GUJARAT AMBUJA CEMENT LTD.

Gujarat Ambuja Cements Ltd. (GACL) was established as Ambuja Cements Private Ltd.
(ACPL) in 1981 by Narotam Satyanarayan Sekhsaria (Sekhsaria), a businessman from the
western Indian state of Gujarat. Originally a cotton trader, Sekhsaria entered the cement
business because of factors such as stable demand, lack of substitutes and limited
competition. With the support of Gujarat Industrial Investment Corporation’s (GIIC1),
Sekhsaria and his two partners, Suresh and Vinod Neotia, set up APCL. Suresh Neotia was
appointed Chairman while Sekhsaria was made the Managing Director. In 1983, the
company floated a public issue and its name was changed to GACL. The same year,
production started at a 0.7 million tons per annum (mtpa) plant, named Ambuja Cements,
in Ambuja Nagar, Gujarat. GIIC sold its stake in GACL in two tranches to Sekhsaria in 1987.
In 1993, GACL commissioned its second cement plant at Ambuja Nagar (capacity 1 mtpa),
named Gujambuja Cements. Attracted by buoyant cement demand in the northern regions,
GACL commissioned a 1.5 mtpa plant at Suli in Himachal Pradesh (HP), named Ambuja
Cements Himachal Unit in 1995. In the same year, GACL floated a wholly owned subsidiary
in Mauritius – Cement Ambuja International Ltd. (CAIL). A year later, GACL floated another
subsidiary, Ceylon Ambuja Cements (Private) Ltd., through which it acquired a small
company, Midigama Cement, in Sri Lanka.

In 1996, GACL set up its third 1 mtpa plant at Ambuja Nagar, named Guj Line – II (capacity
1 mtpa). GACL also established grinding and packing units at Ropar (Punjab) and Panvel
(Maharashtra). In 1997, GACL acquired Modi Cements’ sick 1.4 mtpa plant at Raipur
(Madhya Pradesh) for Rs 1.66 billion. This plant was renamed Ambuja Cement Eastern Ltd.
After the acquisition, GACL revamped its processes to bring them at par with the standards
of its other plants. In 1998, GACL acquired the Nadikudi (around 100 kms from Guntur) and
Proddatur (near Cuddaph) limestone mines in Andhra Pradesh to strengthen its presence in
southern India.

In December 1999, GACL acquired a 51% stake in Delhi based DLF Cement for Rs 3.5
billion. DLF Cement had started its operations in 1997 in Rajasthan with a plant of capacity
1.4 mtpa. After this merger, GACL became the fourth largest cement manufacturer in India
after ACC, L&Tand Grasim. In the same month, GACL also acquired a 7.2% stake in
Associated Cement Companies (ACC) for Rs 4.55 billion. ACC was the largest manufacturer
of cement in India. With 14 manufacturing units in India, it had a total capacity of over 11
mtpa. It was one of the largest integrated cement companies in the world.

By the late 1990s, GACL had emerged as one of the most energy efficient and
technologically advanced cement manufacturers in India. In December 2001, GACL began
trial production at a new 2 mtpa plant in Chandrapur, Maharashtra, taking its total capacity
to 12.5 mtpa (Refer Exhibit I). For the financial year 2000-01, the company recorded a
turnover of Rs 12.52 billion and a net profit of Rs 1.5 billion. GACL had a large distribution
network of 11,500 outlets. It was one of the first cement companies in the country to
recognize the importance of brand building. The company's cement, sold under the Gujarat
Ambuja brand name, enjoyed good brand equity and sold at a premium. The company was
the overall market leader in the Indian cement industry

Indian Cement Industry - Companies and their Marketshare (2001)

Region East South North West Total
(Mkt. Size in
-
million -14 -23.8 -28.1 -90.5
24.6
tonnes)
Grasim-L&T
20 21 13 37 22
Combine
GACL-ACC 24 10 36 23 24
JK Group - - 16 - 5
India
- 22 - - 5
Cements
Madras
- 22 - - 5
Cements
Lafarge 23 - - - 3
Others 33 35 35 40 36
Source: www.equitymaster.com

GACL was not only the market leader, it ALSO ranked very high on the profitability criteria.
Its new plants, use of better quality limestone, innovative energy management efforts, and
strong retail presence in Mumbai, Gujarat and Punjab gave it a strong edge over its peers.
Its cost per rupee of sales was much lower than most of its competitors, resulting in much
better operating margins.

