Expansion in Foreign Markets: When in Russia, Go Russian

How does a business expand into a risky foreign market?

Darden Professor Greg Fairchild researched how Emerson Process Management obtained a strong foothold in the Russian energy market despite the country’s almost Wild West economic and political conditions.

The key to Emerson’s success? The company went “local,” says Fairchild. “Companies bent on expanding abroad must be attuned to the culture of a country to truly succeed,” he says.

Emerson had been enormously successful in expanding its business since its start in 1890 with a single, simple invention — hooking up a tiny motor to everyday gadgets like power tools, sewing machines and dental drills.

The St. Louis, Missouri-based company grew exponentially, first in the U.S., where between 1954 and 1973 Emerson acquired 36 companies and expanded into the industrial and consumer markets. The company grew from two plants and 4,000 employees with $56 million in revenue to an emerging worldwide business with 82 plants, 31,000 employees and $800 million in sales.

By 2004, Emerson boasted a leading global position in all of its businesses — Process Management, Network Power, Industrial Automation, Climate Technologies and Commercial and Residential Solutions — earning $1.2 billion on sales of $15.6 billion and employing over 100,000 people at 250 manufacturing locations.

A significant part of its business was providing process measurement systems for oil and oil refinery companies. “It grew the company by going abroad with traditional oil companies such as Shell and Royal Dutch,” says Fairchild.

European acquisitions were the primary source of Emerson’s growth from the mid-1980s to the mid- 1990s, followed by expansion into Asia. Many of its customers in Asia, however, were American and European companies that were also expanding globally. The successes in Europe and Asia, particularly in the booming, emerging market in China, drove the company to look at other potentially profitable regions of the world — including Russia.

Emerson’s managers knew setting up shop in Russia would be difficult. The breakup of the Soviet Union had created political unrest and, of course, the economy was state-controlled. However, Russia had one of the most vital emerging markets with one of the largest oil and gas reserves in the world. “After the fall of the Soviet Union, energy came to the fore,” says Fairchild.

The Russian market represented a rich opportunity for Emerson to grow its process automation and control systems business, which aimed to improve plant uptime and productivity with its services and with components such as intelligent control systems, software, measuring devices and valves.

Russia was wary of foreign companies. Russia had even prohibited non-Russian firms from owning manufacturing facilities in the energy sectors until the ban was relaxed in 1996. “Russia didn’t want multinationals to control the energy sector,” says Fairchild. “Because of that, they were turning over portions of state owned industries to private enterprises like Metran.” Metran, founded in 1992, was a manufacturer of process automation equipment, too, though it mainly built pressure transmitters.

Emerson’s plan in 2004 was to acquire Metran — a powerful player in the Russian process automation market — so that Emerson would have Russian market access and Russian market experience. Metran had some drawbacks. Its unit margins were low and product quality uneven. Emerson also questioned Metran’s relationship with Pribor — a state-owned mechanical and electronic equipment manufacturer. Was Pribor running Metran?

Emerson also worried that most employees had limited English skills, including top managers. Plus, Metran’s headquarters and main manufacturing facility was located in Siberia, far from the power brokers in Moscow. And what if Russia walked away from market reforms and slipped back to a centrally planned economy and state-run companies?

“Emerson had never gone into a country without a big business like Royal Dutch going with them,” Fairchild says. “It was a different way for them to enter a market.”

Eyeing Russia’s rich energy market, Emerson decided to buy the company. To address its concerns, Emerson brought in a Western manager with experience in dealing with Eastern European languages and culture. “The objective at that point was to implement appropriate operating controls, while building up local management skills and investing in local leadership during the earnout/workout period,” says Fairchild. “After five years, the plan was that Metran would be a wholly owned Emerson subsidiary.” All were important steps for making Emerson’s acquisition local.

Emerson gained wide access to the Russian market, but adverse political events arose quickly. Russia’s invasion of the Ukraine in February of 2014 resulted in U.S. trade sanctions against Russia. And the exploration and expansion of the oil industry slowed because of a world oil glut. However, Emerson withstood both events. The company even gained market share because the American-owned company was perceived as Russian.

The lesson for companies wishing to expand into less than stable parts of the world is to “learn to become local to help weather political turmoil and to win over the populace and political leaders,” says Fairchild. “Attention to geopolitical events and culture are critical when venturing abroad.”

As one company executive said: “Culture eats strategy for lunch.”

Shahir Kassam-Adams, a Darden Ph.D. candidate, drafted the case Emerson Process Management: Metran Acquisition (Darden Business Publishing) under Fairchild’s supervision.