Canadian Business History – Professor Joe Martin
This case was prepared by Anne-Mette de Place Filippini and Professor Joe Martin as the basis for class discussion rather than to illustrate either effective or ineffective handling of a managerial situation. All charts, photos, questions and exhibits omitted.
Times Had Changed
The nickel industry was just not the same, Grubb thought as he settled into his new office in 1972. He believed that the turnaround would be even tougher to achieve than the cost-cutting measures he had implemented in Hereford. He thought back wistfully to an earlier, simpler time. And he asked his Secretary to pull out some old annual reports. At random he picked up the 1955 annual report.
Grubb read the stirring words of John Thompson, the legendary former Chairman after whom Thompson, Manitoba, is named. Grubb also looked at the words of his predecessor Henry Wingate, who was the brand-new President back in 1955 (before Wingate was promoted to Chairman in 1960) and who had just come through a level of prosperity that warranted an upbeat annual report.
The words were buoyant, and revealed to Grubb the contrast between the company’s past and present fortunes. Wingate’s message began, “In 1955 the Company achieved the largest production of nickel and realized the highest earnings in its history. A new record was made for dividend payments to shareholders.(6) Disbursements for wages were larger than ever before.”
Was there a touch of hubris in these words? Did the two men recognize all the external factors that contributed to their current success? Did they see how those outside developments had also sowed the seeds of future difficulties?
From the end of World War II until the mid 1960s (with the notable exception of 1959), nickel had enjoyed a prolonged period of above-average growth. In the two decades prior to 1965, nickel demand grew at an average 6% per annum, ahead of worldwide GDP growth. A number of factors had contributed to the good times in the nickel industry. These factors included: European reconstruction following the Second World War, which required high quantities of nickel; the discovery of expanded uses for nickel, including the rapid growth of the stainless steel industry;(7) the dynamic growth of the Japanese economy;(8) the military demands of the Korean War; and the subsequent demand for strategic metals during the Cold War.
During this period, the price of nickel was determined by Inco and Inco alone. From 1929 to 1948, the price of nickel held steady at about 35 cents per pound. From mid-1948 to May 1962, the price climbed to 79 cents per pound. This was followed by more price increases: by the early 1970s, Inco’s price had risen to $1.33 per pound.
While there were signs of trouble earlier, the problems became clearer in the 1960s. Sales were relatively flat and earnings flatter, and both Return on Assets (ROA) and Return on Equity (ROE) were declining. Part of the problem was the decline in market share. Although it would have been difficult for Inco to retain the 80% market share enjoyed immediately after the war, why hadn’t the company been able to sustain the 70% market share it enjoyed at the beginning of the 1960s? Yet the 1960s had seen a rapid decline in market share from about 70% at the end of the 1950s to less than 50% in 1969.
What was the problem? Why had this happened? With hindsight the problem was easier to analyze. The tight supply situation was hardly sustainable. Strong demand and high prices were bound to encourage new competition which resulted in the availability of new supply. And the U.S. government would help this development along. Inco had benefited immensely from the American government’s decision to stockpile nickel, which helped smooth underlying demand cyclicality and reduced the ups and downs in demand. However, in addition to giving Inco guaranteed contracts, the U.S. government also provided subsidies to Inco’s competition, viz. Falconbridge and Sherritt-Gordon. Adding to these factors was Inco’s ability to control price, moving the price from $0.79 in the early 1960s to $1.38 by 1970, a 75% increase.
As Grubb reflected on the past, he recalled Wingate’s decision to launch a major five-year investment program. Wingate stated that “Nickel is important to economic growth. Modern technology demands and requires the type of properties it imparts to metals.”(9) In the capital expansion program of the late 1950s, when Inco was bringing the Thompson site on stream, the company had spent $165 million over a three year period. In 1968, as part of Wingate’s plans, it had spent more than that in one year and, by 1970, it was spending nearly $300 million a year. The combination of capital spending and the buildup of inventories forced Inco to initiate a debt financing in the late 1960s. By 1969, the company had nearly $200 million of long term debt on its books.
