Cemex: High Tech Cement
Report title page +names of team members
To be done
Executive Summary
To be done
Question A.
Based on case data outline the strategy followed by Cemex to achieve its position of prominence in the cement industry. What factors and resources equipped the company to grow so successfully over the period described in the case? Also, compare Cemex with Cisco. Where are they similar and where do they differ? Cemex utilized four key strategies to achieve a position of prominence in the cement industry. First, Cemex innovated state of the art technology to outperform competitors. Cemex leaders challenged the operations groups to develop more efficient ways ways to produce concrete and bought technology through acquisitions. A telecommunications network between 11 plants was established as early as 1988. The IT consulting group, Cemtec, was spun off which utilized online surveys to manage customer relations. Second, Cemex converted the commodity business into a specialty business by helping their end users improve profitability. E.g. in Mexico City, by guaranteeing delivery times of 20 minutes or less, the contractors maximize the cost effectiveness of the crews working on the site. Third, Cemex bought out competition in markets they wanted to expand influence. In some geographies, such as Mexico, Cemex owned >70% market share through acquisitions. Lastly, Cemex embraced risk management as one of its core competencies. Risk management is fully embedded within its business, and not seen as a “parallel’ process. Cemex views risks (operational, competitive and institutional) not only as threats but also as opportunities for growth and performance (Lessard and Lucea, 2009).
Similarities Cemex-Cisco: * Rapid global expansion through acquisitions, with Cisco’s acquisitions aimed at acquiring new technology and intellectual property, whereas Cemex’s acquisitions were aimed at acquiring physical production assets and access to markets outside Mexico; * Internet working (IT infrastructure), both companies relied heavily on the IT infrastructure to support the companies' innovation. Cemex utilized their IT department to connect the plants and allow senior management the ability to monitor each facility in real time. Cisco used internetworking to increase revenue per employee by managing employees; * Supporting clients’ profitability to drive business, each company understood the challenges of the end user and worked to make their lives easier. Cemex satisfied their customers by promising lead times allowing projects to be completed as quickly as possible. Cisco specialized technical support making it easier on the customer to quickly address their problems themselves; * Family founded, both companies were founded and driven by owners who ran the business themselves. The drive and innovation of these companies mirror the level of innovation by founder/owners in other industries such as Apple and Facebook; * Innovative, these two companies relied heavily on changing the landscape of their respective industries;
Differences Cemex-Cisco: * Growth opportunities, Cisco can scale up much quicker than Cemex which must build significant assets or grow quickly through acquisition; * Production location, Cemex must have production close to its customers due to high transportation costs and limited product lifetime, whereas Cisco has no such restrictions on its production locations; * Market, Cisco works in a specialty market while Cemex works in a commodity market. Brand name means much more to Cisco than Cemex on the surface, Cemex must dedicate a large amount of resources to achieve minimal brand recognition ; * IT uses, Cemex focused on building products through networking, Cisco focused on networking as a product; * Infrastructure, Cemex controls their own production, whereas Cisco has outsourced all of its manufacturing.
Question B.
How did globalization and post-industrialization converge in the company’s ascent? Further, identify Cemex’s ‘base of the pyramid’ strategy and comment on its suitability and efficacy, if you can.

When Mexico signed the GATT in 1985, the process began of opening up its economy, forcing companies like Cemex to compete in global markets. That same year Zambrano was appointed to head Cemex. Zambrano implemented a deliberate strategy to make cement its core business. The opening of Mexico’s economy enabled foreign companies to enter the Mexican cement market. Cemex adapted to the new situation by divesting from all non-core businesses (tourism, petroleum and mining projects), reinvesting the proceeds into cement assets and in a complete overhaul of its operations (Lessard and Lucea, 2009). It acquired the two major cement manufacturers in Mexico (Cementos Anahuac in 1987 and Cementos Tolteca in 1989), thus becoming the main national player with 70% of Mexico’s cement production capacity and the tenth largest cement company in the world.

Cemex strategy to become one of the leading players in the world of cement can be divided into four major stages (Lessard andf Lucea, 2009): * Laying the Groundwork for Internationalization, The first step involves divestitures from non-related businesses and the disposal of non-core assets. Cemex also began “exploring” opportunities in foreign markets through exports, which required a fairly aggressive program of building or buying terminal facilities in other markets; * Stepping Out, Cemex’s move into Spain was followed soon after with acquisitions in Venezuela, Panama and the Dominican Republic. Access to capital markets and strategic response capacity. Formalization of PMI process; * Growing Up, Accelerating Internationalization and Consolidating the Cemex Way (see below) as a learning culture. * Stepping Up, Market redefinition, countries as regions . Reframing the way that performance was measured to identify new targets.

From the 1990’s on, its rapid globalization proceeded largely by acquisitions in a.o. Latin America, the USA, Europe, the Philippines, Indonesia, Egypt and Australia.

To enable its globalization, Cemex employed a strategy with important post-industrial elements: * In the early 2000’s Cemex started the transition from being mainly a cement supplier to becoming a service provider, offering complete building construction solutions to its customers. * With the Construrama franchising initiative, Cemex chose for further downward integration of its business in some markets, getting close to the final customer through bundling of its commodity product with high value-added services (Lessard and Lucea, 2009), * Cemex addressed distribution problems due to high transportation costs and limited lifetime of (ready-mix) products by innovating its distribution through a.o. prediction of order rates using chaos theory, now being able to commit to strict delivery times. * To enable a fast and effective integration of newly acquired operations, it employs a formalized Post-Merger-Integration process (e.g. Lessard and Lucea, 2009). The creation of the Cemex Way program in 2000 was the answer to the need to accelerate integration through highly standardized processes and information exchange.

