TIMKEN CASE STUDY1Doan Thi Thu Ha Timken was known as a leading manufacturer of highly engineered bearings and alloy steels and famous for its tapered roller bearings with over 200 types in more than 30,000 sizes. It was also the market leader in mechanical seamless steel tubing and shipped more than one million tons of premium alloy steels annually. Timken was located in Canton, Ohio. However, its operation was not limited in Ohio but in twenty-five countries and employed over 20,000 people worldwide.
In the early 1990s, Timken intended to take the U.
S model to Europe with some customization for the local market and focused on case-carburized tapered roller bearings. In early 1997, Timken reviewed its strategy with specific aim for the European market: to gain market share, to lower its cost structure and to increase production capacity. It also addressed three segments: small bearings for automotive and light industrial markets, medium bearings for construction equipment and large bearings for process and other heavy industries.
As Timken Polska fulfilled the small bearings plant requirement and Gnutti Carlo S. p.
A. in Italy provided a medium-sized bearings plant, Timken had to search for a large bearings plant in Central Europe that would provide the company with low-cost manufacturing capacity. Rulmenti Grei in Romania could be the potential choice for Timken¶s large bearings plant. Rulmenti Grei offered valuable assets from market share, equipments to skill engineers to help Timken to crack the European industrial bearings market. This acquisition would be consistent with Timken¶s strategy of gaining market share, improving cost structure and increasing production capacity.
However, Timken might face the difficulties of Romania¶s political instability and the numerous operational challenges of integrating the plant into Timken¶s global organization. Furthermore, as Rulmenti Grei produced a variety of bearing types, this investment could lead to the change in its century-corporate culture of focusing on tapered roller bearings. Timken also had to consider the acquisition cost and the additional investment they would undertake for plant upgrades and expansion. The merits of an acquisition of Rulmenti Grei and the risks for Timken
According to the ranking system of Timken, Rulmenti Grei seemed to have a good assessment First, Rulmenti Grei had been a big manufacturer producing over 1,200 types and sizes of bearings including tapered, cylindrical, spherical, and ball bearings. Although tapered roller bearings currently represented only 18 percent of production, this proportion could be increased by retooling its equipment. Second, Timken was familiar with much of Grei’s equipment as It was made by an American machine builder. Third, the employees of Rulmenti Grei seemed to have high education and many of them had technical degrees.
Furthermore, many professors spoke English fluently. Therefore, Timken could easily bring it up to US standards. Skilled talent is hard to find and difficult to retain. Local companies usually take advantages of this as they understand the culture, the behaviors and the expectation of local people to build up a strategy to attract talents (Bhattacharya, 2008). Thus, acquisition a company with impressive workforce could strengthen Timken’s competitive ability. Rulmenti Grei was considered as the good candidate for the company’s three-plant plan.
It could offer Timken an opportunity to establish a stronger competitive position in the European industrial bearings market and to lower manufacturing costs across its heavy bearings business. It is said that local companies often win in the price war while the organizational processes and cost structures of many global companies make it difficult for them to sell products and services at optimal price points to satisfy both global, glocal, local and bottom customers (Khanna, 2006). Therefore, having effective cost structure would be the great advantage for Timken to become more competitive not only in Europe but also globally.
Although Timken had several plants in Europe, their operation was less effective than those of competitors. With this acquisition, Timken could break into and dominate the European market and use it as the leverage to be the leader in bearing industry. However, the investment was not without risks. There are four types of risks in international business called cross-culture risk, country risk, currency risk and commercial risk. Cross-cultural risk refers to a situation or event where a cultural miscommunication puts some human value at stake. Country risk describes the potentially adverse effects on company operations and rofitability holes by developments in the political, legal, and economic environment in a foreign country. Currency risk is the risk of adverse unexpected fluctuations in exchange rates. Commercial risk refers to potential loss or failure from poorly developed or executed business strategies, tactics, or procedures (Boter & Wincent, 2010). Investment in Rulmenti Grei, Timken might face the salient risks of political and economic instability. Romania’s economic growth was slower, inflation was higher, and the labor force was more volatile. Furthermore, there might be a risk of re-nationalization.
