Читать книгу Stuff Matters: Genius, Risk and the Secret of Capitalism - Harry Bingham - Страница 8

If you start to take Vienna – take Vienna.

– NAPOLEON BONAPARTE

In 1927, Paul Getty had a problem. One of his companies owned a patch of land in Santa Fe Springs, just outside Los Angeles. The land was potentially oil rich and Getty had a rig set up and a drilling team working it. They’d spudded the well in and were ‘making hole’ at a good rate when the drill bit sheared off and got stuck. Getty doesn’t report the precise details, but wells of the era generally ran 3,000 or 4,000 feet deep, so if the bit twisted at around the halfway stage, then it laid maybe 1,500 or 2,000 feet underground. The drill bit was a large chunk of metal that was impossible to drill through. The drilling shaft was perhaps a couple of hand breadths wide.

Fortunately a solution existed to the problem. You could lower a so-called fishing tool down the shaft to fish for the bit and bring it to the surface. The work was delicate, skilled and chancy. After a couple of weeks’ work, Getty’s men had still not retrieved the bit. The problem was annoying but far from calamitous. ‘Twist-offs’ were a familiar irritation and any experienced drilling crew would have seen and dealt with plenty in their time.

All the same, two weeks wasted were two weeks wasted. Wages had to be paid and the capital costs of the rig and the lease were not yielding any return. Worse still, competing drilling crews on neighbouring leases would get to the oil sooner. Since neighbouring rigs generally tapped the same pool of oil, every barrel extracted by the guys next door meant one less barrel for you. Getty was already a millionaire by this point and hardly needed to fret about problems of this sort, but then again he was a millionaire precisely because he did fret about problems of this sort. On one occasion, he’d owned a lease too small for an oil rig, plus an access route too narrow to take a truck. Most owners would have turned their attention to other things, but not Getty. He commissioned and built a miniature derrick and brought the steelwork to site on a specially built miniature railway. The derrick struck oil and the well made money.

So, faced with this new problem – a jammed drill bit and a halted well – what did he do? You have all the details you need: a drilling shaft 1,500 feet deep and perhaps twelve inches wide; a heavy steel drill bit twisted off and jammed somewhere close to the bottom. You need to find a way to resume drilling as fast and as cheaply as you can.

I won’t give you the answer yet – you’ll have to wait till the end of the chapter for that – but I will tell you this. Getty was not an inventor. He had no more mechanical ingenuity than you do. Certainly there were countless people drilling for oil in the 1920s who had more drilling experience, a better knowledge of rigs and fishing tools, greater mechanical and technical dexterity. Yet back in 1927, it was not those people who solved the problem, it was Paul Getty.

For now, though, we’ll jump forwards in time and across the globe. It’s 1975. Bob Dylan has returned to form with Blood on the Tracks. Pink Floyd Wishing You Were Here. Bruce Springsteen is Born to Run. If your musical tastes are a little more Meryl Streep than that, then you’ll be remembering 1975 as the year of Abba’s ‘I Do, I Do, I Do, I Do, I Do’, the least lyrically inventive song title in the history of lyrically uninventive song titles.

But those artists and their concerns are a long way from here, a collection of rice paddies in Surabaya, East Java, Indonesia. What’s more the young man looking out at those rice paddies is probably not wishing he was here. But that young man – who was there on a $250 cut-price holiday – has a decision to make. His name is Lakshmi Niwas Mittal and he has been asked by his father to sell those paddy fields. His father was originally from Rajasthan and was not, to start with, by any means a wealthy man. Lakshmi himself had grown up with twenty others in a house with rope beds, no electricity and the only water coming from the hand pump in the yard outside. It wouldn’t be quite accurate to say that Mittal’s was a poor family. In India, especially then, poor means poor, and the Mittals were middle class by the standards of their place and time.

In due course, Mittal’s family moved to an unremarkable house in a poorish district of Calcutta. Young Lakshmi went to school then accountancy college. In the meantime, Lakshmi’s father had become partner in a company called the British India Rolling Mill. I’m not sure quite how the company had managed to stagger through a decade or two without noticing that the British had left India in 1947, but presumably its clients loved it anyway. Lakshmi’s uncles were involved in steel trading and, in 1963, the family won an important licence to build a steel rolling mill in southern India. Things, unquestionably, were on the up.

