The Globalization of CEMEX
Introduction
CEMEX is a Mexican cement company that had grown to become the third largest player in the world with capacity of approximately 65 million tons by the year 2000. CEMEX’s growth was led by CEO Lorenzo Zambrano without compromising profitability through geographic diversification, with acquisitions of existing capacity as opposed to greenfield plants. This report shall firstly outline the benefits to be gained from globalisation and global activities in the cement industry, one that had previously been previously perceived as otherwise localised. Ghemawat’s (2007) AAA framework shall be employed to highlight how CEMEX has managed to surpass their competitors to become a global leader.
The CAGE model (Ghemawat, 2001) shall be used to analyse CEMEX’s historic choice of markets to enter and will be used to identify other potential geographic areas for expansion in the future. Finally, recommendations shall be provided based on this analysis along with a summary of key findings.
The Cement Industry: From Local to Global, the Benefits of Running a Multinational Operation
While the cement industry may have been viewed previously as a localised industry with high fragmentation within a country there are many benefits to be gained from cross-border activities which shall be discussed. There are several things which impact the demand for cement, population density, the climate, and rainfall, however demand depends largely on GDP and more accurately on construction investment. Given the cyclicality of the construction sector this creates risk for companies operating in one market. By engaging in geographic diversification, it allows companies to reduce earnings volatility as they are not dependent on one market.
This has clearly been the case for CEMEX whose standard deviation of quarterly cash flow margins averaged at 7. 1% from 1994-1997 compared to other countries it operated in such as Spain 22%, Mexico 12% and Venezuela 30%. In times of low demand in one country, cross-border activities have allowed companies to keep capacity utilisation high (decreasing per unit costs) by exporting surplus production to nearby markets. This was the case for CEMEX’s Venezuelan operations when the economy was not performing well and instead they exported to the Caribbean. Globalisation also protects against other risks such as political instability in a country. Exporting was one of the reasons that CEMEX managed to maintain margins during the 1994/1995-peso crisis. As outlined by Ghemawat (2001), products, such as cement, that have a low value-to-weight ratio are affected by geographic distance. This means that the cement industry is characterised by high transportation costs and deliver competitive prices from long distances.
For instance, road transport which is the most expensive form of transport is limited to a radius of 150-300 miles if a company want to remain competitive. While transport by water is more economical there were still significant costs which must be considered, including land transport after delivery (as was shown in Exhibit 2 of the text). Thus, the use of shipping and road transport erode margins or alternatively demand higher prices from consumers, both reducing profitability. Foreign direct investments allow cement companies to position themselves closer to their consumers, reducing the geographical distance their product must travel and so leads to reduced transport costs.
Furthermore, by reducing the distance the product had to travel it resulted in a shorter lead time. Quick delivery shall be discussed in ‘The Cemex Way’ section in more detail as it was a differentiating factor for them. In the case of CEMEX, following their decision to export to the United States at low prices an antidumping ban that was placed on CEMEX with a duty of 58% which was later reduced to 31%. Because of this CEMEX started to focus on foreign direct investments. The benefit in this case and for all players in the cement industry is that by establishing operations in another country they can avoid traffic barriers and import taxes on the delivery of cement.
Other benefits of globalisation include standardisation, consolidating activities by region to reduce costs, gaining a foothold in a market to analyse the larger market before too much investment and buying existing capacity when market value is below target companies underlying value. The CEMEX Way. When analysing the data provided in Exhibit 4 of the text it’s clear CEMEX is surpassing their competitors. Calculating the EBITDA margin for the top 6 global competitors (appendix A), CEMEX is performing much better and indicating that they keep their earnings at a good level via efficient processes that have kept operating expenses low. Taking the cash flow margin ratio (appendix B) which looks at a firm’s ability to translate sales into cash, again CEMEX is outperforming their competition with 17. 85% compared to the next closest firm Italcementi with 7. 6%. Finally looking at stock profitability given in Exhibit 4, CEMEX’s is 114%, followed by Lafarge 22% and then Holderbank with 16%. By employing Ghemawat’s (2007) AAA triangle approach to globalisation, on managing tensions between global strategies, the source of CEMEX’s advantage becomes clearer. CEMEX has managed to outperform competitors by focusing on aggregation and managing adaption. As cement is a commodity there is little variation from market to market. However, the aggregation in CEMEX wasn’t only achieved through economies of scale by centralisation of production and development but by the management of its global knowledge base. At the heart of this was the standardisation and transfer of best practices.
