ThyssenKrupp’s International Expansion Strategy: Greenfield Investments and M&As

QUESTION

1. List the potential advantages and disadvantages of Greenfield investments and M&As and evaluate Thyssenkrupp‘s current situation. Provide examples from the below case for each advantage and disadvantage.
2. Does the sequence of Thyssenkrupp‘s strategy of international expansion follow the theoretical concept of psychic distance?
3. Which Processes and organizational structures are important for creating new subsidiaries in foreign countries? Prove at least one Organisational structure with the example from the below case.

Case Study: ThyssenKrupp

Profile History and Status Quo

This case study concerns the German company ThyssenKrupp and several of its business operations in international markets. More precisely, this case study provides insights into the company’s activities with regard to whollyowned subsidiaries, especially greenfield investments and mergers & acquisitions.

Today, ThyssenKrupp is the largest steel producer in Germany and one of the largest steel producing companies in the world. The multinational conglomerate is based in Germany and consists of 630 companies in 77 countries and has about 160,000 employees worldwide. As well as steel production, the company also provides components and systems for the automotive industry, elevators, escalators and industrial services.

The company is the result of the merger between Thyssen AG and Krupp, and now has its operational headquarters in Essen. The negotiations for the merger started in the early 1980s. The two companies then cooperated closely in several business areas and the proposed alliance was finalised in 1983. In 1997, the two companies combined their activities in the flat steel business and formed Thyssen Krupp Stahl AG. In the same year, Krupp and Thyssen further negotiated on expanding their cooperation into other business areas. During these talks, both companies identified a great potential for strategic development and operating synergies through a full merger, which took place in 1999.

In 2009, the company was reorganised into eight business areas, which fall under the Materials and Technology divisions. After a further reorganisation, the Technology division was divided into Plant and Mechanical divisions. Today, the Mechanical division designs and manufactures highquality components for the automotive, machinery, energy and construction industries. Furthermore, as a part of this division, the company also produces innovative technological goods such as modern elevator systems.

The Plant division extends from the engineering and construction of complete industrial complexes to a global service network and advanced naval technology. Last but not least, the Material division includes custom material solution, efficient materials manufacturing and processing with a focus on stainless steel and carbon steel, and materials services. The portfolio is further supplemented by ThyssenKrupp Business Services and ThyssenKrupp IT Services.

The company’s strategy focuses on the development of innovative products, high quality materials and intelligent industrial processes and services for a sustainable infrastructure and resource efficiency, providing several challenges and business opportunities (see Figure 18.3). To achieve these strategic aims, ThyssenKrupp has to combine its traditional competitive advantage in materials with its engineering expertise and broad technology expertise to deal with a worldwide demographic change, the globalisation of goods flows and the rapid growth of mega cities, meaning that global demand still will continue to rise.

ThyssenKrupp has made several investments and previous attempts to deal with the aforementioned challenges and to realise future business opportunities in international markets. Throughout the company’s history, an integral part of the company’s business strategy for expansion and international growth has involved wholly-owned subsidiaries and mergers and acquisitions in emerging markets and international markets with a suitable infrastructure and a stable demand for the company’s products. After a brief overview of activities in the company’s early history, the following provides some detailed examples of greenfield investments and mergers and acquisitions made by ThyssenKrupp.

The Company’s International Expansion 

In the early 1970s, Thyssen was already considering ideas to strengthen the group’s international focus. Plans to produce steel in different locations around the world and process it in Duisburg were abandoned after the 1973 oil crisis. To expand their business base and to reduce the company’s dependency on steel demand, the Budd Company (USA) was acquired in 1978. With the acquisition of Budd’s automotive operations in 1978, ThyssenKrupp entered the North American automotive industry. Budd Company became the automotive division of Thyssen and was operated in North America as Budd Thyssen, later ThyssenKrupp Budd Co. In October 2006, ThyssenKrupp sold ThyssenKrupp Budd’s North American body and chassis operations to Martinrea International Inc.

During the 1990s, further international expansion was based on a concentration on selected fields of business with good market and earnings potential. In this context, it is worth highlighting the acquisitions of the machine tool manufacturer Giddings & Lewis Inc. (USA) and Copper and Brass Sales Inc. (USA), a leading trading and service centre for nonferrous metals in North America, in 1997, and of Dover Elevators (USA), market leader in hydraulic elevators in North America, in 1998.

