Globalization of CEMEX

What benefits have CEMEX and the other global competitors in cement derived from globalization? To answer this question, we used the ADDING framework (HBS Press 2007). This framework consists of six components of value creation. The first one is “adding volume”. In the 1980’s, CEMEX refocused its strategy on growth through acquisitions instead of continuing to diversify horizontally into other areas such as mining, tourism and petrochemicals. At first, they focused on Mexico by unifying their operations in order to secure their position, after which CEMEX also expanded internationally. By buying local existing plants rather than building “greenfield” plants, CEMEX could acquire new capacity at a cheaper cost, because they targeted companies of which the market value of the plants was lower than their underlying values. Another benefit of buying existing capacity instead of creating new one, was that in this way overcapacity in the worldwide production could be avoided, because this could be detrimental in the cement sector. By expanding, CEMEX benefitted from economies of scale as well. The minimum efficient scale in the cement industry is approximated around 1 million tons of capacity per year.

When CEMEX started out in 1906, they had a capacity of less than 5000 tons per year, but by 2000 the capacity has grown to over 65 million tons of capacity. The second component of value creation is “decreasing costs”, of which the economies of scale already give a first example. The biggest cost reduction that the internalisation of CEMEX brought about, was the fact that the product did not have to be distributed all the way from Mexico. By buying factories in different countries, materials handling could be minimized. Since transportation costs account for one-third of total delivered costs in the cement sector, this was a major cost reduction. The bought plants were, in addition, also close to ports and other transportation opportunities, as to further decrease transportation costs. The US distribution facilities were, for example, located near the coast, as was the Venezuela company located near a major port facility. Moreover, CEMEX was able to fold the ownership of its non-Mexican assets into their Spanish operations, in this way reducing the effects of the peso crisis, which had raised domestic interest rates and lowered the value of Mexican cash flows significantly.

The company could also finance its new acquisitions through its Spanish operations, in this way saving about 100 million dollar per year in interest costs, because interest expenses were tax-deductible in Spain. The expansion process of CEMEX, however, did also create cost increases. Before entering into a new market, there had to be an opportunity identification, which brought about additional costs. After the merger, the newly attained company also needed to be harmonized with the own culture of CEMEX in order to keep all the operations in line. It needs to be noted, that although these adaptations cost money, the post-merger integration process also worked as a vehicle for continuous improvement in existing operations. The third component of value creation is “differentiation or increasing willingness to pay”.

Since CEMEX operates in the cement industry, the elasticity of demand in the cement product is relatively low. The differentiation of the products offered by the different cement companies is also rather low. It might be the case that sometimes consumers prefer to choose cement from the big and well-known companies since they seem to be more trustworthy and better organized. CEMEX offered a campaign that let the customers track their deliveries and guarantee them to within 20 minutes. It was first implemented in Mexico, and later implemented in other countries as well. This campaign actually raised up the customer’s willingness to pay while saving up fuel, maintenance, and payroll cost. However, the price paid might play a bigger role in this case, since cement is the raw material in constructions of buildings, roads, and so on, the potential customers would rather pay attention on their cost saving. The cross-boarder (CAGE) heterogeneity in willingness to pay would also hardly play role in this case. Moreover, globality does not affect much in willingness to pay. The cross-boarder appeal is more likely rooted in the specific country of origin such as French wine or Belgian chocolate. For the cement product, there is no appeal in country of origin.

The fourth component of value creation is “improving industry attractiveness or bargaining power”. CEMEX firstly build up their bargaining power in Mexico as the largest cement producer. The increasing capacity also allows the company to have more bargaining power on suppliers. CEMEX became financially secure by having a firm base in Mexico before its next move, expanding internationally. When it started to expand, it chose to buy the existing companies (competitors) instead of building new factory not just to reduce cost but also to deescalate competition. The company expanded to potential markets, like US, to have a firewall protecting the Mexican market. Even though CEMEX was affected by the antidumping petition, and the countervailing duty imposed by the US. Finally, they are moving closer to repeal it. After already expansions in the US, Spain, and Latin America, CEMEX has a very balanced and well-diversified portfolio, so it can be more selective in choosing which country it should expand to. It considers more at a regional context instead of independent markets. It once considered China, but the industry structure is more into the small, low-tech, local producers, so CEMEX chose not to invest there.

