Alcoa Inc.

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Alcoa Inc.

Alcoa Corporate Center
201 Isabella Street
Pittsburgh, Pennsylvania 15212-5858
U.S.A.
Telephone: (412) 553-4545
Fax: (412) 553-4498
Web site: http://www.alcoa.com

Public Company
Incorporated: 1888 as The Pittsburgh Reduction Company
Employees: 127,000
Sales: $20.2 billion (2002)
Stock Exchanges: New York American Swiss Australia Brussels Frankfurt London
Ticker Symbol: AA
NAIC: 331312 Primary Aluminum Production; 331314 Secondary Smelting, Refining, and Alloying of Aluminum

The largest aluminum manufacturer in the world, Alcoa Inc. produces aluminum and alumina for automotive, aerospace, commercial transportation, construction, packaging, and other markets. Active worldwide in all major elements of the industry, Alcoa’s operations include mining, refining, smelting, fabricating, recycling, and developing technology. In addition to its numerous industrial applications, Alcoa aluminum is used in beverage cans and such consumer products as Reynolds Wrap aluminum foil and Alcoa Wheels. In 2003 the company employed 127,000 people in 39 countries.

Company Origins: 1888

Alcoa was founded in 1888 in Pittsburgh, Pennsylvania, under the name The Pittsburgh Reduction Company. Its founders were a coalition of entrepreneurs headed by Alfred Hunt, a metallurgist who had been working in the steel industry, and a young chemist named Charles Martin Hall. Pittsburgh Reduction’s sole property was a patented process for extracting aluminum from bauxite ore by electrolysis, which Hall had invented in the woodshed of his family house in 1886, just one year after his graduation from Oberlin College. Hall’s discovery had promised to make aluminum production economical for the first time in history. Later in 1886, Hall had taken his process to a smelting company in Cleveland, Ohio, but left in 1888 after it showed little interest. One of his associates there, who had also worked with Hunt at another company, introduced the two men, and Pittsburgh Reduction was started as a result of their meeting.

Despite its relative abundance, few practical uses existed for aluminum because it was so expensive to extract. By 1893, however, Hall’s process allowed Pittsburgh Reduction to undercut its competitors with aluminum that had been produced at a lower price. The company then faced two challenges: to generate a larger market for aluminum by promoting new uses for the metal and to increase production so that it could cut costs even further through economies of scale. Efforts in the former area proved most successful in the manufacturing of cooking utensils, so much so that the company formed its own cookware subsidiary, Aluminum Cooking Utensil Company, in 1901. Aluminum Cooking Utensil adopted the Wear-Ever brand name.

Pittsburgh Reduction also began the process of vertical integration, insuring itself against the day when Hall’s patent would expire and it would no longer have a monopoly on his process. In the mid-1890s, it began acquiring its own bauxite mines and power-generating facilities. This process continued after the death of Alfred Hunt, who had served as president since founding the company. In 1899 Hunt, an artillery captain in the Pennsylvania militia was sent to Puerto Rico with his battery during the Spanish-American War and succumbed to malaria there. He was succeeded by R.B. Mellon of the Mellon banking family, which had loaned the company much of its startup capital and controlled a substantial minority stake. The Mellons, however, had been content to let the engineers run the company. Arthur Vining Davis, a partner who had joined Pittsburgh Reduction only months after its founding, acted as president during this time, and the Mellons formally ceded power to him in 1910. In 1907 The Pittsburgh Reduction Company changed its name to Aluminum Company of America, but eventually went by the shortened form of Alcoa. In 1914 Davis became the company’s last surviving link to its early days when Charles Martin Hall died, leaving an estate worth some $45 million.

Post-World War I Expansion

Alcoa had virtually created the market for aluminum, and its only competition came from foreign producers, who were hindered by high tariffs. Alcoa also benefited from rising demand from the automobile industry; by 1915, 65 percent of all new aluminum went into automotive parts. The outbreak of World War I ended the threat from foreign producers, and Alcoa even became an exporter. Annual production rose from 109 million pounds to 152 million pounds between 1915 and 1918, with much of it going to Great Britain, France, and Italy. At home, the vast majority of Alcoa’s output was used for military applications.

