By Andrew McDermott
President Donald Trump’s proposal to allow Nippon Steel to invest in U.S. Steel could produce a genuine victory out of the embarrassing saga of the past year. That culminated with President Joe Biden, in his final days, vetoing Nippon Steel’s purchase offer on dubious national security concerns. The key question of any new deal will be whether the terms allow Nippon Steel to deploy its management strengths and show Americans the path back to their manufacturing glory days. And for this, we need to once again value real engineering over financial engineering.
Much of the blame for the “national emergency” created by America's manufacturing decline rests squarely on the shoulders of my industry, the finance industry. As fiduciaries, we have two principal tasks: capital allocation and management oversight. For too long, we have ignored the example set by Japanese executives while valorizing financial engineers whom we have overpaid to under-manage our most strategic industries. U.S. Steel follows a long line of manufacturing icons destroyed by finance. Nippon Steel provides the antidote to this poison, not simply through the cash injection of the transaction itself, but in the way Nippon Steel's shareholders have nurtured its management team and could nurture that of U.S. Steel.
Much of the blame for the “national emergency” created by America's manufacturing decline rests squarely on the shoulders of my industry, the finance industry.
To quote the Wall Street Journal's Greg Ip:
“The US still designs the world's most innovative products, but is losing the knack for making them. Intel and Boeing were once the gold standard in manufacturing. ... Not any longer. Neither fell prey to cheap foreign competition, but to their own mistakes. Their culture evolved to prioritize financial performance over engineering excellence, which also brought down another manufacturing icon, General Electric.”
If the US no longer sets the gold standard for manufacturing, who does? Despite China's extraordinary progress, Japan is the unquestioned leader in the most advanced manufacturing tasks in the world. Sony remains the sole supplier of camera sensors to Apple. Tesla builds nothing without Japanese robots. Japanese suppliers provide nearly 40% of Boeing's most advanced (and reliable) parts. TSMC's semiconductor plants in Japan have been built much faster and at lower cost in Japan than in either Europe or the US, thanks to the quality and experience of the Japanese manufacturing workforce.
American steel companies have under-invested in capacity and technology for so long that the key components of the recently completed Georgia nuclear plant had to be forged by Japanese steel companies. In almost every one of these industries, Japanese executives get to the top by mastering the craft of making things themselves or immersing themselves in the specifics of their industry over decades.
This brings us back to Nippon Steel. Over the last twenty years, Nippon Steel has run rings around U.S. Steel on every front. As U.S. Steel CEO Dave Burritt freely admits, Nippon Steel is at least a decade ahead of U.S. Steel in manufacturing and environmental technologies. Nippon Steel is three times larger and eight times more profitable than U.S. Steel even though U.S. Steel has been the primary beneficiary of tariffs that have created a severe headwind for Nippon Steel. Meanwhile, U.S. Steel has under-invested in facilities, employees, communities, and pensions for decades.
Nippon Steel is at least a decade ahead of U.S. Steel in manufacturing and environmental technologies.
Nippon Steel CEO Eiji Hashimoto is a bilingual 45-year veteran of the steel industry with a Harvard degree. He has led the transformation of his company from a loss-making minor player to the free-world's largest and most profitable steel company, soothing labor relations while working collaboratively with big customers along the way. Hashimoto has built steel businesses from Brazil to India, enriching the communities where Nippon Steel operates while also enriching shareholders and protecting the environment relative to both U.S. Steel and China's state-backed competitors. For his troubles, he receives $1-2 million in annual compensation.
In contrast, U.S. Steel’s Burritt is an accountant with limited experience in the steel industry. He spent 32 years at Caterpillar and joined U.S. Steel in 2013 as CFO. Like so many American executives, he rose to CEO without any practical operating experience. Yet, for the past three years, he has received average annual compensation of $18 million. He will receive a $50 million bonus for selling U.S. Steel even if he does not work another day in his life. This is not his fault. He plays by the rules we set.
This disparity in pay and performance recurs in almost every industry critical to America's much-needed re-shoring of manufacturing expertise. As Boeing, GE, GM, Intel and so many others have paid hundreds of millions of dollars to executives without practical experience in making things, Japan's “salaryman” CEOs, often with engineering degrees rather than MBAs, have quietly filled the gap. The Magnificent Seven US tech giants cannot operate without Japanese expertise in industrial automation, semiconductor manufacturing, and robotics. The US Navy cannot operate without Japan's shipbuilding and repair facilities. Our rail, nuclear, aerospace, and cell phone industries depend on Japanese technical leadership, but you wouldn't know this if you spoke to your average money manager.
The Biden administration’s treatment of Nippon Steel has been a national embarrassment. On Feb. 7, after meeting with Japanese Prime Minister Shigeru Ishiba, President Trump said that Nippon Steel was interested in making “an investment rather than a purchase,” and that he would help mediate a deal. One successful model for cooperation between US and Japanese companies is the 50/50 joint venture between General Electric and Hitachi in the field of nuclear energy, which was created in 2007 to deal with genuine (as opposed, in this case, to questionable) national security interests, and combined portions of their respective power businesses.
Trump may have re-opened the door to an investor that can offer not just cash but something much more valuable. This should appeal to many in the new administration, including Secretary of State Marco Rubio, whose latest book Decades of Decadence notes the importance of stable manufacturing jobs. If Trump is serious about reinvigorating America's industrial base and supporting middle-class jobs rather than those of financial elites whose interests are often aligned with our adversaries, then he will not waste this second opportunity. He will welcome Nippon Steel and limit the damage that financial engineers can inflict on our common prosperity.
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Andrew McDermott is president of Mission Value Partners and a long-time investor in Japan. The opinions expressed above are his own and are not intended as investment advice. His firm may own positions in companies mentioned in this article.
Suggested citation:
Andrew McDermott, “Why America’s Steel Industry Needs Nippon Steel: An Investor’s Reflections,” USALI Perspectives, 5, No. 5, February 10, 2025, https://usali.org/usali-perspectives-blog/why-americas-steel-industry-needs-nippon-steel.
The views expressed in USALI Perspectives essays are those of the authors, and do not represent those of USALI or NYU.
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