Patrimonio Hoy is the Cemex program (and an internationally recognized model) for developing housing solutions for the base of the pyramid. It provides: * Low-income families living in urban and semi-urban areas with access to building materials such as cement, concrete blocks, and steel; * Products at average market prices as well as micro financing, technical advice, and logistical support to assist participants in building their own homes.

The program accomplishes this through a collaborative network of local Cemex distributors: community-based promoters, mainly women trained and empowered through the program who build trust and secure participation of community members, and the families themselves.

Its suitability and efficacy relies on the fact of sales to the informal, low-income, self-construction market as these customers are no longer dependent on formal consumer credit and can still continue building. In other words, there was a stable market that was not being served, due to the lack of comprehension of the needs of low-income families. Serving this new market segment requires a combination of factors of small-unit packaging, low-unit margins and large volume of sales. By the end of 2007, a total of 185,000 Mexican families have benefited through the Patrimonio Hoy program, building the equivalent of 95,000 ten-square meter rooms. To this end, credits for 83 million USD have been granted, with an on- time payment rate of more than 99 percent. During 2012, 42,989 families benefited from Patrimonio Hoy, bringing the accumulated total to nearly 400,000 families in 5 countries in Latin America.

The bottom of the pyramid does not only present social problems but also vast marketing opportunities for innovative, socially minded companies. CSR is typically treated as a sideline activity, outside the company’s main business, but Cemex aimed its marketing at the bottom of the pyramid, creating a whole category of new consumers and improving the people’s standard of living (KelloggInsight, 2010). According to Cemex, this program results in three times faster building at one third of average cost, in higher quality buildings, in local job creation (e.g. masons, promotors) and in generation of new home-based small enterprises. This impressive out-of-the-box innovation has enlarged its market, built customer loyalty and strengthened its ties with municipalities. It enlarged Cemex’s reputation of a socially responsible company (Business Today, 2011). We consider the Patrimonio Hoy program suitable as well as efficacious for Cemex’s strategy. This program has received a lot of international recognition, a.o. the United Nations Habitat Business Award (2009).

Question C.
Establish how Cemex has progressed since the time of the case. Among other sources consult the company’s website for financial information and insights into the company’s recent strategy and actions. Also consult the popular and business press for articles/updates/commentaries on the company’s performance. Be sure to cite the source of any articles/information included in your report. In your analysis:
i) Determine how Cemex’ market/competitive position has changed since 2007, and comment upon whether you think the company is more or less competitive now than it was in 2007. Be sure to identify how the global economic adjustment has affected Cemex and its operations. The strategies and actions of major competitors (for example Holcim or LaFarge) should be taken into account.

Cemex and competitors
Cemex is not having a ‘good crisis’. Their sales volume and profitability have eroded much faster than those of its nearest competitors (Holcim and Lafarge), as is shown in the graphs below.

Source: http://globaledge.msu.edu

The causes of this significant difference in performance are mostly linked to the geographical diversification, as shown in the table below. Cemex has by far the highest exposure to the OECD countries of any of the international cement producers, whereas Lafarge and Holcim both derive close to 60% of their revenues from emerging markets. Consequently, with the OECD countries slowing down their spending on infrastructure and housing (as has been evident in the USA and European Union) over the last 5 years, Cemex was especially impacted by the recession.

International competitors – 2012 numbers | CapacityMln tons | Global revenues | Home market & OECD | Emer’g markets | EBITDA/Revenues | Comments | Cemex – Mexico | 96 | $ 15 bln | 82% | 18% | 17% | Only 4% of revenues in Asia; | Lafarge – France | 225 | $ 21 bln | 41% | 59% | 22% | 27% of revenues in Middle East & Africa | Holcim – Switzerland | 217 | $ 22 bln | 41% | 59% | 19% | 39% of revenues in Asia Pacific |

The differences in current international footprint can be traced back to the different strategic decisions that Lafarge, Holcim and Cemex have taken over the last 10 years: * Holcim: build further on the international expansion activities from the 1970’s (Asia Pacific), and 1980’s (Eastern Europe), by entering India in 2005, and China in 2008 * Lafarge: focus on fast-growing emerging markets, and diversify country/market risks. Their international expansion strategy since 2005 has been aimed at developing a diversified geographic portfolio weighted towards fast-growing emerging markets. These account for 59% of Group sales in 2012, compared to 32% in 2005. None of the emerging countries represent more than 5% of Group sales (www.lafarge.com); * Cemex: while Holcim and Lafarge where actively expanding their portfolio in emerging markets (with a high need for physical infrastructure), Cemex was making its major acquisitions in OECD countries: 2005 – RMC in the UK (for $5.8 bln) and 2007 – Rinker in Australia (for $16.5 bln).

Financial data
The debt burden at Cemex is significant, and they have financially less room than either Lafarge or Holcim.

| Gearing (LT debt/equity) | 2012 Dividend/Share | Cemex | 155% (Oct 2013) | Non since 2008: retained | Holcim | 52% (Dec 2012) | USD 1.05 | Lafarge | 63% (Dec 2012) | USD 1.30 |

In order to reduce their increasing debt burden from these acquisitions and the losses from operations, Cemex made various divestments of assets previously acquired to optimize the global portfolio: * In 2009 Cemex divested its activities in Australia (for USD 1.7 bln to Holcim), so effectively only retaining the US-assets from Rinker, which accounted for 80% of Rinker’s activities at the time of the 2007 take-over; * In 2012, raised some USD 1.1 bln from divestments: Cemex divested 26.65% of their 100% subsidiary in Columbia (US$960 mln) and USD 227 million from other asset sales.
Indicative of reduced financial leverage is the fact that in 2012, Cemex limited the maintenance and strategic capital expenditures to some US$ 609 million.

