.

Expansion through Early 1970s

With the war's end, the global demand for steel was even greater than during the conflict.
Consumer demands for new cars and household goods, along with the massive amounts
of structural steel needed to rebuild war-torn economies, resulted in further expansion.
Bethlehem built new furnaces and mills at many of its plants and by the late 1950s was
capable of producing 23 million tons of steel annually. The nature of the company's
shipbuilding business began to change as Bethlehem produced larger, longer cargo ships.
Forerunners to supertankers, the new ships produced by Bethlehem cost less per unit,
carried more tonnage, and were able to cruise at speeds 30 percent faster than their
prewar predecessors. More iron ore was delivered in less time. In 1957, Bethlehem's peak
postwar production year, the company made more than 19 million tons of steel and
earned $190 million on sales of $2.6 billion. At the close of the decade, Bethlehem's full-
time postwar employee roster stood at 165,000.

In 1960 the United States imported more steel than it exported for the first time in the
U.S. steel industry's history. This situation was a harbinger of things to come. The
deterioration of Bethlehem's enterprises, as well as those of other U.S. steel
manufacturers, can be traced to several major factors. High wages, foreign competition,
and the enormous costs of environmental clean-up of the lands and waters around the
company's many production plants cut deeply into the company's profits and cash
reserves. In addition, decades of unlimited growth, expansion, and profits had made
Bethlehem's leadership complacent. Antitrust and price fixing suits against several U.S.
steel giants including Bethlehem followed. Throughout the 1960s and 1970s, company
leaders believed that procedures could continue as they had been for over a half century
without change in processes or structure.

Bethlehem's leaders did not engage in product research, innovation, or reorganization.

The company, like its competitors, relied on continual price increases to protect profits.
These policies allowed opportunities for entrance into the U.S. market by Japanese and
other foreign steelmakers, who rebuilt their steel industries after World War II and
captured the competitive edge worldwide. This new competition, a shrinking domestic
market, and the expansion of steel substitutes such as aluminum and plastics, created a
still-existent threat to Bethlehem's future. Following Grace's death in 1960, Homer, the
company's new chairman, committed the company to a $3 billion modernization and
expansion program. The old mentality still prevailed as the company pushed to produce
more tonnage. Bigger still seemed to be better.

Two important factors permitted Bethlehem to sustain its business and expansion through
the early 1970s. First, pressure was put on the U.S. government to limit the amount of
foreign steel allowed into the country. Early in 1969 the State Department persuaded
Japanese and European steel producers voluntarily to cut their imports to the United
States by 25 percent. The second factor that helped sustain Bethlehem during the 1970s
was the Vietnam War, which stimulated production in all sectors of the U.S. economy.
Bethlehem again pushed for more production and higher steel prices. After the price of
steel rose steeply in 1969, the administration of President Richard Nixon instituted price
controls on steel in August 1971.
The company faced growing competition from mini-mills. These small operations
challenged the premise that the steel business had to be huge and integrated to survive.
Using scrap metal melted down in electric furnaces, the small operations were capable of
producing simple iron and steel products at a much lower cost than the large steelmakers.
In light of increased competition, the company chose to grow with the construction of a
huge blast furnace at Sparrows Point. Named Big L, it was built at a cost of $275 million.
The furnace began operations three years after the end of the early-1970s boom years and
one year after the company had shown a net operating loss of over $448 million.
Bethlehem Steel was in trouble.

Major Reorganization in the 1980s

As the 1970s ended, drastic action was needed to save the company. In 1980 Donald
Trautlein, Bethlehem's controller, was named chairman, and he began to cut away at the
company's cost of doing business. The company possessed outmoded production plants,
steep labor costs, rising foreign and domestic competition, and eroding profits at a time
when the steel industry was experiencing the worst downturn in more than 50 years.
Trautlein had other problems as well. He knew little about the business of steelmaking;
he felt that most of Bethlehem's problems were due to external forces beyond the
company's control. Trautlein chose first to diversify, then to remain exclusively in the
steel business, and then began a diversification that was not completed.

The company's new chairman began cutting costs at the top. Salaries were cut by 20
percent over a four-year period. Lump-sum retirement packages were offered to
employees over the age of 55; vacations were cut back; and by the fall of 1982, 13 upper
echelon executives had taken early retirement. These measures were accompanied by
mass firings and layoffs. Further cutbacks eliminated such perquisites as company
limousines and drivers, security forces for executives' homes, and a fleet of jet airplanes.
By 1984, the number of Bethlehem employees had shrunk by almost 50 percent.
Trautlein replaced some of the executive-level positions made vacant with professional
managers who had little or no experience in the steel business; many positions were left
unfilled.

The company also began the liquidation of some subsidiaries. During the 1980s, 11 of the
company's operations were sold. In that same period, Bethlehem began to consolidate
many of its steelmaking operations by closing marginal facilities and modernizing aging
plants. The company closed its West Coast steel plants and scaled back shipbuilding
operations, and in 1983 steelmaking was discontinued at the Lackawanna plant.