Instead it focuses on a country that has a large population, a high population growth and a relatively low level of current consumption, e.g. India. It is interested in investing in the Mediterranean, Caribbean basin and South East Asia. There might be a bulk of capacity that could be consolidated by six big international competitors in emerging market. However, CEMEX is negotiating over a 10% stake in Cimentos de Portugal, Portugal biggest cement producer. This allows not only consolidation of CEMEX operation in the Mediterranean, but also the access to Brazil and some African markets. To discuss the fifth component, “normalizing risk”, we first need to determine the sources of risk for a company like CEMEX. There are risks that have an impact on the demand for cement. In this case climate can be mentioned as a risk, because demand tends to be higher in warm climates and lower in cold ones. Likewise rainfall has an influence, it makes cement-based construction more difficult and increases the likelihood of using substitutes like wood or steel. The cyclicality on the demand side combined with capital-intensity, durability and specialization on the supply side can be disastrous for a cement company. For CEMEX, the political instability and the crises with the peso formed serious threats as well.

The company countered this risk by expanding to other markets. By using geographic diversification, CEMEX was able to counter the crisis in the peso in ’94-’97. This also means that they are less depended of the Mexican market, which lowers the volatility. The international trade offered CEMEX the opportunity to study local markets and their structure at a minimal cost before deciding whether to make a commitment or not. As a result of the study they are able to expand the range of options available to deal with threats from particular competitors and markets. CEMEX, and possibly other large cement companies, tries to pursue controlling stake of 100% in the local firms they buy into. This ensures them maximal flexibility and, moreover, they also try to restructure the target company and the market to make a better fit and synergy. The sixth and final part of the ADDING framework is “generating knowledge”.

The CEO of CEMEX, Lorenzo Zambrano, focuses and commits himself to information technology. IT made and enormous amount of information available. For instance, sales figures were reported daily, broken down by product and geography. This information flowed upwards toward the management and Zambrano, so they could decide on their strategy. But it also flowed sideways towards the country and regional managers. Before acquiring a new company CEMEX did a due diligence, this resulted in a standardized report that was presented to the Executive Vice President. The report was critical in pricing deals. As further discussed below CEMEX formed a post-merger integration (PMI) process, this process made sure that an acquired company was quickly integrated into the mother company. PMI made sure that the processes were streamlined and workforce and investment in technology were stepped up. What makes CEMEX’s internationalization process so effective? What procedures and techniques are used?

CEMEX has a strategy of growth through acquisitions and geographical diversification. They have been very successful in doing so. In order for this internationalization process to be so effective, CEMEX uses a particular procedure consisting of three stages, namely the opportunity identification, the due diligence and the post-merger integration (PMI) process. Furthermore, CEMEX consistently uses information technology (IT). These factors are discussed in the following of this paragraph. Internationalization procedure

Opportunity identification:
CEMEX has developed great tools for screening opportunities of potential foreign investments. The criteria they considered to be important were large population and high population growth as well as a relatively low level of current consumption. They assigned quantitative and qualitative factors, respectively with a weight of 65% and 35%, to each possible target country. Important is the fact that CEMEX looked at countries in a regional context rather than as independent markets, which results in a very balanced and well-diversified portfolio. Moreover, they distinguished themselves by its emphasis on emerging markets. After this detailed market analysis, the process of target companies identification starts. During this process they take the attractiveness and the transaction feasibility of the companies into account. In order to maximize flexibility, CEMEX also pursued controlling stakes in the companies that are bought. In addition, when identifying these possible acquisition targets, the potential for restructuring both the target company and the market as a whole is considered as an important factor. Due diligence:

By due diligence an investigation of a business or person prior to signing a contract is meant. It is assessed in depth by a team of people. Ultimately, a standardized report, that is critical in pricing deals, is presented to the Executive Vice president of Planning and Finance (i.e. Hector Medina). CEMEX believes that its due diligence process is more specific and systematic than that of their competitors. In addition, their process methodology is revised every six months to reflect recent experiences. Post-Merger integration (PMI) process:

After the decision to proceed with an acquisition target is made, a PMI team is formed. This team has to improve the efficiency of the newly obtained operation and they have to adapt it to the standards and culture of CEMEX. These PMI teams has become more diverse and multinational over time. The PMI process involves integration at three levels. First, the improvement of the situation at the plant acquired. Second, the sharing or replication of basic management principles. Third, the harmonization of cultural beliefs. Every two or three years, a PMI process is performed on CEMEX’s Mexican operations, which are looked at as if they had just been acquired. This maximizes the effectiveness and efficiency of the PMI process. Use of information technology

CEMEX distinguishes itself by its consistent use of information technology in order to increase productivity. The use of IT has transformed the way the company works in numerous ways. For example, the 20-minute site delivery guarantee, which led to the company being canonized as a master of digital business design. Furthermore, IT made it possible that an enormous amount of information became available to the CEO and his top management. CEMEX provides its employees with a number of IT training programs and has also been aggressive in using new technology to overhaul its training functions.