The export boom that the war had fostered made it seem natural that Alcoa should expand its overseas operations once hostilities ended. Throughout the 1920s, the company acquired factories, mines, and power-generating facilities in Western Europe, Scandinavia, and, most prominently, in Canada. Late in the decade, however, the difficulty of managing far-flung operations, combined with a rising tide of economic nationalism abroad, made Alcoa’s position overseas increasingly untenable. In 1928 it divested all of its foreign operations except its Dutch Guyana bauxite mines, spinning them off as Aluminum Limited, based in Montreal and headed by Edward Davis, A.V. Davis’s brother. Aluminum Limited was renamed Alean Aluminum Limited in 1966. In 1929 Arthur Vining Davis retired as president and became chairman. He was succeeded by Roy Hunt, the son of Alfred Hunt.

At home, the general economic boom carried Alcoa with it, but between 1929 and 1932, during the early years of the Great Depression, sales fell from $34.4 million to $11.1 million. Alcoa laid off half of its workforce in this time, slashed wages for those who remained, and cut back its research-and-development budget. Demand for aluminum did not recover until 1936. Even so, Alcoa’s market share remained unchallenged, as it was still the only aluminum smelter in the United States thanks to its technological lead and economies of scale—a position that had not gone unnoticed.

Alcoa had been having antitrust run-ins with the Justice Department since 1911, but all of the blows had glanced off of it until U.S. Attorney General Homer Cummings filed suit in 1937, charging monopolization and restraint of trade on Alcoa’s part. The trial lasted from 1938 to 1940 and was the largest proceeding in the history of U.S. law to that time. A district court ruling in 1942 found in favor of Alcoa, but the government appealed. In 1945 an appeals court sustained that appeal. In his decision, Judge Learned Hand ruled that although Alcoa had not intended to create its monopoly, the fact remained that it had a monopoly on the domestic aluminum market in violation of antitrust law and it would be in the nation’s best interest to break it up. Hand’s decision became a landmark in the history of judicial activism, although it did leave open the question of how Alcoa’s grip on aluminum was to be broken.

Meanwhile, of course, the United States had entered World War II. Demand for aluminum skyrocketed. Alcoa, however, proved to be unable to keep up with the increases in demand, disappointing the War Department. During the war the government financed new plants that were built and run by Alcoa, but also encouraged the development of other aluminum producers. As the tide of the war shifted in favor of the Allies in 1944, the U.S. government began deliberations on how to dispose of these plants, which would soon become surplus capacity. As a result, a solution to the problem of how to carry out Hand’s ruling became apparent. The Alcoa plants that the government had financed would be sold off to two new rivals: Reynolds Metals Company and Permanente Metals Corporation, owned by industrialist Henry Kaiser. Reynolds and Permanente were to buy the plants at cut-rate prices. In effect, this divestiture created an oligarchy where there had formerly been a monopoly. In 1950 a district court decree carved up the U.S. aluminum market between the three: Alcoa would get 50.9 percent of production capacity, Reynolds 30.9 percent, and Kaiser Aluminum & Chemical Corporation, as Permanente Metals was renamed, 18.2 percent.

Roy Hunt retired in 1951 and was succeeded by Irving Wilson. During the 1950s, Alcoa’s share of U.S. production capacity declined as it expanded more slowly than Reynolds and Kaiser. Faced with increased competition, Alcoa also found itself without any brand-name recognition on which to capitalize in the consumer products arena; Reynolds, by comparison, had established a name for itself quickly with its Reynolds Wrap aluminum foil. Nevertheless, booming demand for aluminum, the result of successful wartime experiments in using the metal to build military aircraft, helped compensate for decreased market share. Despite increased competition, Alcoa remained the industry’s largest member and its acknowledged price leader.