It was as part of this ferment of activity that Mittal’s father had come by those Indonesian paddy fields. His intent was to build a steel mill there, producing for the local market. Further investigation, however, proved that a small mountain of bureaucracy lay in the way. Paperwork, licences, permits, hassle. Mohan Lal Mittal decided this was too much. A hugely experienced, ambitious, and capable entrepreneur, he gave the challenge his careful consideration, and refused it. He asked his son to extract the family from the mess with as little financial damage as possible.

Here, you should for a moment put yourself into the young Mittal’s shoes. You are not a complete novice. You have taken a keen interest in your family’s steel operation and have been working in it now for a number of years. For what it’s worth, when you left St Xavier’s College in Calcutta, you did so with a BCom. and the highest marks ever achieved by a St Xavier’s student in accountancy and commercial mathematics. But you have no money of your own. You do not speak Indonesian. You do not possess influential connections in a country with an authoritarian and corrupt government. You have a young wife and are a very long way away from home. And it’s 1975, let’s remember, when the world seemed a lot larger than it does today, and when India marched with very much less swagger on the global stage.

How would you personally have proceeded if placed in this situation? For you, of course, these questions are purely theoretical, but for the young Mittal in 1975 they were nothing of the sort.

And we already know the answers. Most of us would have sold those paddy fields, probably getting ripped off in the process, then gone home to a comfortable future in Indian steelmaking. We’d have done well, congratulated ourselves for our wisdom and prudence. We’d never even have noticed the size of the opportunity that we had allowed to go by.

Lakshmi Mittal, however, didn’t sell the paddy fields. He decided to build a steel mill on them himself. No money? No problem! Back then the Indian government offered export loans equal to 85 per cent of the cost of the equipment and materials being exported. Mittal put together a deal where Indian export loans, plus some shares in the family company, plus some cash from a local partner, plus some more loans from an Indian bank in Singapore were somehow enough to make the whole thing float. He hadn’t quite separated himself from his family, but by starting out in an entirely different country, he was making the firmest possible statement of his independence.

He used the funds to build a mini-mill, a term which rather understates the scale of the enterprise involved. A modern integrated steel mill handles everything. It takes raw iron ore, melts it down in a blast furnace, extracts the now liquid iron, then starts to adjust the chemistry: removing impurities, controlling the carbon, adding alloying materials as required. Only then can the molten steel be formed into blooms, ingots, slabs and sheet. The scale of enterprise required to manage these things efficiently is colossal. A ‘small’ integrated mill will produce two million tonnes a year. A large one can produce as many as fifteen million.

Only when judged against these gargantuan standards is there anything ‘mini’ about a mini-mill, which are typically around one-tenth the size of their integrated cousins. The heart of the mini-mill’s method is to cut the raw iron ore out of the process altogether. Instead of the whole cumbersome process of melting metal out of rock, the mini-mill relies on the steel industry’s version of the ready-meal: a mixture of scrap metal and direct-reduced iron (a form of the metal which is about 90 per cent pure).

In mid-1970s Indonesia, this technology made perfect sense. Mittal couldn’t afford – and the market couldn’t sustain – a five million tonne monster plant. What’s more, at the time, the Indonesian market was dominated by Japanese companies importing steel from overseas. There was no domestic production at all and when Mittal did his sums, he realized that he could achieve a cost advantage of as much as 50 per cent.

Building the mill took two years. In its first year of operation, the plant made 26,000 tonnes of steel, which brought in revenues of $10 million. The plant made $1 million in profit. But profit and riches is not the same thing. Banks had to be paid. Further capital investment was scheduled. Mittal – by now a father – was paying himself just $250 a month. His car was second-hand and he worked all hours of the clock. But he had his steel plant and it was doing well. By the end of the 1980s, production had grown to 330,000 tonnes. Lakshmi Mittal was 39.

Again, life brought to the still young Mittal another tantalizing moment of opportunity, a sweet intersection of character and risk. It was a moment that you or I would probably not have noticed. If you’ve built one successful steel plant – and let’s face it, most of us haven’t – then the temptation would surely be to do the same again, and then again, and then maybe again. If Mittal had been in the business of talking to life coaches that presumably would have been the life-plan he’d have evolved. Mittal could’ve looked forward to a prospect of extraordinary success. He’d create and operate multiple plants as well as being the first Indian ever to have manufactured steel overseas. He’d be a hero.

However, Mittal didn’t want it. As he saw it, building steel plants from scratch was slow. Why build them, when you could buy them? The trouble was, in the world of steel, Mittal was still a very small player. His funds were meagre. He had no government or major institution backing him. He had no technological edge, no breakthrough invention, no special access to raw materials. But if you’ve already done the impossible once, you’re not that daunted by the idea of doing it again.