Global Concrete and Cement Market
When it comes to building houses, roads and huge infrastructure projects, cement, which recipe has hardly changed in hundreds of years, is the most versatile material of the market. The major categories of this market are: Portland cement, ready-mix concrete, prefabricated structural components, cement clinker, factory-made mortars and refractory cements. In 2012, the global concrete and cement market valued US$ 449.4 billion, 58.1% of it in the Asia Pacific Region. China has a 71.4% share of this regional market.
The largest category in the concrete and cement market in 2012 was Portland cement (43.2%), followed by ready-mix concrete. The fastest growing category in this market is expected to be refractory cements, mortars and concretes.
Due to the high costs of transportation and the high entry barriers, the cement market tends to be local (only 3% of global production is traded across borders). The industry of cement tends towards oligopolies because it is much cheaper for an incumbent to expand. Facing declining growth rates in their home markets, the world´s biggest cement-makers have been buying firms in developing countries.
Despite of the reduction of annual growth rates around the globe (8.3 per cent in 2011 and 4.2 per cent in 2012), global consumption of cement continued to climb, rising to 3585Mt in 2011 and 3736Mt in 2012.
China’s and India´s construction activity, for the next five years, is forecast to be positive, despite the subdued growth of these countries, driven by growth in nuclear families, urbanization and the need to invest in physical infrastructure.
Even though the scenario of austerity may remain in 2013 in Europe, domestic investment and demand are expected to improve in 2014, especially in Russia, which is Europe´s second-largest market after France.
A surge in private residential construction (multi-family housing especially) in the US is slowly regaining pace, but this trend will be affected by anticipated spending cuts to be imposed by the government.
The government of South Africa is planning to increase investment (US$ 82 billion) in infrastructure projects.
Brazil´s government launched its “growth acceleration” programme in 2011 and will spend US$ 80 billion on infrastructure. 2014 FIFA World Cup and 2016 Rio de Janeiro Olympic Games will require a lot of investment in the country and increase the demand of cement and concrete.
In conclusion, developing economies (BRICS) are expected to support the expansion of this market in the near future, due to the rapid development of infrastructure and the increase of residential construction. Cemex’s presence in emerging markets, however, is much smaller that that of its main competitors.

Table moved to appendix: Top Cement Producers / Consumers

The cement industry: Technology & Environment
The basic technology for producing cement and concrete is expected to be the same for most producers. The cement industry is one of the main sources of anthropogenic CO2, and contributes approximately 5% to the world-wide emissions. For every ton of cement produced, 0.9 ton CO2 is released, directly (50%) from chemical reactions, and indirectly (40%) through energy consumption in the process (Mahasenan et al., 2003). Climate change policies, when implemented, may thus have a severe financial impact on the cement industry. Furthermore, the cement industry is a significant emitter of SO2, NOx, particulate matter and heavy metals (a.o. chromium-VI and mercury). There is a high probability that environmental legislation and especially the regulation of CO2 emissions will become stricter: * The IPCC (WG1), in its latest assessment and in its summary for policy makers has mentioned cement production together with fossil fuel combustion as the main source of anthropogenic CO2 emissions (climatechange2013.org), although this does not seem in proportion to the actual contribution of the cement industry to CO2 emissions (current annual contribution is approximately 5%, globalcement.com, 2013). * The US EPA has announced its plan to issue a cap on CO2 emissions from new coal-fired power plants (1100 pounds CO2/MWh) that can only be achieved with carbon capture and storage (CCS). (Bloomberg.com, 2013). Such legislation may also be imposed soon on (new?) cement production plants. * China is reducing cement production overcapacity through imposing higher standards for environmental control and fuel efficiency (globalcement.com) * The introduction of an Australian carbon tax of $23/ton CO2 in 2012 (EU: $10/ton) supposedly has already led to serious job losses at Holcim and Boral (globalcement.com).
Much of the innovation in the cement industry is therefore directed at improving its efficiency and reducing its environmental footprint, especially its carbon footprint. An overview of these developments, based on Schneider et al. (2011), is given below: * Reduction of energy demand in clinker production (e.g. through increasing kiln size and recovering waste heat) * Alternative fuels. Replacement of fossil fuels such as coal and petroleum coke by biofuels and waste streams (e.g. tires, sewage sludge) * Alternative raw materials. Replacement of limestone-based clinker by materials such as blast furnace slag and fly ash (clinker factor) * Improvement of grinding efficiency. Particle reduction consumes two thirds of total electricity consumption * Carbon capture and storage. Technologies are still in their infancy, not ready for application in the cement industry

Cemex and its largest (non-Asian) competitors are all engaged in projects and other activities to further reduce their carbon footprint: * Cemex and Lafarge are investing in generation of renewable energy (resp. wind farms in Mexico and energy crops in Ontario, CN * Cemex participates in UNFCC Clean Development Mechanism (CDM) projects in developing countries * Holcim and Cemex are involved in carbon capture and sequestration projects (holcim.com, environmentalleader.com) * Lafarge develops a new class of lower-carbon clinkers (Aether-cement), allowing a 25-30% reduction in CO2 emissions (aether-cement.eu) * All companies replace coal and petroleum coke with alternative fossil fuels with a lower specific CO2 emission (natural gas, shale gas) where possible and economically feasible.

Cemex and its three largest competitors (Lafarge, Holcim, HeidelbergCement) all publish yearly sustainability reports. The extent to which the Global Reporting Initiative guidelines have been applied in the reports of these four companies has received the highest GRI rating A+ (externally assured). Overall, the top (non-Asian) cement producers are taking their sustainability programs very seriously, and differ hardly in ambition level regarding the decrease of their environmental footprint.

In the table below some of the key environmental figures 2012 for the four companies mentioned above have been listed, and compared with the average numbers of 2011 for the GNR (Get the Numbers Right) participants, 24 companies which represent 25% of the global cement production (World Business Council for Sustainable Development, Cement Sustainable Initiative, 2013).

