Monthly Archives: May 2012

The Prince of Pipes

Piotr Galitzine (left) and Dave Mitch of TMK IPSCO

Noah and I had the opportunity to interview the Prince of Pipes, Piotr Galitzine, last week at the American offices of TMK IPSCO, a Russian owned American company with 11 (soon 12) plants in North America.

Galitzine, a Prince who is a direct descendant of the Russian czars, was friendly and expansive as he gave us an insider’s view of the energy business where three quarters of IPSCO’s orders come from.

Piotr wore the pinched collar shirt of a European nobleman, but talked like an American CEO, with a little bit of St. Petersburg in his voice.

His father ended up in Peru where Piotr was born in 1955, then moved to New York City in the 1960s. Piotr went to a U.S. prep school and MIT and ultimately gravitated to Russia working for the German engineering goliaths, Mannesmann and BASF. Being a Russian surely helped his business career, but I can imagine the Royal blood thing annoyed some of the unreformed Communists he encountered.

When TMK bought IPSCO a couple of years ago and made Galitzine head of the company they got American capacity, but perhaps of more value was the intellectual property that they are beginning to transfer to the Russian operations. TMK announced on May 21 that they had made a shipment of casing to Gazprom, the Russian oil and gas behemoth, with ULTRA-FJJM Premium Connections developed in the U.S. but manufactured at the Orsky Machine Building Plant in Russia.

One of the first things the Prince told us as we began the 45-minute interview with him and Dave Mitch, his newly hired Chief Operating Officer who came over from U.S. Steel, was that IPSCO was bringing Six Sigma quality techniques to TMK in Russia.

According to Galitzine, the purchase of IPSCO is the largest direct investment by a Russian company in the U.S. to date. Russia means business in oil and gas, and North America is the place you want to be today.

The oil sands in Alberta, Canada, have as much recoverable oil as Saudi Arabia by some estimates. I asked Piotr where TMK IPSCO fits in with that oil, because oil sands are more a mining operation than drilling. He explained that the company provides the pipes that shoot hot steam into the rock thus making the liquids easier to extract. They also make the pipe to transport gas from Alaska to Alberta and the tubular goods to ship product out of the oil sands area. They are also building a tubular goods plant in Edmonton, Alberta, to serve that market and North Dakota’s Bakken Oil Field that is quickly becoming the biggest producer in the U.S.

The natural gas coming to the Alberta fields is vital today, but Galitzine thinks that a compact nuclear reactor or two are the long-term answer for providing power to the monster oil mines of Alberta.

The Prince feels that the United States will be a net exporter of hydrocarbons by 2020. (This explains the big fight over the Keystone Pipeline. When Keystone is approved and built, providing inexpensive access to the oil sands and North Dakota, alternative energy will have no security or balance of payments significance and therefore will become the luxury of the elites who still want to tilt at the global warming bugaboo. Thus – GAME OVER for the GREENS, and they know it. The environmentalists will scream “Keystone catastrophe!” at the top of their lungs.)

We asked Galitzine about the importance of horizontal drilling for gas and oil and whether it makes expensive deep water drilling unnecessary. He told us that the worldwide demand is insatiable and we need every source we can find. The only place where net production is rising today is North America, though that will change when the giant Brazilian finds start pumping.

The next big thing, according to Galitzine, is LNG (Liquid Natural Gas). He says by 2015 the U.S. will be exporting LNG in gigantic tankers. I thought the logical place to sell American LNG was to Japan, which just shut off its last nuclear reactor. Galitzine feels differently. Because of the huge shale gas fields in Ohio, Pennsylvania and New York, he thinks the big customer will be the United Kingdom. Any way you look at the hydrocarbons today it appears ugly for the coal mines. Coal usage is dropping dramatically in North America. I think Warren Buffet may have muffed it when he bought Burlington Northern Railroad for $27 billion, because a big piece of its business is shipping coal from Montana to the power plants of the Midwest and Eastern U.S.

IPSCO is completing a $17 million tubular goods facility in Odessa, Texas, a fitting place for a Russian-American firm to invest. Though the Prince has lived in America much of his life, he hadn’t heard of the wonderful film and TV show “Friday Night Lights” about life and football in Midland-Odessa, Texas. But I imagine Prince Piotr Galitzine, the astute businessman of the world he is, checked it out on the Internet after we left.

Question: Do you worry about global warming?

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Going Once, Going Twice …

Auction Hunters is an American documentary reality television series that follows Allen Haff, a second generation antiques dealer, and Clinton "Ton" Jones as they participate in storage unit auctions throughout Southern California.