Company Perspectives:

At Alcoa, our vision is to be the best company in the world in the eyes of our customers, shareholders, communities and people. We expect and demand the best we have to offer by always keeping Alcoa’s values top of mind.

Integrity: Alcoa’s foundation is our integrity. We are open, honest and trustworthy in dealing with customers, suppliers, coworkers, shareholders and the communities where we have an impact. Environment, Health and Safety: We work safely in a manner that protects and promotes the health and well being of the individual and the environment. Customer: We support our customers’ success by creating exceptional value through innovative product and service solutions. Excellence: We relentlessly pursue excellence in everything we do, every day. People: We work in an inclusive environment that embraces change, new ideas, respect for the individual and equal opportunity to succeed. Profitability: We earn sustainable financial results that enable profitable growth and superior shareholder value. Accountability: We are accountable individually and in teams for our behaviors, actions and results. We live our Values and measure our success by the success of our customers, shareholders, communities and people.

Davis retired in 1957, ending his 69 years of service with Alcoa. He was succeeded by Wilson, and Frank Magee became president and CEO. Alcoa came out of the brief recession of 1957–58 by realizing that it would have to internationalize and diversify in order to ensure its future. In 1958 Alcoa joined with Lockheed and Japanese manufacturer Furukawa Electric Company to form Furalco, which would produce aluminum aircraft parts for Lockheed. Also that year, Alcoa became a player in what was then the largest takeover battle in British corporate history when it negotiated a friendly acquisition of a stake in struggling British Aluminum, Ltd. The acquisition was aborted, however. Alcoa had been approached by British Aluminum Chairman Lord Portal, Viscount of Hungerford, who had neglected to consult his major stockholders before closing the deal. Thus, when Reynolds and British manufacturer Tube Investments made a substantially sweeter bid, a bitter struggle ensued. Institutional investors sold their shares to the Reynolds and Tube venture and Alcoa lost out. The fight over British Aluminum became a sensation in Britain not only because of the sheer spectacle of foreign interests vying for control of a major domestic corporation, but also because hostile takeovers were considered a breach of etiquette in British finance. What came to be known as The Great Aluminum War split British investment banks between the old-line, established houses that backed Alcoa and Portal, and the upstart firms that supported Reynolds and Tube.

Undeterred by this setback, Alcoa went on to spread its mining operations into other parts of the world, reestablishing an international presence it had not had since it spun off Alean. Back home, the company moved aggressively into producing finished aluminum products. In 1959 it acquired Rome Cable and Wire Company. The next year, it purchased Rea Magnet Wire Company and Cupples Products Company, a manufacturer of aluminum curtain walls and doors. Both Rome and Cupples eventually had to be divested, however, because of antitrust objections.

When John Harper became president and CEO in 1963, Alcoa found its profit margins squeezed by increased competition, high overhead, and a generally low market price for aluminum. One of Harper’s solutions was to move more aggressively into manufacturing finished products, which provided higher returns than smelting. On his initiative, Alcoa began producing sheet metal for aluminum cans, which became more popular among beverage consumers in the 1960s after the invention of the pop-top, and aerospace parts. In 1966 the company posted a record profit, finally exceeding a mark it had set ten years before.

1970s: Recycling and Diversification

High labor costs, dramatically high-energy prices, unpredictable bauxite prices, a slower national economy, and new competitors trying to break up the aluminum oligarchy all conspired against Alcoa in the 1970s. Sales and other operating revenues grew from $1.8 billion to $4.6 billion between 1972 and 1982, but profits as a percentage of gross income remained below historical levels. High interest rates forced Alcoa to slow its expansion and concentrate on paying down existing debt. In 1972 the company also decided to sell its technology to other manufacturers on a large scale, something it had been loath to do in the past.