In the West Indies, the state-owned Iron and Steel Co. of Trinidad and Tobago (ISCOTT) was going bust and Mittal reckoned he could fix it. He promised the government that he would turn losses of $10 million a month into profits of the same amount. There was only one condition: if he did as he promised, then he’d win the right to buy the company.

The government agreed. Mittal fired the team of sixty German managers who had been running the plant, and brought in sixty Indians instead, thereby cutting the wage bill by almost $20 million a year. He slashed other costs and ramped up production. In just four years, by 1993, production had more than doubled and Mittal bought the company.

Which was his second, not first, major purchase, because in 1991 Mittal had gone to see a government-owned steel plant in Mexico. A plant running at 25 per cent capacity and losing $1 million a day. A year later, in 1992, he bought it.

In 1994, he bought Canada’s Sidbec-Dosco.

In 1995, he gobbled up Hamburger Stahlwerke and created a shipping company to handle the group’s increasingly global transport logistics.

In the same year, he also bought the Karmet Steel Mill in Temirtau (‘Iron Mountain’), Kazakhstan. This was a massive plant, one of the world’s biggest. Built by forced labour and prisoners of war in the evil old days of the Soviet Union, the plant was on an almost inconceivable scale. It boasted 1.5 billion tonnes of coal in its own reserves, 1.7 billion tonnes of its own iron ore and its own 435 megawatt power station. It was also, needless to say, a financial basketcase in a country whose economy faced massive issues of its own.

It’s hard to overstate how extraordinary all this is. The speed of it. The total lack of concern for geographical or political boundary. The confidence of it: the willingness to take on a Mexican business that was losing a million dollars a day. The willingness to acquire a huge, crumbling, loss-making empire in Kazakhstan, certain that the thing is fixable and that you’re the right person to fix it.

In this welter of extraordinaries, a few particular points are worth picking out.

First, the extraordinarily successful execution. The Kazakh plant in particular constituted an utterly unprecedented scale of industrial challenge. Take, for example, what is usually a fairly routine aspect of a company’s business: paying the workers. When Mittal bought the plant, he had promised to pay salary arrears in full, averaging about six months’ pay per worker. No problem. The funds were there to do it. But few of the workers had bank accounts, so they needed to be paid in cash. No problem. Mittal started to convert hard currency into local cash…until he got a call from the Central Bank. Whoops, sorry, Lakshmi, but if you bring that much hard currency into the country all at once, we’re going to have an inflationary problem on our hands. Would you mind stopping, please? So Mittal obliged. He continued to bring in hard currency, albeit in much smaller amounts, but meantime hired a plane to fly in suitcases of cash from the capital city Almaty.

Or take power. Not power for the plant, but for the town itself. It’s probably fair to say that there aren’t so many enterprises in the West where CEOs need to worry about how their workers are going to keep their homes warm through winter. But up in Temirtau, the temperature can fall to –40°C and the power company, like most things in Kazakhstan, was falling apart. So Mittal bought the power company too, and fixed it. And the local tram services. And the railway. And the TV station. And a few mines while he was at it.

This was Mittal. He didn’t simply solve these problems; he solved them in extraordinary fashion. Within a year, this appalling, decaying business was profitable again. Along the way, steel production had doubled. The Kazakh plant now produced in a month what Mittal’s first steel mill would have taken ten years to produce at its first year’s rate of output.

Given the sheer scale of the problems, it was extraordinary that Mittal managed it at all – but remember that he did it while also owning, managing and turning around steel companies all across the globe, and did it with an extremely young and self-created organization.

Secondly, Mittal was an outsider. He came from the wrong place. When you read, for example, about Mark Zuckerberg’s amazing success in creating Facebook, you can’t help but feel that his success has been amazing, but also a little predictable. Social networking was clearly going to take off at some point. It was always more likely to take off in America than anywhere. Mark Zuckerberg was a Harvard student who had been programming computers since he was at middle school. Facebook itself started purely as a Harvard thing, and spread from there.

Please don’t misunderstand my point. I’m not knocking the guy. There were loads of other equally privileged, equally well-educated students at Harvard and elsewhere who did not do what Zuckerberg did. But Mittal grew up without electricity. Without running water. With rope beds and twenty in a house. In a country whose economy was not only backward, but self-isolating from the global mainstream. If, in 1950, you were asked to pick the future king of steel, you’d never have come close to picking Mittal. He was in the wrong continent, the wrong country, the wrong part of the wrong country. All he really had going for him was an able and ambitious family that would educate him superbly and (in due course and through their own entrepreneurial efforts) supply the funds to get him going.

