1

1. Background

2. Issue• What is the main issue for Gillespie?

3. Option• What are criteria?• How do we analyze each option?

4. Recommendation• Which option is the best?

5. Execution plan• What should we consider for the execution of

recommendation?

6. Conclusion2

Table of contents

33

1. Background

1987 1988 1989 1990 1991 1992 1993 1994 1995-200

0

200

400

600

800

1,000

1,200

Net SalesNet Income

US$

Mil

lion

s

History of Lincoln Electric

Growth & Decline Revival period Post revival period

Key person George Willis Don Hastings Tony Massaro

Management policy

• Aggressive international expansion

• Frequent acquisitions• Retain Lincoln’s way

• Conduct an　examination

• Hire executives with international experience

• Restructure international operations

• Build manufacturing capacity in the developing markets

• Reinforce local sales team

A severe recession in Europe and Japan

Was operating in the red

44

1. BackgroundCurrent status

• The plants in Germany, Japan, Venezuela, and Brazil were shut down

• US share was still enormous

Look for Asian markets

1987 1988 1989 1990 1991 1992 1993 1994 19950

2,000

4,000

6,000

8,000

10,000

12,000Other

Europe

U.S.

Net

sal

es (

US

$ m

illio

ns)

Plants shut down

Ongoing plants

55

2. Issue

Before the meeting between Massaro and the presidents of Lincoln’s five worldwide regions in 1996…

Issue:Decide entry strategy to expand business in Asia

1. Is Indonesia an appropriate market?2. How about profitability? 3. How should we enter?4. Is Licoln’s incentive policy adaptable?5. When should we enter?

66

3. Option

1. To build a factory in Indonesia →Reduce the production costs & better access of market

2. A wholly-owned factory or a JV?→100%: Full control and the right to all profits

→JV: Experience including good access to market

3. To adopt Lincoln’s incentive policy →Piecework, Annual bonus, Guaranteed employment,

Limited benefits

77

3. Option (1)

1. To build a factory in Indonesia →Reduce the production costs & better access of market

2. A wholly-owned factory or a JV?→100%: Full control and the right to all profits

→JV: Experience including good access to market

3. To adopt Lincoln’s incentive policy →Piecework, Annual bonus, Guaranteed employment,

Limited benefits

8

Market Analysis (Consumable)

Automatic welding process Semi-automatic welding process Stick welding process Total Market Size

Equipment Consumables

Equipment Consumables Equipment Consumables 　

Size (per year, in metric tons) n.a. 1,500 n.a. 5,000 n.a. 50,000　 Size* 1000 * $1.35 　 2,025,000　 6,750,000　 67,500,000 76,275,000

　 　 　 　 　 　 　 　 Annual growth rate n.a. 12% n.a. 12% n.a. 9%　

　 US$ 1996 1997 1998 1999 2000 Growth Rate

Automatic welding process 2,025,000 2,268,000 2,540,160 2,844,979 3,186,377 12.0%

Semi-automatic welding process 6,750,000 7,560,000 8,467,200 9,483,264 10,621,256 12.0%

Stick welding process 67,500,000 73,575,000 80,196,750 87,414,458 95,281,759 9.0%

　 　 　 　 　 　 CAGR(1996-2000)

Total Market Size 76,275,000 83,403,000 91,204,110 99,742,701 109,089,391 9.4%

Market size is about $76M in 1996 and CAGR(1996-2000) will be 9.4%

1996

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0

9

Lincoln in Indonesia

Stick welding process (88%)

Semi-auto welding process (9%)

Automatic welding process (3%)

Stick welding process(0.8% MKT share)

Market size ($M/ year)

Semi-auto welding process(0% MKT share )

Automatic welding process(1.5% MKT share )

1%

45%

15%

35%

4%

40%

20%

40%50%

5%

25%

20%

Lincoln has only 2.3% of $76M

10

Profitability Analysis

$ Million 1995

Net Income 1032.4

Cost of goods sold

634.6

SGA 287.9

Gross Profit 109.9

Gross Margin 10.6%

Consolidated Lincoln Performance

Exhibit 5

Normal 20% 40%

Price $1.35 $1.35 $1.35

CostMaterials, Valuable cost and Direct labor

0.80 0.80 0.80

Shared of fixed cost including SGA and depreciation

0.20 0.17 0.14

Gross Profit 0.35 0.38 0.41

Gross Margin 25.9% 28.1% 30.4%

Exhibit 9

Cost structure of welding electrodes manufactured in

Indonesia

Lincoln estimates that Indonesia business is more profitable than the consolidated Lincoln business performance

