Lincoln Electric and Indian Market Entry 1

Lincoln Electric and Indian Market Entry

Since India entered the global marketplace in the aftermath of the Cold War, companies
worldwide have sought to enter the worlds second-largest market by population. With a
population of 1.3 billion people, India represents an opportunity for great profit for investors
should they enter the Indian market correctly. Likewise, long extant companies such as those in
the United States are positioned to reap great rewards but also can encounter great risks when
making this endeavor. One of these companies is Lincoln Electric of Cleveland, Ohio. The
Lincoln Electric Company was founded in 1895 by John C. Lincoln. Originally a motor
company, Lincoln Electric now specializes in welding technologies. After nearly a century in
business, Lincoln Electric became the leading U.S. manufacturer of welding equipment (Spiegel
1) and Lincoln Electric bean trading on the NASDAQ stock exchange. By 2005, Lincoln Electric
had become the largest welding manufacturer in the entire world. Even with this success, the
opening of a market such as Indias represents not just great opportunity for a preeminent
manufacturer such as Lincoln Electric, but a necessary challenge in order to remain dominant in
its particular market. As such, Lincoln Electric is tasked with choosing a mode of entry into the
Indian marketplace. This paper will analyze three different possibilities for the entry of Lincoln
Electric into India: via joint venture, the acquisition of another company, or so-called
greenfield operations. Each of these possible modes of entry have advantages and
disadvantages, both for companies in general and Lincoln Electric in particular. This paper will
suggest a preferred mode of entry for Lincoln Electric, while taking into consideration its unique
management and human resources systems (particularly its compensation system).
Lincoln Electric has pursued these routes in its past. While Lincoln had possessed
international operations since the 1940s, it wasnt until the late 1980s and the collapse of so-
called second world communism that an international expansion began in earnest. Prior to this,
Lincoln operated only in the United States, Canada, Australia, and France, where each country
had very similar economic systems and unionization policies. Minority interests were acquired in
plants in Venezuela, while acquisitions were made in Mexico, Brazil, Scotland, Norway, the
United Kingdom, the Netherlands, Spain, and Germany. These acquisitions cost a great deal of
money and forced Lincoln into a position where it had to borrow money in order to meet payroll
requirements. After bringing in executive Anthony Massaro, unprofitable plants were closed in
Japan, Germany, Venezuela, and Brazil. Some of these plants were in competition with one
another, an unintended consequence of Lincolns over-expansion. Lincoln then moved away
from an acquisition model and towards a joint venture model.
After this restructuring, Lincoln once again became profitable. Lincoln entered into joint
ventures in Taiwan, South Africa, and other countries. Greenfield operations, which were
started from scratch, were opened in Mexico. Massaro, who had since risen to become Lincolns
CEO, retired in 2004. John Stropki replaced him. Stropkis tenure was marked by Lincolns
entry into the Chinese market. The Chinese market represents the most similar market to India in
terms of population and standard of living among the workforce. Where Lincoln had attempted
greenfield or mostly-greenfield startups in Japan and South Korea, they did not do so in China.
Lincoln entered into joint-venture arrangements with Taiwanese companies that already had
production on the Chinese mainland. Generally, these joint-ventures had Lincoln pursuing stakes
Lincoln Electric and Indian Market Entry 2

at less-than-majority levels. In the case of Kuang Tai, Lincolns share of the venture was just
35%, which eventually became 46% as Lincolns experience in navigating Chinese bureaucracy
and workplace practices increased (Spiegel 8).
This was not without its downsides. Having a minority stake in these joint-ventures
restricted Lincolns ability to grow. Lincoln then moved to a majority-owned joint-venture
model. Lincoln still found itself having to bring in executives from Cleveland to run these
enterprises, as the company was unable to find talented local management that understood the
nuance of Lincolns operations. China also presented a unique problem in that intellectual
property laws are not similar to those in the United States. Therefore, Lincoln opted not to
produce any sort of highly-sophisticated products in China, despite the extreme competitive
advantage offshoring their manufacturing base to the country would provide.
Opportunity in India presents itself in a similar way to China, but has unique differences
and challenges. Indias economy has not grown quite as fast as Chinas, but has still averaged
nearly 6% per year since 1991 (Spiegel 9). This is greater than all of Latin America combined.
Since welding operations closely follow a countrys development and industrialization as a
whole, Lincoln cannot afford to ignore the market in the highly fractured welding industry. India
in particular focuses on infrastructure to a degree that other Asian and worldwide economies
dont. Like China, India presents a significant problem with intellectual property disputes, as
their market features a large contingent of small businesses that often copy the designs of large
companies with little recourse available through the local court system. Like China, India offers
government-subsidized tax-free zones where companies can startup businesses without any
sort of tax burden for a set period of years. The largest welding company in India is Ador
Welding Limited. The other large company is ESAB India, one of Lincolns global competitors.
A mid-sized competitor is EWAC Alloys Limited, a joint-venture between German and Indian
companies. After these three companies, the competition becomes very small and is of negligible
importance to Lincoln, beyond the aforementioned intellectual property concerns.
Indias labor laws are extremely advantageous for Lincoln. Pay-for-performance, which
has been part of Lincolns model for decades, is permissible in India. Approval from
governmental authorities or unions is not needed for this or for discretionary bonus policies. The
average industrial workers salary is approximately $88 per month (Spiegel 10). Some Indian
states lack a minimum wage. Taken together, this most notable difference between entry into
China and entry into India is that India lacks the significant state bureaucracy and competition
from state-run ventures that defines the Chinese marketplace. Having little experience with a
mixed socialist market like China, India is very agreeable to Western-style capitalism and
provides great opportunity for Lincoln.
Lincoln therefore has to choose between three modes of entry into the Indian market: a
joint-venture, the acquisitions of another company, or a greenfield operation. According to the
rules laid out by Stropki, Lincoln will only enter by acquisition if the acquisition was accretive
immediately under FASB goodwill rules, the investment had a minimal internal rate of return of
at least 10% increasing to at least 18% over 3-4 years, the acquisition price is less than 8 times
EBITDA, the companywide balance sheet would continue to justify the corporate-targeted credit
rating, all liabilities were recognized appropriately on the balance sheet, and full financial and
legal due diligence could be conducted before Lincoln committed to the acquisition (Spiegel 11).
Lincoln Electric and Indian Market Entry 3

