Should Lincoln Electric expand into India by investing in a major production facility there? I think that Lincoln Electric (LE) should definitely has a production facility in India because of its growth and foreseen opportunities, but if I were LE I would suggest to enter with a local partner in order to gain knowledge and experience in how the country operates in terms of bureaucracy, labor, culture and so on. LE is known for its high quality products and its technical innovations.
On its 60 years of international experience, the company gained valuable knowledge on what to do and what to avoid when moving abroad, and that is why they refocused their expansion strategy into joint ventures, instead of acquisitions avoiding the problems suffered in the early 1990s. Moreover, their technical know-how and sales structure allow them to provide the best solution for its customer’s worldwide and differentiate from its competitors. On the upside of moving to India, the country represents a huge growth opportunity for the company.
With a GDP increase of 6% in 2005 and the projection done by Goldman Sachs to become the fastest-growing economy in the next 50 years globally, a lot of chances will emerge for LE in the region. India foresees an increasing demand on construction and infrastructure projects that will require a lot of wilding machinery and consumables. Being the 3rd market in Asia and having a 500 million dollar (2006) market for the welding industry, India will become a key strategic region for LE in its effort to keep the global leading position.
Finally, the fact that the country is friendly to use of pay-for-performance would allow LE to introduce some of their keys of success previously used in the US, the HR policies. These policies would need to be modified in order to upheld with the Indian legislation, but the changes are minor compared to other countries where such policies did not fit (Europe). On the downside, large firms only take the 56% of the welding consumables sales, but what it is more hazardous is the fact that the remaining 44%, comes from small companies capable of imitating new designs. That could eopardize LE position of finding a partner in India, because the company would be exposed to share some of its secrets with them, and as the case states, they wouldn’t mind coping it in the future. Another difficulty the company will face is the two main competitors that are already doing business in India, Ador welding Ltd and ESAD India. Finally, we have to wonder how the Liability of Foreigners would affect the company. Even though we do not have any direct reference on the culture and political situation, we can assume that they are a lot different to what the company is used in its own country.
Therefore, and even though the recommendation is to enter India finding a partner that can help them understanding the culture, distribution channels and help them dealing with the Indian bureaucracy, the LOF variables should be taking into account to help the company minimize the failure risk of succeeding in India. 2. Irrespective of your answer to the first question, suppose Lincoln Electric does expand into the Indian market by investing in a production facility: Should they enter through acquisition, Greenfield, or joint venture?
What factors inform your decision among these entry modes? Analyzing the pros and cons of each entry mode, I would say that a Joint Venture(JV) is the best option for LE to enter the country. On the one hand, local partners can help LE to reduce the LOF. The local experience operating in the country would allow LE to accelerate the entry, to learn how to do business in India (how does the Indian culture affect businesses and how does the government and country legislation work) and to share some costs.
As the CEO mentioned in the case the use of JV in China was key for starting business in that country (even though they are starting to do thing by their own) and that without the help from a local partner they could not have succeeded in that market. On the other hand, the use of JV with a local partner would expose the company to share some confidential information that could be used by the partner, copying or imitating technology, in case the deal break. Another negative point is the fact that in a later stage of the relationship, interests might differ.
As it happens in China, the partner wants to grow in volume but LE wants to do it in revenues. All this conflicts, even though are necessary, can erode the business relationship. Another way of entering the country would be either by an acquisition of an existing Indian company or by starting from scratch a new plant. These two options in my opinion also have some positive and negative points, but do not overcome JV. By acquiring a company within the welding industry the problem of which valuation to use become essential.
As the case mentioned, LE has some very strict criteria to proceed with the acquisition and, the purchase price would be affected by the economic booming in India influencing on the price premium to pay. The strategy to use for acquiring such companies would also raise the difficulty because negotiations would include Indian family owned businesses instead of big corporations. Moreover, LE would inherit existing assets and labor that could not be on its best interest.
As a consequence some legal problems can arise to get rid of those unwanted employees and to divesture the assets they do not want. Finally, the integration cost would arise on the merger. On the contrary, a positive point to enter acquiring a firm is the speed in which they would start operations in India and how the acquired company could help them to reduce the LOF. They would also have a control position and would run the business as they want to without dealing with a local partner sharing information.
Another positive point to acquire a company is to have some kind of recognition from the market. The local brand would be already known in the Indian market and LE could leverage that in its advantage. Finally, building a new facility could help LE to organically learn the culture, create a plant with the latest technology and set the same American operational efficiencies. Moreover, the company would have complete control, not knowledge sharing, and could hire staff that best fit their values and culture.
On the other side, building a plant is slower than the other methods and the inexistence of trading records in the region can difficult the generation of clients. Another problem of starting from scratch is that cost would be borne only by LE without the possibility of sharing them during the first stage in the country. Finally, the company might find some kind of problems with the government that can delay the building of the new facility and produce problems with the financials forecasted.