Distance & Global Strategy

CEMEX & HAIER

Professor Ruth V. Aguilera
Top 10 Non-Financial TNCs from Developing Economies
ranked by foreign assets (US$bn), 2004
Company Country Industry Foreign
Assets
Total
Assets
1. Hutchison Whampoa HK,
China
Diversified 67.6 84.2
2. Petronas Malaysia Oil expl/ref/dist 22.6 62.9
3. Singtel Ltd SGP Telecommunications 18.6 21.6
4. Samsung Electronics S Korea Electronics 14.6 66.7
5. CITIC Group China Diversified 14.5 84.7
6. Cemex S.A. Mexico Cement 13.3 17.2
7. LG Electronics S Korea Electronics 10.4 28.9
8. China Ocean Shipping China Shipping 9.0 15.0
9. Petrleos De Venezuela Veneza Oil expl/ref/dist 8.9 55.4
10. Jardine Matheson HK,
China
Diversified 7.1 10.6
Source: UNCTAD, 2006
The Evolution of Cemex
1985 2005 CAGR
Sales (US$ billions) 0.276 15.5 22%
EBITDA 0.084 3.6 21%
Mexico 100% 33%
Total Assets 0.791 26.5 19%
Market Capitalization 0.103 19.0 30%
Installed Capacity (m tons) 10.7 97 12%
Employees 6,358 52,741 11%
Countries 1 50
The Global Cement Majors
Capacity EBITDA
CAGR 85-05E CAGR
95-05E
Margin
05E
ROCE
04
Holcim 6% 14% 25% 8.8%
Lafarge 8% 14% 21% 8.9%
Cemex 12% 21% 23% 12.5%
Heidelberg 8% 15% 18% 3.0%
Italcementi 6% 13% 24% 9.3%
Frequency Distribution of International
Cement Firms Market Entries
0
10
20
30
40
50
60
70
80
F
r
e
q
u
e
n
c
y
1960-
1965
1965-
1970
1970-
1975
1975-
1980
1980-
1985
1985-
1990
1990-
1995
1995-
2000
Why this trend?
Todays Class
What is the global potential for these two
industries?

What accounts for Cemex and Hiaer s success to
date?

What explains the sequence in which
Cemex and Haier entered foreign markets?

How far can Cemex & Haier s competitive
advantage travel?


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

Global Industry Analysis
Market
Drivers
Competitive
Drivers
Government
Drivers
Cost
Drivers
Existence of trade barriers
Similarity of technical standards
Similarity of regulations
Differences in taxes
Similarity of customer needs & tastes
Existence of global customers
Similarity of distribution channels
Transferability of marketing know-how
Globalization of competitors
Industry concentration
Differences in industry
concentration across countries
Feasibility of protecting intangibles


Differences in cost across countries
Potential for economies of scale/scope
Potential for learning
Transportation costs
Forces favoring
global integration/
local responsiveness
Adapted from: G. S. Yip, Global Strategy in a World of Nations? Sloan Management Review 31(1) (Fall 1989), pp. 29-41.
Global Industry Concentration
(late 1990s, 2000)
Industry Top 5 share
of global
production
Entertainment 71%
Carbonated Soft Drinks 70%
Light Bulbs 68%
Computer Software 59%
Computer Hardware 59%
Aerospace/ Defense 55%
Automobiles 53%
Semiconductors 40%
Cement 19%
Source: Ghemawat and Ghadar, 2006, p. 600
Cost: economies of scale are not that important on global scale;
small differences in costs across countries & high transportation
costs; no product/ process innovations in 20 years.

Market: homogenous product but most customers are local;
transferable marketing (e.g. branding) of limited importance.

Government: protectionism is a factor (e.g. US); concerns
about foreign ownership (e.g. Indonesia, Venezuela).

Competition: industry becoming more globally concentrated
(six global majors share of world market increased from 12% in
1988 to 25% in 2000) but most competition is still local; major
differences in concentration across countries; limited role for
standard intangibles (advertising/ R&D) with cement close to the
bottom decile of manufacturing industries on both R&D and
advertising intensity.


Global Potential of the
Cement Industry
PUZZLE

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

What is the rationale behind
Cemexs global strategy?
Growth?

Geographic diversification?

Global competitive advantage?

Matching competitors?

Empire-building?