Cement Companies - Operating Margins

(%) FY97 FY98 FY99 FY00 FY01
Grasim NA NA 14 13 17
L&T NA NA 11 15 17
ACC 14 11 7 9 16
India
25 24 25 23 24
Cements
Madras
35 33 31 31 31
Cements
GACL 36 36 36 36 37
Source: www.equitymaster.com
 Cement Companies - Capacity Utilization (1996-97)
(in
Company
%)
Grasim 79
L&T 87
ACC 95
India Cements 94
Madras
98
Cements
GACL 102
Source: Analyst, March 1998.

Industry observers unanimously agreed that GACL was the most efficient cement
manufacturer mainly because of its operational excellence. The company had done well in
spite of the fluctuations in the cement industry by adopting aggressive productivity
improvement and cost-cutting measures. GACL had won a host of awards for management
excellence, quality, business strategy and environment management. Ever since its
inception, the company believed in doing things in an innovative and unconventional way,
so as to reap benefits in new ways, using new methods.

According to analysts, GACL's strategic farsightedness was evident in its decision to locate
its plants in backward areas, so as to take advantage of substantial sales tax and income
tax incentives2. GACL's units in the states of Gujarat, HP and Punjab also received sales tax
incentives. This was possible as all new investments in cement after 1986 enjoyed a sales
tax benefit of up to 90% of the value of fixed assets for a period of 14 years.

To get the sales tax incentives on a continual basis, companies needed to incur constant
capital expenditure. Thus, GACL continually expanded capacities in Gujarat and Punjab. The
Himachal Pradesh plant had the advantage of prioritized power supply at a guaranteed cost
for five years from the date of commissioning. The decision to set up a plant in HP made all
the more sense because the region was cement deficit at that point of time. Also, the plant
was closer to the mines and the Punjab grinding unit. Another reason GACL finalized the
plant location in HP was that the area had substantial limestone deposits. However, there
were three hills directly between the quarries and the nearest piece of flat land large
enough for the plant.

Though the actual distance was just a few kilometres away, the only way existing was a 17
km stretch of road full of potholes. This would have involved time delays and large fuel bills
for transporting the limestone to the plant location. GACL engineers decided to get a
conveyor belt built across the three valleys, through the mountains. After many big
construction firms refused to do the job, GACL built the conveyor belt on its own, in just 18
months. The distance was cut down to just 2.8 kms and the belt moved 800 tonnes of
limestone every hour.

Even the company's latest plant at Chandrapur was set up to take advantage of substantial
sales-tax benefits for almost 18 years. This unit was situated at the pit-head of coal mines,
to save on freight costs. GACL's management realized that the time taken to set up a plant
was not entirely in its hands. The company's actual work began after it had identified the
right location, acquired the necessary license, power and water supply connections and
machinery. From this point onwards, the work at the site was something the company could
control. GACL decided to let its engineers define their own jobs and gave them the authority
to take on-the-spot decisions regarding capital expenditure and schedules for achieving
targets. The engineers were also allowed to set daily, weekly and monthly tasks for
themselves. This empowerment of engineers proved to be very advantageous for the
company: job functions were more clearly defined and response time was reduced by as
much as 90% since engineers did not have to wait for approvals. GACL's plant engineers
placed orders for machinery well before the site was chosen. So the equipment was ready
for installation by the time the site engineers had acquired the land.
As a result, GACL was able to cut down substantially on the commissioning time of its
plants. The very first plant at Ambuja Nagar was commissioned in just 22 months. This was
a significant achievement, as a plant of similar size normally took three years to install.
Even the second plant was commissioned in a record time of 13 months. GACL was able to
save a lot of money just in terms of inflationary costs. Anil Singhvi (Singhvi), Treasurer,
GACL said, "By squeezing the project time, you save 10 per cent on account of inflation
alone; plus we estimated an interest cost savings of around Rs 250 million."

Once GACL got the plants running, it realized that to compete with the established players,
who had larger plants and economies of scale, cost control would be important. The major
cost components of cement are fuel (20%), freight and raw material (17% each) and power
(16%), with other components accounting for the balance 30%. GACL decided to adopt a
two-pronged strategy to achieve total cost management (TCM): enhancing plant
productivity and reducing costs on each of the cost components individually.

