Case Study 11_The Timken Company_Market Entry into Romania.pdf

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CASE: IB-39A

DATE:1/29/03(REVD.10/15/08)

Susan Mackenzie prepared this case under the supervision of Professor Bruce McKern as the basis for class discussion ratherthan to illustrate either effective or ineffective handling of an administrative situation. Some information has been modified for

pedagogical purposes.

Copyright 2003 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies orrequest permission to reproduce materials, e-mail the Case Writing Office at: [email protected] or write: Case WritingOffice, Stanford Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015. No part of

this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by anymeans electronic, mechanical, photocopying, recording, or otherwise without the permission of the Stanford Graduate

School of Business.

THE TIMKEN COMPANY:MARKET ENTRY INTO ROMANIA (A)

Strategy is the mixing of opportunity and capability. Good strategies are well-thought out

beforehand, but also must be flexible enough to evolve with the environment. Good companies

learn from their changing environment.

Jon T. Elsasser, Senior Vice PresidentCorporate Development, The Timken Company1

On November 17, 1997, Jon T. Elsasser, then vice president of The Timken Companys Bearings

business for Europe, Africa and West Asia, reviewed the companys proposal to the Romaniangovernment for the acquisition of Rulmenti Grei, S.A., an industrial bearings plant beingprivatized through the Romanian State Ownership Fund (SOF). Elsasser reflected on thesignificance of the acquisition and its potential impact on Timkens global bearings business.Rulmenti Grei offered valuable assetsas well as an opportunity to crack the Europeanindustrial bearings marketbut the investment was not without risks. While Timkenappreciated the benefits of the venture, such as needed production capacity and an improved coststructure, the company remained wary of Romanias political instability and the numerous

operational challenges of integrating the plant into Timkens global organization.

Importantly, the investment also represented a marked shift in corporate culture and objectives.As late as the mid-1990s, Timken entered new geographies with an objective of serving the localmarket. In contrast, Timken evaluated the 1997 Romanian investment in the context of its globalbearings business. Furthermore, while Rulmenti Grei produced a variety of bearings types,Timken remained focused on tapered roller bearings, driven by corporate history, know-how,and pride as a specialist manufacturer. Yet European customer demand required that Timkenconsider expanding its product offering. Thus, Timkens investment in Romania could have a

significant impact on the entire organization: Rulmenti Grei represented much more than neededproduction capacity; it had the potential to drive change in a century-old corporate culture.

1All quotations are from the authors interviews, unless otherwise noted.

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The Timken Company: Market Entr y into Romania (A) IB-39A p. 3

In 1997, its American subsidiary, SKF USA, was based in Norristown, Pennsylvania, and had5,000 employees. SKF USA sales were approximately $1 billion in 1997.

FAG

FAG Kugelfischer Georg Schfer (FAG), based in Schweinfurt, Germany, was founded in 1883

by Friedrich Fischer, a sewing machine repair shop owner. By 1997, the company was thesecond largest bearings manufacturer in Europe, after SKF. Europe represented 54 percent of itsbusiness, with 26 percent of sales in Germany. FAG also had a significant presence in NorthAmerica (26 percent of sales), its second-largest market. FAG made bearings for automakers (25percent of sales) and OEM/industrial companies (51 percent), as well as precision bearings forthe high-tech and medical industries (10 percent). FAG also remained in the sewing business,selling sewing technology and materials handling systems. Sales in 1997 were $1.4 billion(1.647 billion).

NSK

Based in Tokyo, Japan, NSK employed approximately 20,000 people, and reported $4 billion

(493.151 billion) in 1997 annual sales. NSK manufactured ball bearings (approximately 60percent of sales) for many applications, such as automobiles, aircraft engines, machine tools, andcomputers. The company also produced automotive components, such as steering columns,automatic transmission parts, and precision machinery. The majority of NSKs revenues were inJapan (about 60 percent of sales), with the rest split among Europe (15 percent), the Americas(15 percent), and Asia (10 percent).

The Torr ington Company (I ngersoll -Rand)

The Torrington Company was founded in 1866 as a manufacturer of sewing needles. By 1997,the company had over $1 billion in annual sales and manufactured several brands of bearings,including Torrington, Fafnir, and Kilian. Based in Torrington, Connecticut, the companyemployed over 11,000 people as a subsidiary of Ingersoll-Rand. Ingersoll-Rand acquiredTorrington in 1968 in an effort to diversify its revenue base. Ingersoll-Rand was based inWoodcliff, New Jersey and employed over 46,000 people. The company was founded in 1905 asan engineering products firm specializing in coal mining equipment and air compressors.