Between 1982 and 1985 the company posted losses of $1.9 billion. Under pressure and
criticism, Trautlein resigned in 1986. He was replaced by the company's president,
Walter F. Williams, who had more than 30 years of experience in the business. Williams
was faced with a downward momentum that would be difficult to reverse. The company's
stock hovered around an all-time low of $4 per share.
Williams instituted a campaign to improve and revitalize Bethlehem's basic steel
business. He began by selling off the assets that were not related to steel. He smoothed
relations with both customers and suppliers and persuaded bankers to stay with the
company. Slowly, Williams's program began to make a difference. For the year ending
December 31, 1987, the company reported more than $174 million in profits compared to
a net loss of over $150 million the previous year. In 1988 the company increased its sales
volume another 18 percent over 1987 sales figures and reported record earnings of more
than $400 million. Two important problems were solved in 1989. First, a 50-month labor
contract that included cost-of-living increases and profit sharing was signed with the
United Steelworkers. Second, the U.S. government's steel-trade-liberalization program
with other countries extended voluntary restraint arrangements previously negotiated
with other countries by President Ronald Reagan's administration.

1990s: Recession and Foreign Competition

In 1990 and 1991 Bethlehem worked at increasing its market share in products that
produced higher profit margins. Further, the company focused on modernization and the
development of high-technology production methods, and increased research and
development into new products and processes. The severe economic recession of the
early 1990s, however, hit Bethlehem earlier than most U.S. industries, offsetting the
benefits of management's determined modernization and streamlining efforts. Steel prices
and domestic demand sank to all-time lows. With the capacity to produce 16 million tons
of steel annually, Bethlehem produced only eight million tons in 1991. Unfortunately, the
economic recession also exacerbated longstanding problems of the company, such as
high employment costs and, in particular, skyrocketing health insurance costs, which
were reportedly two to three times higher than those of foreign steel competitors. By the
end of 1991 Bethlehem posted a $191 million loss.

Nevertheless, under the leadership of Chairman and CEO Williams, Bethlehem forged
ahead with $564 million worth of capital expenses for the modernization of Sparrows
Point, improvement of flat rolled operations at the Burns Harbor plant, and completion of
a new galvanizing line for the production of coated sheet products. In 1991, the worst
year of the recession, such leading automotive companies as Ford, Mazda, and Nissan
presented the Burns Harbor plant with outstanding quality awards.

Restructuring continued as Bethlehem sold its Freight Car Division and most of its coal
properties. The company discontinued the manufacture of trackwork at its Steelton,
Pennsylvania, plant as well as its coke production operations at its Sparrows Point,
Maryland, plant. These capital outlays and structural changes were all part of
management's comprehensive plan (which was approved by the board of directors in
January 1992) to revitalize Bethlehem during the recession.

The plan also called for the elimination of the quarterly stock dividend and a reduction in
the work force by 6,500 employees. The leaner, more streamlined company weathered
the storm, just as it had in previous and even more severe economic downturns. By 1993,
Bethlehem had recovered its 12 percent domestic market share and had become a world
producer of coated sheet products for both the construction industry and domestic and
U.S.-based foreign automobile companies.

Demand for steel increased steadily in the mid-1990s, especially in view of the federal
government's plan to invest billions of dollars in upgrading the nation's infrastructure of
bridges (40 percent of 576,000 bridges were found to be in need of serious repairs),
highways (60 percent of 1.1 million miles of highway in need of repairs), and public
transportation systems. With a return to profitability, Bethlehem became the biggest low-
cost steel producer in the United States. The company also boasted thoroughly modern,
world-class facilities for producing steel--especially high quality flat rolled sheets, a
product that held great future promise and accounted for 80 percent of the company's
sales.

Getting Bethlehem back on track was the major accomplishment of Chairman Williams,
who retired in the mid-1990s. The challenge for incoming CEO and Chairman Curtis H.
Barnette, former top counsel in Bethlehem's legal department, would be not only to
maintain this record but to try to make Bethlehem the number one steelmaker on the
domestic scene as the 1990s closed.

Outlook in the Late 1990s

Under the new leadership of Barnette, Bethlehem went through drastic restructuring. The
company had accumulated substantial debt, as well as a huge unfunded pension liability
($1.6 billion in 1993) that had to be corrected. In 1996 the company adopted a
comprehensive restructuring plan which resulted in the planned sale of several poorly
performing businesses, among them the Iron Ore Company in Canada and Sparrows
Point Shipyard, and the sale or discontinuation of operations at the Bethlehem Coke
Division. 1997 saw a slight drop in sales but a return to profitability with $280 million in
net income. By the end of that year the pension liability also had been reduced to only
$440 million.