1111

3. Option (2)

1. To build a factory in Indonesia →Reduce the production costs & better access of market

2. A wholly-owned factory or a JV?→100%: Full control and the right to all profits

→JV: Experience including good access to market

3. To adopt Lincoln’s incentive policy →Piecework, Annual bonus, Guaranteed employment,

Limited benefits

12

PEST AnalysisSituation Impact

Risk Possibility

Unstable political situation- Corruption, riots- Change regulation due to gov. change- Permit 100% foreign ownership company

Large Middle

Growing but unstable- GDP +7.3%, Inflation +9.0%→Salary increase- Chance of financial crisis, currency fluctuation- Controlled by Presidents’ relatives- Dominated by local companies

Large High

Different culture-Population 196,600,000-GDP per capita $945-Less educated labor -Islam religion → Cultural difference

Middle High

Lincoln’s product is good enough- Less sophisticated- Hand-held stick welders is common

Low Low

Politi

cs

Econo

mic

Soci

al

Tech

nolo

gy

Wholly-owned or JV

JVWholly-owned

Less than 50% More than 50%

Initial Investment(Capital)

Small Middle Large

Local access Strong Strong Weak

Management control Weak Middle Full control

Implement own strategy Difficult Middle Full control

Incentive policy Difficult Middle Full control

Right to profit In proportion to share

In proportion to share

100%

Risk control Low Middle Full control

13

1414

3. Option (3)

1. To build a factory in Indonesia →Reduce the production costs & better access of market

2. A wholly-owned factory or a JV?→100%: Full control and the right to all profits

→JV: Experience including good access to market

3. To adopt Lincoln’s incentive policy →Piecework, Annual bonus, Guaranteed employment,

Limited benefits

Incentive Policy

Hofstede’s cultural dimensions

Individualism

Masculinity

Uncertainty AvoidanceLong-term Orientation

Power Distance

0

50

100

Indonesia USA

Indones

iaUSA

Canad

a

Australi

a

France

0

20

40

60

80

Power distance

Indones

iaUSA

Canad

a

Australi

a

France

0

20

40

60

80

100

Individualism

Piece work Annual bonus Guaranteed employment Limited benefit

Succeeded Succeeded

15

1616

Recommendation (1)

1. Build a plant in Indonesia Indonesian Market is Attractive Market is not large, but a lot of room to increase Lincoln’s

market share Production in Indonesia is profitable

2. Wholly-owned factory is appropriate Indonesian market has a lot of uncertainty Wholly-owned factory has full control for risk & benefit

1717

Recommendation (2)

3. Adopt local incentive policy Piecework & annual bonus might not work in Indonesia Create an original incentive policy to fit the local tradition Set team incentive policy

USA/ Others Indonesia

Piece work OK NO

Annual bonus OK NO

Guaranteed employment OK OK

Limited benefit OK OK

Team incentive system - OK

18

Sales/Profit Forecast

1996 1997 1998 1999 2000 2001 2002 2003 2004 20050.0

2.0

4.0

6.0

8.0

10.0

12.0

Sales Profit

$US

mill

ion

s

Sales and Profit (Indonesia)Assumptions Automati

c weldingSemi-automatic welding

Stick welding

Market Growth rate

12% 12% 9%

Market Share target

Maintain 50%

8% (5 years)

8% (5 years)

Cost Plant running three shifts, normal labor Productivity

Investment • Manufacturing Plant in Indonesia (Consumables)

• Investment = $21.77MM• Construction starts and

completes in 1996.• Capacity : 7,500 tons

[Invested in 11 countries]Japan, Germany, Ireland, Italy, Netherlands, Norway, Spain, United Kingdom, Brazil, Mexico, Venezuela[1987] $195.7MM ->[1992] $435.2MM = +$239.5MM

19

Investment Analysis Investment: $21.77 million IRR: 15.3%Payback Period: 4.1 Years

Profitable enough but longer than expected break even period!!

