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How to create a new industry

February 28, 2011

Last week, President Obama went to Cleveland to meet with small business owners to hear about their successes and setbacks. One of the prominent themes of that meeting was innovation. In his closing remarks from the forum, Obama cited multiple examples of innovation in companies he sees moving the economy forward, such as Ashlawn Energy, a company that Obama says is “poised to manufacture a next-generation energy storage system in Painesville [Ohio] that will improve efficiency.”

While we wait to see which companies will shape our future, an example of one company that transformed the U.S. economy over 100 years ago is Alcoa, the world’s leading producing of aluminum. The current head of that company, Klaus Kleinfeld, will be at Thomson Reuters tomorrow to discuss how to thrive in a new global economy as part of the Reuters Future Face of Finance Summit. But before we get ahead of ourselves, there’s a lot to learn from Alcoa’s past — and present day — success.

ALCOA’S BEGINNINGS
cmhallWhen Charles Martin Hall was a student at Oberlin College, his chemistry professor told the class that “fame and fortune awaited the man who would find an inexpensive way to separate the metal (aluminum)” from bauxite ore, the rock from which most aluminium is extracted. Hall turned out to be that student. In February of 1886, at the age of 22, he discovered that molten cryolite, a sodium aluminum fluoride, would dissolve aluminum oxide. That discovery completely changed the manner — and cost — of aluminum production. And it paved the way for the founding of Alcoa, which had a profound impact on the metals industry and the U.S. economy in ways that even Hall’s prophetic professor couldn’t have imagined.

So, how does an aluminum experiment performed in a summer kitchen attached to the back of Hall’s home lead to the creation of one of the nation’s largest companies? From the beginning, the importance of Hall’s discovery was recognized by businessmen of the day. In 1888, a group of Pittsburgh businessmen agreed to put up $50,000 to build a plant for what was then called the Pittsburgh Aluminum Company. They recognized that a cheap process to produce aluminum would have a major impact on the construction industry.

Before Hall’s innovation, aluminum was quite expensive. Hall and his backers knew that they needed aluminum to be seen as a common metal and not a specialty material. So they set out to achieve this goal and by 1897 the fledgling Alcoa managed to reduce the price for a pound of aluminum to $0.36 from $8. This positioned the company to  compete directly with the prevailing construction materials of the day, such as wood and steel, which paved the way for Alcoa’s success.

THE NEXT ALCOA?
smelterLooking at Alcoa in relation to Obama’s small business summit in Cleveland, one has to ask, of all the new companies that have been started recently, which ones will be talked about in 125 years as not only changing, but also creating an entirely new industry? One might say the tech boom was just that. We have yet to see if Facebook and Twitter will create the same amount of jobs that Alcoa does. Currently there are around 59,000 employees, at Alcoa (123 years old) compared to about 2,000 at Facebook (seven years old) and some 350 at Twitter (five years old).

So, we’d like you to tell us. What company do you think is or will be the next one born from an industry-changing innovation?

Alcoa founder Charles Martin Hall is seen in an undated file photo. REUTERS/Alcoa
Alcoa’s smelter near Geelong, Australia is seen in an undated handout photo. REUTERS/Alcoa

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