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

2. 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

3. 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

4. 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%

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

6. 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?

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

8. 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

9. 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

10. 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.

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

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

13. 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

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

15. 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

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

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

18. 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…

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

20. 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

21. 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?

22. 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

23. 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

24. 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

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

26. 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

27. 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

28. 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?

29. 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.