It is our recommendation that Lincoln Electric enters the high growth Indian market by acquiring majority stake in smaller welding equipment manufacturers. The company has set high performance standards for itself, especially their goal to grow at double the rate of welding industry’s growth rate which is predicted to be 3% in 2006. These growths are driven by high demand of welding products in China, India, and Eastern Europe. Given the fact that Lincoln has a well-established set-up to cater demands of China and Europe, entry to Indian market, with $500m in annual industry sales, is next logical step.
We recommend that Lincoln should enter only the equipment market right now and avoid the consumable market. Though consumables form 58% of global sales, its market is highly fragmented in India. Local players control 44% of the market and will provide still price competition. The only major competition currently in equipment market in India is ESAB.
Leveraging its expertise in high quality welding equipment and solutions and by locating itself in proximity of major manufacturers and multinationals, Lincoln can quickly gain market share in the equipment business by differentiating on basis of quality and after sales support.
Though Lincoln will have decision making power through majority stake, they should let local managers manage the labor market as they understand the cultural and political nuances of the country. A lot of changes are taking place in Indian labor market currently and it would be tough for Lincoln to keep abreast with labor unions and changing rules and regulations without local managers.
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Hence, we recommend that company adapts its compensation policy in-line with changing socio-political scenario of India and operate through local managers in labor market.
Case Memo
Lincoln Electric has set some ambitious financial goals for itself. Its sales have grown at a rate of more than 20% since 2003 and in the long-term company wants to grow at twice the rate of global industrial production. To achieve these steep targets, Lincoln needs to enter the Indian market in 2006. Since its government adopted measures to liberalize its economy in 1991, India’s GDP has steadily been around 6%. India is investing in construction and infrastructure projects. With $500m in annual industrial sales, it is currently third largest welding market in Asia. The country is tipped to be fastest growing of the world’s major economies in next 50 years. Growing economy results in higher purchasing power of Indian public and will further increase demand of goods. This will result into further demands for strengthening of country’s infrastructure. This is a good fit with Lincoln’s long-term strategy. Hence, we recommend that Lincoln should not let the opportunity of entry into Indian market pass.
To benefit from India’s growing economy major multinationals are entering the country and investing in setting up facilities in India. Lincoln has a strong brand identity and recognition globally. With the multinationals Lincoln will be able to leverage its reputation and differentiate itself based on quality of equipment and after sales services offered. Hence, it should focus on providing services to institutional players. Bigger companies value productivity and efficiency improvements that Lincoln offers through its broad and market appropriate product range. They will also value the technical application support that Lincoln is known to provide its customers. Hence, multinationals will be ready to pay a premium price for Lincoln’s welding equipment and solutions.
Lincoln should stay clear of consumable market for now. In India, consumable market is highly fragmented because it has lower barriers to entry than equipment market. Local players quickly try and imitate products of bigger companies and sell it for high discounts. This would present high price competition for Lincoln in consumable market. Even ESAB, the only other welding major operating in India currently, increased percentage investment and had higher profit percentage increase than consumables. We should keep in mind that though growing, India is still not a mature economy. Any investment in the country exposes Lincoln not only to currency exchange rate risk, but also risk of inflated assets. In 2004 ESAB India had to resort to one time write offs to register profitability. Lincoln is not new to global expansion, but it had mixed experiences while expanding in Asia. In China, company had to adopt different strategies at different stages to successfully penetrate the market and gain market share.
Lincoln should use lessons it learned in China and strive to understand the cultural and market norms that exist in India relevant for welding products before entering the Indian market. It should hire a local consulting agency to do these evaluations. Based on the above factors, Lincoln should enter by acquiring majority stake in existing welding equipment facilities. Lincoln can bring its expertise in cutting edge technology and efficient manufacturing processes in the partnership and let its local partners handle the cultural, distribution and labor related matters. Having majority stake will also enable Lincoln to make key decisions in fields like introducing new technology, changing internal controls or expanding distribution networks, when need arises.
India has an evolving economy which is currently undergoing liberalization. Though the country is investment friendly, regulations and norms vary from state to state within the country (minor differences). Most of the firms in welding industry in the country are small businesses who most likely rely on personal relationships to achieve success in business. These establishments will have local managers who are abreast with changing norms applicable to the industry. By going in with local partners, Lincoln Electric will be able to use this expertise and partner’s capability to navigate through India’s political structure to company’s advantage. Local partners will also help Lincoln to navigate through labor market which might be unionized in certain pockets of the country. Recently, Indian Prime Minister has announced his intent to revise the labor wages which he said were old and not suitable to current scenario. Local managers can use their expertise to help Lincoln in mitigating impacts of such scenarios.
The compensation and vacation/leave structure of Indian labor market is different from what Lincoln’s current structure. If an unsuitable compensation structure is implemented by Lincoln, a lot of attrition in the work force can be expected. Attrition will be more pronounced for low-skilled workers because they will have ample opportunities available in the market in a fast-paced growing economy. High turnover of low skilled workers will present a significant cost for the company due to repeated hiring and training costs. It will also hamper company’s production efficiencies. Hence, we recommend that Lincoln Electric should not change the ongoing Indian compensation structure for low skilled workers. Lincoln should play only a supervisory role in this field and let their local partners, who have a better insight, handle this aspect of business. This would insure Lincoln Electric against any changes to minimum labor wages made by regulatory authorities in India.
For high-skilled managers, we recommend company to incorporate its “pay-for-performance” incentive structure. This would help in weeding out the poor performers at managerial level and would also attract other high performers available in the market to the company. The existing managers who are performing will feel valued and will remain with the company. Lincoln should re-evaluate their compensation policy every couple of years as they establish themselves in the Indian market to check if certain tweaks are necessary to keep pace with ongoing market scenario. Hence, in conclusion, our recommendation for Lincoln Electric are as follows: Enter Indian welding market through acquisition of majority stake in local players. Focus on equipment business for now. Entry to consumable market should be evaluated later. Phase-wise implementation of Lincoln’s “par-for-performance” incentive.
Reference
- HBS Lincoln Electric Case.
Indian Market Lincoln Electric. (2022, Feb 24). Retrieved from https://paperap.com/indian-market-lincoln-electric/