The Grubb Era
Faced with problems of this magnitude, Edward Grubb moved quickly on his mandate to put Inco’s house back in order. In less than two years, Grubb was named Chairman as well as Chief Officer and he picked Edward Carter as his key man and promoted him to President. Carter had been made a Vice President of Inco in early 1971. Prior to that he had been Executive Vice President of the Huntington Alloy Products Division, a subsidiary of Inco located in the U.S. Grubb and Carter had worked together in the U.K.
A drastic cost cutting program was immediately implemented. Grubb’s new regime emphasized that only profitable nickel would be mined. Planned capital expenditures were cut by $50 million, and by 1973 were less than $100 million. Employment levels were reduced and overtime was eliminated. Production plans for 1972 were cut by 30%.
By the end of 1972, Grubb and his team had reduced the employee count by 4,000, or about 11% of total workforce. By 1974 Inco had dropped more than 6,000 employees from its payroll. Restructuring efforts also saw Inco write off fixed assets and reduce its U.S. $78 million portfolio of marketable securities, with proceeds going toward debt repayment. Inco’s 1972 annual report noted that cash generation after investments was positive for the first time since 1965.
New methods of management were also introduced at Inco. Grubb’s philosophy was one of “no surprises.” One-year and five-year plans became mandatory under Grubb and Carter. The team also gave unprecedented autonomy to operating executives, while corporate staff was re-organized.
A newly-created position of Financial Vice President, aimed at creating better controls, was given to Charles F. Baird, who later became CEO. Baird continued the long tradition of maintaining Inco’s close ties with the United States Navy in that Baird had served as Undersecretary of the Navy in the administration of President Lyndon B. Johnson. Prior to that appointment, Baird had been a financial executive with Standard Oil (New Jersey) who had worked in London and Paris, as well as New York.
The team also tried to deal with Inco’s persistent problem of capital cost overruns by creating an in-house construction-engineering department. “Inco was better than most at underestimating costs. Capital cost overruns have brought an end to more than one CEO career at Inco,” said a former Inco executive.
Grubb and his team announced the reorganization of the sales and marketing organizations in 1972. Grubb wanted to end the status of what he called “supplier of last resort” and take a fiercer competitive stance. Despite the loss of market dominance, Inco had continued to act as the industry association for nickel, geared simply to promote demand of nickel overall, not just Inco nickel. Inco would collect and publish general market research, organize industry conferences around the world and freely distribute reports on its research and development efforts.
In a new stance, Inco decided to stop providing comprehensive consumption trends and general industry information, including prices on its marketing materials, to its customer base. Because Inco had previously made this information public to its customers, its competitors could take advantage of this knowledge and sell their products at prices below those published by Inco.
Instead, Inco now provided general guidelines such as one indicating that “it believed demand was likely to continue to grow at a 6% corporate annual growth rate (cagr) over a business cycle.” By the mid-1970s, management announced, “the prices Inco charges its customers will be considered confidential information.”
Another development in 1972, which shocked the staff at New York Plaza, was Grubb’s personal decision to move both home and office to Toronto. The Inco leader would soon be working out of a small office in the TD Centre.(10) Edward Grubb became the first CEO in Inco’s history to reside in Canada.
Some have suggested that Grubb’s sensitivity to political issues was the main motivation behind the move. Perhaps it was an attempt to rid himself of the image of being “just another U.S. lawyer coming to Toronto to negotiate labour relations.” The new team also seemed to be taking some steps to improve labour relations. “From as far back as 1957 or 1958, almost every time we renegotiated our three-year contract with the Canadian unions, we had long and costly strikes. Lost production affected our profitability in the negotiation years. You can’t endure long strikes every three years without causing real concern among your customers. Obviously they are going to seek other sources of supply,” Grubb said.
“The strikes became so much part of company life that customers used to stockpile nickel in anticipation,” said Warner Woodley, director of administration at Sudbury.
“We came to the conclusion in 1970 that we ought to try and introduce a human element to get a closer relationship with both the union officials and the people at all our locations,” L. Edward Grubb was quoted as saying. “It used to be unthinkable for management to come to my office. Now they come here regularly,” said Michael Maguire, head of a local union of United Steelworkers.