The world of auctions has always intrigued me, so when Roger Meyers alerted me to the coinciding events last week of Liquidity Services buying GoIndustry DoveBid, and Ritchie Bros. purchasing AssetNation I wanted to check it out.

The buyout of Go was the most interesting because I am familiar with its history.

Ross and Kirk Dove started DoveBid in 1999, though they had been in the dog eat dog auction business in the Bay area for many years. They saw the magnificent opportunity to roll up the fragmented business dominated by aggressive but small family businesses in America and Europe. The Doves were charismatic believers and found adventurous dot-com money for their vision of a worldwide online auction business, before the technology had really emerged. The Dove vision and the prospect of going public during the Internet frenzy convinced several auctioneers to join them. The money was good, too – way more than they even dreamed their businesses were worth – and DoveBid grew like topsy. My friend Robert Levy of Norman Levy Associates in Detroit was one of the most important dominoes to fall to the Doves and Robert committed himself to building the business while his brother David was happy to take the big bucks and walk away.

The big payoff of going public never happened as the dot-com boom crashed, but the upfront cash the auctioneers received for joining DoveBid was a windfall by itself.

The brilliant conception of the Dove brothers never really reached fulfillment because the details of running an entrepreneurial auction business did not really fit the needs of the venture capital dudes, who had one thing on their minds – go public and cash your chips. A guy like Robert Levy, who was committed to the business, his clients, and his employees, felt thwarted by the managerial mess in San Francisco. eBay of San Jose had built a professional and highly successful online business and left DoveBid in the dust. The entrepreneurial auction firms who resisted the easy money easily outmaneuvered the cumbersome DoveBid operation on competitive deals.

Where DoveBid made its mark was in developing relationships with big public companies to sell their assets on a commission basis, thus outsourcing a messy job they did not want to do.

GoIndustry, based in London had a similar history to DoveBid’s and eventually managed to go public in England. Unfortunately, the company struggled to make any money, but they had enough capital to pick up a weak DoveBid making a marriage with them in 2008.

The stock of the company did nothing but lose value over the last few years, though GoIndustry DoveBid did a nice job of servicing companies like Delphi, Eaton, Parker, and many pharma clients. They just couldn’t find the formula for making money.

Robert Levy left DoveBid several years ago, but rejoined the fray with the backing of Hilco, an entrepreneurial group in Chicago that has allowed him to reassemble the auctioneering powerhouse he had at Norman Levy with the financial muscle needed to handle big deals. Hilco has done extremely well by servicing the Big Three automotive firms as they shed assets over the last five years.

So now GoDove has been picked up for $31 million (only $9 million cash) by Liquidity Services Inc. in Washington DC. The company has made its mark by selling government assets efficiently. They have a $2 billion market cap, so this deal is pocket change for them. Liquidity started in 1999, but their entrepreneurial challenge was to convince government agencies they could save them aggravation. Obviously it has worked so far.

I am a bit skeptical about their ability to convert GoDove’s private accounts into moneymakers. Perhaps they will try the speculative approach of the agile, smaller entrepreneurial auctioneers, but I doubt a big public firm will have the stomach for it.

Question: On memorial day 2012 should American troops still be in combat in Afghanistan?

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Do you think you’re better than everybody else?

Muhammad Ali: "The Greatest of All Time"

A recent article in Wired Magazine featured a list of principal forces which spur new innovations. One of the forces the piece discusses is the audacity of individuals. The people who change the world have to have a strong belief that they can do things better than anybody else before them and not be afraid to fail. Creating a device that fit in your pocket that could hold thousands of songs, mass producing all-electric cars, building a lathe that can do 16 operations at a time unmanned 24-7–it takes balls and arrogance to try that stuff.

Audacity is vital and ubiquitous in the machining industry. Machinists constantly brag to me that their latest setup has never been done in a particular way before. I walk into shops and engineers beam as they show off the homemade machines they’ve concocted.

Audacious personalities are often found among the most successful entrepreneurs as well. Groupon believed that retailers would be willing to offer their products at over 50 percent off to the masses and that millions of consumers would bite. Paypal believed it could make people pay for items in a way that had never done before and pay a fee for the privilege. Online brokerage firms turned the trading institution upside down by allowing traders to pay $10 per trade without calling a broker. Screw Machine World (Today’s Machining World) believed it could produce a revolutionary trade magazine for the machining industry, something interesting and readable versus the tried-and-true traditional stale trade rag. We were naive to think that advertisers would instantly flock to us for our high quality, despite our refusal to run their advertorial submissions. Had we known how hard it would be to make money in publishing, we probably wouldn’t have tried it and I wouldn’t be posting this blog.