To take the point a step further, consider how many other companies could have done what Mittal did. British Steel was a badly run state-owned firm when Thatcher privatized it. The company soon became efficient, profitable and with funds to invest. In 1989, as Mittal was wondering what to do next, British Steel might just as well have been asking itself the same thing. Or the big German producers. Or those in France, Spain, or Italy. Or those in America or Japan or Australia. The list of companies better placed – financially, managerially, technologically, politically – to succeed to pre-eminence was a long and formidable one. And none of them did.

Thirdly, Mittal retained ownership. A slightly more complex point this, but a crucial one. In theory, it’s not all that hard to grow fast and aggressively. You go to the stock market or private investors. You raise money. You acquire assets. You grow bigger and you raise more money. You keep going. Needless to say, it’s not quite so simple – you need a track record strong enough to persuade investors to trust you with their money – but it’s still a much, much easier route to success than funding your growth very largely from your own pocket, as Mittal did.

What’s more, steel is a business which involves a lot of stuff. Iron mines. Coal mines. Transport. Blast furnaces. Rolling mills. Mini-mills. Power plants. TV stations and railway lines. Tangible kit with a tangible price tag. The reason why most of the billionaires that you’re familiar with are involved in software (Bill Gates, Larry Page, Sergey Brin, Larry Ellison, and Mark Zuckerberg, for starters) is a simple one. If you’ve got a decent computer program, you have most of what you need to succeed. There is not a huge list of physical assets that need to be bought out of cashflow. Steel is the precise reverse of that. There, the assets are everything – and managing to fund an extraordinary amount of growth from cashflow is all the more remarkable as a consequence.

If you’re not yet persuaded, then wait till you’ve heard the end of the story.

Mittal went on buying. He tried to buy a Venezualan producer, but somebody was bugging his phones and the deal went elsewhere. He compensated by buying an iconic Chicago-based steelmaker, Inland Steel.

It was the wrong time. His company was by now loaded with debt. The Asian currency crisis and the post-millennial dot.com slowdown caused a slump in steel prices. The (fairly small) portion of Mittal company shares which were freely traded on the stock market slumped from their opening price of $28.50 per share to less than $2. To the outside world, this looked like a crisis. To an entrepreneur, it was a moment of risk.

For the Mittals – Lakshmi had now been joined at the family firm by his son, Aditya – the first years of the Noughties were the best possible ones. A global slump in the price of steel meant that there was also a global slump in the price of steel mills. Mittal acquired plants in Algeria, Poland, Romania, Macedonia, the Czech Republic, South Africa and France. The economics of these purchases was alluring. Because of the huge fixed costs involved in steel production, there is probably no industry more prone to huge cycles of boom and bust.^* That means that the assets you pick up for a song in times of dearth stand to make huge amounts of money in times of plenty. And the Mittals were the only players willing to stack all their chips on red, and wait for the turn of the wheel.

Eventually, the buying spree reached its natural end. In 2006, Lakshmi Mittal made a formal offer for Arcelor SA, the world’s largest steelmaker by revenue. The company could boast world-class technology, a century of steelmaking experience, and had achieved its success in the heart of Europe, one of the world’s most sophisticated steel markets. (The company was headquartered in Luxembourg, but had recently been formed from a merger involving French and Spanish steel companies as well.)

The bid was one of the most keenly contested in financial history. On the Arcelor side, there was a tangible sense of who do these people think they are? This wasn’t the way the world order was meant to work. European flagship companies weren’t simply sitting in a shop window, waiting to snapped up by the first emerging market billionaire to take a fancy to them. There was no evidence of racism, as such, in Arcelor’s outraged defence, but – well – there was outrage. Arcelor had the history. It had the technology. It was the industry’s biggest name. It was European. Indeed, it was practically French! And the company was about to vanish because it had been out-thought and out-manouevred by the nobody-from-nowhere, Lakshmi Mittal.

Mittal won. The resultant company – ArcelorMittal – is the world’s largest steelmaker by any ranking at all. The industry that gave birth to the Industrial Revolution itself had finally been consolidated by a kid from Rajasthan, whose family continues to own slightly more than two-fifths of the resultant behemoth.

This story is astonishing and little known. When the British press talk about Mittal, it is largely in the context of his very large fortune, which has been as high as some $26 billion (and is, of course, down again in the midst of the current slump).

