Global Business Environment Assignment

CEMEX- CASE STUDY

Submitted to: Submitted by:

Dr.Kalindi Maheshwari Himanshu Sagar (s163f0009)

Q1. Please refer to the above figure which has been extracted from the paper- Global
Strategy An organizing framework by SumantraGhoshal.

In the above figure based on the integration responsiveness framework, Cement is

considered low on account of both integration and responsiveness. How then has
CEMEX managed to leverage the gains from globalization?[10 marks]

Ans1.

The frame-work is a conceptual lens for visualizing the cost advantages of global integration
of certain tasks i.e., the differentiation benefits of responding to national differences in tastes,
industry structures, distribution systems, and government regulations. The same framework
can be used to understand differences in the benefits of integration and responsiveness at the
aggregate level of industries, at the level of individual companies within an industry, or even,
at the level of different functions within a company. CEMEX has used the same to leverage
the gains from globalisation even though cement industry is low on both integration and
responsiveness. Some of these decisions are:
 Acquisition of local companies in Spain, Latin America and Indonesia to increase the
market share.
In 1998, CEMEX had to sell off its Seville plant which accounted for about 10% of
CEMEXs capacity in Spain and had high production costs. This helped CEMEX to
invest in South East Asia particularly Indonesia where the cost of operation were low
and the long term revenue was high because of the availability of higher long term
growth opportunity in the Indonesian market.
The due diligence was process was performed where the team focused on target
company and gave a standardized methodology to follow in assessing it.
Negotiations with the government were done and were usually continued in the
acquisition process through the due diligence process and meetings with local
competitors and industry associations were held to allay any concerns about the
acquisition.
When CEMEX management felt that capital had been a major issue for Mexican
companies especially during peso crisis which raised domestic interest rates and
restricted the extent to which Mexican cash flows could be used to finance FDI,
CEMEX responded to it by folding ownership of its non-Mexican assets into its
Spanish operations and financing new acquisitions through the latter and also
consolidating its bank debts through Spanish operations saved them about $100
million dollars.
The purpose of the post integration process was to improve the efficiency of the
newly obtained operation and adapt it to CEMEXs standards and cultures. The
process involved integration at the improvement of situation of the plant acquired, the
sharing or replication of basic management principles and harmonization of cultural
belief helped CEMEX became a global brand.

Q2. Using the theories of internationalization, please account for the sequence in which
CEMEX entered foreign markets? Please comment on the choice of entry mode for
atleast two markets that it entered based on the choice of the market and the timing of
entry. [10+ 10 marks]

Ans2. As in case on CEMEX, thetheory of internationalization by John Dunning are:

1. Ownership advantages
In 1987, CEMEX acquired Cementos Anahuac, giving the company access to
Mexicos central market and 2 years later in 1989, it also acquired CementosTolteca,
which made CEMEX Mexicos largest producer by having production capacity of 28
million tons, or about 60% of the country's total.
By this time CEMEX had not much scope left for further expansion in Mexican
marketso the company quickly reworked its plan and began to expand into foreign
markets.
 CEMEX Post Merger Integration (PMI) process was so powerful which increased
operating margins of Spanish Companies from 7% at time of acquisition to 20% by
1992 which also helped CEMEX from Mexico Peso crisis of 1994/1995 and gave
CEMEX an opportunity and confidence to expand further.
In 1994, after having good market share in US and improved operating margin and
EBITDA in Spain CEMEXs next international move was entry into Venezuela and
the Caribbean basin Trinidad and Tobago, Jamaica and Barbados.
CEMEX entered Colombia in 1996 considering CAGE framework components which
were stronger in terms of Cultural, Administrative and Geographic but firms main
aim was to acquire 2 largest cement producers in Colombia which made CEMEX the
third largest cement company worldwide.
In 1999 CEMEX entered Egypt wherein they had stronger Administrative relation
with government due to countries interest in increasing production to fulfil demand.
Because of the unsaturated market and the Egyptian governments interest in
increasing domestic production to meet the countrys demand which was growing at
an average annual rate of 11% since 1995, CEMEX had an ownership advantage their
too.

2. Location Advantages
CEMEX first entered its neighbouring country US, where there were no
barriers due to signing of GATT had helped Mexico in dispute of lower prices
as compared to local U.S cement companies which also made administrative
distance lower and also having lot of Mexican immigrants working in U.S.
After the imposition of trade sanctions by the US, FDI had become a much
more important component of CEMEXs internationalization strategy rather
than pure trade. CEMEXs foreign investments focused on acquiring existing
capacity rather than building greenfield plants.
After the countervailing duty was imposed, CEMEX continued to import into
US from the third parties and companys plant and acquired a cement plant in
Texas. Thus, CEMEX credited imports of Chinese cement for doubling the
profits of its activities in the US during 1999, which accounted for 12% of
CEMEX total sales and 7% of its EBITDA.
In Spain they opened distribution facilities first and imported cement from
Mexico and simultaneously studied the European market before acquiring the
production facilities.
In Spain, they also opened a distribution terminal to study the European
market and then they entered into production by acquiring two major Spanish
companies that is Valenciana and Sanson.
CEMEX entered Philippines (South Asian country) in 1997 considering Cage
framework components,which was due to Macroeconomics crisis, presence of
Spanish Colony, and local companies like Rizal and APO that were close to
port gave geographic advantage for export of cement.
 In Indonesia because of its geographic location it was easier to export cement
to Bangladesh.

Market Entry and Timing of entry:

1. Venezuela:
CEMEX entered into Venezuela, which initiated a broader series of engagements in
Latin America. Venezuela had been wracked by macroeconomic instability since the
late 1980s, depressing demand for cement and forcing large losses on the industry. It
then quickly moved to integrate and improve the efficiency of its Venezuelan
operations and was able to keep capacity utilization high even when domestic demand
was low because it was located near a major port facility.
2. Spain:
In Spain they opened distribution facilities first and imported cement from Mexico
and simultaneously studied the European market before acquiring the production
facilities of two major Spanish companies that is Valenciana and Sanson. The timing
of entry in Spain was of eminent since the crisis of peso also occurred at the same
time because of which Mexican cash flow for FDI was restricted and their presence in
Spain helped them to finance new acquisitions which were more profitable. The
acquisitions yielded them 28% market share in one of the Europes largest cement
market.