TIMKEN COMPANY BACKGROUND

In 1997 Timken was a leading manufacturer of highly engineered bearings and alloy steels with$2.6 billion in annual sales (Exhibit 3). In fact, Timken was the worlds largest manufacturer oftapered roller bearings (Exhibit 4), offering over 200 types in more than 30,000 sizes. Thecompany was also the market leader in mechanical seamless steel tubing and shipped more thanone million tons of premium alloy steels annually. Its two business units, Bearings and Steel,served major manufacturing industries, including automotive, mining and construction,aerospace, and rail (Exhibit 5). The company also manufactured super-precision bearings formedical, semiconductor, computer, and robotic applications, and provided steel components andservices such as refurbishment for the aerospace, medical, industrial, and railroad industries.Based in Canton, Ohio, the company operated in twenty-five countries and employed over20,000 people worldwide.


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Corporate History

In 1899, Henry Timken founded The Timken Roller Bearing Axle Company (the name waschanged to The Timken Company in 1970) in St. Louis, Missouri after receiving two patents forthe tapered roller bearing in 1898. His sons, William R. and Henry H., assumed active

management of the company, and in 1901, moved the company to Canton, Ohio to be close tothe fast-growing automobile and steel industries. By 1909 Timkens client list included all majorU.S. automakers except Ford. In the same year, the company also made its first foray overseas,securing a licensing agreement with The Electric & Ordnance Accessories Company, Ltd., abearings manufacturer based in England.

During World War I, the steel supply was unreliable, and Timken had difficulty in obtaining thefull range of seamless tubing sizes necessary for bearings manufacturing. Timken decided tovertically integrate into steel production to ensure an adequate supply of quality steel, a moveuncommon among manufacturers of precision-machined products. Thus, in 1916, the companyinstalled four five-ton electric furnaces for steel making.2 By the mid-1920s, Timken had

successfully saturated the automobile market, with 80 percent of all domestically producedmotor vehicles using Timken bearings. The company soon began seeking new avenues ofgrowth, and non-automotive applications would become the largest segment of its bearingsbusiness after World War II.

After World War IIa time when most American companies were decentralizing theirmanagement structure and diversifying their businessesTimken steadfastly maintained acentralized, hierarchical organization, managing both domestic and international operationsthrough a functional structure. Furthermore, commitment to core products was also strong.Timken continued to focus on tapered roller bearings to the exclusion of other types of bearings.In 1966, the company created Timken Research, a centralized research and developmentorganization.

Although Timken had an international presence since 1909, the companys aggressive globalexpansion occurred after World War II (Exhibit 6), driven in part by its multinationalcustomerssuch as Ford and Caterpillarwhich were rapidly opening overseas plants anddemanding the same quality bearings from their suppliers. Timken was also motivated by a 1951Supreme Court antitrust decision that commanded Timken to compete with its associatecompanies in Europe. In response, Timken bought out British Timken in 1959. Elsasserexplained: Because we did not own them entirely, it was considered to be a carving of markets.So the only way to solve it was to buy them.

Timken faced a difficult economic and operating environment in the 1980s as foreigncompetitors surpassed American manufacturers both in the U.S. and abroad. In 1989, Timkenresponded with Vision 2000, a restructuring program that addressed both the companysorganizational structure and operational processes. Timken moved from a top-down, functionalstructure to one based on two business units, Bearings and Steel, which were supported by fivecorporate centers. The Bearings business was organized geographically into three units: NorthAmerican Industrial, North American Automotive (including Latin America and Asia), and

2In 1975, Timken acquired Latrobe Steel Company in Latrobe Pennsylvania.


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Timken considered building a new plant in Germany, but decided against it primarily due toconcerns about existing economic conditions. The companys other two options for market entry

were joint venture and acquisition. Timken ruled out a joint venture for both cultural andbusiness reasons. Although the companys 1989 joint venture with Tata Iron and Steel Company

in India proved to be a good experience and increased Timkens confidence in external

affiliations, Timken remained an insular organization. Elsasser commented: In 1994 a jointventure was not at the top of our list of things to do. If we could have 100 percent of it, we weregoing to do that. Culturally, that was our attitude. We wanted to own it. Regardless of culturalissues, however, Timken concluded that a joint venture did not make business sense. Elsassercontinued:

We did not have a lot of industrial manufacturing in Europe, so were limited inwhat we could bring to a European bearings producer other than a deepknowledge of tapered roller bearings and their applications. Furthermore, if wewere to partner with FAG, for instance, we would have to take away significantbusiness from SKF to make one plus one equal three.

Growth through acquisition also did not appear to be a feasible strategy. Western Europe hadalready been substantially consolidated, leaving little value and few opportunities for Timken topursue. In the end, Timken decided to rely on organic growth: We thought we could do it onour own with what we had. However, the companys European market outlook changed withthe opening up of Central European economies in the mid-1990s.

