TIMKEN CASE STUDY

Timken was known as a leading manufacturer of highly engineered bearings and alloy steels and

famous for its tapered roller bearings with over 200 types in more than 30,000 sizes. It was also

the market leader in mechanical seamless steel tubing and shipped more than one million tons of

premium alloy steels annually. Timken was located in Canton, Ohio. However, its operation was

not limited in Ohio but in twenty-five countries and employed over 20,000 people worldwide. In

the early 1990s, Timken intended to take the U.S model to Europe with some customization for

the local market and focused on case-carburized tapered roller bearings. In early 1997, Timken

reviewed its strategy with specific aim for the European market: to gain market share, to lower its

cost structure and to increase production capacity. It also addressed three segments: small

bearings for automotive and light industrial markets, medium bearings for construction

equipment and large bearings for process and other heavy industries. As Timken Polska fulfilled

the small bearings plant requirement and Gnutti Carlo S.p.A. in Italy provided a medium-sized

bearings plant, Timken had to search for a large bearings plant in Central Europe that would

provide the company with low-cost manufacturing capacity. Rulmenti Grei in Romania could be

the potential choice for Timken’s large bearings plant. Rulmenti Grei offered valuable assets

from market share, equipments to skill engineers to help Timken to crack the European industrial

bearings market. This acquisition would be consistent with Timken’s strategy of gaining market

share, improving cost structure and increasing production capacity. However, Timken might face

the difficulties of Romania’s political instability and the numerous operational challenges of

integrating the plant into Timken’s global organization. Furthermore, as Rulmenti Grei produced

a variety of bearing types, this investment could lead to the change in its century-corporate

culture of focusing on tapered roller bearings. Timken also had to consider the acquisition cost

and the additional investment they would undertake for plant upgrades and expansion.

The merits of an acquisition of Rulmenti Grei and the risks for Timken

According to the ranking system of Timken, Rulmenti Grei seemed to have a good assessment.

First, Rulmenti Grei had been a big manufacturer producing over 1,200 types and sizes of

bearings including tapered, cylindrical, spherical, and ball bearings. Although tapered roller

bearings currently represented only 18 percent of production, this proportion could be increased

by retooling its equipment. Second, Timken was familiar with much of Grei’s equipment as it

was made by an American machine builder. Third, the employees of Rulmenti Grei seemed to

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have high education and many of them had technical degrees. Furthermore, many professors

spoke English fluently. Therefore, Timken could easily bring it up to US standards. Skilled talent

is hard to find and difficult to retain. Local companies usually take advantages of this as they

understand the culture, the behaviors and the expectation of local people to build up a strategy to

attract talents (Bhattacharya, 2008). Thus, acquisition a company with impressive workforce

could strengthen Timken’s competitive ability. Rulmenti Grei was considered as the good

candidate for the company’s three-plant plan. It could offer Timken an opportunity to establish a

stronger competitive position in the European industrial bearings market and to lower

manufacturing costs across its heavy bearings business. It is said that local companies often win

in the price war while the organizational processes and cost structures of many global companies

make it difficult for them to sell products and services at optimal price points to satisfy both

global, glocal, local and bottom customers (Khanna, 2006). Therefore, having effective cost

structure would be the great advantage for Timken to become more competitive not only in

Europe but also globally. Although Timken had several plants in Europe, their operation was less

effective than those of competitors. With this acquisition, Timken could break into and dominate

the European market and use it as the leverage to be the leader in bearing industry.

However, the investment was not without risks. There are four types of risks in international

business called cross-culture risk, country risk, currency risk and commercial risk. Cross-cultural

risk refers to a situation or event where a cultural miscommunication puts some human value at

stake. Country risk describes the potentially adverse effects on company operations and

profitability holes by developments in the political, legal, and economic environment in a foreign

country. Currency risk is the risk of adverse unexpected fluctuations in exchange rates.

Commercial risk refers to potential loss or failure from poorly developed or executed business

strategies, tactics, or procedures (Boter & Wincent, 2010). Investment in Rulmenti Grei, Timken

might face the salient risks of political and economic instability. Romania’s economic growth

was slower, inflation was higher, and the labor force was more volatile. Furthermore, there might

be a risk of re-nationalization. It is said that economic risk analysis tells corporate leaders the

ability of a particular country to pay its debt while political risk analysis tells them whether that

country will pay its debt. Political risk measures the stability of individual countries through the

combination of four factors: government, society, security, and the economy (Bremmer, 2005).

