The Lincoln Electric Company, 1996

1
The Lincoln Electric Company, 1996

• By
• Arthur Sharplin and
• John A. Seeger

2
Arc Welding Business

• Connect steel by sending electric current (50 to
  1000 amps at 30-60 volts) through welding
  electrodes to arc and melt together the
  materials being welded.

3
Welding Industry 1995

• Annual US sales 2.5 - 2.7 billion.
• Employment around 19.5 million
• Production workers 11.7 million.
• Cyclical affected by economic growth.

4
Arc Welding Business

• Market targets
• Shipbuilding, Construction, Automobiles, etc.
• Products
• Welders basic welding equipment (like razors).
• Electrodes consumables used during welding
  process (like blades).

5
Arc Welding Business

• Critical capabilities
• Advanced welding technology for specific
  applications (under water welding, space-age
  alloys, gas shielded welding)
• Low cost manufacturing (welders are commodities
  mature technology)

6
Arc Welding Business

• Competitors
• 75 of 1995 industry sales by Lincoln, Miller
  Electric, ESAB, and Hobart Brothers.
• Illinois Tool Works owns Miller and Hobart.
• ESAB is the largest consumables and materials
  supplier.
• 600 exhibitors at Chicago Welding Show.

7
Arc Welding Business KSFs

• Customers Quality (ease of welding),
  Productivity (speed/robots), Availability
  (consumable electrodes), Price (equipment cost).
• Competitors Advanced welding technologies,
  Distribution, Equipment costs.

8
Lincoln Strategy

• Sell to steel welding businesses.
• High-value, high-quality products at competitive
  prices.
• Using own technology LE processes selling
  directly and indirectly.
• Outstanding customer service.

9
Lincoln Capabilities

• Makes most components, except engines, in-house.
• Gasoline tanks, steel shafts, wiring harnesses,
  switches, rheostats, and transformers.
• Robotics welding systems.
• Built a capital intensive electrodes factory.
• Require one-year payback on equipment.
• Largest iron oxide flux factory.
• New electric motor factory.

10
Lincolns 1995 Financials

• 1 billion in sales, 61.5 million net profits.
• Dividends 9.1 million.
• Employee bonus of 66 million (55.9 of annual
  pay or 21,168 per worker).
• Incentive management system.
• Piece work payment.
• Profit-sharing bonuses (averaged 21,000).
• Guaranteed lifetime employment.

11
Internal Hiring Priority

• Only entry level jobs open to outside.
• All jobs posted internally.
• Minimum 35 hours guaranteed during hard times.
• Guaranteed lifetime employment.
• Acquisitions brought new leaders and board
  members recently.

12
Lincolns Incentive System

• Merit ratings twice per year
• Quality
• Dependability
• Output
• Ideas and Cooperation
• Average of 100 points for each group.
• Bonus is of profits (60) times rating (80)
  times wages (.6 x .8 48 of salary)
• Average W-2 per factory worker 57,758 in 1995
• Base Salary plus Incentives (Hastings got 600k
  plus 404k).

13
Lincoln Management

• Management were the coaches who must be obeyed.
• Employees are the team players who must win the
  game, but are rewarded for their success.
• There were no executive perks (same parking and
  cafeteria).
• Employees are entrepreneurs (Supervisors have
  60-100 workers).

14
Global Threats

• This fragmented industry is consolidating.
• ESAB entered the US market in 1986 with an
  electrode plant.
• Acquisitions gave it economies for production and
  RD.
• Lincoln is attacking ESAB globally.
• Purchased controlling interest in manufacturing
  and marketing operation in 16 countries.
• Built stronger global position to support RD.

15
Operating Weaknesses

• EU recession hurts German operations (27
  unemployment).
• Brazilian plant cant compete with ESAB.
• European, Mexican/Venezuelan, and Japanese plants
  required heavy borrowing (220 million).
• Incentive management system only worked in
  Mexico, Australia, and US.

16
Restructuring Losses

• Write off 130 million in foreign assets.
• From 21 plants in 15 countries in 1992 to 16
  plants in 11 countries in 1995.
• Close Brazilian factory (license ESAB).
• Supply ESAB needs in Spain.
• Close German plant (100 million).
• 1992 1993 Losses (46 38 million).
• 60 bonus and dividends.

17
Lincoln Sales in 1995

• United Other
• States Europe Counties Total
• Sales 711.9 201.7 118.8 1,032.4
• Profits 79.7 10.2 11.0 99.6
• Assets 405.0 194.3 80.9 617.8
• ROA 19 5 13 16