The company began to formalise and standardise their expansion process by learning from their past experiences and a continuous learning attitude was adopted by executives, which resulted in operational efficiency. Taking the PMI process for example, it wasn’t just about implementing the existing process on new plants but also about benchmarking and analysing the practices of the new acquisitions to improve the standardised process. Considering that CEMEX’s growth strategy was dependent on acquiring existing capacity this had huge implications for performance. Taking for example the company’s acquisition of Vencemos in Venezuela, they were able to improve operating margin from 9% to 41% a year later. The free flow of information both directions and emphasis on continuous learning is a key driver to the firm’s success. Another key differentiator of CEMEX to their competitors is their focus on innovation technology. Zambrano invested heavily in IT when others weren’t. A private network helped with the flow of data between plants and to control its operations efficiently.
Furthermore, the Mexican hub invests heavily in R&D on new ways to improve and compete. An example of this is CEMEX going beyond offering a commodity and through their IT capabilities were able to offer customers and enhanced service with their 20-minute delivery system which increased customer willingness-to-pay. Other elements that distinguished CEMEX: their simple organisational structure comprised of country level managers and regional directors, in comparison to more complex systems, and their emphasis on emerging markets.
CAGE Analysis: The Journey so Far and Future Possibilities
Looking at the order in which CEMEX entered into new markets, one thing is clear: they targeted geographical areas that were not ‘distant’ to Mexico in terms of Ghemawat’s (2001) CAGE framework. Expansion started in America before moving onto Spain, South American countries such as Venezuela and Colombia and then onto South East Asia such as the Philippines. As we can see from appendix C none of these countries are distant in terms of cultural, administrative and geographic elements. CEMEX sequence of expansion began by entering into one market of a region and using it as a hub to analyse the larger market without having to invest too much, like it did with Spain whilst analysing Europe. Compared to the companies two most recent markets in which they entered, Egypt and Indonesia, CEMEX has concentrated on more economic distance factors. This has proved a bit more difficult due to the other forms of distance, for example in Indonesia CEMEX are faced by lots of administrative distance due to public opposition against the government selling its shares. With a substantial budget of $1. 75 billion to spend on global acquisitions, the three primary markets up for consideration were China, India and Brazil.
The CAGE framework will be employed to gauge the ‘distance’ of these markets with details provided in appendix X. From this analysis China is the most distant, followed by India and then Brazil. However, it is important to bear in mind the foregoing strategic objectives of the company; conquer the Caribbean markets, of which Brazil would not provide any direct access to. Two major competitors in Brazil already have a large chunk of the market share which could prove difficult to enter against and cost of capacity per ton is $250 or more which is a huge expense and goes against the company’s norm of buying companies when market values were less than their underlying values. India on the other hand, while it may be slightly more distant in terms of culture and administration it still has potential. The location could serve as a foothold into the South Asia market and domestic demand is much larger than Brazils (80. 8m tons vs 40. 1m tons respectively). The market in India is fragmented which may pose problems if they band together and lobby against CEMEX, resulting in significant cost to the due diligence. The company has already made commitments to set up some production in Bangladesh and so this might serve as a foothold for the larger market before investing fully. With respect to global competitors in India there are only two, both of which have a low market share (1. 4% and 0. 3%).
Finally, with regards to China, while there may be unequalled market potential the analysis indicates that it is not a good investment as there is two much distance for the other 3 elements. Based on the relatively limited cultural distance, market potential and lack of presence of global competitors, India would be the best geographic location for the next set of acquisitions. With an increased focus by the PMI team on cultural awareness and teambuilding it may minimise the risk of failure by reducing the impact of cultural distance. As 8 of the major cement firms in the market control two-thirds of demand, acquiring from this pool of companies would be a good strategic move.
Conclusion
There are many benefits to be gained from operating across-borders in the cement industry; reduced earnings volatility, improved capacity utilisation, reduced transportation costs, improved customer service and avoiding import taxes. CEMEX has been able to benefit from these and more. They have surpassed competitors thanks to their sharing of knowledge in implementing standardised best practices which are constantly being updated based on experiences and thanks to their focus on information technology and innovation.
Analysing the progression of CEMEX’s geographic diversification, a clear pattern forms, acquisitions into markets at are not distant in terms of culture, administration and geography. Moving forward Cemex is branching into new markets that offer less economic distance but at a higher risk. Based on analysis India appears to be a viable option for the companies next round of acquisitions.