However, the most important risks Timken faced were operations. Besides, the plant was

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struggling and lack a broad sales base outside Central Europe. Moreover, it sold most of its

bearings to Romanian and Russian steel mills, whose business was in decline. An inability to

make change rapidly could result in the need for Timken corporate to subsidize the Romanian

operations for some time.

Operating and organizational issues

In order to gain broad acceptance of its product outside Central Europe, Timken need both

technical and marketing expertise. First, Timken needed to improve the product to Western

European standards. It would be difficult as steel quality was low, and the equipment was in

disrepair. Even FLT where the technology and processes were relatively simple as it

manufactured only tapered roller bearings, it had taken eighteen months to bring product quality

up to Timken standards. Therefore, it would be impossible for Rulmenti Grei which had over

1,000 part numbers for four different bearing types to achieve Timken-level quality in six month.

Furthermore, if Timken wanted to increase the proportion of tapered roller bearings production,

new heat treatment equipment and workforce education in tapered roller manufacturing skills

would be required. Besides, Timken needed to improve not only technology, technology but also

raw materials to produce case-carburized bearings for industrial market with total additional

investment of at least $8 million which was not a small figure.

To bring Rulmenti Grei up to Timken’s quality was difficult but to convince potential customers

that the product was of high quality and met their standards was also a big concern due to the fact

that Western companies generally matched Central European manufactured bearings with poor

quality. Applying Timken brand on these bearings producing to Western standards could help to

gain the customers’ confidence. However, if the quality was not well controlled, it could damage

Timken’s image and lead to a huge loss. Another issue was about what Timken would decide

with other bearings that Rulmenti Grei was producing. If Timken decided to continue to produce

these types of bearing, it might need to consider how to sell them and how to change its century-

old corporate culture of producing tapered roller bearings. If Timken continued to focus only on

tapered roller bearings, investment in equipment, technology and human resource must be high

and the investment project would take a long time.

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Conditions to secure in framing the proposal and what the Romanian Government

looked for in a winning proposal

The Romanian government assessed the proposals based on the scoring worksheet including the

acquisition price, future investment, and environmental remediation. Bidders were asked to

nominate their acquisition price for 50.99% of Rulmenti Grei which was for sale from a

minimum of 183.72 billion lei. In addition, bidders were required to indicate how much

additional investment they would undertake for plant upgrades and expansion, and also what they

would spend on environmental remediation. Romanian Government also expected bidders to put

forward other more qualitative dimensions which could be influential in the final decision.

Understanding the expectation of Romanian Government to satisfy them was the key element to

win the acquisition. When a government was calling for an investment, of course they wanted an

outstanding investor which had ability to drive the company successfully with a long-term

investment not only for that company but also for society. Therefore, Timken would mention

clearly in the proposal about its competitive strength and future development ability. In addition,

Timken would focus on what Timken could do for the Rulmenti Grei as well as Romanian

society such as a detail plan to make Grei become the biggest manufacturer in Europe which

could bring thousands jobs for Romanian people by applying new technologies and processes.

This investment would contribute much to Romania’s economic and technology as well as

shorten the distance between Romania and other developed countries in Europe. Furthermore,

Timken would show its investment in environmental protection and other activities to improve

the Romanian environment, education, and living standards. Last but not least, Timken should

also consider to nominate the appropriate acquisition price as it would be very difficult to win if

its nominated price is much lower than that of other competitors. Furthermore, Timken could

even ask for some commitment from Rumanian Government for a stable law in bearing industry

or even a favorable treatment for Timken to ensure the sustainable growth especially in the first

stage of investment.

Proceed with a proposal or not?