Four years later, ThyssenKrupp acquired the Korean-based Dongyang Elevator. These latter acquisitions can be considered the starting point of the company’s tremendous success in the international elevator market. After that, ThyssenKrupp Elevator pressed ahead with acquisitions of established small and medium-size elevator companies in the USA in the following years. In 2013, ThyssenKrupp acquired all the assets of Ohio-based Edmonds Elevator, Inc. With this acquisition, ThyssenKrupp continued its international growth strategy and strengthened the company’s service business in the North American market.

In 2007, as a part of their forward strategies for profitable and sustainable growth, ThyssenKrupp started to plan a new plant in the USA at a cost of 2.3 billion EUR. After a phase of extensive preliminary investigations, the site selection process focussed on Alabama and Louisiana. The investigations revealed several positive factors in these states in terms of energy costs, logistical advantages and geological conditions.

This greenfield venture was mainly intended to considerably strengthen ThyssenKrupp’s position in North America. The NAFTA (North American Free Trade Agreement) is one of the biggest volume markets for high-quality flat carbon steel, and ThyssenKrupp thought that the company would be able to leverage the strengths of its broad range of high-quality products in this sector. Another reason for setting up a new production facility was that at this point in time ThyssenKrupp was already an established producer on the NAFTA market thanks to its cold rolling mill in Mexico and sales/distribution bases in the USA. Hence, the new plant was intended to produce for the fast-growing US market, while the production facility in Mexico focused more on the Mexican market. The central element of the new plant was a hot strip mill, which would be used primarily to process slabs from the new ThyssenKrupp steel mill in Brazil. In addition, the plans for the new plant included cold rolling and hot-dip coating capacities for highquality flat carbon steel end products.

Overall, the estimated annual capacity of the new production facility was about 4.5 million metric tons of end products and the planned costs of the investment were about 1.8 billion EUR. The new plant opened in December 2010. It was ultimately one of the largest foreign investments in the history of ThyssenKrupp. Contrary to expectations, the overall costs of the new production facility were about 3.7 billion EUR.

In 2005, ThyssenKrupp started planning the construction of a new facility to produce steel in Brazil for the global market. The initial estimated costs for the establishment of the new production facility were about 1.3 billion EUR. But, when construction was finished in 2010, the final costs for this greenfield investment proved to be much higher (about 5.3 billion EUR). The reasons for this tremendous increase in costs were the strict constraints put in place by the Brazilian government regarding environmental protection, especially concerning prevention of atmospheric pollution. The new plant was intended to produce five billion tons of steel, which would be refined in Germany and in North America for the automotive industry in Europe, North America and China.

In 2014, ThyssenKrupp started the construction of a new automotive supply plant for the production of assembled cylinder-head modules in Brazil (Pocos de Caldas, Minas Gerais). The company has invested about 40 million EUR in the construction of the plant, which is expected to be completed by the end of 2014 and will create for about 170 jobs. The production is planned to start in early 2015. With this greenfield investment, ThyssenKrupp will be able to produce more than one million modules a year. The finished products will mainly be supplied to car producers in Brazil.

The new Brazilian plant is the fourth such plant being built or put into operation around the world by ThyssenKrupp since 2013, and it is an important part of the company’s global growth strategy as a supplier of highperformance components for the automotive industry. As a result of extraordinary efforts in the development of innovative and high-quality components for the automotive industry, ThyssenKrupp now has a substantial competitive advantage compared to its competitors in the global market. For example, ThyssenKrupp’s products allow car producers to reduce weight by up to 30%. This will considerably lower fuel consumption and hence reduce carbonate dioxide emissions.

But ultimately the greenfield investments in the North and South American market strategy were not a success. With the beginning of the worldwide recession starting in 2008 and the associated cutbacks, ThyssenKrupp lost about 8 billion EUR on its two new plants in North America and Brazil, which sold steel below the cost of production. Hence, the two steel production facilities were offered for sale as a consequence of continuous losses. ThyssenKrupp’s stainless steel division, including the stainless portion of the US plant, was sold to Finnish stainless steel company Outokumpu in 2012. In 2013, ThyssenKrupp offered the remaining portion of the plant for sale at less than 4 billion USD. Finally, ThyssenKrupp’s Clavert carbon steel production facility was sold to ArcelorMittal and NipponSteel in 2014.