From this table it appears that Holcim, Lafarge and, to a lesser extent, HeidelbergCement are currently outperforming Cemex regarding energy efficiency and CO2 emission in 2012. Also, Cemex performs marginally poorer than the average GNR-participant. Cemex could catch up by a.o. improving its energy efficiency (modernizing its assets), increasing the contribution of renewable energy sources (wind, biomass), using fossil fuels with a lower specific CO2 emission (a.o. natural gas), and lowering its clinker/cement ratio.

ii) Based on your findings what would keep you awake at night and be of concern to you if you were CEO of Cemex today?

In order to identify the various risks facing Cemex, we have used the ‘risk taxonomy’ of Lessard & Lucea (2009). The various risks/concerns are shown in the table below.

Risk category | Specific Cemex risks | Operational risks | None – operations are fully under control, although personal safety always remains a key risk; | Competitive risks | The larger drop in profitability of Cemex compared to the industry average over the last 5 years. With 3 years (2010 – 2012) of significant losses, ‘Cemex is having a bad crisis’. This makes Cemex vulnerable: * Europe, especially Spain, remains a drain on Cemex performance. In Spain there is still an overhang of 700,000 new houses (Economist, Oct 12, 2013) and Spain has 1 of the best infrastructure systems (trains, roads, bridges and air ports) in the European Union. Both means that the building industry will stay depressed for years to come; * An activist investor or hedge fund may want to shake up the board room, as happens regularly with companies perceived of underperforming the market, which Cemex is when compared to Holcim; Holcim’s share price has only come down 17% (since Jan 2007), whereas Cemex has come down 61%. With a market capitalization of some USD 12 bln, Cemex would be in reach of some of the larger hedge funds; * Holcim starting a price war in Mexico, with Mexico providing Cemex with 50% of their global EBITDA. This should normally not happen, as Holcim benefits from the role as price taker, with the market price set by the dominant player Cemex. * Reduced financial means for investment and M&A activities – the traditional growth model of Cemex seems to be broken; * Moreover, where to grow? How does Cemex get access to the fast growing markets in China, India, Turkey and Africa? | Institutional risks | * Price investigations by authorities: UK Competition Commission to take action on cement pricing http://www.globalcement.com/news/item/1677-uk-competition-commission-to-take-action-on-cement-pricing; * Cemex staff involved in price collusion with competitors to improve financial results: potential for large fines from competition authorities; * Action by Nieto government: if they are willing to take on the vested interests of PEMEX, then the government could start pushing for restructuring of other highly concentrated industries, such as cement or telecommunications; * In various markets: Introduction of carbon tax, and not being able to pass costs onto customers; being taxed more than main competitors due to higher carbon footprint; * In USA/Europe: Imposition on a CO2 emissions cap on cement production, as now proposed by the EPA for power plants; * In USA/Europe: stricter regulations on emissions of particulate matter and heavy metals; * Non-traditional stakeholders attacking Cemex and the cement industry, e.g. customers starting to complain about high cement pricing in Mexico (compared to the US). | Country risks | * Cemex is too dependent on Mexico for its profitability; | Global market risks | * High fuel prices in Europe, which will continue to make European assets, in an oversupplied market, marginally profitable at best. |

iii) Finally, make recommendations on what you would do about the factors that you highlight as of concern.
The Cemex response plan will be based on the following elements: 1. Solidify the base a. Europe - Further rationalise underperforming assets in Europe. Thus continue to explore more asset swaps with competitors, along the lines as with Holcim in Spain, and Germany/Czech Republic (FT, August 28, 2013) b. Mexico – pro-actively engage with Nieto government to understand and influence their agenda. Moreover, use the business network (centred in Monterrey) to exert influence to prevent challenges to market status-quo. Although Cemex will stay well away from any collusion with its competitors, the European asset deal with Holcim may have as a side benefit that Holcim will not challenge the market status quo in Mexico. But just in case, Cemex will identify markets where Cemex could ‘hurt’ Holcim in retaliation for any aggressive pricing actions in Mexico; c. USA – convert all the remaining coal-fired operations to natural gas. This will not only save costs, as natural gas will remain cheap due to the ‘shale gas revolution’, but will also improve the CO2 footprint; d. UK – vigorously defend any claims of market/price manipulation, as any negative outcome would undermine the business in the UK, but could also trigger investigations in Mexico; e. Commercial - Enforce a zero-tolerance policy on anti-competitive behavior by Cemex staff (or approaches by competitors to collude);

