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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
IIM Lucknow
3
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
IIM Lucknow
4
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
IIM Lucknow
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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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6
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
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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9
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
IIM Lucknow
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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