4The Global Cement Majors CapacityEBITDACAGR 85-05ECAGR 95-05EMargin ‘05EROCE ‘04Holcim6%14%25%8.8%Lafarge8%21%8.9%Cemex12%23%12.5%Heidelberg15%18%3.0%Italcementi13%24%9.3%
5Frequency Distribution of International Cement Firms’ Market Entries Why this trend?
6Today’s Class What is the global potential for these two industries? What accounts for Cemex and Hiaer ’s success to date?What explains the sequence in which Cemex and Haier entered foreign markets?How far can Cemex & Haier ’s competitive advantage travel?
71. What are the global potential of the cement and white goods industries?
8Global Industry Analysis MarketDriversSimilarity of customer needs & tastesExistence of global customersSimilarity of distribution channelsTransferability of marketing know-howDifferences in cost across countriesPotential for economies of scale/scopePotential for learningTransportation costsForces favoring global integration/local responsivenessCostDriversGovernmentDriversExistence of trade barriersSimilarity of technical standardsSimilarity of regulationsDifferences in taxesGlobalization of competitorsIndustry concentrationDifferences in industryconcentration across countriesFeasibility of protecting intangiblesCompetitiveDriversAdapted from: G. S. Yip, “Global Strategy… in a World of Nations?” Sloan Management Review 31(1) (Fall 1989), pp
9Global Industry Concentration (late 1990s, 2000) Top 5 share of global productionEntertainment71%Carbonated Soft Drinks70%Light Bulbs68%Computer Software59%Computer HardwareAerospace/ Defense55%Automobiles53%Semiconductors40%Cement19%Source: Ghemawat and Ghadar, 2006, p. 600
10Global Potential of the Cement Industry Cost: economies of scale are not that important on global scale; small differences in costs across countries & high transportation costs; no product/ process innovations in 20 years.Market: homogenous product but most customers are local; transferable marketing (e.g. branding) of limited importance.Government: protectionism is a factor (e.g. US); concerns about foreign ownership (e.g. Indonesia, Venezuela).Competition: industry becoming more globally concentrated (six global majors’ share of world market increased from 12% in 1988 to 25% in 2000) but most competition is still local; major differences in concentration across countries; limited role for standard intangibles (advertising/ R&D) with cement close to the bottom decile of manufacturing industries on both R&D and advertising intensity.
11PUZZLE So what is the rationale for global expansion in a multidomestic industry?
12What is the rationale behind Cemex’s global strategy? Growth?Geographic diversification?Global competitive advantage?Matching competitors?Empire-building?
13Does Cemex have a global competitive advantage? Holder bankLafargeCemexHeidelbergerItalcementiBlue CircleEBITDA margin23.4%23.2%37.1%18.7%24.5%19.0%EBITDA/ ton sold23.938.045.826.022.2n.a.Source: Case, Exhibit 4
15What accounts for Cemex’s success to date? Ownership: it has succeeded in creating intangibles that are different from the traditional ones (R&D/ marketing), which create a rationale for its global strategyLocation: given high transportation costs, it has to be present in different locations to exploit these advantages; that presence also allows it to arbitrage differences in financing costs across countriesInternalization: almost impossible to exploit its advantages, especially O advantages, through arm’s length contracts
163. What explains the sequence in which Cemex entered foreign markets?
17Sequence of Market Entry Dimensions of Proximity (or Distance)CulturalAdministrativeGeographicEconomicUSA√√√SpainCaribbeanLatin AmericaPhilippinesIndonesiaEgypt
18Sequence of Market Entry Until the late 1990s, largely explicable using the CAGE framework:Cultural (language, religion)Administrative (colonial ties, trade areas)Geographic (US, Caribbean, L. America)Economic (mostly developing countries)But Indonesia and Egypt were more “distant”And looking at countries that are more “distant” stillWhich begs an important question…
194. How far can Cemex’s competitive advantage travel?
20Cemex’s global strategy Cemex has increased the upside for a global strategyDeveloped intangibles that apply across countries and create rationale for its global strategy (e.g., managerial processes and innovation)Cemex has limited the downside for a global strategyEntered more similar countries first (CAGE), lowering the risks created by differences across countries
21How far can Cemex’s competitive advantage travel? Has Cemex systematized and standardized what it has learned to a sufficient degree to go beyond its CAGE region?To other developing countries?Are all developing countries sufficiently alike?What advantage does Cemex have in India, China, Russia, etc?And even to developed countries?
22Recent Acquisitions by Cemex 2000 acquired Southdown (US), 2nd largest cement manufacturer in US, for $2.9 billion2001 acquired Saraburi Cement (Thailand), for $73 million2002 acquired Puerto Rican Cement Company for $281 million2004 acquired RMC Group (UK), one of Europe’s largest cement producers and world’s largest supplier of ready-mix concrete, for $5.8 billion2006 sold its 25.5% stake in Semen Gresik (Indonesia)2006 acquired Rinker Group (Australia), a major seller of construction materials with 85% of its business in the US, for nearly $12 billion (27% premium) in largest deal ever concluded in the cement industry
23Can Cemex add value in developed countries? “[Cemex] uses basic enterprise resource processing technology, but with rigour. It has process maps and imposes them on all its subsidiaries. It bought the UK building materials group RMC 18 months ago. RMC was not as efficient as Cemex. It had multiple systems running different processes around the company. It was not the IT department's fault. It was doing what it was told but it was not the way to run modern cement and it got bought.” Mark Raskino, Gartner Group
24Can Cemex add value in developed countries? “Before the takeover, RMC's flagship plant at Rugby in the UK had been running at 71 per cent capacity, and the central kiln had been stopped a mind-boggling 229 times. Just two months after the takeover, capacity was up to almost 94 per cent, and production had risen from 83,000 tons to 105,000 tons a month.” Financial Times, October 2006
26Or is there something else going on? “We had to become one of the biggest global companies. If we didn’t, someone undoubtedly would have acquired us.” Lorenzo Zambrano, CEO of Cemex
27Is there another game being played? HolderbankCemexEBITDA margin23.4%37.1%EBITDA/ ton sold (US$)23.945.8Sales/ country (US$m)143.7321.9Average price/ ton sold (US$)102.1123.5Average cost/ ton sold (US$)78.277.7Source: Case, Exhibit 4
28And is it now being played out on a global stage? Are the majors pursuing a strategy of multi-market competition (matching each other's markets) to gain better control over price and quantity in the industry?Incentives to maintain collusive prices in any one market are potentially greater given threat of retaliatory price-cutting in multiple marketsIf Cemex doesn’t match the other majors’ moves, does it risk being vulnerable to their competitive moves?
29TakeawaysDesigning a global strategy is not a mechanical exercise – it’s a creative response to the global potential of industry.Innovative global strategies, based on novel ownership and location advantages, can sometimes work in, and eventually transform, industries with apparently low global potential.“Distance” matters in a variety of ways (CAGE) in the design and execution of global strategy.Always analyze whether and why particular global strategies generate sustainable competitive advantage – the fact that companies pursue such strategies does not necessarily mean they do so.