Brazil and the related losses have caused serious problems for the whole company. While this strategy has allowed ThyssenKrupp to protect their tacit knowledge from competitors in the new market to a certain degree, these investments show the associated high risks of this kind of internationalisation strategy for the overall business success of a company, due to the high investments and long time required to establish new production facilities and create for a business in a foreign country.

For ThyssenKrupp, China is the world’s most important growth market. In the last two fiscal years the company has invested about 250 million EUR in new supply plants for the Chinese automotive industry and now has seven Chinese production facilities in this technology sector.

In 2013, ThyssenKrupp opened a new automotive supply plant in China (Chengdu, Sichuan Province). Thanks to the opening of this new production facility, the company now produces springs and stabilisers for the Chinese automotive market. Springs and stabilisers are important comfort and safety related components in cars. They ensure even grip, while absorbing and cushioning shocks from the road surface and centrifugal forces during cornering. ThyssenKrupp has invested around 20 million EUR in the new plant and has created about 200 new jobs. The strategic expansion of automotive supply plants in one of the world’s fastest growing regions is a key component of ThyssenKrupp’s transformation into a diversified technology group.

Overall, since 2010 the company has invested around one billion EUR in the global expansion of its auto components business. Another production facility for cylinder head modules is currently under construction. The components produced there support the company in its ability to meet the still rising demand for greater personal mobility in the Asian market, by meeting the need for lighter, more comfortable, more economical and safer vehicles.

A new production line for cylinder-head modules in Dalian and a new crankshaft plant in Nanjing were opened in 2013. In Shanghai, a new production line for steering systems also started operation. The company has invested around 350 million EUR in these projects.

Overall, ThyssenKrupp’s range of automotive products in China now ranges from crankshafts, camshafts, cylinder head modules and steering systems to springs and stabilisers. In total, ThyssenKrupp employs around 3,800 people at ten production facilities in the components sector for the Chinese auto, truck and building machinery and wind power industries. In the 2012/2013 fiscal year, the company generated sales of around 750 million EUR in this segment in China, with the automotive sector accounting for about two thirds of this result.

Summary and Outlook 

The company’s strategy of global growth through greenfield investments and mergers and acquisitions is an integral part of ThyssenKrupp’s business strategy and has considerably strengthened the company’s position in the international markets. Today, ThyssenKrupp generates about 69% of its consolidated sales in international markets, while customers in the German domestic market account for the remaining 31%. Overall, the member countries of the European Union (24%) and North America (21%) are the key foreign markets for the company’s business activities.

ThyssenKrupp companies hold leading positions with their products in numerous international markets and the degree of internationalisation of the whole group is still rising. ThyssenKrupp is already the world market leader in assembled camshafts and is continuously optimising this established technology in line with the latest findings and requirements. The company is able to meet car manufacturers’ demands for lightweight components and the associated reduction in fuel consumption. Furthermore, ThyssenKrupp is one of the world’s leading elevator manufacturers (sales: 5.7 billion EUR in the 2011/2012 fiscal year). Their portfolio consists of passenger boarding bridges, stair and platform lifts, as well as tailored services for all components.

ANSWER

 ThyssenKrupp’s International Expansion Strategy: Greenfield Investments and M&As

Introduction

ThyssenKrupp, a German multinational conglomerate, has pursued an international expansion strategy using both greenfield investments and mergers & acquisitions (M&As). This essay evaluates the advantages and disadvantages of each approach and assesses how well the company’s strategy aligns with the concept of psychic distance. Additionally, the organizational processes and structures crucial for creating new subsidiaries in foreign countries will be discussed, with an example from the case study.

Advantages and Disadvantages of Greenfield Investments and M&As

Greenfield Investments

Advantages:
Control and Flexibility: Greenfield investments offer complete control over operations and strategy, allowing the company to tailor its approach to the local market’s needs and preferences.
Example: ThyssenKrupp’s greenfield venture in the USA aimed to strengthen its position in North America, enabling it to leverage its product range for the fast-growing US market.

New Technology and Efficiency: Starting from scratch allows the company to incorporate the latest technology and design processes, leading to higher efficiency and productivity.
Example: ThyssenKrupp’s greenfield plant in China focused on producing springs and stabilizers for the Chinese automotive market, ensuring the use of modern technology to meet market demands.