Enhancing Productivity
GACL worked hard to reduce mining expenses. Cement companies normally operate their
own limestone mines. Mines were not only extremely destructive environmentally, they
were also expensive to operate. The explosives used for mining were on the negative list of
imports and substantial costs were involved in implementing safety measures. In 1997,
GACL sent its engineers to Australia to study the extraction of metals. On their return, GACL
implemented new technologies that could access limestone in smaller areas where blasting
was not possible. To reduce the noise and vibration that occurred during the conventional
drilling, blasting and crushing process, the company introduced an Australian device called
Surface Miner. The Surface Miner was not only energy efficient, it also recovered more
material from a given area.
GACL engineers found that by focusing on kiln operations, they could not only ensure
cement quality, but could also reduce power consumption. A company official said, "You
have to make sure that the reactivity is such in the burning zone that whatever you burn is
converted into clinker3 minerals. And all this depends on the burning process, which we had
no way of monitoring from the outside. Inadequate heating yielded inferior quality cement
and over cooking made the clinker harder to grind."

In the early 1990s, during a visit to a cement plant in Japan, GACL engineers learnt that
factors like retention time (time elapsed in the kiln and the speed of burning), temperature,
and rate of cooling could be judged from the microstructure of the clinker minerals. The
Japanese engineers physically scanned the clinker pieces extracted from the kiln under a
microscope to determine on the basis of their experience, whether the clinker had been
heated to the right temperature. After undergoing extensive training, GACL's engineers tried
the above procedure at their own plants and successfully brought down power costs from
120 units/ton to 90 units/ton.
At GACL's second plant in Ambuja Nagar, kiln productivity ranged between 2800-3000
tonnes. While setting up the third plant in the area, GACL engineers realized that if they had
a larger pre-heater (in which the limestone was heated before being fed into the kiln), they
would be able to put more material into the kiln and thereby increase production. However,
the company's supplier of pre-heaters said it was not possible to make a bigger pre-heater
without modifying the kiln. The engineers told the supplier to make a bigger pre-heater,
while they themselves modified the existing kiln.

After spending two month studying the data available on kilns from the other plants, the
engineers eventually worked out a plan for kiln modification. After the above plans were
implemented, the same kiln began producing 3500 tonnes per day. With a marginal
investment of Rs 24 million, the plant was now producing 0.17 million tonnes more per
year.
To ensure consistency in the quality of material and kiln temperature, GACL installed a
centrally operated computerized process control system. The system controlled around
3,000 operational parameters to ensure quality at each step of the production process. The
system utilized raw material management software to evaluate the optimum mix and
redesign accordingly to get consistent quality and optimum utilization of raw material.

In 1990-91, capacity utilization of the first plant at Ambuja Nagar was 140%. However,
GACL's engineers continued their drive to improve capacity utilization further and installed a
24-hour monitoring system and introduced weekly checks to check faults before a
breakdown occurred for certain key components. As a result of these measures, capacity
utilization went up to 143% that year. GACL decided to run its plants non-stop for 40 days
against the industry average of five. This was again inspired by the visit to the Japanese
cement plant, which ran for 100 days continuously. As a result of all these initiatives, GACL
achieved more than 100% capacity utilization during 1999.

GACL's focus on quality control practices was manifested in its decision to introduce the
practice of reporting quality related data 48 times a day instead of just once. And to ensure
that bags contained the right quantity of cement, GACL used Zero Error Electronic Rotary
machines which checked the quantity of cement in randomly picked bags. In the case of 50
kg bags, GACL permitted a maximum variation of 200 gm. The company also invested
around Rs 60 million in pollution control equipment to limit dust and debris in emissions and
dust suppression and extraction systems at brushing and grinding units.

These pollution control measures led to a significant decline in the plant's repair bills. Since
dust particles cause wear and tear of equipment, the decrease in such particles led to a
sharp fall in the number of breakdowns in moving parts and gear boxes. Around 81,000
trees were planted in Ambuja Nagar and an artificial lake was also built. A portion of an old
quarry was reclaimed and converted into a vegetable garden. Because of the stringent
environmental pollution control norms at its plants, GACL was even able to maintain a rose
garden near the Ambuja Nagar plant. The conveyor belt set up for the HP plant was totally
covered and no limestone dust escaped into the fragile ecosystem around the conveyor. And
because all three motors for the conveyor belt were located at the plant site, there were no
engine noises and noxious vapors along its entire length.

- POWER
Power accounted for a large part of GACL's cost of production. GACL realized that a captive
power plant would increase savings substantially as power sourced from the power grids
was both unreliable and costly. So it set up fuel based captive power plants in Gujarat (40
MW) and Himachal Pradesh (12 MW) in 1998. GACL's captive power generation cost was
only Rs 1.30 per kilowatt (excluding interest and depreciation), compared to Rs 4.50 per
kilowatt for power supplied by the Electricity Boards. Soon, the company was not only
getting around 60.3% of its total power requirement from these plants, it was also selling
the excess power it generated to the local state governments. B S Dulani, Vice President,
Operations, at the Gujambuja plant said, "Small measures like modifications in higher
capacity motors for fans, coolers etc. according to specific requirements (shifting from AC to
DC drive, which allows regulation of current) wherever possible, and many other simple
steps helped reduce GACL's power consumption from 120 units/tonne of cement in 1987 to
88-90 units per tonne in 1995 against an industry average of 121 units per tonne."