MARKET ENTRY INTO POLAND

Recognizing the economic liberalization in Central Europe as an opportunity to expandproduction capacity and to tap new markets, Timken began seeking acquisition opportunities inthe region. The company entered into discussions with the Polish government in 1994 for theprivatization of FLT Prema Milmet S.A. (FLT), a bearings manufacturer based in Sosnowiec,Poland. The plantbuilt by a Japanese bearings manufacturer for the Polish governmentmanufactured high-volume, tapered roller bearings for the automotive and light industrialmarkets. Enthused about both the assets and the employees of FLT, Timken finalized theacquisition in 1996, renaming the plant Timken Polska. Notably, Timken was the first foreigninvestor in Poland to own 100 percent of a previously state-owned manufacturer.

Learning Experience

Despite its desire for control in business ventures, Timken corporate had limited experience withacquisitions. The companys 1975 acquisition of Latrobe Steel Company was considered to be

more of a process extension than a new business venture. In fact, prior to 1996, mostinternational expansion was executed by British Timken, which for years operated independentlyfrom its American parent. Thus, many managers at Timken corporate lacked experience inforeign business entry. The acquisition and integration of FLT proved to be a valuable learningexperience for Timken, one that would help shape the companys European market strategy,

product strategy, and sales strategy and execution.


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First, Timken initially regarded the Polish plant as a platform for entering the Central Europeanmarket. However, Timken soon realized that the local market was too small and unsophisticatedfor development in isolation, although it provided a good base to produce for Timkens businessacross all of Europe. Elsasser commented:

We realized that Central Europe offered us a different model. There were goodmanufacturing assets as well as good people and technical skills. The marketitself was not that large or ready for what we could bring in terms of productperformance, but the investment could restructure the cost base and productivecapacity of all our European business.

Second, there was internal controversy about what Timken should do with the through-hardenedbearings manufactured in the Polish plant. Some managers believed Timken could successfullysell both case-carburized and through-hardened product, as its European customers were alreadybuying through-hardened product, and its European competitors were already selling it.However, other senior managers felt that selling through-hardened product would betray

Timkens heritage. Elsasser explained:

Largely driven by a technical view of the world and by tradition, selling through-hardened product was a problem for many managers. They felt it wouldinvalidate all the advertising we had done for case-carburized bearingswe couldnot sell through-hardened product under the Timken brand, because Timkenbearings were case-carburized. This set us back in marketing and sales.

To resolve the issue, Timken carried out several marketing and technical studies, whichconcluded that there was a performance difference between case-carburized and through-hardened bearings. Moreover, case-carburized bearings outperformed most remarkably in high-stress/high-shock applications, such as heavy machinery. Thus, Timken continued to sell bothtypes of bearings while educating its sales force on how to market each product by focusing onappropriate levels of performance. For example, through-hardened steel could be sufficient for afarm implement, but heavy machinery such as mining equipment would require the higherperformance of case-carburized bearings.

Third, Timken did not have a sales strategy firmly in place before closing the deal. Thecompany did not work closely with FLTs main exporter during negotiations, not offering thedistributor needed reassurance that the plant would remain a good trading partner underTimkens ownership: They got nervous and started buying more of what they could havebought from us from one of the other Polish bearing plants, which hurt our volume. Withhindsight, Timken recognized that it needed to improve its market and brand research, as well asassess how to sell to traditional customers in new markets. Moreover, Timkens experience in

Poland would drive development of a new European market strategy for industrial bearings.

NEW EUROPEAN STRATEGY

In early 1997, prompted by the companys experience in Poland, Timkens board of directorsmet in Europe for a strategy review. They left with a new market strategy that included clear,


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established objectives for the European market. The new objectives for Timkens European

bearings business (which now included both Western and Central Europe) were three-fold: togain market share; to lower its cost structure; and to increase production capacity. Furthermore,the company instituted a three-plant plan that addressed each segment of its bearings business:

1)

Small bearings for automotive and light industrial markets.2) Medium bearings for construction equipment.3) Large bearings for process and other heavy industries.

Timken Polska fulfilled the small bearings plant requirement, while the 1997 acquisition ofprivately owned Gnutti Carlo S.p.A. in Italy provided a medium-sized bearings plant. Thus,Timken began its search for a large bearings plant in Central Europe that would provide thecompany with low-cost manufacturing capacity.

Ranking the Opportunities

Timken worked with Central European Trust (CET), a strategic and financial advisory firmspecializing in Central and Eastern Europe, to identify plants for potential investment. CET washelpful in providing an initial candidate list and in facilitating introductions. Beginning in June1997, Timken began an evaluation process that spanned several months. The company chartereda plane to take the team to visit each of the leading candidates. Ward J. Timken, Jr. (Tim),corporate vice presidentoffice of the chairman, elaborated: We are the type of company thatneeds to walk the floor and see what is really there to believe it. Not a lot of people understandour industry in one take. Timken remained focused in the evaluation process by relying on aranking system it developed following the acquisition of FLT. The ranking comprised fivecategories that covered strategic, financial, and operational criteria:

1. Product: Timken focused only on those plants that would meet its needsindustrial-size, tapered roller bearings. Thus, the companys first screen wasthe types and sizes of bearings the plant produced. What percent were taperedroller bearings? What percent were industrial-size bearings?

