By Stuart Burns
Some were surprised by Alcoa's (NYSE:AA) proposed purchase of jet engine component maker Firth Rixson, mostly on the basis that Firth Rixson works in nickel and titanium alloys rather than Alcoa's home turf of aluminum.
Alcoa, more than any firm, has been identified with aluminum since it started in 1888 as the Aluminum Company of America, and where others have risen and fallen or been taken over by rivals, Alcoa has endured and flourished by staying true to its core material.
But it has done so largely because of its ability to innovate and respond to the market's demands, and the company's purchase of Firth Rixson should be seen as yet another chapter in that story. It is not that Alcoa is turning its back on aluminum but, rather, it recognizes what just about every business strategy guru will tell you; to be successful, you have to look to your core strengths and build on those.
In Alcoa's case, that is experience in material applications for high-tech applications, such as aerospace and automotive. The material used is less important than the understanding of the application and experience in the industry concerned. In Alcoa's case, the parameters around material selection, performance and engineering will be similar for any metal; it is understanding the application that is key.
It has been a long time since Alcoa was simply a company that bashes out finished metal. Aerospace already contributes 17% of revenue, and is growing. So, when Alcoa looks to find a solution to a client's engineering challenge, whether the component is made of aluminum or nickel or titanium is not the issue. Indeed, having depth of experience in all materials is a distinct advantage in industries constantly pushing the boundaries of material applications.
Alcoa's purchase of Firth Rixson should be seen in the same light as its $100 million investment in a new plant to make nickel-based alloy engine parts last month, and its announcement last week that it would invest $25 million in Virginia to produce nickel alloy jet engine blades. The firm is playing to its strengths, and the stock market seems to like it; shares are up 80% from a year ago, when Alcoa was struggling with an aluminum market awash with metal and prices at or below cost for many of its older smelters.
Hopefully, success in these new areas will strengthen and stabilize returns, reducing calls for the firm to be broken up or to spin off divisions, like Alcan did with its rolling division, Novelis, in 2005, only to be swallowed up by Rio Tinto a short while later. As Reuters observed in January, Alcoa quietly revised the company description that appears in its news releases. Instead of "the world's leading producer of primary and fabricated aluminum," it now introduces itself as "a global leader in lightweight metals engineering and manufacturing." Way to go.