Lincoln Electric - Venturing Abroad

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Lincoln Electric Venturing Abroad

The data given in the case clearly shows that Lincoln Electric has a dominant position in the Indonesian market. However, this position is existent only in the Automatic welding process and the Semi-automatic welding process segments. In the Stick welding process, which is used by most Indonesian customers, Lincoln is not the clear market leader. Despite this, they have a very significant market share and their products are well recognized by the Indonesian market.

At present, Lincoln’s strategy is to import all units sold in the Indonesian market. This strategy would, however, need to be revised. Indonesia’s economy is growing rapidly (in 16) but most of the key positions are controlled by Suharto’s relatives. This has enabled local companies to dominate the import and export business by giving ‘gratuities’ to the relevant officials. Also, there were indications of financial troubles which would lead to a slump causing the currency to drop, reducing the demand for Lincoln’s imports.




Keeping this in mind it is recommended that Lincoln should set up a factory in Indonesia. This will allow them to not only circumvent the impending problems with imports but it would also allow them to take advantage of Indonesia’s comparative advantage vis-à-vis labour and raw materials. A manufacturing base would also allow Lincoln to serve the growing Asian market better with reduced transportation time and costs.

In setting up this factory, Lincoln should explore the possibility to enter into a Joint Venture with a local partner. This would have several advantages. First, the local partner would bring knowledge about the domestic conditions, laws and regulations. Second, it would also know which government official counts and the optimum amount of ‘gratuity’ that would be required. Lastly, since Lincoln Electric does not seem to have the finances to setup a factory entirely on its own and it is very reluctant to acquire new long term debt, the local partner will be able to contribute to the capital requirements thereby easing the financial burden on Lincoln.

The case presents two possible partners for Lincoln, Tira Austenite (Tira) and Suryiasuyrana Hidupjaya (SSHJ). Each of these possible partners will bring in different advantages. It is recommended that Lincoln should enter into a Joint Venture with both Tira and SSHJ.

While we recognize the managerial difficulties that would probably arise from doing so, the advantages would out-weigh the problems. For example, Tira would be able to bring in their distribution network, customer base and high level relationships with government officials. SSHJ would be able to bring in the required capital and a stronger presence in China, Vietnam and Burma. Also, this Joint Venture would afford them a dominant position in the market which would be attractive to all three partners.

Lincoln has realized that the compensation system in place in the United States would not necessarily show the same results if applied in other countries. This hold true for a country like Indonesia also. A brief summary of the compensation system in Indonesia is mentioned in the appendix.

The incentive system and compensation plan that had been devised by Lincoln worked very well in the US, because there it is acceptable to the employees that remuneration be given on the basis of performance. Secondly, since the hierarchical systems are not very strong, the top management would not mind lunching with the shop-floor workers. The compensation systems and the needs of the personnel in Indonesia are very similar to those of India, and are in contrast with those in the US. Here, the manufacturing workers have poor working conditions, have large families to support, and hence, have a high need for security. On the contrary, in the US, the social security systems are very strong.

Hence, the compensation plan should be devised according to the local conditions of the country. First of all, the manufacturing workers would be paid a fixed salary, which would form a substantial part of their income. There should be no system of bonus based on individual performance, infact, we suggest a system of group-linked incentives, where, for example, if the whole group of workers, together produces more pieces than the normal rate, the entire group will be rewarded. This would help in encouraging the workers to perform better, and at the same time avoid any jealousies, frustration and insecurity on the part of the workers. Besides these, benefits such as housing allowance, educational allowance for dependents (maybe scholarships for meritious performances), and medical help should also be provided, since, if the Company looks at fulfilling the basic needs of the workers in kind, the workers (being poor, and giving a lot of importance to sentiments) would feel more attached to Lincoln.

The managers’ salary systems should directly be linked to performance, as the professionals would like to be rewarded on the basis of performance, and this would provide an incentive to them for working harder.

For the salespersons, as the norms seem to be universal, the salaries should be fixed with a variable component of commission based on the performance. The only change that could be made is, that the fixed part of salary may include the benefits in kind as well.



Appendix

Compensation information in Indonesia

For the matched positions we will be seeking the following information in respect of both

expatriate and Indonesian national employees

SALARY

- Actual annual or monthly salary paid to the incumbent, and/or;

- Midpoint annual or monthly salary (for those companies which operate a salary

range);

- is the employee eligible for overtime or overtime allowance - how much is

earned per month or per annum for regular rostered overtime?

BONUS

- Additional actual cash payments (by way of bonus, profit share or incentive)

made for performance in the past 1 months, and/or

- notional additional cash payments that would be made for performance if all

targets are achieved.

OTHER CASH

- Any other cash payments made to the incumbent (eg. Festive Day Gift, or site,

shift, overtime, field, cost of living, attraction allowances).

SALARY REVIEW

- The month in which salaries are reviewed for individual performance or market

movement;

- The overall average increase (expressed as a percentage of salary budget) for

last year;

- The estimated overall increase (expressed as a percentage of salary budget) for

next year.

RETIREMENT AND HEALTH BENEFITS

- Payments made by the organization for the benefit of the incumbent in respect

of retirement (eg. Jamsostek, 401[K] or superannuation).

- Payment made by the organization for the benefit of the incumbent in respect of

health or dental insurance plans;

- Any other payments made by the organization for the benefit of the job

incumbent (eg. salary continuance or life insurance).

TAX POLICY

- Payments made by the organization to cover the incumbents tax liability on any

aspect of compensation.

HOUSING AND PERQUISITES

- The type of accommodation provided to the incumbent and any costs borne by

the incumbent;

- Assistance provided for the education of dependent children;

- The type of assistance provided for travel to the employees place of hire;

- The provision of a motor vehicle and/or driver;

- Membership of social, sporting or professional bodies;

- Any other perquisites.



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