2. Equipment: The quality and condition of the manufacturing equipment wasimportant to the companys ability to produce quality bearings that met

Timkens high standards. Western equipment was considered the highestquality, while Russian equipment was considered the least reliable. Czechand East German equipment were ranked in the middle of the scale.

3. Labor cost: Low labor cost was especially important in the industrial marketbecause the labor component was very high relative to other bearing types. Inmost Central European countries, Timken could lower costs by at least 20percent through the utilization of lower-wage labor, giving the companyample room to absorb lower productivity.

4. Labor skills: Timken believed that employees with higher education levels

and language skills would facilitate the modernization and Timkenization of

the plant.


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5. Political and economic environment: Political stability and economicgrowth were important to the success of the plant and of Timkens ability to

meet global capacity requirements.

RULMENTI GREI S.A.

While evaluating several opportunities in Romania, Timken learned about Rulmenti Grei throughone of its employees, a Hungarian sales engineer who previously worked with various Centraland Eastern European bearings plants. As part of a large economic stimulus program, theRomanian government, through the SOF, was privatizing Rulmenti Grei, a bearingsmanufacturing plant near Bucharest. The SOF was offering 50.99% of Rulmenti Grei for lei165,389,384 ($23.6 million, or $24.5 per share).4 An unusual feature of the privatization planthat upon closing, 60 percent of the approved bid would be refunded to Rulmenti Grei (and itsnew owners) to be used to meet the plants financial commitments.

At first glance, Rulmenti Grei appeared to be a good candidate to complete the companys three -

plant plan. However, the operating environment was more volatile in Romania than in Poland,and this time, a bidding process was required by the SOF to win the investment. Timken wouldneed to compete against FAG and SKF, its primary competitors in Europe, as well as severallocal companies.

Privatization in Romania5

In contrast to Poland and the rest of Central Europe, Romania was much slower in privatizinglarge state-owned enterprises. The collapse of the Soviet bloc in 1989 to 1991 left the countrywith an obsolete industrial base and latent social unrest, and the new government proceededcautiously with economic reform, only partly privatizing industries and relying on theagricultural sector to absorb displaced labor. In fact, broad privatization did not occur until anew government was installed in 1996. Consequently, Romanian economic growth andpurchasing power lagged that of its neighbors. Thus, while foreign investors were attracted toRomanias large population size, skilled workforce, low labor costs, and significant naturalresources, they were also wary of political and economic instability as well as a lack of bothbusiness and physical infrastructure.

Company Overview

Rulmenti Grei was commissioned in 1979 utilizing technology and knowledge transfer fromRollway,6 an American company. Rulmenti Grei produced over 1,200 types and sizes ofbearings, including tapered, cylindrical, spherical, and ball bearings. Tapered roller bearingsconstituted 18 percent of production. The companys bearings were used in steel and aluminum

rolling mills, paper mills, marine systems, oil and gas production, and other heavy industrialequipment.

4Romanian State Ownership Fund, ShareStock Sale Offer under the law no. 55/1995 for Rulmenti Grei SA Ploiesti .5For further information, see "Romania: Country Note," GSB Case No. IB-42.6Rollway was acquired by Emerson Electric in 1996.


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Net sales were $8.5 million in 1997, with net income after tax of $2.17 million (althoughoperating profits were typically subsidized by the government). (Exhibits 7 and 8).Approximately 62 percent of sales were for export to other European countries, Asia, and NorthAmerica. In the domestic market, Rulmenti Grei competed primarily against other Romanianbearings plants, while foreign competition was insignificant. Sales were typically direct, with

dealers contributing only 10 percent of total domestic sales. In foreign markets, Rulmenti Greicompeted against the major playerssuch as Timken and SKFand relied more heavily onindirect sales, with approximately half its exports sold by dealers.

The plant was located in Ploieti, 60 kilometers north of Bucharest, and employed 1,060 people.The Romanian State Ownership Fund (SOF) held 70 percent of the company, a private investorowned 8 percent, and 22 percent of the shares were publicly traded.

