Distance & Global Strategy CEMEX & HAIER Professor Ruth V. Aguilera

Top 10 Non-Financial TNCs from Developing Economies ranked by foreign assets (US$bn), 2004 Company Country Industry Foreign Assets Total Assets 1. Hutchison Whampoa HK, China Diversified 67.6 84.2 2. Petronas Malaysia Oil expl/ref/dist 22.6 62.9 3. Singtel Ltd SGP Telecommunications 18.6 21.6 4. Samsung Electronics S Korea Electronics 14.6 66.7 5. CITIC Group China 14.5 84.7 6. Cemex S.A. Mexico Cement 13.3 17.2 7. LG Electronics 10.4 28.9 8. China Ocean Shipping Shipping 9.0 15.0 9. Petróleos De Venezuela Venez’a 8.9 55.4 10. Jardine Matheson 7.1 10.6 Source: UNCTAD, 2006

The Evolution of Cemex 1985 2005 CAGR Sales (US$ billions) 0.276 15.5 22% EBITDA 0.084 3.6 21% Mexico 100% 33% Total Assets 0.791 26.5 19% Market Capitalization 0.103 19.0 30% Installed Capacity (m tons) 10.7 97 12% Employees 6,358 52,741 11% Countries 1 50

The Global Cement Majors Capacity EBITDA CAGR 85-05E CAGR 95-05E Margin ‘05E ROCE ‘04 Holcim 6% 14% 25% 8.8% Lafarge 8% 21% 8.9% Cemex 12% 23% 12.5% Heidelberg 15% 18% 3.0% Italcementi 13% 24% 9.3%

Frequency Distribution of International Cement Firms’ Market Entries Why this trend?

Today’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?

1. What are the global potential of the cement and white goods industries?

Global Industry Analysis Market Drivers Similarity of customer needs & tastes Existence of global customers Similarity of distribution channels Transferability of marketing know-how Differences in cost across countries Potential for economies of scale/scope Potential for learning Transportation costs Forces favoring global integration/ local responsiveness Cost Drivers Government Drivers Existence of trade barriers Similarity of technical standards Similarity of regulations Differences in taxes Globalization of competitors Industry concentration Differences in industry concentration across countries Feasibility of protecting intangibles Competitive Drivers Adapted from: G. S. Yip, “Global Strategy… in a World of Nations?” Sloan Management Review 31(1) (Fall 1989), pp. 29-41.

Global Industry Concentration (late 1990s, 2000) Top 5 share of global production Entertainment 71% Carbonated Soft Drinks 70% Light Bulbs 68% Computer Software 59% Computer Hardware Aerospace/ Defense 55% Automobiles 53% Semiconductors 40% Cement 19% Source: Ghemawat and Ghadar, 2006, p. 600

Global 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.

PUZZLE So what is the rationale for global expansion in a multidomestic industry?

What is the rationale behind Cemex’s global strategy? Growth? Geographic diversification? Global competitive advantage? Matching competitors? Empire-building?

Does Cemex have a global competitive advantage? Holder bank Lafarge Cemex Heidelberger Italcementi Blue Circle EBITDA margin 23.4% 23.2% 37.1% 18.7% 24.5% 19.0% EBITDA/ ton sold 23.9 38.0 45.8 26.0 22.2 n.a. Source: Case, Exhibit 4

2. What accounts for Cemex’s success to date?

What 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 strategy Location: 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 countries Internalization: almost impossible to exploit its advantages, especially O advantages, through arm’s length contracts

3. What explains the sequence in which Cemex entered foreign markets?

Sequence of Market Entry Dimensions of Proximity (or Distance) Cultural Administrative Geographic Economic USA √ √√ Spain Caribbean Latin America Philippines Indonesia Egypt

Sequence 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” still Which begs an important question…

4. How far can Cemex’s competitive advantage travel?

Cemex’s global strategy Cemex has increased the upside for a global strategy Developed 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 strategy Entered more similar countries first (CAGE), lowering the risks created by differences across countries

How 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?

Recent Acquisitions by Cemex 2000 acquired Southdown (US), 2nd largest cement manufacturer in US, for $2.9 billion 2001 acquired Saraburi Cement (Thailand), for $73 million 2002 acquired Puerto Rican Cement Company for $281 million 2004 acquired RMC Group (UK), one of Europe’s largest cement producers and world’s largest supplier of ready-mix concrete, for $5.8 billion 2006 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

Can 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

Can 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

Cemex’s Operating Margins, 2006 Source: Annual Report, 2006

Or 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

Is there another game being played? Holderbank Cemex EBITDA margin 23.4% 37.1% EBITDA/ ton sold (US$) 23.9 45.8 Sales/ country (US$m) 143.7 321.9 Average price/ ton sold (US$) 102.1 123.5 Average cost/ ton sold (US$) 78.2 77.7 Source: Case, Exhibit 4

And 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 markets If Cemex doesn’t match the other majors’ moves, does it risk being vulnerable to their competitive moves?

Takeaways Designing 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.