Disadvantages

High Investment and Time Requirement: Greenfield investments involve substantial upfront costs and take time to establish new production facilities and gain market traction.
Example: ThyssenKrupp faced significant cost overruns in its greenfield projects in North America and Brazil due to unexpected challenges and stringent environmental regulations.

Market Uncertainty: Entering a new market without existing customer relationships can lead to uncertainty about demand and market dynamics.
Example: ThyssenKrupp experienced losses in North and South America due to the worldwide recession, resulting in steel sales below the cost of production.

 Mergers & Acquisitions (M&As)

Advantages
Market Access and Established Presence: M&As provide immediate access to existing customer bases, distribution networks, and established market presence.
Example: ThyssenKrupp’s acquisition of Dongyang Elevator in Korea marked the starting point of its success in the international elevator market.

Synergy and Diversification: M&As can create synergies and diversify the company’s portfolio, reducing dependence on a single market or product.
Example: The acquisition of Giddings & Lewis and Copper and Brass Sales in the USA diversified ThyssenKrupp’s business operations in North America.

Disadvantages

Cultural and Organizational Integration: Merging with or acquiring a company in a foreign market may face challenges in integrating different organizational cultures and practices.
Example: ThyssenKrupp’s merger with Krupp in 1999 required substantial efforts to align the two companies’ operations and realize synergies.

Overpayment and Failed Integration: Overvaluing the target company or failing to integrate successfully can lead to financial losses and operational inefficiencies.
Example: ThyssenKrupp incurred significant losses in its greenfield investments in North and South America due to steel sales below the cost of production.

Evaluation of ThyssenKrupp’s International Expansion Strategy

ThyssenKrupp’s strategy of global growth through greenfield investments and M&As has both positive and negative implications. While the company has strengthened its position in international markets and achieved world market leadership in certain sectors, it also faced significant losses and challenges in its international ventures. The high investments and long time required for greenfield projects in North and South America highlight the risks associated with this expansion strategy. On the other hand, successful M&As, such as Dongyang Elevator, enabled ThyssenKrupp to establish a strong presence in the international elevator market.

Psychic Distance and International Expansion

Psychic distance refers to the cultural, linguistic, and institutional differences between a company’s home country and the target market. Generally, as the psychic distance increases, the complexity and uncertainty of doing business in that market also increase. ThyssenKrupp’s strategy appears to follow the concept of psychic distance, as it selectively targeted markets with suitable infrastructure and stable demand for its products. For instance, the company invested heavily in China, one of its most important growth markets, and built several automotive supply plants to meet rising demands. This approach indicates a strategic consideration of market attractiveness and alignment with the company’s capabilities.

Processes and Organizational Structures for Creating New Subsidiaries

To create successful subsidiaries in foreign countries, ThyssenKrupp needs effective processes and organizational structures. These may include:

Thorough Market Research: Conducting comprehensive market research to assess market demand, competition, regulatory environment, and cultural nuances.

Strategic Planning: Developing a clear expansion strategy with defined objectives, target markets, and performance metrics.

Local Partnerships: Establishing strategic partnerships with local companies to leverage their knowledge of the market, distribution channels, and customer base.

Effective Communication: Implementing effective communication channels between headquarters and subsidiaries to ensure alignment with the company’s overall vision and strategy.

Cultural Integration: Fostering cultural integration through training, cross-cultural workshops, and promoting a collaborative work environment.

Example of Organizational Structure: ThyssenKrupp’s acquisition of Dongyang Elevator in Korea required a thoughtful organizational structure to facilitate integration and leverage synergies. The company established cross-functional teams composed of experts from both ThyssenKrupp and Dongyang Elevator. These teams were responsible for overseeing the integration process, identifying areas of synergy, and streamlining operations. By integrating expertise from both companies, ThyssenKrupp successfully entered the international elevator market and continued its growth strategy.

Conclusion

ThyssenKrupp’s international expansion strategy of using greenfield investments and M&As has both strengths and weaknesses. While it has expanded its global presence and achieved market leadership in specific segments, it has also faced significant challenges and losses. The company’s approach appears to align with the concept of psychic distance, as it selectively targets markets with suitable infrastructure and stable demand. To create successful subsidiaries in foreign countries, ThyssenKrupp must implement effective processes, form strategic partnerships, and foster cultural integration. The example of the Dongyang Elevator acquisition showcases the importance of a thoughtful organizational structure to ensure successful integration and synergies in international expansion.