KOSICE, Slovakia -- When U.S. Steel paid $475 million to buy teetering Slovak steel maker VSZ five years ago, many thought the normally cautious, penny-pinching powers at 600 Grant St. had taken temporary leave of their senses.

Old Country / New Steel Frantisek Ivan/CTK

Steam rises into the sky from the Slovak U.S. Steel Kosice plant earlier this year. Also Today In a way, execs are returning favor done by forebears About the author Next Tomorrow: Labor unions struggle to find a role and a voice. Tuesday: U.S. Steel brings a measure of prosperity to Slovakia. Wednesday: A neglected Serbian steel industry gets a lesson in modernization. Thursday: Serbian workers who "get it" are groomed for bigger things. Your views, Your voices: Join a live online discussion of the series with staff writer Len Boselovic Thursday from noon to 1 p.m. Sign in at: www.postgazette.com/chat/business/.

The same doubts were cast three years later, when U.S. Steel expanded its central European beachhead by purchasing bankrupt Serbian steelmaker Sartid. That $33 million deal was negotiated against a backdrop of turmoil in Serbia, including the assassination of Prime Minister Zoran Djindjic at the Serbian Parliament building.

Now, U.S. Steel's risky strategy is receiving rave reviews. Each ton of steel from the European mills generates three times more profit than a ton from U.S. Steel's domestic plants. Since 2000, the old country has accounted for nearly half of the Pittsburgh-based steelmaker's operating profits.

With demand growing faster in the region than in the United States, U.S. Steel thinks the story will get even better.

Last week, U.S. Steel fired up the second blast furnace at its mill in Smederevo, 40 miles southeast of Belgrade, a move that will double output. And at its mill in Kosice, about six miles south of Slovakia's second-largest city, the steelmaker is investing $160 million in a galvanizing line that is expected to start producing higher profit, rust-resistant sheet steel just as Hyundai and Peugeot open car plants in Slovakia.

"There's some amazing things that have been accomplished there," says chief operating officer John H. Goodish, the executive who led U.S. Steel back overseas after nearly a 10-year absence.

The European mills propelled U.S. Steel into the ranks of the world's largest producers and injected some feistiness into a company whose bold moves in recent decades had made it smaller, not larger.

Says Goodish: "We have a glimpse of the world I don't think some of our competitors do."

But it's not only the financial returns at its Serbian and Slovakian operations that have executives on the 61st floor of U.S. Steel Tower feeling good. For many of them, resuscitating Eastern European mills returns a favor performed by their ancestors, whose migration to the United States in the early 19th century helped build the U.S. industry.

"It's been a home run acquisition any way you want to slice it," says Mark Parr, an analyst with KeyBanc Capital Markets.

To be sure, challenges remain as Slovakia and Serbia struggle with issues confronting the rest of formerly Communist Eastern Europe. The transition from communism to market-based economies remains perilous, and privatization, the process of transferring state-owned enterprises to private ownership, has been fraught with corruption. Slovakia and Serbia have proved no exception.

	Online Chart: Click image to view more details on U.S. Steel operations in Europe.

Moreover, privatization can lead to higher unemployment in a region where joblessness is already a serious concern. State-owned companies -- basically employment agencies under Communist rule -- padded their payrolls with thousands of workers who weren't necessary by Western business standards.

There also were serious questions about whether U.S. Steel could manage the European mills. Concerns about the language barrier were overshadowed by culture clashes. Would steelworkers who never had worn a hard hat, who sometimes reported to work drunk, who were never expected to think for themselves, adapt to Western practices?

Although U.S. Steel promised to maintain employment levels for the time being, most Western investors insist on slashing work forces before they take over. Privatization also has been slowed because a host of laws regarding taxes, bankruptcy, pensions and other business issues have to be developed.

Slovakia, a nation of 5.4 million people and the size of two New Hampshires, has an unemployment rate of 13 percent. The rate is slightly more prevalent in Kosice, located just north of the Hungarian border in economically depressed eastern Slovakia.

Unemployment of 30 percent is only one of the concerns confronting Serbia, an ethnically charged nation the size of Kentucky with a population of 10.8 million.

Part of a splintered nation long referred to as the powder keg of Europe, Serbia is recovering from Western sanctions imposed to oust former Yugoslav President Slobodan Milosevic. There is stark evidence a few blocks from the U.S. embassy, where damage from NATO's 1999 bombing campaign can be seen on Knez Milosa, a major Belgrade thoroughfare.

As one of the largest foreign companies in both countries, U.S. Steel executives are bombarded with questions from potential investors about the countries' political and business climate.

"We're very upfront about some of the issues you face," says Christopher J. Navetta, who just completed a two-year tour as president of U.S. Steel Kosice.

U.S. Steel hopes skilled Slovak and Serb work forces, paid wages well below U.S. and Western European standards, will attract steel-consuming companies to the region.

