From the WSJ...
TEXAS JOURNAL
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Some Question
Zoltek's Plan
In Abilene
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By Jonathan Weil
Staff Reporter of The Wall Street Journal
ABILENE -- Flush with more than $5 million in
economic-development incentives, Zoltek Cos. set out eight months
ago to make this West Texas city the carbon-fiber capital of the
world.
Civic leaders celebrated the impending arrival of 250 badly needed
jobs. The Texas Department of Economic Development dubbed
Zoltek's plant here a "success story" and posted the tale on its Web
site.
But now questions are being raised about the St. Louis-based
manufacturer's ability to make good on its promises. Sales out of the
Abilene plant are behind schedule. Securities analysts and former
company executives also suggest Zoltek might not have as many
customers as first thought. And rivals are casting doubts on the
company's ability to come up with cheap raw materials, a key
component in Zoltek's long-term plan to slash prices 37% and
capture nearly half of the fast-growing carbon-fiber market.
"They have to sell their product somewhere, and if it doesn't get sold
those people don't have jobs," says John Bossler, president of
Ambassador Capital Management, a research firm in Manchester,
N.H. Mr. Bossler, who recently completed research reports on
Zoltek for several institutional investors, says that if significant sales
don't materialize soon, "what's going to be left is a building shell
that's not going to be manufacturing anything."
The company says the skeptics are way off base. Zsolt Rumy,
Zoltek's founder and chief executive officer, says: "Like any other
start-up, we've had some disappointments. That's nothing new,
nothing unusual. We've done a hell of a job."
And officials in this city of 112,000 say they are confident the
company will prove to be worth every penny used to lure it to town:
$3.2 million in low-interest loans, $1.6 million in grants, an estimated
$650,000 in property-tax abatements and use of a building owned by
the Development Corporation of Abilene. (By pledging to make
$60.2 million in capital improvements, Zoltek also won designation as
a state enterprise-zone project, qualifying it for up to $925,000 in
state tax incentives.)
"They have always done exactly what they said they were going to
do," says John Breier, Abilene's economic-development director. He
says he is certain Zoltek will meet the terms of its contract.
That pact calls for the company to boost the local payroll to 250 by
the end of 1998, and to increase production capacity to 11 lines, each
capable of producing one million pounds annually of carbon fiber, a
strong but lightweight material used in automobile drive shafts,
cellular telephone casings and a host of other products.
And certainly Zoltek has met and even exceeded some of the terms
of the contract. Currently, the Abilene facility employs 86, whereas
the pact had called for 65 jobs by the end of 1997. What's more, the
plant now has three production lines in place, instead of the two
expected by year end.
But critics question Zoltek's ability to support continued expansion
at the plant, or to fulfill its bold long-term growth plan. Concerns
center on three issues:
-- A sales shortfall. In August, Zoltek said in its third-quarter report
that it expected its new Abilene lines would "contribute significantly
to carbon-fiber sales" during its fiscal fourth quarter ending Sept. 30.
But now the company says that won't happen until the second
quarter, ending March 30. Mr. Rumy warned analysts last month
that 1998 profits would be affected by delays in the start-up of new
production lines in Texas and at another plant in Hungary.
Orel Kiphart, former president of Zoltek's carbon-fiber unit, says the
lack of sales out of Abiline "tells me they have a major problem."
Other former Zoltek executives echo his concerns.
Mr. Kiphart, who is suing the company claiming he is owed
severance pay after resigning from Zoltek in May, says the
company's plan to have 250 workers in Abilene next year is "wishful
dreaming." Mr. Kiphart is now a vice president at Spartanburg Steel
Products in Spartanburg, S.C.
For its part, Zoltek notes that it vowed in its Abilene contract to
"make best efforts" to reach its goals and says it expects to have
added 11 production lines throughout the company by the end of
1998, the majority of which will be in Abilene. As for Mr. Kiphart,
Mr. Rumy calls him "a disgruntled former employee."
-- Customer concerns. According to a Merrill Lynch transcript of a
presentation Zoltek made to analysts in March, Mr. Rumy said the
company's strategy is to "establish a partnership" with companies in
expanding markets for carbon fibers. The transcript names nine
companies -- B.F. Goodrich Co.; TRW Inc.; PPG Industries Inc.;
General Motors Corp.; Thiokol Corp.; Morrison Molded Fiberglass
(now known as Strongwell); Stoughton Composites LLC and
American President Lines Ltd.; and Owens-Corning Fiberglas Corp.
-- as "strategic partnerships."
Mr. Bossler of Ambassador Capital says Zoltek has touted this list
to analysts, giving the impression these companies are current or
potential customers, especially by including Goodrich and TRW,
which are known to have contracts with Zoltek.
But PPG, Thiokol, Strongwell, Stoughton, American President and
Owens-Corning deny that they ever entered into any strategic
partnerships with Zoltek. PPG and Owens-Corning say they aren't
Zoltek customers and aren't sure if they ever were. Thiokol,
Strongwell, Stoughton and American President say they bought fiber
from Zoltek in the past, but aren't customers now. GM declined to
comment.
When initially questioned about the list, Mr. Rumy said that his use
of the term "strategic partnership" shouldn't have suggested that
Zoltek had concrete business relationships with the companies.
But in a later interview, he said that he never used the term
"strategic partnership" to describe Zoltek's relationship with any
company and that his company can't be responsible for anything
contained in the Merrill Lynch transcript.
-- The raw-material problem. Zoltek has told analysts that it plans to
boost capacity to 40 million pounds a year by 2000, most of it in
Abilene. That's a lot of carbon fiber: Analysts estimate that
producers around the world will have made just 48 million pounds in
total for 1997. But the company says it will attract enough customers
to support such a bold expansion because it will eventually cut the
price for its fiber to $5 a pound from $8.
To lower prices that much, Zoltek will have to make its own
high-quality acrylic fiber, called precursor, the raw material for
carbon fiber. The company says it is already starting to manufacture
precursor at a former textile plant in Hungary that it bought two
years ago.
Mr. Rumy told securities analysts in a conference call last month
that the material coming out of Hungary was likely to produce fiber
with "better properties" than that made with precursor from a unit of
Britain's Courtalds PLC, the world's only supplier of the type of
precursor Zoltek uses. But Mr. Rumy also told analysts, "I don't
think we have enough tests," adding, "We're not ready to make any
announcements or claims yet."
Rivals definitely don't think Zoltek is ready, and doubt it ever will
be. A study commissioned by carbon-fiber maker SGL Carbon AG of
Germany in 1996 concluded that, at least at that time, there were
"serious doubts that Zoltek's operation in Hungary is able to
produce acrylic-fiber precursor for carbon fibers." SGL officials say
the company isn't worried.
Officials at Courtalds say they aren't fretting, either. John Fagge, a
chemical engineer and director of precursor products, says Courtalds
"reached a conclusion early on that we didn't need to take any
precipitous action" to remain competitive.
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