W.H. Krome George succeeded John Harper as chairman and CEO in 1975, and Alcoa began to show new signs of life. In the late 1970s it seized upon recycling as an alternative to the high cost of smelting, although somewhat later than rival Reynolds. By 1979 Alcoa was reprocessing 110 million pounds of scrap aluminum. By 1985 that figure would rise to over 500 million pounds and recycling would account for 19 percent of the company’s aluminum ingot capacity. George, who was more scientifically oriented than his predecessors, also led Alcoa into expansive research into high-tech applications of aluminum. By the time George retired in 1983, he had started the company on the path once again to developing new high-strength alloys for use in the aerospace business. Other areas of research and development, often pursued as joint ventures with other companies, included alumina chemicals, satellite antennae, and computer memory discs.

Key Dates:

1888:: Alcoa is founded in Pittsburgh, Pennsylvania, under the name The Pittsburgh Reduction Company.
1901:: The company forms its own cookware subsidiary, Aluminum Cooking Utensil Company.
1907:: The Pittsburgh Reduction Company changes its name to Aluminum Company of America (Alcoa).
1928:: Alcoa divests all of its foreign operations except its Dutch Guyana bauxite mines, spinning them off as Aluminum Limited, based in Montreal and headed by Edward Davis.
1945:: An appeals court ruling finds Alcoa guilty of antitrust violations, calling for a breakup of the company’s monopolistic hold on the aluminum market.
1958:: Alcoa joins with Lockheed and Japanese manufacturer Furukawa Electric Company, forming Furalco to produce aluminum aircraft parts for Lockheed.
1972:: Alcoa decides to sell its technology to other manufacturers on a large scale, a significant departure from previous policies.
1987:: Paul O’Neill becomes chairman and CEO of Alcoa and begins to institute a major revitalization program for the business.
1998:: Alcoa moves to new headquarters as part of a major restructuring.
1999:: Alain J.P. Belda succeeds O’Neill as CEO; company officially adopts the name Alcoa Inc.
2000:: Alcoa acquires Reynolds Metals Company for $5.8 billion.

George’s successor, Charles Parry, took over in 1983, and was even more committed to diversifying Alcoa. His goal, he said, was that half of the company’s revenue should come from non-aluminum sources by 1995. Immediately, Alcoa began scouting around for companies to acquire, particularly in high-tech fields. At the same time, however, Parry’s vigor in attempting to reshape the company was not well received in all quarters. He was attempting to radically change corporate thinking in a short period of time even as he continued the layoffs and plant closures that George had begun in an effort to cut costs, and employee morale suffered. Many did not see how he could create new business worth between $7 billion and $9 billion from scratch in less than ten years. Although Alcoa made only minor acquisitions during Parry’s tenure, which ended in 1987, the directors became concerned that the deals that Parry proposed to make would not fit in well. Some worried that the risks involved were more appropriate to a young company just starting up, not a major corporation nearing its centennial.

Even George became uncomfortable with his successor, and in 1986 he led the search for Parry’s replacement. Aware of his board’s discontent, Parry took an early retirement in 1987. He was replaced by Paul O’Neill, former president of International Paper Company and deputy director of the Office of Management and Budget during the administration of President Gerald R. Ford. O’Neill’s appointment was largely George’s doing; the two had met because of the latter’s directorship at International Paper.

Cost-Cutting and Strategic Acquisitions in the 1990s

Under O’Neill, the first outsider ever to run Alcoa, the company slowed its diversification and refocused on its core aluminum business. In 1990 it formed a joint venture with Japanese manufacturer Kobe Steel, Ltd. to make sheet metal for aluminum cans and parts for automakers for the Asian market. O’Neill had also sought to revitalize employee morale and ensure product quality by emphasizing safety as a primary concern, and by instituting a profit sharing plan.

Combined profits for 1988 and 1989 more than doubled Alcoa’s total for the first eight years of the decade, providing an early sign that the changes instituted by O’Neill were working. By 1991, the revitalization of the aluminum business under O’Neill’s watch had achieved great strides. A billion-dollar program to modernize its plants was finished that year, long-term debt had been whittled down, and the company’s research and development budget had been increased significantly. Important changes in the structure of Alcoa also were underway during the early 1990s, as O’Neill pursued his agenda of “reinventing” the venerable aluminum giant. Two layers of corporate management were stripped away, including the company’s presidential post, exposing 24 business units that were ceded autonomous control over their respective operations. Each of these business units reported directly to O’Neill, who exerted considerable sway over the company’s operations despite his desire to give the business units an unprecedented amount of power.

