G R O U P 8S O U N A B H M A N D A L P G P 2 8 2 8 1S R U T H I K E S A R I P G P 2 8 2 8 6U PA S A N A R U S TA G I P G P 2 8 3 0 1R A I YA N W A S I P G P 2 8 3 1 9N O O P U R P G P 2 8 3 2 6

L&T and Samsung Techwin

G R O U P 1 0P R A J A N E Y S . P G P 2 7 1 2 2B R I A N R E G O P G P 2 8 1 1 5A L E X J O S E P H P G P 2 8 1 3 1P R E E T H I V. P G P 2 8 1 3 7S A N J AY G U P TA P G P 2 8 1 4 6

IIM LucknowSection A

IIM Lucknow

Industry Analysis

August 2013

• Indian defense industry is the biggest weapon

importer

• Budget in 2011 was $ 39.4 bn between the years

2007 and 2011

• 42.7 % of the overall budget is spent on defense

equipment wherein almost 70% of the weaponry

is imported

Scenario

• Dynamic growth (CAGR 19.1%) seen between 2007 and 2011Growth

• Indian players producing artillery are L&T

(Heavy Engineering), Tata and Mahindra and

Mahindra

• Foreign players like BAE Systems Plc, Bharat

Electronics Ltd, Dassault Aviation SA and Sukhoi

Company

Competition

• Industrial license (IL) required for manufacturing

defense equipment

• Applicant must be an Indian company or

partnership and has to apply to the Department

of Industrial Policy and Promotion (DIPP)

• Indian Government has started to promote

private players’ entry

Regulations

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Larsen and Toubro

• L&T : an Indian multinational conglomerate

headquartered in Mumbai; founded in 1938 by two

Danish engineers

• The Heavy Engineering Department of L&T is

a supplier of indigenous systems for the defence

and aerospace sectors

• Company is looking for medium to long term

prospects in the defense sector – in both land and

marine business segments

• Earlier the major revenue in defense was coming

from sustainability of in-house efforts but because

of recent government de regulations, primary

focus on co-development and co-production over

medium and long term period.

Areas of Operation• Engineering & Construction

• Heavy Engineering Division (HED)• Constructions and Contract Division

• Electrical and Electronics• Machinery & Industrial products• Financial Services• Developmental Projects• Others

Key Financials (in Rs crore)

Fiscal PeriodY-2011 Indiv.

Y-2012 Indiv.

Total Operating Revenue 45,053.33 54,508.80

Operating profit (EBIT) 5,901.47 6,310.33

Net Profit(Loss) 3,957.89 4,456.50

Margin 8.78% 8.18%

Total Assets 57,110.00 67,692.96

Total equity 21,846.26 25,223.02

August 2013

•Vision Statement : To be a professionally managed Indian multinational committed to customer

satisfaction; to be an innovative, entrepreneurial firm striving to achieve global benchmarks; foster a

culture of learning and meeting expectations of all stakeholders

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Samsung Techwin

• Subsidiary of Samsung Electronics, started with manufacturing jet engines and precision equipment

and now with a diverse product portfolio

• Started in 1977 as a manufacturer of precision equipment and established as Samsung Techwin in

2000

Key Financials (in USD)

Fiscal PeriodY-2011 Indiv.

Y-2012 Indiv.

Total Operating Revenue 2,532,963 2,480,347Operating profit (EBIT) 41,569 107,822Net Profit(Loss) 202,795 91,290Margin 8.01% 3.68%Total Assets 2,676,607 2,899,536Total equity 1,301,436 1,367,110

Areas of Operation

• Surveillance

• Semiconductor System and

Components

• Power Systems

• Defense Industry

• Transportation

August 2013

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Larson and Toubro Samsung Techwin

August 2013

Need Gap Analysis

Identified Gap

• Infringement on borders has led to Indian

government looking to strengthen artillery;

government is looking for new howitzers

which are technologically more capable

• Companies like Tata cater to the Indian army

and provide armoured vehicles, defence

solutions, logistics expertise etc.

Identified Gaps

• Spent large amount of money on R&D but do

not have many potential deals in prospect

• Has only sold them to the Korean and Turkish

Army

• Limited presence in international defense

industry

• Limited credibility of the Self-propelled

Howitzer technology (Comments of

Australian ministers have maligned the image

of the technology)

• Low credibility leading to limited acceptance

to the technology

• No stringent negotiation process to avoid

delay and agency costs in negotiation

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STRATEGIC RATIONALE – L&T

August 2013

• Objective – establish itself as a major player in defense industry

• Capability gap – lack the currently needed technology• Best method – Alliance• Nature of alliance – Co-option and racing for the world

Strategic Importance

• Good prior experience of alliances - High capability and skills of entering into an alliance

• Supportive organizational practices• Separate competence cell to facilitate learning• High project management skills

Organizational Readiness

• Government in need of howitzers at border in mountainous areas

• Asked for bids for manufacturing – competitor is Russian Rosoboronexport and BEML (Bharat Earth Movers ltd.)