ASSESSMENT OF RULMENTI GREI

In contrast to its acquisition of FLT, Timken undertook a careful evaluation of Rulmenti Grei as

a key element of its European market strategy. Moreover, by 1997 Timken viewed CentralEurope as a source of assets and technical skills to meet overall European customer demand.The companys initial assessment of Rulmenti Grei revealed a unique investment opportunity in

Central Europe. First, much of the equipment, although not as well maintained as hoped, wasmade by an American machine builder, so Timken was already familiar with the technology.Second, while tapered roller bearings currently represented only 18 percent of production, theequipment could be retooled (at significant cost) to increase that percentage. Third, Timken wasimpressed by the quality of the workforce. Although the plant was overstaffed, the employeesseemed highly educated, and many had technical degrees. Furthermore, unlike at FLT, many ofthe professionals spoke fluent English. Elsasser commented: It was a fairly good plantgoodassets and good peopleand we felt we could bring it up to US standards. However, theinvestment was not without risks, including the excess labor complement, the lack of experiencein marketing in the West, the need to invest to change the product mix, and of course the bigunknown: how the Romanian government would treat us once we had committed.

Risks and Operational Challenges

The most visible risk to Timkens investment was the political and economic instability inRomania. While Timken recognized that such risk was endemic to the region, Romaniasdemocratization and economic performance lagged that of its neighbors. Economic growth wasslower, inflation was higher, and the labor force was more volatile. Furthermore, Timkenbelieved there was a risk of re-nationalization. The most important risks Timken faced wereoperational, with which the company had more experience. Above all, Timken believed it wouldbe imperative to effect change quickly. The plant was struggling and lacked a broad sales baseoutside Central Europe. Moreover, it sold most of its bearings to Romanian and Russian steelmills, whose business was in decline. An inability to make change rapidly could result in theneed for Timken corporate to subsidize the Romanian operations for some time.

Gaining broad acceptance of its product outside Central Europe required both technical andmarketing expertise. First, Timken needed to improve the product to Western European


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standards. Steel quality was low, and the equipment was in disrepair. Despite these obstacles,Timkens business plan assumed the plant would achieve Timken-level quality in six months.Roger Lindsay, then managing director of Central Europe, commented:

I was looking at a business plan that said that within six months we would have

the Timken brand on our bearings. And that worried me because even at FLT,where the technology and processes were relatively simple, it had taken useighteen months to bring product quality up to Timken standards.

Joe Seich, then director of technology, elaborated: FLT had forty part numbers and onlymanufactured tapered roller bearings. In contrast, Rulmenti Grei had over 1,000 part numbersfor four different bearing types. The business plan was based on a profit modelthat assumedtapered roller bearings would increase from 18 percent of production to 50 percent. The shiftwould require new heat treatment equipment and workforce education in tapered rollermanufacturing skills. Furthermore, because the plant manufactured bearings for the industrialmarket, the bearings needed to be case-carburized, requiring improvements in technology,

processes, and raw materials. Timken estimated that the total additional investment wouldrequire at least $8 million.

Second, Timken needed to convince potential customers that the product was of high quality andmet their standards. Because Western companies generally regarded Central European-manufactured bearings to be of poor quality, branding was central in gaining the customersconfidence. Lindsay explained: The game in the automotive business was consistent quality

and the right cost. In the industrial markets, it was radically different. It was imperative that weget the Timken brand on those bearings and to produce to Western standards. Timken alsoneeded to decide how it would run the current business while making necessary changes. Seichreflected on his thoughts in 1997: We have a plant that just produces a small amount of tapers.

How are we going to sell these other bearings to support the business until we can convert it to aTimken-quality, tapered roller bearing plant?

DECISIONTO INVEST OR NOT?

The Romanian government State Ownership Fund was quite transparent about how the proposalswould be assessed. Each bidder was required to complete a scoring worksheet, summarizing thekey elements of the proposal. (See Exhibit 97). The SOF was asking bidders to nominate theiracquisition price for the 50.99% of Rulmenti Grei which was for sale. The bidders acquisitionprice had to be above a minimum of 183.72 billion lei, or $US23.553 million. In addition,bidders were required to indicate how much additional investment they would undertake forplant upgrades and expansion, over what period (with a premium for rapid additionalinvestment), and also what they would spend on environmental remediation. These elements ofthe proposal were to be recorded on the scoring sheet and weighted to produce a total score.

The scoring sheet for the proposal would constitute the basis of a discussion to be held betweeneach bidder and the State Ownership Fund officials. However, each company was also expectedto put forward other more qualitative dimensions of its proposal, which could be influential in

7The scoring sheet in Exhibit 9 has been modified from the original for exposition purposes


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the final decision. Once this discussion had been held, there would be no opportunity to modifythe proposal before the SOF decision was made.

Elsassers team had put a lot of effort into assessing the Romanian environment and doing theirbest to understand the risks and opportunities provided by the Rulmenti Grei acquisition. On the

positive side they believed that RG could offer Timken an opportunity to establish a strongercompetitive position in the European industrial bearings market and to lower manufacturingcosts across its heavy bearings business. Timken had eliminated all other industrial bearingsplants from consideration and believed that Rulmenti Grei was the best plant it had seen inCentral Europe.