It is said that economic risk analysis tells corporate leaders the ability of a particular country to pay its debt while political risk analysis tells them whether that country will pay its debt. Political risk measures the stability of individual countries through the combination of four factors: government, society, security, and the economy (Bremmer, 2005). However, the most important risks Timken faced were operations. Besides, the plant was struggling and lack a broad sales base outside Central Europe. Moreover, it sold most of its bearings to Romanian and Russian steel mills, whose business was in decline.
An inability to make change rapidly could result in the need for Timken corporate to subsidize the Romanian operations for some time. Operating and organizational issues In order to gain broad acceptance of its product outside Central Europe, Timken need both technical and marketing expertise. First, Timken needed to improve the product to Western European standards. It would be difficult as steel quality was low, and the equipment was in disrepair. Even FLT where the technology and processes were relatively simple as it manufactured only tapered roller bearings, it had taken eighteen months to bring product quality up to Timken standards.
Therefore, it would be impossible for Rulmenti Grei which had over 1,000 part numbers for four different bearing types to achieve Timken-level quality in six month. Further more, if Timken wanted to increase the proportion of tapered roller bearings production, new heat treatment equipment and workforce education in tapered roller manufacturing skills would be required. Besides, Timken needed to improve not only technology, technology but also raw materials to produce case-carburized bearings for industrial market with total additional investment of at least $8 million which was not a small figure.
To bring Rulmenti Grei up to Timken’s quality was difficult but to convince potential customers that the product was of high quality and met their standards was also a big concern due to the fact that Western companies generally matched Central European manufactured bearings with poor quality. Applying Timken brand on these bearings producing to Western standards could help to gain the customers’ confidence. However, if the quality was not well controlled, it could damage Timken’s image and lead to a huge loss. Another issue was about what Timken would decide with other bearings that Rulmenti Grei was producing.
If Timken decided to continue to produce these types of bearing, it might need to consider how to sell them and how to change its century-old corporate culture of producing tapered roller bearings. If Timken continued to focus only on tapered roller bearings, investment in equipment, technology and human resource must be high and the investment project would take a long time. Conditions to secure in framing the proposal and what the Romanian Government looked for in a winning proposal The Romanian government assessed the proposals based on the scoring worksheet including the acquisition price, future investment, and environmental remediation.
Bidders were asked to nominate their acquisition price for 50. 99% of Rulmenti Grei which was for sale from a minimum of 183. 72 billion lei. In addition, bidders were required to indicate how much additional investment they would undertake for plant upgrades and expansion, and also what they would spend on environmental remediation. Romanian Government also expected bidders to put forward other more qualitative dimensions which could be influential in the final decision. Understanding the expectation of Romanian Government to satisfy them was the key element to win the acquisition.
When a government was calling for an investment, of course they wanted an outstanding investor which had ability to drive the company successfully with a long-term investment not only for that company but also for society. Therefore, Timken would mention clearly in the proposal about its competitive strength and future development ability. In addition, Timken would focus on what Timken could do for the Rulmenti Grei as well as Romanian society such as a detail plan to make Grei become the biggest manufacturer in Europe which could bring thousands jobs for Romanian people by applying new technologies and processes.
This investment would contribute much to Romania¶s economic and technology as well as shorten the distance between Romania and other developed countries in Europe. Furthermore, Timken would show its investment in environmental protection and other activities to improve the Romanian environment, education, and living standards. Last but not least, Timken should also consider to nominate the appropriate acquisition price as it would be very difficult to win if its nominated price is much lower than that of other competitors.
Furthermore, Timken could even ask for some commitment from Rumanian Government for a stable law in bearing industry or even a favorable treatment for Timken to ensure the sustainable growth especially in the first stage of investment. Proceed with a proposal or not? Globalization is said to be a double-edged sword (Bhattacharya, 2008). For all the pros and cons of this acquisition, the trade-off between benefits, costs and risks should be taken into consideration.