2. Create an alternative growth model, targeted at new markets. f. The international growth of Cemex over the last 2 decades has been based on a high level of control by deploying ‘The Cemex Way’ quickly. Standardization of all its processes and operations, enabled with a strong information management capability, allowed the HQ in Mexico to quickly turnaround and integrate any new companies and assets into the global Cemex network. However, are there still underperforming assets/companies in growing markets where Cemex can use this approach? g. The markets that may seem attractive to Cemex include Turkey (?), India and current import markets in Western Africa (Nigeria and Angola), Middle East (e.g. Iraq, Qatar) and South & East Asia (Bangladesh, Sri Lanka, and Indonesia); source - http://www.ficem.org/pres/THOMAS-ARMSTRONG-LA-INDUSTRIA-DEL-CEMENTO-EN-CIFRAS.pdf. Which markets should Cemex target? h. Enter India - India has shown the following recent developments: * The national government announced a plan to invest USD 1000 bln in infrastructure over the coming 5 years (Wall Street Journal, June 6, 2012); * National elections in 2014: The BJP candidate for prime minister is seen as more business friendly than the current PM (FT, September 13, 2013). Narendra Modi is chief minister of the western state of Gujarat. The Gujarat economy has thrived under his leadership, with multinational companies streaming into the region on the back of welcoming regulations and impressive infrastructure; * The industrial capacity has quadrupled over the last 2 decades, and as a consequence there is overcapacity, as new capacity has been built in anticipation of growth, and therefore profitability is under pressure. In June 2012, 11 cement manufacturing companies were fined a collective US$1.1bn for alleged price-fixing by the Competition Commission of India (see for review of Indian cement industry: Global Cement Magazine, February 2013). So there may be some producers that look for a tie-up with Cemex (both Lafarge and Holcim already have JVs in India).
The core elements of the India strategy should include: * Partner with a mid-sized local partner via a JV or asset swap; * Consider an asset swap with an Indian company, who is interested in the UK market. Cemex could leverage the prestige value that such a UK market entry may hold for an Indian company, in succession to Tata, Mittal, and Essar. In a JV, Cemex would bring the UK assets into that JV. * In a departure from Cemex’s traditional high level of control, the Indian partner would run the Indian JV, whereas Cemex would continue to run the UK business. However, Indian business would benefit from Cemex skills in operating plants as well as leveraging information management to improve revenues; * Ideally the Indian company should have coastal assets, such that exports markets can be accessed, and Cemex’ global trading network can be expanded. East coast assets could access Bangladesh, Sri Lanka and Indonesia, while a West coast terminal would enable access to Sri Lanka and the Middle East markets; * Deploy and ‘localise’ the Patrimony Hoy program to effectively access the ‘base of the pyramid’, which in India is vast. i. The markets in Western Africa will be supplied from the Cemex operations in Spain. In 2012, exports accounted for 1/3rd (i.e. good for some 3 mln tons, out of a total of 8.8 mln tons traded globally by Cemex) of Cemex production volume in Spain (Cemex Annual Report 2012). Therefore, any investments in Spain will be focused on reducing variable costs (both production and logistics costs) to remain competitive in the global markets. In case Cemex is competitive on costs, also Turkey can be a destination, even if Turkey seems to have sufficient local production.

Question D.
How does demand for Cemex’s products differ in developed versus developing countries? How well positioned is Cemex to meet the demand expected in both of these segments?

Cemex is a global building materials company that provides high quality products and reliable service to customers and communities in more than 50 developed and developing countries in The Americas, Europe, Africa, the Middle East and Asia. This section begins with a brief overview of Cemex products/ capacity and demand variations across the countries. It then describes about Cemex’s ability to meet future demands.

Cemex PRODUCTS:

Cemex through a number of subsidiaries, is engaged in the production, distribution, and marketing of cement, ready-mix concrete, aggregates, and related construction materials.

CEMENT Segment Produces a range of products such as gray Portland cement, white Portland cement, masonry and mortar, oil-well cement, and blended cement. READY-MIX segment develops and produces a number of concrete products for specific requirements such as building structures, stamping designs, textures, and facilities with germ-free environment, insulating, fire-resistance, acid resistance, and crack-resistant construction. AGGREGATES sold by Cemex are used to produce different types of ready-mix concrete and related construction materials (Exhibit 1)

DEMAND VARIATIONS IN DEVELOPED VS DEVELOPING COUNTRIES:

Cement consumption is largely driven by local socio-economic conditions, changes in general economic, political, government and business conditions globally. Moreover, companies in developing countries face serious challenges, including political instability, volatile exchange rates, and an underdeveloped physical infrastructure.

Globally, Cemex identified that following factors influence the demand of their products:

1. Infrastructure development is the main driver of consumption for Cemex products
2. Investment in formal residential sector to be driven by increased commercial lending
3. Self construction sector will benefit from increased employment and remittances
4. Industrial and commercial sector expected to grow in line with the economy

Cross-country comparisons indicated that the long-run demand for cement was directly related to GDP, with per capita consumption increasing up to the $20,000-plus per capita income mark and then declining very gradually. Numerous other local attributes affected cement demand as well. Rainfall had a negative effect since it made cement-based construction more difficult and increased the likelihood of using substitutes such as wood or steel instead. Population density had a positive effect, as higher density led to taller building and more complex infrastructure. Demand also tended to be higher in areas with a warm climate and lower under extremes of heat or cold. Demand generally decreased with a long coastline, since more sea transport meant fewer roads, and increased with the share of governmental expenditures in GDP. Cemex forecast total world demand to grow at slightly under 4% per annum through 2010. Demand growth was expected to be highest in the developing Asian economies, Central America, the Caribbean, and Sub-Saharan Africa, where it would approach or exceed 5%, and lowest in Western Europe and North America, where it would be closer to 1% (Exhibit 2)

Key Attributes and their Impact on developed and developing countries:

Attributes | Developed Countries | Developing Countries | Sales | Market dominated by large construction companies and has high revenue per customer | Market dominated by Individual homebuilders and has low revenue per customer | Payments | Financing generally not required | Financing is important | Demand | More or less steady demand. Mostly depend on real estate market. | Depends on Economy and young population | Price Sensitivity | Driven by bargaining power. Rates are stable and market is flat | Convenience-driven (such as credit, delivery etc). Rates vary as economies fluctuate and cost of material changes. | Brand Equity | Recognized and Trusted | Should build trust to deliver as promised | Growth | Slow growth | Very high potential for growth | Customer Location | Usually located in places of easy access | Mostly located in remote areas | Relationship | Stops at the distributor-level | Requires close ties with end customers |

Cemex’s ABILITY TO MEET FUTURE DEMAND IN DEVELOPED AND DEVELOPING NATIONS:
Cemex is a firm known for identifying potential opportunities and turning them into profitable ventures. They expanded their business to sustainable and profitable growth markets, focused on their core products of cement, aggregates and ready-mix concrete. By taking lead on manufacturing customer centric products, constant Innovation, creating value through operational efficiency and sustainable development; Cemex is well positioned to meet the future demands of global marketplace.