But who cares? Counting Mittal’s money misses the point almost as comprehensively as it would be to obsess over Napoleon’s medals or to count Einstein’s honorary doctorates. Those things – the money, the medals, the doctorates – come with the territory but they are, ultimately, inconsequential.

What matters for the purposes of our investigation into the heart of the capitalist Big Bang itself is what Mittal’s story exemplifies to a quite exceptional degree.^* And the most striking thing about it is precisely its Napoleonic quality. Its speed. Its surprise. Its boldness and decisiveness. Few entrepreneurs have this quality to the degree that Mittal has it, but they all have it. You can’t create a business of any scale without it. If an appetite for risk is the fuse that ignites the entrepreneurial bang, it’s the Napoleonic appetite for conquest that propels it forward.

This might, in fact, be a good point to remind you of the millionaire mindset challenge with which I started the chapter. I left you with a drill bit stuck 1,500 feet down a drilling well and an oil crew hanging around with no oil to pump because they can’t get the drill bit out. You want to get restarted as soon as possible and you won’t make money until you do. Getty’s answer, the billionaire’s answer, requires Napoleonic thinking. Decision, speed, surprise – and force.

Getty wasn’t an oilrigger, he wasn’t a mechanic and he wasn’t an inventor. But he liked to get things done. So he commissioned a monumental mason – the sort of guy who normally carves tombstones for graveyards – to make him a granite spike. Six feet high, as wide as the drilling shaft, and pointed. Once he had his spike, he transported it over to the hole and dropped it in. Getty didn’t know what would happen when a six-foot granite spike fell 1,500 feet onto a jammed drill bit, but he knew that something would. And it did. The spike smashed the drill bit. The riggers got drilling again without delay. The device was known as a Paul Getty Special and it became widely used in the oilfields of the day. In the unlikely event that the entrepreneurs of the world come to form a trade union, then I’d suggest that they adopt the Paul Getty Special as their emblem. It might not be subtle, but by God you know when it hits.

And one last thing. A thing that lies at the heart of this book.

It’s all very well to call attention to the Napoleonic drive and will of entrepreneurs, but the comparison suffers in one enormous respect. Napoleon’s wars devastated a continent. They put back the industrialization of continental Europe by as much as fifty years. They left a legacy of illegimate rulers, aggrieved populations, and entire armies of the dead. Back then, Napoleonic drive had Napoleonic consequences.

These days, the reverse is true. Entrepreneurs are creators. They turn the unproductive into the highly productive. They take advanced technologies and make them available all over the globe.

Needless to say, you can’t do these things and make everyone happy. Mittal’s career has had its share of controversy. When he bought into Kazakhstan, he worked with some intermediaries of doubtful rectitude. When he buys up steel plants, redundancies often follow. In his coal mines and iron mines, there have been accidents which have cost miners their lives.

Call me heartless, if you wish, but my response to this kind of carping is more baffled than anything else. What on earth do you expect? You can’t buy the biggest industrial enterprise in Kazakhstan and not work with people who know the territory, and the business ethics of those people is bound not to be the same as you’d expect in London or New York. Likewise you can’t restore an ailing plant to health and not address its cost structure. In almost every case, that will involve redundancies. You can’t operate mines in Kazakhstan and not expect accidents that would be inconceivable in more developed countries. Kazakhstan is not Sweden. It is a place where even paying your workers constitutes a challenge, a place where you need to buy, mend, and operate a power plant if your workers are to enjoy any heating.

This isn’t to clear Mittal of these charges altogether. It’s possible – I just wouldn’t know – that Mittal should have put more effort into mine safety earlier and more extensively than he did. I’m quite certain that no one has ever built a global business on Mittal’s scale and done it without any errors or regrets along the way. Yet to focus unduly on any errors is to miss the point. Mittal did what no one else was prepared to do. He was prepared to buy one of the least attractive assets in one of the least commercially attractive countries in the world, and make a go of it. He took a bad thing and made it good. He did it in Kazakhstan, in Mexico, in the West Indies, and countless other places besides.

What Mittal did in these places represents the very essence of capitalist energy. It’s the energy that took the world of 1770 – poor, backward, illiterate, hungry, unproductive – and turned it into the world of today. It’s the energy that turns a rice field into a steel mill, a broken enterprise into a thriving one. It’s the energy that lies at the heart of every good thing about capitalism.

But the energy itself is an amoral one. It can be used for good; it can be used for ill. And the next chapter takes us into some morally ambiguous territory indeed, for it’s time to consider the art of selling.