Yet perhaps the most important departure from the past was Inco’s diversification efforts. It started to make forays into non-nickel activities. Another vital change was its international expansion aimed at helping the company to become a global producer of nickel. After the bad years, the new leadership was keen to ensure the company could manage the swings in the business cycles.The team also saw other large companies pursuing a strategy of diversification.(11)
In 1974, Inco acquired ESB Corp., one of the world’s major manufacturers of batteries. ESB management resisted Inco’s approach, and a bidding war with United Technologies saw Inco pay $234 million before the deal was done — up from its $153 million initial offer. It was a massive 100% bid premium in what was to be the first hostile takeover on the New York Stock Exchange.
ESB operated 100 plants in 18 countries and sold products with such well-known trade names as Ray-O-Vac. ESB was barely profitable, but Inco was hoping General Motors and other car makers would use its zinc-nickel oxide battery-powered car.
Other smaller diversification efforts saw Inco acquire Daniel Doncaster & Sons in 1975. Doncaster, a 200-year-old British corporation based in the northern city of Sheffield — the heart of the steel industry — produced high-stress metal components, including turbine blades and gear transmission systems.(12) Inco also launched a venture capital program in 1976 with capital of $7 million. Among the most promising investments was a 24% stake in Biogen, a global biotech and pharmaceutical firm known today for its successful cancer drug, Interferon. At that time, Biogen’s focus was on the development of bacteria that could process ore in the ground.
For decades Inco had sought to expand its production of nickel beyond its Canadian base. It had owned property in New Caledonia, a French island in the South Pacific, since the turn of the 20th Century. However, the French had successfully prevented Inco from mining the ore body, with the aim of protecting the French nickel producer Le Nickel. As well, talks in Guatemala had been ongoing since the 1950s.The late 1960s and early 1970s brought protracted negotiations to develop nickel projects in Indonesia, Guatemala, New Caledonia, Australia and Minnesota.
Despite earlier investments, it was under Grubb that the main investments behind an expansion of production took place.
In 1972, Inco announced its first major development outside Canada, the Indonesian Soroko project. The project was to add 30 million pounds per year in new capacity by 1976 at a cost of $135 million for the initial phase. The project was being undertaken in concert with six Japanese companies, with Inco owning a 60% stake. All production was going to serve the Japanese market. The project was later expanded. Limited production took place in 1977 and the first shipments were made to Japan in early 1978.
Concurrent with the Indonesian investments, Inco began construction in Guatemala in 1973. The Guatemalan mine had the capacity to produce 25 million pounds of nickel per year and costs were estimated to be $90 million.(13)
Management significantly revised cost estimates upwards for both Indonesia and Guatemala as the projects got underway. The final price tag was $850 million for Indonesia and $230 million for Guatemala. Inco’s massive five-year investment program in Canada was completed in 1972. Under the plan, Inco spent $1 billion to modernize and expand its Canadian operations. During the 1974 to 1977 investment phase, capital investments totaled $1.4 billion, of which 80% was directed towards Inco’s goal of becoming a global producer of nickel.
(6) A level sustained for three years before being reduced in 1958 and not exceeded for seven years.
(7) 34% of consumption in 1968, up from 22% in 1954
(8) From 1945 to 1955, Canada’s GDP/capita grew by nearly 50%. In the same period, Japan’s GDP/capita grew 4.4 times!
(9) 1970 Chairman’s Message to Shareholders.
(10) However, Inco’s headquarters, including its Finance and Legal departments, were to remain in New York City for many years.
(11) For example, in 1970, Philip Morris began its diversification away from its core business by acquiring Miller’s Brewing. In Canada, Imperial Tobacco followed suit, creating Imasco, whose business has diversified into retail, financial services, etc.
(12) The 1975 Inco annual report had pictures of a supersonic Concorde jet which used nickel and titanium alloy blades forged by Doncaster and a picture of Prince Charles talking with a Doncaster operator of electronic blade inspection equipment.
(13) Limited production took place in 1977; initial shipments began in 1978 with refined product reaching the marketplace in 1979.