Timing of the Alliance

• Does not affect our core competency• Looking for a long term relationship to establish ourselves in

defense industryCommitment

Ally or Acquire

• Sequential Synergies - equity alliance

• Hard Resources – Acquisition

• Low Redundancy – Alliance

• High Market uncertainty - Equity alliance

• Medium level of competition - Equity alliance

• High collaborative Capabilities

Strategic Rationale : Samsung Techwin

Factor Level Ally?

Type of synergies Modular

Nature of resources Soft

Extent of redundant resources

Low

Market uncertainties High

Level of competition Medium

TCE: Alliance will Techwin to avoid offset clause set by GOI

Faster acceptance to technology and enhanced credibility for

Opportunities to learn processes and new skills through various alliance

Scope of the alliance

Geographical Indian defense requirement

Vertical Joint assembly of product, technology transfer done by Samsung Techwin

August 2013

7

IIM Lucknow

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Partner Selection – L&T

August 2013

• Capabilities - Howitzers’ Technology and Customization for Indian Market

• Kind of Partner – Has the technology and is ready to share it, who also needs access to Indian market

• Parameters - Financially stable company

Criteria

• Hitachi Ltd.• Mitsubishi Heavy Industries• Mirae Corporation • Rafael Advanced Defense Systems Ltd.• Samsung Techwin

Potential Partners

• Shortlisted – Hitachi Ltd, Mirae Corporation and Samsung Techwin

• Shortlist Criteria - Readiness to share technology and eagerness to access Indian Market

• Selected Partner - SAMSUNG TECHWIN

Partner Shortlist

• Strengths - Tested Technology & Global reach• Weakness – Lack of prior Alliance knowledge• Strategic Compatibility - Foothold in Indian Defense

Sector and share technology in order to break even with R&D costs

• Risk Factor - Bid is not yet approved by Indian Government

Due Diligence

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Partner Selection - ST

August 2013

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Preparing for Negotiation

August 2013

• Objective : Enter the growing Indian defense market

• Establish credibility for K9 Howitzer Artillery for future

• KPIs: Winning the deal and developing long term relationship

• Strengths : R&D, Large parent company

• Potential Obstacles : New geography and Govt. regulations

Objective : To gain expertise about defense equipment manufacturing from Techwin

KPIs : Leapfrogging competition to provide artillery to Indian army, ensure profitability is maintained

Strengths : Large parent company, veteran in manufacturing

Obstacles : Cultural differences

• Maintaining strong relationship

• Long term profitability

• Stringent Controls• Focus on

Documentation

Con

dit

ion

s of

Neg

oti

ati

on

IP w.r.t K9 technology

A non equity loosely coupled Co specialization alliance

serves the purpose for both the parties

Manufacturing capabilityReduction in transaction cost

Samsung Techwin L&T

Alliance

Leve

rs

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August 2013

What needs to be Negotiation

Technological Issues Market Issues Alliance Structure

• The ownership of the K9

technology for the project is

primarily with Samsung

• Customization by L&T

• Ownership & rights for

future is an issue and

should be with Samsung

• Decision making process on

product is a key issue

• As the specifications are

strict, the decision making

regarding the product should

be shared between both

parties

• The alliance is non equity JV

alliance with Samsung

providing technology and

L&T customizing it

• Possible expansion of scope

in electrical equipment was

discussed and narrowed

down to just defense

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Alliance Structure and Governance

August 2013

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Performance Evaluation

August 2013

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Termination Contract

August 2013

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Thank You

August 2013

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Alliance Capability

Skills• Advanced weaponry

Technology with Samsung Techwin (K10,K77)

• Existing howitzers guns are operating successfully

• Huge Capital base for developing new defense technology

• Larsen & Turbo technology and engineering expert globally

• Presence of L&T in other ancillary industries help in vertical integration

Design•K9 Thunder design transferred

•Non-equity alliance formed

•More than 50% of the parts manufactured indigenously

•155/52 mm caliber tracked self propelled artillery design

Process and Systems• 100 howitzers guns

to be supplied to Indian Army

• Third party client also used for production of indigenous parts

• Some critical parts are manufactured and imported from Samsung

• Governmental support from India promotes the deal for L&T

Sustainability• Continuous

development of new technology by Samsung gives scopes for upgraded products

• Deep Pockets of both company promotes the sustainability of the products

• Healthy development environment in India, presence of other competitors also promote the deal

August 2013