Naiveté is an enabler of audacious ideas. Often it’s easier to try new things when you haven’t ever seen “the way it’s always been done,” or at least haven’t seen the way things have always been done for very long. That may be one reason younger people often have the fresh revolutionary ideas, while the so-called seasoned experts get stuck just doing what’s worked in the past. Historically most societies have preached conformity. Schools, religious institutions, corporations and assembly lines usually like to discourage audaciousness. Kind of sad, but the world can only take so many audacious SOBs, right? Are you one?

Question: Are schools in the United States inferior?

Post Fight Interview Muhammed Ali after the Rumble in the Jungle

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How Much is a Business Worth?

If it’s a machine shop, the answer has typically been, “a business is worth the value of its physical assets, plus receivables less payables.” But the dynamic appears to be changing as the demand for American produced goods increases. I see companies paying for goodwill, but even more for the fluid organization of skills visible in seasoned viable businesses.

Customers are transferable if the manufacturing skills can be proven and maintained. When new operators come in and fire everybody and then try to hire people back for less money, they are courting disaster. Even if the judgment they make is that the previous management was a bunch of bozos, adding layers of chaos to the existing complexities of revolving ownership is arrogant and dumb. Usually old companies in manufacturing do not fail because the workers were paid too much, but because they were unmotivated and poorly managed. If workers understand the expectations of the owners and know the negative consequences of not meeting them they will generally produce.

I talk to auctioneers who look at lots of deals of machining firms and they tell me that few viable companies sell for asset value these days. In 2012, a skilled workforce and motivated management team has real value – not Silicon Valley kind of numbers, but significantly more than two years ago – before the world started to turn.

Question: Do you think gay marriage should be legal throughout the United States?

Watch a Video of Barbara Streisand singing “People.”

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Do you feel connected with this blog?

From the film "You've Got Mail"

My 50th High School Reunion of the U-High class of 1962 is coming up at the end of May, but it really has already been happening over the last several months on the Web. A class of 100, which has dwindled to 80 with deaths and disappearances, has magically been brought together on the Internet with people sharing their stories, sometimes with amazing candor and sensitivity, like they never did in high school.

Yesterday, the group received the awful news that the wife of a classmate had died of a heart attack over the weekend. The heartfelt condolences have been pouring in to Bill K., a fellow many of us hardly knew in high school.

My classmate Bill K. has been one of the most open about his life’s triumphs and tragedies on the Web. I barely knew him 50 years ago and never connected with him over the five decades, but I grieve for him today because he has let me into his life with his revealing posts. I felt like crying when I read about his loss because he had shared several colorful and sometimes sad vignettes with the class in his writing.

I have become engrossed in the reunion process and have shared many stories about my life, hoping to move my classmates to tell their stories. Bill K. was one of the few to embrace the opportunity to openly share, including a story about his son’s death and the shattering experience of losing many friends on September 11. The Bill I knew as a funny prankster in school became a sympathetic, fascinating person on the Web, which is why he has received an outpouring of sincere condolences from classmates I am sure he barely knew long ago.

Reading the condolences was another reminder of the power of the Internet to bring communities of people together in a beautiful way. Facebook, though I mock it at times, is an amazing tool to connect people who would not pick up the phone or write a letter.

This blog’s ability to connect a community of disparate readers still surprises me. But it inspires me to push fresh ideas and expose my real feelings and personal stories. When I get 25 comments like I did on the last blog about the Caterpillar strike and several thousand people read the piece I feel good. The Today’s Machining World community is gelling and readers take precious minutes out of their days to share their thoughts. Does it change anything? You tell me if you think it makes the machining world a tiny bit better.

Question: Do you feel connected with the people who read this blog? Do you care about what they care about?

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Are We Entering a Period of Labor Unrest?

The International Association of Machinists and Aerospace Workers is involved in two significant high-profile strikes this week – at Caterpillar in Joliet, Illinois, and Hawker-Beechcraft in Wichita, Kansas. The situations are quite different, with Cat making record profits and Hawker on the cusp of bankruptcy with its finances controlled by a cadre of Hedge Funds – but the workers feel they are being abused in both places.

Cat is asking for a 6-year wage freeze for the striking workers, who do not comprise a majority of the Joliet workforce. Caterpillar can keep the plant going without the striking workers. The strike is interesting to me because Cat is expanding production in the U.S. now and building new plants. It has had relative labor peace since the awful Peoria war 10 years ago with the UAW, which set the stage for the tremendous profit growth in recent years. But it left lingering resentment between the workers who were entrenched and those whose contracts were not grandfathered. In Joliet we are seeing union anger play out as Cat uses its financial and manufacturing muscle emanating from its foreign plants and new non-union plants to undermine union workers at factories like Joliet.