Strategic Presence and Production Capacity:
Cemex’s acquisition and market consolidation tactics have created a very strategic network of production facilities and made it one of the top cement makers in the world (along with Lafarge and Holcim). The majority of its sales come from cement: the company has about 60 cement plants and an annual production capacity of about 95 million tons. It also produces markets and distributes ready mix concrete (55 million cubic meters annually), aggregates (160 million tons) and clinker. Cemex has a strong presence in growing and mature markets and operates in North America, as well as Africa, Asia, Europe, the Middle East and South America. The US, Mexico, and Europe account for more than 70% of revenues and has a relatively small footprint in Asia i.e. 4% of total sales.

Operating Initiatives
Cemex’s use of IT had transformed the way company operates in numerous ways. Constant evolution of processes, preparing future leaders through programs such as “Achieve and Leader to Leader”, integration with SAP to leverage information across each of its facilities around the world and a new long-term contract with IBM allows the company to continue enhancing the customer experience while helping lower overall operating costs by nearly one billion dollars over the next ten years (Cemex 2012 Annual Report).
Commercial Strategy and Innovation
Providing integrated building solutions, launching new global ready mix concrete brands and introducing a new pricing strategy is all part of strategic focus at Cemex. They were recently recognized with an award in innovative practices on the implementation of a program called Shift (Cemex Named Most Innovative Enterprise). This is a social networking platform that allows employees to share ideas and helps the most promising idea to bubble up through their network. In addition to operational innovation, they are also working on new building solutions to improve the structure integrity, sound proofing, and even radiation proof demands of their customers. Cemex business units continually offer new, innovative building materials for their specific markets For Ex: In US, Cemex launched Fortium ICF, a concrete product specifically engineered to reduce the time and material needed to build vertical concrete wall systems and In Columbia they began selling aggregates in bags.
Corporate Social Responsibility
By recognizing the long-term social and financial benefits of creating efficient and sustainable operating processes, Cemex has consistently led the industry in this area. They are credited with the development of the dry production process, which drastically reduced water consumption. They have also focused on using alternative fuels to lower the overall impact on air quality in the communities that they serve. There is a strong corporate culture of engaging in their local communities by providing education, supporting small construction projects, promoting self employment, and the development of micro businesses (Cemex 2012). A great example of this investment is the Patrimonio Hoy program that facilitates local purchases of concrete materials that will be used to build and improve homes within their communities.
The Future:
Cemex is absent from the two leading emerging countries, China and India, that represent more than 50% of world markets. Could it ignore those giant source of demand and if no how to develop a presence? The China market in particular is very fragmented with about 1000 local producers. On the other hand, debt has been a big focus on Cemex from the investor community for a long time. It is easily one of the most indebted companies in Latin America. As of 2012, the company lists debt at approximately $16B. This level of debt could become a long-term impediment of future growth and flexibility.

The globalization of Cemex – HBS Case Study

Question E.
Does Cemex as an organization more conform to the type of firm encountered in Liberal Market Economies or Coordinated Market Economies? For more information on these forms of capitalism consult the reading below. You may also do your own research on this topic, using search terms such as varieties or forms of capitalism to gather more information. Be sure to explain not only what form of capitalism Cemex most closely aligns to or identifies with. What caused the company to adopt the model you select, and why it did so should also be covered. Finally, should all firms follow the model you identify for Cemex? Why or why not?
In Mexico, and with a long Mexican history, Cemex certainly is a CME-type company: * Cemex is based in Monterrey, which is home to 6 of 11 biggest conglomerates in Mexico, and Monterrey companies account for 40% of the market cap of the Bolsa de Valores. Therefore Monterrey is the business capital of Mexico, with many of these companies built and still controlled by the founding families. ‘Family ties are still crucial … with leading family members sitting on the boards of each other’s firms’. * If there had been a strong anti -trust regulator, then the take-over of Empresas Tolteca in 1989 should never have been approved, as Cemex now controlled 70% of national productive capacity. With that level of control, they have ‘a lock on the Mexican cement industry’ (ref: case paper by Brews) and can thus extract high margins from their customers, something which they continue to do. Triggered by the 1982 ‘peso crisis’, the Mexican State opened the economy to productive as well as to financial capital, privatized its enterprises, abandoned subsidies to industry and to the ejidos (a system of communal lands for agricultural use), decentralized education and health services, and shifted its social policy towards assistance (Barba, 2007and Valencia Lomelí, 2008). It was able to do so without social or political turmoil, as it had preserved the authoritarian structure of the regime; it had succeeded in only liberalizing the electoral process, while continuing to control popular organizations. According to the new market logic, the State was set to become a regulator. Nonetheless, the manner in which it proceeded with the privatizations of its enterprises and the way it conceived the State retreat from economy weakened its regulatory capacity considerably. This is why the Mexican economy is plagued by monopolies and oligopolies that have formed in several sector such as telecom (America Movil of Carlos Slim) , banking, media, and the cement industry (Cemex); * Labor unions in Mexico for the most strategic and dynamic sectors are strong, e.g. oil, education, health, telecom, automobile workers unions; they have real political power and can obstruct legislation that would go against the interest of their members and leaders; * Their Patrimonio Hoy program is indicative of a company that looks beyond the narrow interest of the shareholders, and shows that Cemex takes a wider ‘stakeholder’ perspective on how to run a company. This is further supported by their commitment to reduce their CO2 footprint, and in general making their business more sustainable from an environmental perspective. The latter is obviously not only the preserve of CME-type companies, as it also makes for good business with the cement industry increasingly under scrutiny of regulators and NGOs;