Bethlehem focused on its core businesses and entered into several agreements with other
companies in an attempt to strengthen its financial footing. Its chief ongoing businesses
were the Burns Harbor Division, Pennsylvania Steel Technologies, and Sparrows Point
Division. Burns Harbor accounted for more than half of the company's revenues,
shipping five million tons of products annually. Bethlehem planned major improvements
to this division's facilities in order to keep the division profitable. It also earmarked $300
million for a new cold rolling mill complex at Sparrows Point, which brought in more
than one-third of the company's revenues. Pennsylvania Steel Technologies maintained
its position as the largest domestic rail producer.

Bethlehem also expanded its operations in several directions in the late 1990s, funding
three new sheet coating lines and entering into several joint ventures and acquisitions.
Chief among these transactions was Bethlehem's 1998 purchase of Lukens, Inc., a major
manufacturer of steel plate and sheet used in industrial equipment. After acquiring
Lukens, Bethlehem merged it into its own plate operations and created the new
Bethlehem Lukens Plate Division, which began to concentrate on alloy steel and carbon
products. In turn Bethlehem sold its existing stainless steel production facilities to
Allegheny Teledyne, which would continue to operate some of these facilities and sell a
portion of the completed products to Bethlehem.

Even with all of these organizational changes improving Bethlehem's infrastructure, its
financial outlook in the near future remained somewhat challenged due to events in the
international market. The end of the 1990s saw a major threat to the domestic steel
industry; foreign markets, especially in Asia, were in crisis and foreign demand was
down.

The drop in sales to foreign markets was not a significant problem for Bethlehem, since
most of its products were sold within the United States, with export sales totalling only
two percent in 1997 (a drop from three percent in 1996 and five percent in 1995).
However, at the same time, foreign steel producers who could not sell their products in
their own countries began to sell them at reduced prices within the United States. As a
result, domestic producers were facing a drop in both prices and demand for their
products. In 1998 a group of leading domestic steel companies, including Bethlehem,
filed federal trade complaints against several countries, among them Brazil, Japan, and
Russia. The companies hoped for federal protection from foreign-made steel being
"dumped" in the United States, in the form of increased import duties on foreign steel
products.

Principal Subsidiaries: Pennsylvania Steel Technologies, Inc.

Principal Divisions: Bethlehem Lukens Plate Division; Burns Harbor Division;

Sparrows Point Division.

Principal Operating Units: Basic Steel Operations; Steel Related Operations.

Further Reading:

"Analysts Disagree on Bethlehem Steel Stock," Morning Call (Allentown, Pa.),

December 14, 1997.
Bethlehem Will Shut Down Coke Div.," New Steel, January 1998.
A Brief History of Bethlehem Steel, Bethlehem, Pa.: Bethlehem Steel Corporation, 1990.
Cotter, Wes, "Still Suffering U.S. Steel Producers Seek Relief from Product Dumping,"
Pittsburgh Business Times & Journal, July 6, 1992.
Fisher, Douglas Alan, The Epic of Steel, New York: Harper & Row, 1963.
Hessen, Robert, Steel Titan: The Life of Charles M. Schwab, Pittsburgh: University of
Pittsburgh Press, 1990.
Jesdanun, Anick, "Illegal Steel Imports Cited," Associated Press, December 23, 1998.
Kleiner, Kurt, "Steel Companies Crying Foul," Baltimore Business Journal, July 10,
1992.
Kuchta, David, Memoirs of a Steelworker, Easton, Pa.: Canal History and Technology
Press, 1995.
McQueen, Rod, "U.S. Charges Likely Against Canada's Steel," Financial Post, June 30,
1992.
Prizinsky, David, "Steel Firms Benefit as Bethlehem Drops Lines," Crain's Cleveland
Business, July 20, 1992.
Reutter, Mark, Sparrows Point: Making Steel-the Rise and Ruin of American Industrial
Might, New York: Summit Books, 1988.
Ritz, Joseph P., "Bethlehem Workers Eye Bleak Future as Bar Mill Closes in
Lackawanna," Buffalo News, September 26, 1992.
Scolieri, Peter, "Walter F. Williams Takes Union Regret Into His Retirement," American
Metal Market, October 27, 1992.
"Steel Makers Unite to Seek Higher Flat-Rolled Prices," Cincinnati Enquirer, October 9,
1992.
Strohmeyer, John, Crisis in Bethlehem: Big Steel's Struggle to Survive, Bethesda: Md.:
Adler & Adler, 1986.
"U.S. Agency Finds Evidence of Steel Dumping," Reuters News Service, December 18,
1998.
Woutat, Donald, "Restructured Steel Firms Face New Problems," Los Angeles Times,
February 9, 1992.

Source: International Directory of Company Histories, Vol. 27. St. James Press, 1999.

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On-the-NET:

Bethlehem Steel, The People Who Built America (1:19:28)

http://www.youtube.com/watch?v=2QTGiHOZZFU