Serbia's recent past complicates that nation's ability to attract foreign investors, a problem government and business leaders expect will gradually subside. Slovakia, farther down the road to privatization, isn't as burdened with those issues and is becoming more attractive. With Volkswagen already in the country and Peugeot and Hyundai on the way, Slovakia expects to produce more cars per-capita than any other nation by the end of the decade.

"Growth rates in the region are going to be much faster than they will be in Western Europe," says Ralph Johnson, former U.S. ambassador to Slovakia and a U.S. Steel consultant.

	Online Map: Click image to more detail on locations of U.S. Steel operations in Europe

U.S. Steel's European gambit unfolded as the U.S. industry descended into its deepest recession in two decades and the global industry took its first steps toward the consolidation that analysts have long said had to happen.

For years, U.S. producers have complained that foreign competitors had an unfair advantage because they weren't saddled with health care and pension expenses, benefits that have cost domestic steelmakers billions of dollars. Their cry became more acute when a wave of cheap foreign steel began hitting U.S. shores in 1998.

The ensuing crisis triggered bankruptcy filings by more than two dozen steel companies, temporary import relief from the Bush administration and a massive industry consolidation. Bankrupt steelmakers shed $8 billion in pension obligations and millions more in retiree health-care costs.

The makeover made them ripe targets for bargain-minded acquirers, who insisted on more favorable terms with the United Steelworkers union before completing their purchases.

The buyers included U.S. Steel, which acquired National Steel for $1.3 billion, and financier Wilbur Ross, who cobbled together Richfield, Ohio-based International Steel Group from the carcasses of Bethlehem Steel, LTV, Weirton Steel and other producers.

Even Russian producer Severstal joined in, acquiring Rouge Steel, once owned by Ford Motor Co.

Meanwhile, government-owned steelmakers in formerly Communist Eastern Europe were put on the block as those countries moved haltingly toward market-based economies. That's what drew U.S. Steel, which also had shopped for steelmakers in Hungary and Poland but was outbid by Lakshmi Mittal. Mittal also purchased producers in Bosnia, the Czech Republic, Romania and Macedonia. In April, the global steel baron acquired International Steel Group, creating the world's largest steel producer.

Industry consolidation, which analysts say they expect to continue, has put the acquirers on firmer footing, giving them more leverage with customers, greater production flexibility and economies of scale -- the ability to spread their fixed costs, such as labor and equipment, over a broader base of operations.

The lower costs are evident at U.S. Steel's European mills. Although high by local standards, hourly wages of $6.50 in Slovakia and $2.40 in Serbia are a far cry from $34.23 an hour, the average U.S. producers paid their American workers last year in wages, benefits and other employment-related costs.

In Serbia, U.S. Steel's 8,500 workers receive government-provided health care coverage. U.S. Steel pays into a government-sponsored national retirement plan, payments that were not being made prior to the 2003 acquisition.

In Slovakia, where the Kosice mill and related operations employ 16,500, union workers received an 8 percent monthly pay increase in February. The new labor agreement included a base pay increase of 800 Slovak crowns a month -- about $25.

Lower employment costs aren't the only advantage. The vast majority of U.S. Steel Europe's $1 billion operating profit since 2000 -- most of it generated at Kosice -- has gone untaxed. Credits provided by the Slovak government in exchange for U.S. Steel's promise to reinvest in Kosice limited income tax payments to $16 million this year and 2004.

The tax credits, set to expire toward the end of the decade, were one product of complex negotiations in both countries. The liabilities of the debilitated steelmakers and the fate of thousands of their workers were also major concerns.

Most of the $475 million price tag for Kosice reflects $325 million in debts rung up during privatization that U.S. Steel assumed as part of the purchase. In riskier Serbia, those liabilities were assumed by the government, the reason U.S. Steel paid so little for its mills.

At both sites, the company agreed to limit work force reductions to attrition and workers who were fired for wrongdoing. It also promised to invest $700 million in the Slovak mill and another $150 million at Smederevo and Sabac, a sister mill. The investments that are running ahead of schedule. U.S. Steel expects to spend $280 million improving the European mills this year compared to $475 million at its U.S. plants.

While most of Eastern Europe's former government-owned steel producers have been claimed, U.S. Steel is scouring the region for raw materials suppliers, hoping to acquire them outright or with partners. The company also is looking at South America, China and India. It's a dramatic change for a company that sold its only overseas operation, a partial interest in a Dutch automotive components producer, in 1990.

The global outlook recalls the days when U.S. Steel had steelmaking interests in Spain and mining ventures in Africa and Venezuela. It has invigorated many of its employees, none more than its U.S. managers serving overseas.

"The company is starting to look now more like it did in the '70s," says James F. Connor, U.S. Steel Kosice's chief financial officer.