However, one of the reason why Timken had not cracked the European market was its lack of competitive production capacity and a strong local presence on the continent, which was the home field of its two largest competitors, SKF and FAG. Although Timken had several manufacturing plants in Europe, the plants were low scale and less efficient compared to those of its major European competitors. Therefore, if Timken chose not to proceed this acquisition, the company would still need to secure low-cost manufacturing capacity some wherein Europe to build a platform to win European market.
With its advantages as mentioned above, Rulmenti Grei was the best choice to support Timken¶s mission, so taking this chance would open a new world of success for Timken. Moreover, SKF was keen on acquire Rulmenti Grei soif Timken did not take this chance, the distance between SKF and Timken might be lengthened and Timken might lose its competitive ability in Europe. Then, increasing European market share would be a big problem of Timken. Proceeding the proposal would be the lucid decision, however, the problem was how to analyze the risks accurately and mitigate them effectively.
For example, as politics never stops moving, risk analysts must be able to follow a nation’s story as it develops with information gathered from journalists in the local and foreign press, current and former midlevel officials, and think-tank specialists (Bremmer, 2005). To mitigate the political risks, companies can maintain the good relationship with the government or become part of the country¶s infrastructure or use local R, etc (Boter & Wincent, 2010). In addition, companies can buy insurance for political risks such as the expropriation of property, political violence, currency inconvertibility, and breach of contract (Bremmer, 2005).
However, it is worth remembering that though instability translates into greater risk, risk is not always a bad thing. Political risk in underdeveloped countries nearly always carries an upside because such nations are so unstable that negative shocks can do little further damage. (Bremmer, 2005). For the operational risk of not achieving Timken¶s quality, Timken could mitigate it by controlling the materials, applying the qualified technologies, equipments, processes and management. The most importance is to prepare an accurate plan and try to apply these things as soon as possible.
Expand its product line in response to European customer demand or not? In contrast to U. S where customers sought out specialty manufacturers for each bearing type, European customers preferred to buy all their bearings from a full-line producers. Thus, remaining a specialty manufacturer limited Timken’s potential market. Besides, Timken’s competitive position was also impacted by the lack of a full metric line for its bearings. In order to satisfy local demand, it would be necessary to expand its product line to compete with both local companies as well as international rivals.
Each market often turns out to be unique because customers¶ needs and tastes are idiosyncratic. Local companies are often the first to realize that and to build businesses. They are not constrained by existing products or by preconceived notions about customer needs. They customize products and services to meet different consumer requirements, and they initially go after economies of scope while many global companies find it costly and cumbersome to modify their products, services, and communications to suit local tastes.
Global companies often end up occupying small, super premium niches (Khanna, 2006). When a business begins, it usually has only one product to satisfy a small group of customers. However, when it becomes famous, it is the time for it to develop something new to offer the customers. A broad product line and wide customer base may be the keys to success in tough times (Levine, 2001). The first advantage of product diversification is the increase of market share. By offering different products, company can satisfy a wide range of customers and enlarge its market share.
Consequently, its revenue will increase and its brand will be known more wider and will be mentioned more frequently which leads to the higher brand value. Furthermore, this strategy also helps reduce overall business risk by offering products in a variety of customer categories to avoid having all eggs in one basket (Acevedo, 2009) and provide quick movement away from declining activities. LIST OF REFERENCE Acevedo, L. 2009. Product Diversification Strategy, Ehow website, retrieved [2010-11-17]. Bhattacharya, A. K. and Michael, D. C. 2008. How Local Companies Keep Multinationals at Bay.
Harvard Business Review, 86(3): 84-95. Boter, H. and Wincent, J. 2010. Managing Networks and Internationalization ± Lecture 2, UmeaSchool of Business. Bremmer, I. 2005. Managing Risk in an Unstable World. Harvard Business Review, 83(6): 51-60 Khanna, T. and Palepu, K. G. 2006. Emerging Giants. Building World-Class Companies inDeveloping Economies. Harvard Business Review, 84(10): 60-69. Levine, B. 2001, Diversify And Prosper, Electronic News (10616624), Vol. 47 Issue 25, p2. Mackenzie, S. 2003. The Timken Company: Market Entry Into Romania (A) Case Study,Stanford Graduate School of Business.