However, two developments outside Alcoa’s control affected the early years of the 1990s, hampering the company’s progress under O’Neill’s decisive rule. The collapse of the Soviet Union had a disastrous effect on the world aluminum market, causing prices to fall to the lowest in history. The Soviets exported an average of 250,000 metric tons of aluminum a year before the Berlin Wall came down, but when revolution swept communism aside and left Russia in a precarious financial position, aluminum shipments exported from the former Soviet Union increased exponentially. In dire need of cash, Russia was shipping an average of 1.2 million metric tons of aluminum per year during the early 1990s, flooding the market and drastically reducing the price of aluminum. Aluminum, which sold for $1.65 a pound in 1988, was priced at $.53 a pound by 1993, the lowest price ever recorded.

To make matters worse, a worldwide recession settled in during the early 1990s as aluminum prices plummeted. The effects of the recession had a more lasting hold on Alcoa’s fortunes than the fall of the Soviet empire. The company trimmed its payroll by 2,000 in 1992, the first major layoff since 1986, as depressing financial totals were tallied at the company’s headquarters. Alcoa lost $1.1 billion in 1992 and recorded a paltry $4.8 million gain in 1993. Despite the bad news, O’Neill remained steadfast to his revitalization plan and focused his attention on reducing the company’s healthcare costs, which were rising by 11 percent a year and costing the company nearly $200 million annually. “Our productivity improvements,” he declared, “are effectively being eaten up by health care costs.”

By the mid-1990s, O’Neill’s reputation for running a tight and efficient enterprise had helped Alcoa realize a marked recovery from the ills of the early 1990s. Alcoa’s net income rose from $4.8 million in 1993 to $375.2 million in 1994 and up to $790.5 million in 1995, while annual sales increased from $9 billion to $12.5 billion. As the company charted its course for the late 1990s and the new century ahead, O’Neill continued to hold a tight rein on spending, vowing to cut $300 million from Alcoa’s annual sales and administrative costs by the end of 1997, which would produce a savings of 25 percent.

Toward this end, O’Neill spent $150 million in 1995 to upgrade Alcoa’s computer technology system to a customized, state-of-the-art network. By linking Alcoa’s businesses across the globe and facilitating the fluid transfer of information and ideas between operations, the system promised to increase the efficiency of bookkeeping, production and delivery cycles, and other corporate functions. Another key initiative of O’Neill’s restructuring vision was to move the company from its 1952 headquarters to a new, $40 million facility on the Allegheny riverfront. Vital to the new corporate headquarters was the emphasis on open space and the leveling of hierarchy as a way of fostering employee interaction and productivity. As Martin Powell, one of the principal architects on the project told the New York Times, “It is a design driven by function, not status. People will be more visible and more accessible.” O’Neill himself even went so far as to give up his own executive office in favor of a common cubicle. The move was complete by 1998.

Ultimately, O’Neill aimed to increase Alcoa’s revenues from $13 billion to $20 billion by the new millennium. But in 1997 the price of aluminum remained depressed, and demand, particularly in the United States, continued to falter. As beverage companies sought to increase their profit margins by packaging drinks in eye-catching and unconventional plastic bottles, the long-held primacy of aluminum can packaging, which had accounted for 20 percent of all aluminum sales in North America and whose efficiencies were unrivaled, began to erode. To reach his ambitious revenue target by the year 2000, O’Neill would have to pursue aggressive strategies to continue cutting costs and increasing market share.