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

($25.00)

($20.00)

($15.00)

($10.00)

($5.00)

$0.00

$5.00

$10.00

[Cash Out] [Cash In]

$US

mill

ions

Cash Flow

1996 1997 1998 1999 20000

50

100

150

200

250

300

1990 1991 1992 1993 1994 19950

50

100

150

200

250

Cash and equivalents Current deb Long-term debt

$US

mill

ions

20

Financing Plan

M&A RestructuringRepay long-term debt from

operating cash flow

Repay the long-term debt right

after cash income

Long-term debt = 0 in 1998

1996 1997 1998 1999 2000.0

200.0400.0600.0800.0

1000.01200.01400.01600.0

.010.020.030.040.050.060.070.080.090.0

Sales - U.S. Sales - Europe Sales - Other Net income

Sale

s [$

US

mill

ions

]

Net

inco

me

[$U

S m

illio

ns]

$M Sales in 1995 CAGR(1989- 95) vs 1995US 711.9 7.0% 11.0%Euro 201.7 6.8% 28.6%Other 118.8 3.2% 9.8%

[Sales Growth Assumption]US 7%, Euro 7%, Others 3% (CAGR ‘89-’95)

Sales Growth & Net income (estimation)

2121

Wait 2 years till 1998 for repaying long-term debt

No cash and much long-term debt

Economic and political risks

Enough growth in the US

Not brilliant investment in Indonesia

Execution Plan

Reasons

Y1996 Y1997 Y1998 Y1999

Decision making for the postpone of Indonesian strategy

• Market research in Asia• Look for the

consultants from Indonesian market

• Increase retained earnings from the US market

Start to construct the factory in Indonesia

Enjoy Indonesian market

22

Risk Management

Type of Risks Impact Possibility Mitigation Plan

External Political Risks Large Middle - Set up risk management office

- Maintain full controllability: Clear exit plan (wholly-owned)Economic

RisksLarge High

Internal Business Risk Middle Middle - Hire local business consultant

- Employ local business managers to adapt local practicesOperational

RisksMiddle High

2323

Management OrganizationDue to match with local culture, Indonesian COO will be

assigned Establish Risk management office to control political and

economic risk in Indonesia

Michael GillespieAsia President

Indonesian COO

Risk Management Office

Salesdepartment

Manufacturing department

Hire from outside!

2424

Issue:Decide entry strategy to expand business in Asia

Conclusion

Questions Recommendation

1.Is Indonesia an appropriate market? Yes, the market is still small, but the growth rate is high

2.How about profitability? Higher profit margin than current market

3.How should we enter? Wholly-owned is better than JV in terms of risk control

4.Is Licoln’s incentive policy adaptable? No, it should be localized and the group incentive will be adapted

5.When should we enter? Not now, the plant will be established from 1998

Enter the Indonesian market by establishing wholly owned plant with localized incentive policy from 1998

25

Q & A　

26

Market ResearchBenefit for ASEAN

No/ Low tariff

2727

Financial analysis (Appendix)Have enough capability for

additional investments in financial status

Not still have much cash in hand and have long-term debt, however, although we have huge net income

0%

50%

100%

150%

200%

250%

300%

350% Equity ratioFixed assets ratioCurrent ratio

1987

1988

1989

1990

1991

1992

1993

1994

1995

-30%

-20%

-10%

0%

10%

20%

30%ROAROE

1987 1988 1989 1990 1991 1992 1993 1994 1995

-100

-50

0

50

100

150

200

250

Cash and equivalents

Long-term debt

Net income

28

Investment Analysis (Appendix)

[Assumptions for Investment Analysis]Additional revenue and cost saving• Additional revenue is from semi-auto and stick welding process (Assumed these two

segments are lower margin segments)• Tariff and shipping cost saving is from auto welding process (shift from import to

local manufacturing)• Depreciation is completed in 10 years (25% tax rate)

2929

Indonesian Market has a lot of uncertainty→ Management control is inevitable

Wholly-owned or JV

Con

trol

Risk

Entry Strategies for International Markets, 1987; 3-21

Management Contract

Financing

Licensing

Exporting

Turnkey Project

JV / Affiliate

Wholly OwnedSubsidiary