Cemex’s Foreign Direct Investment

In little more than a decade, Cemex, Mexico’s largest cement manufacturer has transformed itself from a primarily Mexican operation into the third largest cement company in the world behind Holcim of Switzerland and Lafarge Group of France with 2007 sales of $21.7 billion and more than $2.6 billion in cash flow. Cemex has long been a powerhouse in Mexico and currently controls more than 60 percent of the market for cement in that country. Cemex’s domestic success has been based in large part on an obsession with efficient manufacturing and a focus on customer service that is best in the industry.

Cemex is a leader in using information technology to match production with consumer demand. The company sells ready-mixed cement that can survive for only about 90 minutes before solidifying, so precise delivery is important. But Cemex can never predict with total certainty what demand will be on any given day, week, or month. To better manage unpredictable demand patterns, Cemex developed a system of seamless information technology - including truck-mounted global positioning systems, radio transmitters, satellites, and computer hardware, that allows Cemex to control the production and distribution of cement like no other company can, responding quickly to unanticipated changes in demand and reducing waste. The results are lower costs and superior customer service, both differentiating factors for Cemex.

The company also pays lavish attention to its distributors – some 5,000 in Mexico alone – who can earn points towards rewards for hitting sales targets. The distributors can then convert hose points into Cemex shares. High-volume distributors can purchase trucks and other supplies through Cemex at significant discounts. Cemex also is known for its marketing drives that focus on end users - the builders themselves. For example, Cemex trucks drive around Mexican building sites, and if Cemex cement is being used, the building crews win soccer balls, caps and T-shirts.

Cemex’s international expansion strategy was driven by a number of factors. First, the company wished to reduce its reliance on the Mexican construction market, which was characterized by very volatile demand. Second, the company realized there was tremendous demand for cement in many developing countries, where significant construction was being undertaken or needed. Third, the company believed that it understood the needs of construction businesses in developing nations better than the established multinational cement companies, all of which were from developed nations. Fourth, Cemex believed that it could create significant value by acquiring inefficient cement companies in other markets and transferring its skills in customer service, marketing, information technology, and production management to those units.

The company embarked in earnest on its international expansion strategy in the early 1990s. Initially Cemex targeted other developing nations, acquiring established cement makers in Venezuela, Colombia, Indonesia, the Philippines, Egypt, and several other countries. It also purchased two stagnant companies in Spain and turned them around. Bolstered by the success of its Spanish ventures, Cemex began to look for expansion opportunities in developed nations. In 2000, Cemex purchased Texas-based Southland, one of the largest cement companies in the United States, for US$2.5 billion. Following the Southland acquisition, Cemex had 56 cement plants in 30 countries most of which were gained through acquisitions. In all cases, Cemex devoted great attention to transferring its technological, management, and marketing know-how to acquired units, thereby improving their performance.

In 2004, Cemex made another major foreign investment move, purchasing British company RMC for US$5.8 billion. RMC was a huge multinational cement firm with sales of US$8 billion, only 22% of which were in the U.K, and operations in more than 20 other nations, including many European nations where Cemex had no presence. Finalized in March, 2005, the RMC acquisition has transformed Cemex into a global powerhouse in the cement industry, with more than US$15 billion in annual sales and operations in 50 countries. Only about 15% of the company’s sales are generated in Mexico. Following the acquisition of RMC, Cemez found that the RMC plant in Rugby was only running at 70% of capacity, partly because repeated production problems kept causing kiln shutdown. Cemex brought in an international team of specialists to fix the problem, and quickly increased production to 90% of capacity.
Looking forward, Cemex has made it clear that it will continue to expand and is eyeing opportunities in fast-growing economies of China and India, where it currently lacks a presence and where its global rivals are already expanding. Still, not all of Cemex’s expansions have worked out as planned. In 2006, Cemex announced that it would exit Indonesia after a long-running dispute with the government there. Cemex entered Indonesia in 1998 as part of an IMF-sponsored privatization program, by purchasing a 25% stake in a government-owned Indonesian cement maker, Semen Gresik. At that time, Indonesia promised to allow Cemex to acquire a majority stake in Semen Gresik in 2001. However, the country never granted that permission, as local vested interests, including politicians and unions, voiced about “Indonesian assets falling into foreign hands” and lobbied the government to block the deal. A frustrated Cemex eventually reached an agreement to sell its 25% stake to another Indonesian enterprise.

(a) Which theoretical explanation(s) of FDI best explain(s) Cemex’s FDI? What is the value that Cemex brings to a host country? Explain the potential drawbacks of inward investment by Cemex in a host economy?
(b). Why do you think Cemex decided to exit Indonesia after failing to gain majority control of Semen Gresik? Why is majority control so important to Cemex? Why do you think politician in Indonesia tried to block Cemex’s attempt to gain majority control over Semen Gresik? Do you think Indonesia’s best interests were served by limiting Cemex’s FDI in the country?