- Background about Lincoln Electric
- Learning gleaned from previous experiences
- LE’s entry into Japanese, South Korean and Chinese markets
- South Korea
- People’s Republic of China
- How should LE enter Indian Markets?
- First option- LE acquiring an existing welding business enterprise
- Second option: LE entering into strategic alliances with Indian Company
- Third option: Setting up manufacturing locations within India
Initially LE could think in terms of setting up resident offices in major cities of India, to scout for business opportunities. If it finds that there are ample business in conformity with the size and scope of LE’s business activities, it would be necessary to enter into strategic alliances with strong, established and influential welding partner like the Advanis, ESAB India ( ESAB is a competitor back in US). The stakes need to be commensurate with the capital and risks taken by each partner in the alliance, and in consistency with LE’s global business policies. These strategic alliances would offer ample opportunities for LE to study the Indian market conditions and the complexities of welding business in this part of the world.
Lincoln Electric Co. is one of the largest welding equipment and consumables/supplies Company in the USA. It was established in the year 1909, in Cleveland, and by a period of 8 decades or so, it had diversified into business of welding equipments and supplies.
In the US, market share in welding business is largely fragmented and around six big players hold perhaps the majority share, leaving the others, thousand firms or so to divide the rest of the market among themselves. Welding business has never been easy since smaller firms tend to undercut on pricing of consumables, making it a highly competitive market.
However, Lincoln has managed to consolidate its position not only in US, but also marketing its products in nearly 160 countries of the globe. It has also carved niche markets in South Korea, China, Japan, etc.
Coming to the Indian markets, it is seen that the $500M welding market is not without risks and challenges, especially in the cultural and business scenario in India may be different from what LE has experiences in other Asian countries.
Hence, it would be necessary to enter into strategic alliances with strong, established and influential welding partners in order to initiate and sustain a good marketing foothold in India.
Besides, these strategic alliances would offer ample opportunities for LE to study the Indian conditions and the complexities of welding business in this part of the world and device strategic plans and programs that could specifically address business challenges. Once it has gained sufficient knowledge and experience in the market it could think in terms of setting its own manufacturing plant in India.
Lincoln Electric Co. could be said to be one of the largest welding equipment and consumables/supplies Company in the USA. It was established in the year 1909, in Cleveland, and by the year 1922, it had diversified into business of welding equipments and supplies, making this its principal business. “Lincoln is the world’s premier designer and manufacturer of arc welding products, robotic welding systems, plasma and oxyfuel cutting equipment.” (Lincoln electric 2007).
Today it is a well established name in all types of welding and cutting, including use of advanced arc welding and sophisticated robotic welding needs for specific industrial, commercial and defense installation purposes, throughout the world.
Welding constitutes a very important task in major activities, including construction of bridges, buildings, pipelines used in the oil, chemical and gas industries, in power generation, process industries, shipbuilding, etc. Besides, welding is needed, interalia, in automobile, transportation, power installations and also in farming and mining activities.
It is seen that competition in line of welding in US is largely fragmented and there are only six big players, who hold around 45% market share among themselves and a large number of smaller ones. (Lincoln electric 2008). The main business houses with which Lincoln Electric needs to compete are ESAB, Illinois Tool Works, Air Liquide, Kobelco, etc. While welding may be a basic concept, its equipment and supplies have undergone dramatic changes, and the modern technological advancement aided by massive research and development by Lincoln, has produced state-of-the-art high end welding equipments and consumables to support them.
With technological progress in all major parts of Europe and also in developing countries like South Korea, Japan, China and India, it has become necessary to produce and cater to highly fastidious and quality conscious segment of discerning buyers from these countries who could perhaps be interested in acquiring only the best breed of welding products and consumables from the Lincoln stables.
This has been reinforced by the fact that welding industry standards have become more exacting, quality driven and performance oriented over the years and sellers need to adhere to major pre-contractual commitments and after-sales service in order to be able to survive and thrive in a highly competitive welding business scenario. Moreover, global customer needs may be varied and in need of highly skilled and trained personnel, which LE does possess in good measure. Moreover, it is also seen that they have a wide “global sales and distributor network that covers more than 160 countries. “(Company interview excerpt: Anthony A. Massaro – Lincoln electric holdings inc (LECO) 1999).
Background about Lincoln Electric
Having a very humble beginning way back in 1909, Lincoln has carved a niche of its own in the world of welding equipment, consumables and supplies. It touched $1 billion mark during 1995 and simultaneously its shares began trading in NASDAQ. (Lincoln electric 2008). One of the principal reasons for the phenomenon growth and financial successes is that it believes in healthy human relation with workforce and rewards it based on performance criteria.
It is a pioneer in human relations innovation which has since been adopted as standard practices among industries across America. The commitment LE shows to its workforce is reciprocated manifold by them in terms of efficient performance and powerful commitment to work culture and ethos. Their commitment to the values cherished by LE underpins their work ethos and desire to build and sustain a strong and viable company.