Does Cemex have a global
competitive advantage?
Source: Case, Exhibit 4
Holder
bank
Lafarge Cemex Heidel
berger
Italce
menti
Blue
Circle
EBITDA margin 23.4% 23.2% 37.1% 18.7% 24.5% 19.0%
EBITDA/ ton sold 23.9 38.0 45.8 26.0 22.2 n.a.
2. What accounts for Cemexs
success to date?
What accounts for Cemexs
success to date?
Ownership: it has succeeded in creating intangibles that
are different from the traditional ones (R&D/ marketing),
which create a rationale for its global strategy

Location: given high transportation costs, it has to be
present in different locations to exploit these
advantages; that presence also allows it to arbitrage
differences in financing costs across countries

Internalization: almost impossible to exploit its
advantages, especially O advantages, through arms
length contracts
3. What explains the sequence
in which Cemex entered
foreign markets?
Sequence of Market Entry
Dimensions of Proximity (or Distance)
Cultural Administrative Geographic Economic
USA
Spain
Caribbean
Latin America
Philippines
Indonesia
Egypt
Sequence of Market Entry
Until the late 1990s, largely explicable using the
CAGE framework:

Cultural (language, religion)
Administrative (colonial ties, trade areas)
Geographic (US, Caribbean, L. America)
Economic (mostly developing countries)

But Indonesia and Egypt were more distant

And looking at countries that are more distant still

Which begs an important question
4. How far can Cemexs
competitive advantage travel?
Cemexs global strategy
Cemex has increased the upside for a global strategy

Developed intangibles that apply across countries
and create rationale for its global strategy
(e.g., managerial processes and innovation)


Cemex has limited the downside for a global strategy

Entered more similar countries first (CAGE), lowering
the risks created by differences across countries


How far can Cemexs
competitive advantage travel?
Has Cemex systematized and standardized
what it has learned to a sufficient degree to
go beyond its CAGE region?

To other developing countries?
Are all developing countries sufficiently alike?
What advantage does Cemex have in India,
China, Russia, etc?

And even to developed countries?
Recent Acquisitions by Cemex
2000 acquired Southdown (US), 2
nd
largest cement
manufacturer in US, for $2.9 billion

2001 acquired Saraburi Cement (Thailand), for $73 million

2002 acquired Puerto Rican Cement Company for $281 million

2004 acquired RMC Group (UK), one of Europes largest
cement producers and worlds largest supplier of ready-mix
concrete, for $5.8 billion

2006 sold its 25.5% stake in Semen Gresik (Indonesia)

2006 acquired Rinker Group (Australia), a major seller of
construction materials with 85% of its business in the US,
for nearly $12 billion (27% premium) in largest deal ever
concluded in the cement industry
Can Cemex add value in
developed countries?
[Cemex] uses basic enterprise resource
processing technology, but with rigour. It has
process maps and imposes them on all its
subsidiaries. It bought the UK building materials
group RMC 18 months ago. RMC was not as
efficient as Cemex. It had multiple systems
running different processes around the
company. It was not the IT department's fault. It
was doing what it was told but it was not the way
to run modern cement and it got bought.

Mark Raskino, Gartner Group
Can Cemex add value in
developed countries?
Before the takeover, RMC's flagship plant at
Rugby in the UK had been running at 71 per
cent capacity, and the central kiln had been
stopped a mind-boggling 229 times. Just two
months after the takeover, capacity was up to
almost 94 per cent, and production had risen
from 83,000 tons to 105,000 tons a month.

Financial Times, October 2006
Source: Annual Report, 2006
Cemexs Operating Margins, 2006
31.8%
20.8%
26.1%
0.6%
5.1%
27.1%
41.2%
2.5%
33.7%
-3.6%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Mexico
US
Spain
UK
Rest of Europe
S.Am/C.Am/Carib
Egypt
Rest of Af & ME
Philippines
Rest of Asia
Or is there something else going on?

We had to become one of the biggest
global companies. If we didnt,
someone undoubtedly would have
acquired us.

Lorenzo Zambrano, CEO of Cemex
Source: Case, Exhibit 4
Is there another game being played?
Holderbank Cemex
EBITDA margin 23.4% 37.1%
EBITDA/ ton sold (US$) 23.9 45.8
Sales/ country (US$m) 143.7 321.9
Average price/ ton sold (US$) 102.1 123.5
Average cost/ ton sold (US$) 78.2 77.7
And is it now being played out
on a global stage?
Are the majors pursuing a strategy of multi-market
competition (matching each other's markets) to gain
better control over price and quantity in the industry?

Incentives to maintain collusive prices in any one
market are potentially greater given threat of
retaliatory price-cutting in multiple markets

If Cemex doesnt match the other majors moves, does
it risk being vulnerable to their competitive moves?
Takeaways
Designing a global strategy is not a mechanical exercise
its a creative response to the global potential of industry.

Innovative global strategies, based on novel ownership and
location advantages, can sometimes work in, and eventually
transform, industries with apparently low global potential.

Distance matters in a variety of ways (CAGE) in the design
and execution of global strategy.

Always analyze whether and why particular global strategies
generate sustainable competitive advantage the fact that
companies pursue such strategies does not necessarily
mean they do so.