Globalization is said to be a double-edged sword (Bhattacharya, 2008). For all the pros and cons

of this acquisition, the trade-off between benefits, costs and risks should be taken into

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consideration. However, one of the reason why Timken had not cracked the European market

was its lack of competitive production capacity and a strong local presence on the continent,

which was the home field of its two largest competitors, SKF and FAG. Although Timken had

several manufacturing plants in Europe, the plants were low scale and less efficient compared to

those of its major European competitors. Therefore, if Timken chose not to proceed this

acquisition, the company would still need to secure low-cost manufacturing capacity somewhere

in Europe to build a platform to win European market. With its advantages as mentioned above,

Rulmenti Grei was the best choice to support Timken’s mission, so taking this chance would

open a new world of success for Timken. Moreover, SKF was keen on acquire Rulmenti Grei so

if Timken did not take this chance, the distance between SKF and Timken might be lengthened

and Timken might lose its competitive ability in Europe. Then, increasing European market share

would be a big problem of Timken.

Proceeding the proposal would be the lucid decision, however, the problem was how to analyze

the risks accurately and mitigate them effectively. For example, as politics never stops moving,

risk analysts must be able to follow a nation's story as it develops with information gathered from

journalists in the local and foreign press, current and former midlevel officials, and think-tank

specialists (Bremmer, 2005). To mitigate the political risks, companies can maintain the good

relationship with the government or become part of the country’s infrastructure or use local

R&D, etc (Boter & Wincent, 2010). In addition, companies can buy insurance for political risks

such as the expropriation of property, political violence, currency inconvertibility, and breach of

contract (Bremmer, 2005). However, it is worth remembering that though instability translates

into greater risk, risk is not always a bad thing. Political risk in underdeveloped countries nearly

always carries an upside because such nations are so unstable that negative shocks can do little

further damage. (Bremmer, 2005). For the operational risk of not achieving Timken’s quality,

Timken could mitigate it by controlling the materials, applying the qualified technologies,

equipments, processes and management. The most importance is to prepare an accurate plan and

try to apply these things as soon as possible.

Expand its product line in response to European customer demand or not?

In contrast to U.S where customers sought out specialty manufacturers for each bearing type,

European customers preferred to buy all their bearings from a full-line producers. Thus,

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remaining a specialty manufacturer limited Timken’s potential market. Besides, Timken’s

competitive position was also impacted by the lack of a full metric line for its bearings. In order

to satisfy local demand, it would be necessary to expand its product line to compete with both

local companies as well as international rivals. Each market often turns out to be unique because

customers’ needs and tastes are idiosyncratic. Local companies are often the first to realize that

and to build businesses. They are not constrained by existing products or by preconceived notions

about customer needs. They customize products and services to meet different consumer

requirements, and they initially go after economies of scope while many global companies find it

costly and cumbersome to modify their products, services, and communications to suit local

tastes. Global companies often end up occupying small, super premium niches (Khanna, 2006).

When a business begins, it usually has only one product to satisfy a small group of customers.

However, when it becomes famous, it is the time for it to develop something new to offer the

customers. A broad product line and wide customer base may be the keys to success in tough

times (Levine, 2001). The first advantage of product diversification is the increase of market

share. By offering different products, company can satisfy a wide range of customers and enlarge

its market share. Consequently, its revenue will increase and its brand will be known more wider

and will be mentioned more frequently which leads to the higher brand value. Furthermore, this

strategy also helps reduce overall business risk by offering products in a variety of customer

categories to avoid having all eggs in one basket (Acevedo, 2009) and provide quick movement

away from declining activities.

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LIST OF REFERENCE

Acevedo, L. 2009. Product Diversification Strategy, Ehow website <http://www.ehow.com/way_5272073_product-diversification-strategy.html>, retrieved [2010-11-17].

Bhattacharya, A.K. and Michael, D.C. 2008. How Local Companies Keep Multinationals at Bay. Harvard Business Review, 86(3): 84-95.

Boter, H. and Wincent, J. 2010. Managing Networks and Internationalization – Lecture 2, Umea School of Business.

Bremmer, I. 2005. Managing Risk in an Unstable World. Harvard Business Review, 83(6): 51-60

Khanna, T. and Palepu, K.G. 2006. Emerging Giants. Building World-Class Companies in Developing Economies. Harvard Business Review, 84(10): 60-69.

Levine, B. 2001, Diversify And Prosper, Electronic News (10616624), Vol. 47 Issue 25, p2.

Mackenzie, S. 2003. The Timken Company: Market Entry Into Romania (A) Case Study, Stanford Graduate School of Business.

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