Due to motivated workforce, the company has earned numerous laurels and awards, especially in the technical aspects of welding. The company’s desire for innovativeness, evidences from the fact that it spends nearly 2% of its sales revenues for R&D, transformed it into a market leader in its chosen field of welding equipments, while many of its competitors ended up diversifying into other kinds of allied business to maintain their marketing competencies.
Along with good human relations and innovativeness, the third factor that brought Lincoln to the top of the chart was their passion for solving customers’ welding reacted problems rather than merely trying to push their products on to customers. The technical engineers interacted with clients, studied their requirements and problems, and made advices on how to solve them, using their technological and product skills. (Lincoln electric 2008). This gave customers the notion that LE was keen to solve their problems rather than promote their products, and this strategy was well received and rewarded by customers all over the world.
Learning gleaned from previous experiences
“Lincoln Electric Holdings sells its products principally through industrial distributors and retailers, as well as directly to users of welding products in North America; and through direct sales force and agents internationally.” (Lincoln electric holdings Inc. (LECO) 2008). The wholly owned subsidiaries and joint ventures of the company are located at United States, Argentina, Australia, Brazil, Canada, Colombia, France, Germany, Indonesia, Italy, Mexico, Netherlands, Peoples’ Republic of China, Poland, Portugal, Spain, Taiwan, Turkey, United Kingdom, Venezuela, Vietnam. For the purpose of managerial and operational control, the company has divided its locations into three segments – North America, Europe, and other countries.
The countries that come in the ‘other countries’ category include Australia, Brazil, Canada, Colombia, Germany, People’s Republic of China, (PROC) Venezuela and Vietnam. “Lincoln has 42 manufacturing locations, including operations and joint ventures in 21 countries and a worldwide network of distributors and sales offices covering more than 160 countries.” (Lincoln electric reports 2009 first quarter financial results 2009).
LE’s forays into the global business markets has met with a reasonable amount of success, while this may not have been totally in congruence with results estimated by the company. For one thing, global business has many risks in terms of exchange rate fluctuations, country-wise regulatory norms, challenges dealing with non-native workforce, trade unionism, local corporate management, governmental issues and government specific regulations that may interfere with normal business operations.
“The Company conducts a significant amount of its business and has a number of operating facilities in countries outside the United States. As a result, the Company is subject to business risks inherent to non-U.S. activities, including political uncertainty, import and export limitations, exchange controls and currency fluctuations.” (Lincoln electric the welding experts 2008).
LE’s entry into Japanese, South Korean and Chinese markets
In the context of Asian countries, it had made forays into the Japanese, South Korean and Chinese markets. An assessment of growth in these regions is seen as follows:
It is seen that LE did not have a strong distribution channel for its product lines in Japan nor a clear cut strategy on how to operate in competitive Japanese welding markets. The modus operandi by which LE products were being sold in Japan were through niche products sold to select customers. It did not have a strong brand image or extensive network that could have assured it of good market share in Japan and also, LE may have misjudged or wrongly assessed the competitive aspects in Japan before making forays into Japan.
In SK, LE had struck a distributorship which ran for almost 3 decades. It did not have a strong brand presence and were also in a disadvantage in not having a production base in SK which could possibly result in production efficiencies being translated into market successes. Thus, it had to ship welding equipments from Cleveland to Seoul to meet customer orders, resulting in heavy costs and long lead times. Thus, it is envisaged that LE need to service SK from production unit in China to achieve long term profitability.
People’s Republic of China
The Chinese experience had proved to be most challenging for LE, not only in terms of interacting with local workforce, but also in terms of outsourcing managerial talent to oversee them. Initially, LE’s efforts to set up shop in China proved almost abortive, with issues like availability of managerial talent, governmental laws and regulations, establishing trade outlets, language and local culture issues, proving almost insurmountable.
However, a joint venture with Taiwanese firm saved the situation and helped develop strategic marketing initiatives and negotiate successfully with local Shanghais authorities. Again, the company is now thinking of acquiring 100% stakes ( now 48%) of Jinzhou Jin Tai Welding and Metal Co., (“Jin Tai”), a welding wire business in Jinzhou, China. This acquisition will greatly expand the Company’s customer base and bring significant cost-competitive MIG wire manufacturing capacity under the Company’s control. “(Lincoln electric reports 2009 first quarter financial results 2009).
It is believed that of all global operations undertaken by LE, China proved to be most arduous and risk filled and placed a high premium on its management team. However, LE was not too much apprehensive about protection of its Intellectual Property Rights (IPR) and did not think it important to make its high end products in China.
How should LE enter Indian markets?
It would be injudicious on the part of LE to consider a possible Indian entry at par with that of another Eastern country. For one thing, Indian economy is booming as never before, and major growth areas would be in the construction, public infrastructural development- building of roads, bridges, etc. Again, India has made vast improvements in science and technology. This has been complemented with an Annual GDP growth rate of around 6% which is believed to grow higher in the days to come.
Moreover, it is also seen that industrial growth, especially in core areas like construction, engineering and oil, chemicals and gas sectors in India is market driven and is rising exponentially. All these are critical growth concerns for a global company like LE. It would definitely be in LE’s long term global plans to invest in Indian infra-structure, and share profit prospects of a burgeoning economic growth in this part of Asia. However, this $500M welding market is not without risks and challenges.
