The Globalization of CEMEX

Sucheta Gupta
Lalit Kumar Aggarwal
Amit Kumar
Srujana
Praveen
About CEMEX
• Started in 1906 with a capacity of 5000 tons per year
• Became market leader in 1980’s by expanding its capacity to 15 million ton
• BCG advised to move from horizontal diversification to geographic diversification
• By 1999 - cement plants in 15 countries, Distribution facility in 30, trading in 60 countries
• 3rd largest Cement company in terms of capacity (behind Holderbank and Lafarge)
• Sales revenue increased from $1 billion in 1989 to $5 billion in 1999

1989 1994 1997-99 1999

Mexico Venezuela Philippines Egypt

1991 1996 1998

Exhibit – 5, 10 Spain Colombia Indonesia Exhibit – 11
(Future growth)
About Industry

• Used as a binding agent

• Production process remain unchanged with no major innovation (considered mature) [exhibit 1]
• Production facility near raw material quarries
• High transportation cost limited sale to nearby areas (1/3rd of total delivered cost) [exhibit 2]
• Demand related to GDP
• Other factors : Rainfall, Population density, Warm climate, coastline length and government expenditure
• Bulk sales sensitive to GDP growth, interest rate and other macroeconomic factors
• Retail sales tends to be less cyclical and offered opportunity for branding
• Leadership pricing strategy to avoid overcapacity
• 6 major international players controlled 500 million ton of capacity. (12% concentration ratio) [exhibit 3,4,5]
• Major acquisition happened at the bottom of the local economic cycle
How
CEMEX benefited Mitigation of Risk (Business Cycle)
from Increased Market Size and Economics of Scale
globalization Take Advantage of Arbitrage and study local market at minimum cost

versus being a Pressure for local adaptation is low which reduces product innovation
cost
localized player? Experience to deal with Economic, Currency and management Risks
 • Formal sector: Cemex’s buyers are large construction companies
Bargaining power of and government agencies working on infrastructure projects
buyers: • Cement and other building materials are capital intensive and
have very high fixed costs
HIGH • Product is undifferentiated
• Informal sector: Individual low-income buyers

Bargaining power of • Supply chain consists of aggregate quarries, ready-mix plants,

suppliers: cement plants, and distribution channels
• Heavy vertical integration
Porter’s Five LOW

Forces Analysis of Threat of Competitors:

• Cemex’s major competitors are Lafarge and Holderbank
• Competition with multinational, regional companies and major
acquisitions
Cement Industry HIGH • Slow industry growth leading to intense rivalry and price
competition

Threat of substitutes: • Rainfall has a negative effect on cement based construction which
increases use of substitutes such as wood or steel
LOW

• High initial investment

Threat of new entrants: • Highly regulatted and limited FDI by government
• New entrants could include capital rich firms or construction
LOW companies looking to becoming vertically integrated.
 HIGH

Global
Transnational

Pressure for Lower Cost

Strategy
Strategies that (CEMEX)
Strategy

companies use
to compete in
global markets Multi
International
Domestic
Strategy
Strategy

LOW

LOW Pressure for Local Adaption HIGH

 • Large population and low level of current consumption
• Be a market leader (>25% stake)
• Quantitative factors- 65% and Qualitative factors- 35%
Opportunity • Focus on regional markets rather than independent markets
Identification • Caribbean Basin, South East Asia and the Mediterranean
• Top down approach for identifying opportunities and bottom up
approach for companies
• Potential for restructuring the company and the market
Sequence of
foreign market • Assessment by a team of around 10 people over a period of 2 weeks
• Followed a standard methodology for each company
• Negotiations with the government
entry by Due
Diligence
• Meetings with competitors and industry associations
• Final approval by the EVP of Planning and Finance
CEMEX • Developed it as a competitive advantage
• Revised after every six months

• Formation of PMI team to adapt to CEMEX’s standard and culture

Post-merger • Process took around six months to one year
• Team was briefed on the country and methodology
Integration
• Involvement of senior level people including the CEO
(PMI) • Integration at three levels: Plant, Management Principles and Cultural
Process beliefs
• Performed even on existing operations every 2-3 years
 EBIT of CEMEX is at 29% on the other hand the EBIT of the
competitors is between 10% to 20%
Healthy free cash flows 20% compared to competitors which is
between 1% to 10%
Better than Very high stock profitability (114%)
Competitor Highly leveraged company (Net Debt to EBITDA is 2.7), highest
among the players in the industry
Low cost Production – Established the lowest production cost in
the industry
 Country level managers report directly to regional directors where
as competitors have extra layer of area managers in between
CEMEX conducts monthly group meetings where as the
competitors have quarterly or yearly meetings
CEMEX has centralized decision making compared to the
Management decentralized decision making in competitors
Eg: Consolidated Administrative and financial functions
and Heavily invested in IT for processes and data management
organizational Increased its IT spending from 0.25% of sales in 1987 to 1% in 1999

differences Founded CEMTEC to complement the company’s IT department

20 minute site delivery gaurantee – digital business design
Other initiatives like private Satellite TV, e-business development
accelerator in Latin America
Highly tech driven CEO – Zambrano
 Mergers and Acquisitions
Global presence of CEMEX is low compared to competitors.
With industry consolidation, cement industry is gaining momentum
With merging with local players, CEMEX can leverage the locational
advantage and enter into new markets
Ex: Lafarge tried to acquire Blue Circle which had presence in 14
Future countries
Currently, CEMEX has presence in 15 countries
Expansion Enter new markets to increase market share and global presence
Strategy Augment the brand image
Countries for market entry
China: Can be leveraged using technological advantage of CEMEX as
75% of cement production using kilns
BRICS: Emerging economies and high GDP. Demand can be more
Countries with high growth rate: Korea (5%), India (7.5%), Thailand
(8%), Philippines (8%), Malaysia( 7.5%)