Lincoln Electric

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Summary

Lincoln Electric is a global manufacturer of welding equipment and welding supplies, known as consumables.  Sales of welding equipment and consumables are often sold as a solution to a Lincoln Electric customer.  Customers can purchase consumables from other manufacturers that will be compatible with the Lincoln Electric welders.

The industry is fragmented.  The article indicates that the top six largest welding equipment companies account for less than half of the global market share.  Global growth correlates with global infrastructure growth.  BRIC (Brazil, Russia, India, and China) countries are the fundamental growth engines of the global economy.  This also happens to be where the welding industry is experiencing its best growth.  Developed economies such as the United States continue to have welding equipment and consumables needs, but the pace of growth is much more moderate.  Within developed countries, the welding equipment and consumables demand can be traced to individual industries as the drivers.  For example, when oil exploration is booming there is a simultaneous increase in demand for welding.  When shipbuilding ceases, so does the demand for welding.

Lincoln Electric has set itself apart from the competition by emphasizing welding solutions instead of welding products.  Selling solutions often leads to increased sales and better customer relationships.  The inspiration for developing customer relationships can be traced to Lincoln Electric’s unique compensation system:  system-wide bonuses for all employees that are the critical element of each employee’s compensation.  Employees are quick to protect these bonuses by continually improving the quality of Lincoln welders and eagerly pursuing happy customers.  In a press release issued by Lincoln Electric in December 2008, the company announced an average employee bonus of $28,873 for 2008 (http://www.istockanalyst.com/article/viewiStockNews/articleid/2877574).  The large bonus amounts to a significant portion of each employee’s earnings.  Employees are interested in protecting this income and developing it for a long period of time.

Lincoln Electric has made forays into the global marketplace with success.  Some countries represent sales prospects.  Others have opened up opportunities to manufacture in the prospect country.  Lincoln Electric has joint ventured in China to provide rapid market entry and a local base.  This gave them quick entry and market presence at the cost of complete control.  Lincoln Electric has also acquired its way into markets.  The company reported seven acquisitions in its 2008 annual report (2008 Lincoln Electric Annual Report).

Issue

Lincoln Electric is poised to enter the welding equipment and consumables market in India.  This investment could represent a significant opportunity for the company to profit.  The large infrastructure projects in India will drive phenomenal growth for the welding industry for many years to come.  Should Lincoln Electric invest substantial capital in India?  If so, what would be an effective means of investing that capital?

Analysis

Lincoln Electric has developed a competitive advantage in offering true welding solutions to its customers.  It has also been an innovator in an industry not often associated with new technology.  Many welding applications are smaller in scale and are done by individual welders or small welding shops.  The technology has been little changed for the actual welding process.  It is in the application of large scale welding, manufacturing, and precise welding that change and accuracy has been rapidly improving.  Computers are able to control beads and movement of the arcs to a much higher resolution than the human eye can even notice.

Lincoln Electric has had the most success in places that it controls all of its operations beginning with purchasing through to the customer’s application.  It is the employees that have made this possible and has also led to Lincoln Electric being associated with high quality.  Duplicating this commitment to continuous improvement and quality is not easy in countries that do not embrace a bonus system for rewarding employees.  In fact, that can be a stumbling block for merging different cultures.  Joint ventures and acquisitions have a hard time fitting in with this culture.
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The joint venture with Kuang Tai in Taiwan to penetrate the Chinese market was formed after the Lincoln Electric struggled with its own newly developed plant.  The plant could not find the right local management and did not do well in the Chinese business environment.  India’s business environment is much friendlier.  English speaking educated managers are readily available in India as well.  The Chinese joint venture has also presented Lincoln Electric with another set of concerns in regards to management of the enterprise.  Complete control results in better flexibility and more rapid management response to local market conditions.

Lincoln Electric appears to have many market fronts being focused on all at the same time.  This may be a disadvantage in that it can create a span of control too large to manage.  The company does it right in the United States.  In fact, the company is so successful in the U.S., that the automobile manufacturers could learn many lessons from Lincoln Electric.

Recommendation

Lincoln Electric should commit the necessary capital to construct a new manufacturing facility in India.  The newly hired Indian work force should receive training at the company’s headquarters in Cleveland.  American workers can be given an opportunity to do one year stints in India as part of a program designed to foster better communication between the cultures and help instill the worker’s commitment to high quality.  This would also reinforce the concept that the employees have an interest in seeing the company succeed.  Since both the U.S. and India speak English, it will make communicating and teaching easier than having to translate into a different language.

Innovative high quality products that fill a need sell rapidly.  Lincoln Electric’s Indian operations should focus on first-class manufacturing that starts with an investment in the workforce instilling these values.  The plant should be located near one of the many railroads in India that provide access to shipping and transportation throughout the region.  Indian workers must be encouraged to develop the same passion for the company that their American counterparts have.  Without this passion, Lincoln Electric might be better off to deploy a sales force that sales welders made elsewhere.

A well executed plant development and workforce training should give Lincoln Electric an opportunity to become the leader in welding equipment and consumables in India and the region.  It is not unreasonable to think that the new plant could export into China from India.  This is no different than any other expansion decision, and throwing money in a region is not the solution.  A long-term strategy must be generated that protects all of the stakeholders of Lincoln Electric.

 
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