The anger is understandable, with the Joliet workers seeing the company doing so well yet offering no wage increases and reduced health care benefits for the next six years. Meanwhile, Cat knows it can move the work to South Carolina or Texas where labor costs will be significantly lower than in Joliet, Illinois.

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In Wichita you have a weak company in Hawker-Beechcraft, which will be going into Chapter 11 bankruptcy imminently, while the workers are trying to position themselves in the next iteration of the struggling company, which was mated by Goldman Sachs in 2007 – perfect timing for disaster.

As often is the case when manufacturing companies are run by investment guys to score a quick killing – very bad things happen. Hawker-Beechcraft is getting slaughtered by Cessna these days, and the private aviation business is mediocre. Defense buying is also down.

On the other hand, while Caterpillar could move production to other facilities relatively easily, Wichita is the mecca of small plane building, and a new plant would require big investment and expensive training. This is a case where union and management are stuck with each other. Unfortunately, the key players in this deal are the hedge fund guys who control the crappy debt of Hawker. They are evidently going to swap debt for equity in the bankrupt company and then hammer the workers for concessions. The union can make life miserable for the new owners, which they are making clear by striking while the lawyers are dividing the pie. Meanwhile, if you were shopping for a private jet these days, you probably would not buy Hawker-Beechcraft’s offerings.

For the last several years we have been living in relative business-labor tranquility. These two machinist strikes in progress may auger in a period of more unrest, particularly with China a less attractive alternative. The high unemployment rate will theoretically mitigate labor contention, but the reality may be more volatility in the machining and machinery environment.

Question: What would you do if Caterpillar cut your benefits and froze your wages for six years?

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Scuttlebutt: College, Housing, Chrysler and Baseball

During the 2010-11 academic year, 157,588 Chinese students were studying in the U.S. – an increase of 23 percent from the previous year, according to the Institute of International Education.

May 1 is decision day for American colleges on the million applications from aspiring freshman. A lot of the seats that used to be occupied by Jimmy from Janesville and Susie from Springfield will be taken by Sing-Sung from Shanghai. Higher education in the United States is in a secular growth pattern despite skyrocketing tuitions because foreign students must pay full boat for an American college education. Their parents see it as the surest path to riches and respect in the world economy.

U.S. parents may be doubting the value of a four-year university and its accompanying debt load, but not the nouveau riche of Asia. Increasingly they are also applying to high school exchange programs and pricey prep schools to position their kids for the college application process. Things have changed since the ’70s and ’80s when the Japanese elites made a big push into American commerce. Japanese culture valued American markets, but businessmen were cautious about their families becoming too Americanized. The Chinese do not seem to carry the same worries.

So far I have not seen a backlash against the Chinese charge into American higher education, and the U.S. colleges are eager for the dollars. It definitely aids the trade balance numbers. It will be fascinating to monitor attitudes as Chinese students take more front row seats at lectures here.

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The aggregate numbers in housing are still rather grim, but when you drill into particular markets, you see a different picture. Two of the hottest markets are Phoenix and Tucson, which have been the poster children of the housing debacle. The price of homes is up 20% year over year there as speculators paying cash have been pouring hundreds of millions of dollars into buying homes for renting and flipping. It’s the best game in town these days, in Arizona.

My sister lives in Potomac, Maryland, near D.C. and she says houses are drawing multiple overbids these days as people are jumping into the market. The same is true in the Bay Area. San Francisco and Silicon Valley are red hot.

Unfortunately, back in the Rust Belt of Chicago, homes are still pretty dead, but industrial is picking up a bit. Rents are rising briskly in residential. A prediction: by the time you are ready to pull the trigger to buy a property, you may have missed the bottom by a year.

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Chrysler sales were up 20% in April versus a year ago. The Jeep Grand Cherokee is selling so well that Signore Marchionne, who is running the show now, is adding a third shift to make more SUVs and keep the plants running in the summer. With $4 gasoline, go figure.

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Baseball is a funny game. Albert Pujols signed a mega contract with the Los Angeles Angels. He went homerless (zero) in April for his new team. On Monday, Ryan Braun, who beat the Commissioner on alleged steroids usage during the offseason, hit three homers and a triple in one game. This is almost unheard of, but to do it at Petco Park in San Diego, which is bigger than Omaha, is ridiculous.

Add Joe Madden, Tampa Bay’s fabulous and slightly eccentric manager, who went “Steve Jobs minimalist” on his team headed for a short three game road trip. He suggested players take one pair of underwear, one shirt, and one pair of jeans. Say it ain’t so, Joe.

Question: Are you in the market for a house now?

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