One such strategy was to drive up demand for aluminum in the auto industry. This was a challenging objective, as steel was generally a much less expensive material for manufacturing cars, and as auto manufacturers had already invested heavily in equipment designed to handle steel. Still, with fuel efficiency standards on the rise, there was reason to believe that lighter weight aluminum would gain appeal. Alcoa had begun in the early 1990s to court car companies including Audi and Chrysler to cooperate in aluminum car projects. While all-aluminum cars remained a thing of the future, Alcoa nonetheless made incremental strides to penetrate the industry. In 1995, for example, anticipating increased foreign demand for its lightweight, forged aluminum bus and truck wheels, the company announced plans to invest $30 million to begin manufacturing the wheels in Europe. In addition to wheels automakers were amenable to the use of aluminum in transmissions, doors, and roof racks.

To better position itself to take advantage of these areas of demand, in 1998 Alcoa spent $2.8 billion to purchase Atlanta-based Alumax, then a leader in the business of aluminum extrusion for the automobile and construction industries. The acquisition put Alcoa first in the extrusion business, expanding its overseas exposure, especially in emerging markets in China and India. This was seen as an important step toward insulating Alcoa from the cyclical nature of the raw aluminum market.

Indeed, an aggressive course of international acquisitions—including significant deals in Australia, Italy, and Spain—became increasingly important to Alcoa’s growth strategy for the 1990s. The biggest move, however, came in 1999, when Alcoa secured a $4.8 billion deal to take over the Reynolds Metals Company, shortly after the consolidation of three of its biggest rivals, Alcan Aluminum of Canada, Pechiney of France, and Alusuisse Lonza Group of Switzerland. While companies were powerless to control the price of aluminum, they could maximize their profit-per-pound of metal sold by merging various operations and excising overlapping expenses. Although Alcoa’s 1997 bid to buy certain assets from Reynolds was terminated after the Justice Department cited antitrust concerns, the 1999 deal won regulatory approval because of the complementary nature of the two businesses. Fulfilling O’Neill’s lofty goal, the merger brought Alcoa’s projected earnings for 2000 to $24 billion and enabled the company to retain its position as the world’s number one aluminum producer. The merger was completed in 2000.

New Leadership for a New Century

In 1999, O’Neill’s protégé, Alain J.P. Belda, succeeded him as CEO. Announcing his own, even loftier goal of growing the company—now officially renamed Alcoa Inc.—to a $40 billion concern by 2004, Belda continued to pursue a bold course of strategic acquisitions and cost-cutting. In 2000, Belda angled to secure Alcoa’s stake in the aerospace industry with the $2.9 billion purchase of Cordant Technologies, a leading supplier of aluminum airplane parts and solid-fuel rockets. The following year, the company reached a further agreement to complete the purchase of Howmet International, Cordant’s biggest business and the number one manufacturer of jet engine castings. Belda projected a combined cost savings of $425 million from the Reynolds and Cordant deals.

Still, in spite of Alcoa’s shrewd strategic gains, the company remained vulnerable to the metals market, which continued to founder, and in January 2002, Alcoa posted its first quarterly loss since 1994. Later that year Alcoa announced plans to realign its businesses to better focus on the aerospace, automotive, and commercial transportation markets. By early in 2003, with sales still flat, the scope of the restructuring initiatives included the dismissal of 8,000 employees worldwide and the divestiture of the company’s underperforming assets, especially in Europe and South America. Belda remained steadfast in his belief that these initiatives would afford the company increased flexibility to focus on and profit from its core businesses.

Principal Subsidiaries

Alcoa Brazil Holdings Co.; Alcoa Building Products, Inc.; Alcoa Closure Systems International, Inc.; Alcoa International Holdings Company; Alcoa Latin American Holdings Corporation; Alcoa Laudel, Inc. Alcoa Power Generating Inc.; Alcoa Securities Corporation; Alcoa (Shanghai) Aluminum Products Company Limited (China); Alcoa World Alumina LLC; Alumax Inc.; Howmet International Inc.; Cordant Technologies Holding Company; Gulf Closures W.L.L.; Reynolds Metals Company; Shibazaki Seisakusho Limited (Japan).