If entering by joint-venture, Lincoln needed to ensure its ability to control business decisions
(Spigel 11). If starting a greenfield operation from scratch, would the profitability realized be
worth the additional investment required (Spiegel 11).
Greenfield operations in India are likely to be too unprofitable for Lincoln to consider
starting from scratch. Lincolns high degree of specialization in its welding products means that
the company would be immediately subjected to loss of intellectual property when competing
against the behemoth of small welding outfits. While India lacks significant regulatory arms, it is
much less homogenous than Han-dominated China. India has 17 official languages, 6 religions,
and ethnic diversity greater than all of Europe (Bose 169). Lincoln had enough trouble dealing
with the culture-divide in China in a joint-venture, and would find it near-impossible to hire
enough local talent on its own while still maintaining its unique corporate culture. India is not a
signatory to the International Centre for the Settlement of Investment Disputes, and neither is it
party to the New York Convention of 1958. This is not to say that greenfield operations are
impossible -- Hyundai very successfully started greenfield operations after having used a joint-
venture model for entry (Bose 170).
While joint-ventures can be profitable when companies enter the Indian market,
Lincolns own rules make that impossible. The joint-venture between Tata Motors and Chrysler-
Fiat, Fiat India Automobile, sustained losses for the first five years of its existence (Baggonkar
2015). More importantly, joint-ventures in India are subject to foreign entity restrictions when
51% of the business is owned by a foreign entity, limiting the appeal of starting from a minority-
owned stake and then proceeding to a majority-owned one, as has been in the case in other
countries in which Lincoln has invested (Desai 13). The cultural differences between India and
the United States are such that Lincoln would be unlikely to import its model and retain control
over key business decisions should they enter into a joint-venture with a local Indian company.
Additionally, the presence of only a few large firms, primarily owned by Lincolns global
competitors and one native company in India makes a joint-venture seem unlikely to present
itself in the near-term.
Therefore, it seems most likely that Lincoln would have the greatest amount of success in
pursuing acquisitions to enter the Indian market. While this is not how the company has typically
expanded, it presents the greatest opportunity for immediate profit in a booming economy. A
study of 39 manufacturing firms that were acquired or merged between 2001 and 2012 showed
that the acquisition process did not negatively affect profitability (Sathishkumar and Azhagaiah
93). In fact, profit was greatly accelerated. The already-extant infrastructure of these companies
was identified as being key to the merged or newly-acquired companies successes, as well as the
talent and modern knowledge of manufacturing processes that the Western companies were able
to provide. Lincoln would be wise to pursue this model, as it would be highly likely to be
successful under the internal goals they have set out. Time and energy could therefore be devoted
to importing Lincolns unique system in the Indian market.
Lincoln Electric and Indian Market Entry 4

Works Cited
Baggonkar, Swaraj. Tata-Fiat Venture Turns Profitable. Business Standard, 2015.
<http://www.business-standard.com/article/companies/tata-fiat-venture-turns-profitable-
115080500108_1.html>
Bose, Tarun. Advantages and Disadvantages of FDI in China and India. International Business
Research, 2012.
<http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.964.9553&rep=rep1&type=p
df>
Desai, Nishith. Joint Ventures in India. Nishith Desai Associates, 2013.
<http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Joint%20
Ventures%20in%20India.pdf>
Sathishkumar, T., and Azhagaiah, R. Impact of Mergers and Acquisitions on Profitability:
Evidence from Manufacturing Industry in India. Pacific Business Review International,
2014. <http://www.pbr.co.in/July2014/13.pdf>
Spiegel, Jordan. Lincoln Electric. Harvard Business School, 2008.