As he read the companys investment proposal to the Romanian government, Elsasser reflectedon the opportunities and risks of the acquisition. What could the company do to mitigate therisks? Should Timken proceed with the investment? If Timken chose not to proceed, thecompany would still need to secure low-cost manufacturing capacity somewhere in Europe. IfTimken proceeded with the proposal, how could the company improve its chances of winning

the bid? The government was welcoming bids starting at $23.5 million, but a commitment tocontinued investment in the plant and other non-price factors would also be important. Althoughthe successful bidder would be refunded 60% of the initial purchase price, that value could bereduced by further devaluation of the Romanian Lei. Furthermore, he suspected that SKF waskeen to acquire Rulmenti Grei (perhaps only to close it down) and Timken would likely lose thedeal if the process turned into a bidding war. He also felt this decision might have broaderimplications for the company as a whole. Should Timken cut drastically the broad product lineRG was currently making, or consider expanding its product line in response to Europeancustomer demand? This would be a critical decision for a company which for nearly 100 yearshad held true to its heritage as a specialist manufacturer of tapered roller bearings.

What should be the teamsstrategy for the meeting with the State Ownership Fund?


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Exhibit 1

World Bearings Demand: 1997

By Region and Application

World Bearings Demand by Region: 1997

North America

26%

Western Europe

24%

Other

24%

Japan

18%

Eastern Europe

8%

Compliled from The Freedonia Group and Timken est imates .

World Bearings Demand by Application: 1997

55%

25%

20%

Industrial machinery

Motor vehicles

Aerospace and other

Compliled from The Freedonia Group and Timken est imates .


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Exhibit 2

World Bearings Demand: 1997

Percent of Sales by Company

Company

Percent of

Sales

SKF 14%

NSK 8%

Timken 6%

NTN 6%

FAG 6%

Koyo Seiko 6%

INA 5%

Torrington 4%

Other 45%

100%

Source: Company estimates


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Exhibit 3

The Timken Company

Consolidated Statement of Income

Year Ended December 31

1997 1996 1995

(Thousands of dollars, except per share data)

Net Sales $2,617,562 $2,394,757 $2,230,504

Cost of products sold 1,997,403 1,820,985 1,717,700Gross Profit 620,159 573,772 512,804

Selling, administrative and general expenses 330,830 316,515 302,588

Operating Income 289,329 257,257 210,216

Interest expense (21,432) (17,899) (19;813)Other income (expense) (1,305) (14,099) (10,229)Income Before Income Taxes 266,592 225,259 180;174

Provision for income taxes 95,173 86,322 67,824

Net Income $171,419 $138,937 $112,350

Earnings Per Share $ 2.73 $ 2.21 $ 1.80Earnings Per Share-assuming dilution $ 2.69 $ 2.19 $ 1.78


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Exhibit 3 (contd)

The Timken Company

Consolidated Balance Sheet

December 31,1997 1996

(Thousands of dollars)

ASSETS

Current Assets

Cash and cash equivalents $ 9,824 $ 5,342Accounts receivable, less allowances:

1997-$7,003; 1996-$7,062 357,423 313,932Deferred income taxes 42,071 54,852Inventories:

Manufacturing supplies 36,448 40,150Work in process and raw materials 264,784 241,691Finished products 144,621 137,666

Total Inventories 445,853 419,507

Total Current Assets 855,171 793,633

Property, Plant and EquipmentLand and buildings 420,322 397,895Machinery and equipment 2,257,464 2,085,305

2,677,786 2,483,200Less allowances for depreciation 1,457,270 1,388,871

Property, Plant and Equipment-Net 1,220,516 1,094,329

Other AssetsCosts in excess of net assets of acquired businesses,

net of amortization,1997-$23,448; 1996-$18,670 139,409 125,018

Deferred income taxes 26,605 3,803Miscellaneous receivables and other assets 60,161 32,175Deferred charges and prepaid expenses 24,688 22,380

Total Other Assets 250,863 183,376

Total Assets $2,326,550 $2,071,338


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Exhibit 3 (contd)

The Timken Company

Consolidated Balance Sheet

December 31,1997 1996

(Thousands of dollars)

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities

Commercial paper $ 71,566 $ 46,977Short-term debt 61,399 59,457Accounts payable and other liabilities 284,890 237,020Salaries, wages and benefits 115,136 125,026Income taxes 22,953 29,072

Current portion of long-term debt 23,620 30,396Total Current Liabilities 579,564 527,948

Non-Current LiabilitiesLong-term debt 202,846 165,835Accrued pension cost 103,061 56,568Accrued postretirement benefits cost 409,003 398,759

Total Non-Current Liabilities 714,910 621,162

Shareholders' EquityClass I and II Serial Preferred Stock

without par value:Authorized-10,000,000 shareseach class, none issued -0- -0-

Common stock without par value:Authorized-200,000,000 sharesIssued (including shares in treasury)63,082,626 shares in 1997; 63,050,402 shares in 1996