Only fairly recently was the Mexican economy opened up, and thus economic structures, relationships and norms should still expected to be largely unaffected as they were as developed during most of the 20th century; Cemex was part of that development - Cemex origins can be traced back to 1906. So for most of their history, Cemex has worked within a closed economic (i.e. CME) system, which was dominated by the Partido Revolucionario Institucional for 7 decades, until 2000. Obviously the previously closed economy of Mexico has changed after joining GATT (in 1985) and signing up for NAFTA (in 1994). E.g. Mexico has seen a large influx of foreign manufacturing investment located in free-trade zones just south of the US borders, the so-called maquiladores, with the products aimed at the US markets. Mexico has thus moved in the direction of the USA LME-type system, without becoming a full-fledged LME enterprise. Therefore one could assume that, if it were available, the Hicks-Kenworthy corporatism score would probably have gone down over the last 25 years, with lower scores representative of LMEs (USA, UK, Canada, New Zealand) and higher scores representative of CMEs (Germany, Finland, Norway, Austria; see Peter A. Gourevitch, James Shinn, Princeton University Press, 2010; Political Power and Corporate Control).
At a global level, however, with Cemex being active in the USA and UK, it also shows elements of an LME-type company: * Whereas in European countries (e.g. The Netherlands or Germany) the term ‘social partners’ has a real meaning, i.e. labor unions and employer organizations, this term is absent in the UK or USA vocabulary. A key CME feature is collective wage bargaining, which is well developed in Germany and The Netherlands, but largely absent in the UK and USA; * As Cemex grew by various international acquisitions, they were the newcomers to such markets and thus could not build on old existing networks of relations, or incomplete contracting. The rules during the foreign M&A activities are different per country, but in general these are LME-type rules, with clear government regulations and take-over conditions; * International commodity trading, one of the key strengths of Cemex, is an obvious example of pure LME activities: clear contracts and supply/demand sets competitive pricing; * Quite a number of the Cemex management team have been trained outside Mexico, with several of them holding MBAs from Stanford or MIT. So these managers were educated in the CME world (in Mexico), but should also feel at ease in the LME world.

In summary, Cemex seems to have the management skills and flexibility to successfully operate in both LMEs as well as CMEs.

Any company that wants to be successful globally in a wide variety of economies, should have the knowledge and flexibility to somewhat adapt its behavior to the ‘cultural norms’ of the country where it operates. A tried-and-tested method is to have a local national run the operations. E.g. a US company wanting to set-up a business in Europe should understand how the socio-economic structures work in that country, e.g. workers councils in The Netherlands, Germany or France, but probably should also hire a German as the general manager for their German operations. All things being equal, it may therefore be more expedient (from a CME vs LME type analysis) for a US company to set up a European base in UK or Ireland, rather than Germany or Austria (the former being real LMEs, and the latter CMEs).
Conversely a German company wanting to enter the USA may have to rethink the manner in which to manage their relationship with banks (or alternative sources of funding) in a different manner than they were used to doing in Germany.

So one approach does not fit all. Any company, whether with a CME-heritage or an LME-heritage, can be globally successful. For instance, in the industrial sector, both Siemens (Germany) and General Electric (USA) are both quite successful, but clearly having a different heritage and corporate DNA.
What is required is a corporate understanding of the local conditions (in all its different facets) and the required skills and attitudes. Therefore, if Cemex wants to be successful in India (also more of a CME than LME), they probably should look more towards the CME-part of their heritage rather than the LME-part, and should have a management team largely consisting of Indian nationals.

Total # words: 7146/6000 STILL TOO LONG!

Appendix 1: Top cement producing and consuming countries # | Country | Production 2012 (Mt) | Forecast GDP Growth Rate 2013 (%) | Forecast GDP Growth Rate 2014 (%) | Comments | 1 | China | 1800.0 | 7.6 | 7.3 | World’s largest market, but not a candidate for Cemex’s investment because it is extremely saturated | 2 | India | 220.0 | 3.8 | 5.1 | Indian market is highly recommended for investment, although some negative factors must be considered, such as dampening construction activity in FY2012/13, relatively non-conducive monetary conditions, policy inertia and lack of infrastructure activity. | 3 | USA | 63.5 | 1.6 | 2.6 | The economy is slowly recovering, but with a slower pace than the developing countries. | 4 | Turkey | 60.0 | 3.8 | 3.5 | With Turkey's healthy construction pipeline, complete with numerous high-profile projects within both its infrastructure and residential/non-residential sectors, a long-term strong construction industry growth is expected However, the short-term outlook has been dented by social unrest and macro-economic conditions. Average year-on-year real growth in the Turkish economy outstrips any developed market in the region, making Turkey an attractive investment destination. | 5 | Brazil | 59.0 | 2.5 | 2.5 | The lack of government investment in infrastructure and the low GDP growth rate is not attractive for international investors | 6 | Japan | 56.0 | 2.0 | 1.2 | Japan’s GDP growth rate forecast is not optimistic and being a developed country reduces the opportunity for investment in housing and infrastructure | 7 | Iran | 55.0 | -1.5 | 1.3 | Not recommended, due to the US sanctions to the Country | 8 | Vietnam | 50.0 | 5.3 | 5.4 | Vietnam's construction sector is still in an upward cyclical phase. This recovery in Vietnam's construction sector could last well into 2013. Despite this faster rate (when compared with developed countries) there are some negative facts to take under consideration, such as an oversupply of housing and difficulties in securing project financing within the infrastructure sector. | 9 | Spain | 50.0 | -1.3 | 0.2 | Not recommended, due to the present European economic scenario. |