- FUEL
Coal is an important source of energy for the cement industry. However, while most of the
coal production in India is located in the central and eastern parts, the cement industry is
concentrated in western and southern parts. Thus, the cost of transporting coal to the
cement plants was very high. Moreover, the quality of coal was also very poor. Cement
companies had to decide whether to use imported coal or substitutes like lignite, natural gas
and oil.

GACL decided to import cheaper, higher quality coal from South Africa. The company also
began importing better quality furnace oil for its diesel generator (DG) sets for its power
requirements. This led to a considerable reduction in the operating costs of their power
plants. GACL consumed only 96 kwh of power per tonne of cement against the industry
average of 110-115 kwh per tonne. The company's coal consumption was also the lowest in
the industry. GACL consumed 170 kg per tonne of cement while the industry average was
250 kg per tonne. GACL decided to import cheaper, higher quality coal from South Africa.
The company also began importing better quality furnace oil for its diesel generator (DG)
sets for its power requirements. This led to a considerable reduction in the operating costs
of their power plants. GACL consumed only 96 kwh of power per tonne of cement against
the industry average of 110-115 kwh per tonne. The company's coal consumption was also
the lowest in the industry. GACL consumed 170 kg per tonne of cement while the industry
average was 250 kg per tonne. Since the company's Ambuja Nagar plants were located in
the agricultural belt of Saurashtra, where groundnut husk was available in plenty, GACL
engineers tried to use groundnut husk instead of coal to fire the kilns in one of the plants.
The idea worked wonderfully and the company was able to bring down the overall coal
consumption by 3%. In another plant, GACL replaced coal with crushed sugarcane. The use
of sugarcane however, created problems because the water content differed with every
batch, leading to fluctuations in kiln temperature. So the company's engineers designed a
special mechanical system that could adjust the rate of feeding to ensure a stable
temperature in the kiln. In the process, GACL brought the energy bill down by Rs 20 for
every tonne of crushed sugarcane.

GACL also began using fluorspar,4 a waste dumped by Gujarat Mineral Development
Corporation to reduce fuel consumption. They modified many higher capacity motors for
fans, coolers, and other equipments to reduce power requirements by 1 to 1.5 units per
tonne. The company also replaced V belt drives (which consumed more energy due to
friction) with flat belt drives. Even though mechanical conveyors gave rise to problems like
spillages and breakdowns, GACL did not shift to pneumatic conveyors, which consumed
more power. Instead, the company devised an improved version of the mechanical conveyor
to eliminate its drawbacks.

- FREIGHT
According to analysts, the most successful of GACL's innovative strategies was the
development of a sea transportation route for its cement. At a company meeting in the
early 1990s, a Marketing Manager said, "As we all know, Bombay is the country's largest
cement market. It consumes a vast 2 lakh tonnes a month. The city is also 1060 kms away
by rail. The transportation and packing costs alone will be phenomenal." Road transport was
very costly and rail transport was not feasible due to the limited number of wagons
available with Indian Railways. Just when it seemed that the company would have to agree
to bear the road/rail transportation costs, an employee in the Logistics department said, "I
can bring Bombay closer to our plant."

This marked the birth of the idea of using the sea route, instead of land. The sea route
would bring down the distance to 315 kms. GACL set up a special cell to develop this idea.
The company invested Rs 1 billion to set up modern ports and freight-handling terminals at
Muldwarka and Surat (south Gujarat) and Panvel (near Bombay). In addition, it bought
three special ships (one designed in Singapore and the other two in India) to transport the
cement. The vessels, custom made for Indian conditions and requirements, had the capacity
to transport 2500 tonnes of cement each. The port terminal at Muldwarka was an all-
weather port, handling ships with 40,000 DWT.5 It was also equipped to export clinker and
cement and import coal and furnace oil. A fleet of five ships, with a capacity of 2500 DWT
each, ferried bulk cement to the packaging units from this port. The bulk cement terminal at
Surat had bulk cement unloading capacity with a storage capacity of 15,000 tonnes. The
terminal at Panvel had a storage capacity of 17,500 tonnes.