Stated capital 53,064 53,064Other paid-in capital 273,873 270,840

Earnings invested in the business 749,033 619,061Accumulated other comprehensive income (38,026) (12,799)

Treasury shares at cost (1997-202,627 shares;1996-403,512 shares) (5,868) (7,938)Total Shareholders' Equity 1,032,076 922,228

Total Liabilities and Shareholders' Equity $2,326,550 $2,071,338


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Exhibit 3 (contd)

The Timken Company

Consolidated Statement Of Cash Flows

Year Ended December 31

1997 1996 1995(Thousands of dollars)

CASH PROVIDED (USED)

Operating Activities

Net income $171,419 $138,937 $112,350Adjustments to reconcile net income to net cash

provided by operating activities: - - -Depreciation and amortization 134,431 126,457 123,409Deferred income tax provision (credit) (1,564) 23,216 14,390Common stock issued in lieu of cash to - -

benefit plans 20,452 4,862 4,317Changes in operating assets and liabilities: -

Accounts receivable (48,584) (18,348) (20,228)Inventories and other assets (30,056) (25,398) (57,821)

Accounts payable and accrued expenses 66,357 (63,100) 47,568Foreign currency translation (gain) loss (472) (215) 27

Net Cash Provided by Operating Activities 311,983 186,411 224,012

Investing Activities

Purchases of property, plant and equipment-net (233,392) (150,728) (128,824)Acquisitions (78,739) (85,459) -0-

Net Cash Used by Investing Activities (312,131) (236,187) (128,824)

Financing ActivitiesCash dividends paid to shareholders (38,714) (30,244) (28,383)Purchases of treasury shares (18,083) (13,786) (170)Proceeds from issuance of long-term debt 60,453 45,000 -0-Payments on long-term debt (30,217) (288) (30,168)Short-term debt activity-net 32,485 47,461 (40,930)

Net Cash Provided (Used) by Financing Activities 5,924 48,143 (99,651)

Effect of exchange rate changes on cash (1,294) (287) (396)

Increase (Decrease) In Cash and Cash Equivalents 4,482 (1,920) (4,859)Cash and cash equivalents at beginning of year 5,342 7,262 12,121

Cash and Cash Equivalents at End of Year $9,824 $5,342 $7,262

Source: Timken SEC filings


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Exhibit 4

Timken Bearings and Plants

Tapered Roller Bearings

In 1997, Timken was the worlds largest manufacturer of tapered roller bearings.

Other Bearings

Timken also produced cylindrical bearings.


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Exhibit 4 (contd)

Timken Bearings and Plants

Timken Research Center, Canton, Ohio

Engineers from various disciplines occupy the 63,600 square feet of Timken Research

office space.

Timken Asheboro Plant, North Carolina

Timken invested $200 million in the Asheboro Plant, which used flexible manufacturingtechnology to provide speed and flexibility in design, manufacturing, and delivery.

Source: Timken


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Exhibit 5

Timken Principal Markets: 2001

Source: Timken

The Timken Company:

Principal Markets

Automotive

Construction

Mining

Farm

Metal Working General

Industrial*Aerospace

Oil & Gas

Rail

Other

*Included Power Transmis sion, Process Equipment, and Pumps & Compressors.


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Exhibit 6

Chronology of Timken Global Expansion

1909 Timken entered overseas markets through a licensing agreement with Vickerssubsidiary, Electric & Ordnance Accessories, Ltd., in England.

1917 Electric & Ordnance transferred Timken license to another Vickers subsidiary,Wolseley Motors.

1918 Wolseley Motors licensed La Socit de Mcanique de Gennevilliers to assembleTimken bearings in Paris, France (original license granted during World War I).Wolseley sublicensee Max Prausnitzer incorporated Deutsche Timken GmbH inBerlin, Germany.

1920 Wolseley Motors incorporated British Timken, Ltd., and transferred Timken licenseto the new entity.

1927 The Timken Company and Michael Dewar jointly purchased British Timken, Ltd.,from Wolseley Motors. Timken was the majority shareholder.

1928 British Timken created La Socit Anonyme Franaise Timken, a newmanufacturing and sales subsidiary in France.Timken formed a sales subsidiary in Canada, Timken Roller Bearing Company, Ltd.

1932 British Timken formed a South African sales subsidiary, British Timken S.A.Proprietary, Ltd., in Johannesburg.

1937 Deutsche Timken ceased all operations.

1944 Timken organized a sales subsidiary in Sao Paolo, Brazil, The Timken RollerBearing Company of South America.

1951 Timken attained ownership of 100 percent of La Socit Anonyme Franaise Timkenand 53 percent of British Timken by acquiring shares owned by Michael Dewar

following his death.The U.S. Supreme Court resolved an antitrust suit brought against Timken in 1947with an order requiring the company to compete with its British and French associatecompanies.