10 | Russia | 49.0 | 1.5 | 3.0 | A multibillion dollar Eastern Gas Programme, which will cement Russia's economic pivot towards Asia. Freight railways, pipelines, ports and power generation projects will therefore see high levels of growth in the coming years. | 11 | Egypt | 48.0 | 1.8 | 2.8 | Construction activity in Egypt continued to slow as the sector has continued to face significant challenges. The construction growth in Egypt is dependent upon demand for projects and foreign investment. Given the current unstable - and further deteriorating - political climate, the country is not a good investment candidate. | 12 | South Korea | 46.0 | 2.8 | 3.7 | The South Korean government has decided to significantly reduce infrastructure spending over the next four years and there are growing signs of delays among non-nuclear power plant projects due to public opposition. | 13 | Saudi Arabia | 45.0 | 3.6 | 4.4 | This increasing growth rate trend is expected to continue in the short to medium term on the back of the government's vast infrastructure investment scheme. | 14 | Indonesia | 42.0 | 5.3 | 5.5 | Indonesia is investing in infrastructure spending to upgrade roads, ports, water facilities, and power plants. Instead of leaning heavily on public funds to get them done, the government is inviting the private sector to take advantage of investment opportunities. In December 2012, Parliament passed the Land Acquisition Law, allowing the government to obtain civilian land for public works projects and compensating landowners for the property. Analysts say this law, together with Indonesia’s recent credit rating upgrade, which makes fundraising cheaper, would help jumpstart infrastructure investments in 2013. | 15 | Italy | 35.0 | -1.8 | 0.7 | Not recommended, due to the present European economic scenario. | 16 | Mexico | 34.0 | 1.2 | 3.0 | Invest internally to defend market share | 17 | Germany | 31.0 | 0.5 | 1.4 | Not recommended, due to the present European economic scenario.After official data was released it has come to light that Germany's construction sector has continued to struggle as Eurozone worries impede growth. | 18 | Thailand | 31.0 | 3.1 | 5.2 | Thailand will spend more than US$70 billion (S$88 billion) on infrastructure, until 2020.The “Future 2020” plan will be the first state-led push to build anything on a truly grand scale since the crash of 1997. A new construction boom is expected. | 19 | Pakistan | 30.0 | 3.6 | 2.5 | The Executive Board of the International Monetary Fund (IMF) approved on September 4th, 2013, a 3-year arrangement under the Extended Fund Facility (EFF) for Pakistan in an amount equivalent US$6.64 billion, to support the country’s economic reform program to promote inclusive growth. |
Appendix 2: Overview of Cemex production and sales

Overview of Cemex Global Production Capacity and Facilities:

Cemex Sales distribution by product and geographic location

References

http://businesstoday.intoday.in/story/innovation-Cemex/1/20184.html http://insight.kellogg.northwestern.edu/article/reframing_the_poverty_problem/ http://www.holcim.com/about-us/company-profile/key-figures.html http://www.heidelbergcement.com/global/en/company/about_us/profile.htm http://www.lafarge.com/wps/portal/1_2-Profil http://www.Cemex.com/InvestorCenter/KeyCompanyFigures.aspx http://www.ficem.org/pres/THOMAS-ARMSTRONG-LA-INDUSTRIA-DEL-CEMENTO-EN-CIFRAS.pdf http://www.globalcement.com/news Sources http://www.sacbee.com/2013/09/26/5771190/global-concrete-and-cement-market.html http://www.economist.com/news/business/21579844-worlds-cement-giants-look-set-recoverybut-will-it-be-durable-ready-mixed-fortunes http://www.globalcement.com/news/itemlist/tag/Consumption http://www.worldcement.com/news/cement/articles/Cement_India_demand_price_capacity_160.aspx http://www.constructionrussia.com/178868/Cement-consumption-reaches-record-high-in-2012.shtml Lessard D, Lucea R, (2009). 'Insights from Cemex '. In: Ravi R, Jitendra S (ed), Emerging Multinationals in Emerging Markets. 1st ed. UK: Cambridge University Press. pp.291.
References:
N. Mahasenan, S. Smith, K. Humphreys, The Cement Industry and Global Climate Change: Current and Potential Future Cement Industry CO2 Emissions, In: J. Gale and Y. Kaya, Editor(s), Greenhouse Gas Control Technologies - 6th International Conference, Pergamon, Oxford, 2003, 995-1000.

M. Schneider, M. Romer, M. Tschudin, H. Bolio. Sustainable cement production – present and future. Cement and Concrete Research 41, 2011, 642-650.

www.holcim.com (accessed 29 sep 2013) www.Cemex.com (accessed 29 sep 2013) www.lafarge.com (accessed 29 sep 2013) www.heidelbergcement.com (accessed 29 sep 2013) http://www.climatechange2013.org/images/uploads/WGIAR5-SPM_Approved27Sep2013.pdf(accessed 6 oct 2013) http://www.wbcsdcement.org/GNR-2011/index.html (accessed 29 sep 2013) www.globalcement.com (accessed 6 oct 2013) http://www.bloomberg.com/news/2013-09-20/new-coal-plants-must-capture-carbon-dioxide-output-epa.html (accessed 6 oct 2013) http://www.environmentalleader.com/2010/03/02/Cemex-rti-to-demo-co2-capture-technology/(accessed 6 oct 2013) http://biomassmagazine.com/articles/3835/lafarge-cement-plant-reduced-co2-with-biomass(accessed 6 oct 2013) http://www.aether-cement.eu/(accessed 6 oct 2013) http://www.holcim.com/sustainable-development/case-studies/case-studies-by-topic/casestudies/acc-india-industrial-farming-of-co2-into-algal-biomass-fuel.html(accessed 6 oct 2013) http://www.bloomberg.com/news/2013-09-20/new-coal-plants-must-capture-carbon-dioxide-output-epa.html(accessed 6 oct 2013)

References:

Cemex 2011 Q1 Results – Cemex.com
Cemex 2013 Q2 Results – Cemex.com
Cemex Annual Report 2012 – Cemex.com
Cemex Globalization “The Cemex Way”
Cemex 2012 company financials – Hoover Report
Cemex Global Expansion – A mini case