It is seen that LE’s strategies of placing US systems in other parts of the globe did not prove successful. It was only partially successful in Europe, and failed in non-Europeans counties. It was only when the managers realised that specialised remuneration system needs to be devised and implemented, especially in the Asian context, that LE met with success in non-US markets. (Lane 2004).
LE’s entry into the Indian markets could envisage any of the following strategies
Either through acquisitions, or takeovers, or secondly by joint ventureships, or partnerships or finally, by setting up manufacturing units in India. It is necessary to consider each of these options in depth.
First option: LE acquiring an existing welding/cutting business enterprise
The aspect that needs to be considered is the purchase price that needs to be in consonance with LE’s standard acquisition policies, especially with regard to valuation of assets, liabilities, ROI, minimum IRR parameters and the fact that acquisition price needs to be less than 8 times earnings before interest, taxes, depreciation and amortization (EBITA). Given the fact that industrial growth in India is on the rise, it would be necessary for LE to pay a higher acquisition price in India, than what it would be in a position to pay for acquisitions in other parts of the world. This would be in collusion course with the management policies enunciated by top management and hence it would be advisable not to go ahead with acquisitions in India under the present scenario.
Second option: LE entering into a strategic alliance/partnership with Indian Company
It is seen that LE operates under strategic alliances and own plants in nearly 21 countries. This has underpinned global operations and has contributed immensely to the overall business success of the company. As a matter of fact the achievements made by LE in many countries, particularly the People’s Republic of China have been primarily due to strong partnerships that have withstood local challenges.
International operations are fraught with risks relating to overseas laws and conventions, including EU and European Convention laws, norms and guidelines relating to exports and import monitoring, curbs on technology relocation, taxation and flight of capital, repatriation of earnings, exchange controls, and so on. Thus it would be in the best interests if LE were to enter into strategic partnerships with large Indian organisations like Advanis, ESAB India, D & H Secheron or others who would be able to provide local leadership and business solutions to conduct operations in India.
However, it is quite possible that LE’s operations may be adversely affected in the event the joint alliances do not effectively address labour issues, impacts of trade union and other business impediments that may retard progression of business in India. Therefore, it is necessary that the cultural and local settings, including training of local manpower, need to be taken into account before enjoining in joint venture business in the Indian environment.
Another enjoining issue would be the stakes that LE needs to have in the Indian business. It is necessary to have majority stakes (more than51%) in order to retain controlling interests. These vital interests in the Indian business could remain with LE. Alternatively, it could also acquire a running manufacturing unit in India, and restructure it in line with LE’s manufacturing units in other parts of the world.
This is in terms of management, manpower, marketing, money resources and uniform standardized manufacturing processes. This would be more appropriate rather than to start a new manufacturing unit afresh, since the risks of starting a new venture in an unknown destination is higher than running an existing unit with the help of local partners.
Once LE is able to acquire the necessary technical know how and commercial expertise, it could think in terms of setting up a fresh unit independently in India.
Third option: Setting up manufacturing locations within India
The Chinese experience at manufacturing products at Shanghai would serve LE well in as far as production is concerned. Were it not for the joint venture partnership, it is quite possible that LE would not have been able to make the inroads in Chinese market that it has been able to achieve. Similarly, it would not be advisable to set up manufacturing unit in India until such time LE is fully aware of the contemporary markets in India, competitors, risks and challenges and the intense competitive business from both genuine and dubious products.
India presents a bigger challenge in terms of the proliferation and growth of a plethora of small and medium arc welding and cutting units, who are willing to undercut, to gain and maintain market shares in a ruthlessly competitive market.
LE would need to undertake a complete and comprehensive market study of welding market before embarking on such ambitious plans. Thus, it would not be a wise option for LE to enter manufacturing right away.
This topic deals with whether Lincoln Electrics needs to build operations in India. It is believed that initially LE could think in terms of setting up a resident office in India to scout for business opportunities. If it finds that there is ample scope in conformity with the size and scope of LE’s business activities, it would be necessary to enter into strategic alliances with strong, established and influential welding partner like the Advanis, ESAB India ( ESAB is a competitor back in US).
The stakes need to be commensurate with the capital and risks taken by each partner in the alliance, and in consistency with LE’s global business policies. These strategic alliances would offer ample opportunities for LE to study the Indian market conditions and the complexities of welding business in this part of the world. After several years of such business, it would be appropriate to set up manufacturing units with help of local managers that could be commercially successful.
Company interview excerpt: Anthony A. Massaro – Lincoln electric holdings inc (LECO) 1999, TWST. Web.
Lane, Henry W 2004, The Blackwell handbook of global management: A guide to managing complexity, Blackwell publishing. Web.
Lincoln electric 2007. Web.
Lincoln electric 2008, Jordan Siegel. (Provided by the customer).
Lincoln electric holdings Inc. (LECO) 2008, Finance. Web.
Lincoln electric reports 2009 first quarter financial results 2009, Reuters. Web.
Lincoln electric the welding experts 2008, Annual report. Web.
Lincoln electric reports 2009 first quarter financial results 2009, examiner. Web.