1953 Timken formed a sales subsidiary in Mexico, Timken de Mexico.

1956 Timken formed a sales subsidiary, Timken Rollenlager GmbH, in Cologne, Germany(moved to Dsseldorf the same year).

1957 Timken established a new manufacturing and sales subsidiary, Australian TimkenProprietary, Limited.

1958 Timken reorganized La Socit Anonyme Franaise Timken as Timken France, a

division of the U.S. company.1959 Timken acquired the publicly held shares of British Timken and consolidated it as a

division of the U.S. company.Timken established a sales subsidiary in Buenos Aires, Timken Argentina S.r.l.


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Exhibit 6 (contd)

Chronology of Timken Global Expansion

1960 Timken formed a manufacturing and sales subsidiary, Timken do Brasil, in So Paulo.

1974 Timken established a sales subsidiary in Japan, Nihon Timken K.K.

1988 Timken opened sales offices in Italy, Korea, Singapore, and Venezuela.

1989 Timken entered into a joint venture for bearing production in India with Tata Iron andSteel Company, creating Tata Timken Ltd.

1990 Timken opened a sales office in Hungary.

1991 Timken formed a sales subsidiary in Spain, Timken Espaa S.A.

1993 Timken opened a sales office in Hong Kong.Timken opened a Shanghai representative office in China.

1994 Timken opened MPB Singapore Pte. Ltd., for production of rotary actuator cartridges forcomputer disk drives.

1996 Timken acquired Sanderson Kayser Ltd. in Great Britain.Timken acquired FLT Prema Milmet S.A. in Poland.Timken formed a joint venture for bearing production in China, Yantai Timken CompanyLtd.Timken opened office in Beijing, China.Timken opened Moscow office.

1997 Timken acquired bearing assets of Gnutti Carlo S.p.A., in Italy.Timken acquired aerospace bearing operations of The Torrington Company Ltd. InWolverhampton, England.Timken opened office in Istanbul, Turkey.

Source: Bettye H. Pruitt, Timken: From Missouri to MarsA Century of Leadership in Manufacturing(Boston: Harvard Business School Press, 1998), pp. 421-433.

Exhibit 7

The Rulmenti Grei S.A Plant at Ploie ti

Source: Casewriters photo


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Exhibit 8

Rulmenti Grei S.A.

Financial and Operational Summary

FINANCIAL SUMMARY

Income Statement (000 Lei)* In $US million

@ av. exch rate of 7,185

1994 1995 1996 1997E 1997E

Sales Revenue 19,345,206 37,558,403 56,753,783 61,032,631 8.49

Inc. before tax 438,199 7,344,905 9,114,392 17,982,345 2.50

Net income 1,476,505 7,287,785 7,324,724 15,592,280 2.17

Note: Lei/$US exchange rate depreciated in 1997 from 4,150 to 8,150. 7,185 is the average rate

Sales Summary

1994 1995 1996 Q2 1997

Domestic sales (tonnes) 661 529 605 168

Direct sales 90%

Dealers 10%

Exports (tonnes) 631 910 926 267

Direct sales 53% 45%

Dealers 47% 55%

MANUFACTURING CAPACITY

Production

Activity

Capacity(tonnes/year)

Utilization (%)

1994 1995 1996 Q2 1997

Large-sized 2,500 46.0 72.0 62.8 65.2

Forged rings 3,277 58.8 64.0 73.8 78.8

Source: Romanian State Ownership Fund


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Exhibit 9.Romanian State Ownership Fund Rulmenti Grei Offer Scoring Worksheet(modified)

Currency Lei billion Dollars million (Exch. rate 7,800)Registered capital (equity) 47.13 6.04SOF minimum price 183.72 23.553Acquisition Price Offered

Future investmentsInvestment period (yrs)

Environmental invest. (& yrs)

1) Acquisition Price (50% of total score)

a. (Price offered by buyer / Approved price) x 100

b. Investor terms (paid in full within 90 days)

Romanian investor = 100 points

Foreign investor, hard currency = 120 points

Total points

2) Future Investment (25%)a. (Future Investment / Registered capital) x 100

b. Investment period

1-2 years = 60 points

3-5 years = 20 points

Total points

3) Environmental Protection (10%)

a. (Env. Investment / Registered capital) x 200 x K

b. Investment period factor (K)

Investment achieved in first 2-year period K = 1

Investment achieved in next 3-5 year period K = 0.5Total points

4) Other (15%)

a. Ownership share

Majority package (50.1%) = 100 points

Less than majority package = 0 points

b. Maintain field of activity

At least 5 years = 50 points

At least 10 years = 100 points

Total points

SUMMARY Score Weighting % Weighted scoreAcquisition Price/Terms 50%

Future investments 25%

Environment 10%

Share/Maintain field 15%

Total Score


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Case Study 11_The Timken Company_Market Entry into Romania.pdf

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