To facilitate transportation by ship, GACL sent cement in sealed road tankers from the plant
site to the shipping terminal, where it was transferred to silos.6 From these silos, it was
transferred into airtight holds in the ships. At the destination, the cement was unloaded
from ship holds and again placed in silos, before being pumped into the sealed road tankers.
Customers were provided small storage tanks into which cement was pumped from the
sealed tankers by a fluidization process.7 For customers who preferred bagged cement,
GACL arranged special packing facilities at the unloading terminals. GACL had conveyor
belts running up to the dispatch yard for loading the trucks and wagons. A fleet of around
350 self-financed trucks and a railway siding on the factory premises provided flexibility in
the mode of transportation.

The cost of transporting cement to Bombay worked out to about Rs 400 per tonne as
compared to over Rs 1800 per tonne by road. Since the cement was now being moved in
bulk, packaging costs were also reduced. Thus, GACL was able to save roughly Rs 160
million annually. Besides, there was far less wastage and spillage, and since the cement was
untouched by human hand, it of the finest quality. GACL's shipping facilities brought many
coastal markets within easy reach and made it one of the largest exporters of cement.
Because of the port, it was now much more convenient for the company to import coal. A
strong focus on logistics management helped GACL reduce finished goods inventory levels
also. A Mumbai dealer could obtain stocks within eight hours because of the company-
owned jetty.8 The cement was packed at a plant at the jetty itself, at the rate of 100 tonnes
per hour.

The Future
The continual capacity build-up in the Indian cement industry led to an excess capacity
situation by the beginning of the 21st century. During the same period, growth in the
cement industry declined from 21% (April-September 1999) to 11% (October 1999-March
2000) because of drought in many parts of the country. Prices dropped because people
feared that construction activities would decline due to the drought. At the same time, the
cost of production continued to increase because of hikes in power, rail freight, and coal and
diesel prices. As a result of the above factors, cement companies were affected negatively.
According to some analysts, even GACL seemed to have exhausted its armory of cost-
cutting and productivity enhancing strategies. For the third quarter ended March 31, 2002,
the company registered a 9.27% decline in net profit. Its profits had come down from Rs
600 million to Rs 544 million in 2002 for the same period last year.

This was despite a 11% increase in turnover: Rs 4.3 billion in 2002 as against Rs 3.9 billion
in 2001 for the corresponding quarter. The operating margin also came down to 32% as
compared to 38% in the previous year. Critics even commented that GACL's cost efficiencies
were more driven by market compulsions rather than a strategic cost focus. GACL however
did not seem to be very worried, because the decline in profitability was caused by factors
that were beyond its control. Singhvi said, "We have put up a good show despite low
cement prices during the quarter by around Rs 300 per tonne. Lower cement prices have
not been reflected in the bottomline." At the same time, the company was not taking things
lightly.

GACL realized that while its traditional cost-saving methods would continue to prove
valuable, they were not enough. As stated in the company's Director's report, "The route to
higher profitability lay elsewhere: Namely, better sales realization." Thus, GACL's marketing
team began focusing its attention on the retail market. The company believed that the retail
market offered it the opportunity to build loyalty through higher standards of service.

The company asked its marketing teams to push for better prices. Because of these
marketing initiatives, GACL was able to maintain its market share in Gujarat, even while
commanding a high price. The company posted an increase in sales in the highly
competitive and complex Mumbai market even as demand growth slowed down and prices
declined. Similarly, this focus on marketing led to an 8% increase in sales in the northern
region during 1999-00.

GACL continued to seek ways to reduce costs. It planned to use a captive thermal (coal-
based) power plant to meet the power requirements of its Chandrapur plant. As the power
plant was close to coal mines, the company expected the variable cost of power to be
significantly lower.

Refuting the claims that the company's drive for achieving operational excellence was totally
market-driven, Singhvi said, "We eat, live and breathe cement and we are completely
focused on the business. We try and bring in global best practices into a commodity
business. This obsession is important for survival."
Questions for Discussion

1. Study the evolution of GACL from a small start-up to a cement major over the years.
How far do you think the company's success can be attributed to its project location, design
and implementation decisions?

2. 'GACL's cost management focus was the biggest factor responsible for its success.'
Critically comment on the above statement and examine the company's approach to cost
reduction and productivity enhancement. How did this approach help it gain a competitive
advantage and emerge a leader in the commoditised industry?

3. Do you think that GACL's efforts were more driven by market compulsions than a
strategic cost focus? Will GACL be able to sustain its superior performance in the years to
come? Give reasons to support your stand.