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INDIANCEMENTINDUSTRY:CANULTRATECHBETHENEXTMARKET
LEADER?
StudentContributors:ArjunRKannan,DebabrataGhosh,ManawMohan,PriyankDuttDwivedi,RahulRajJain
This article analyzes UltraTech's present position in the market and its strategies to enhance its presence in the
cement industry. An industry analysis followed by the resource based view of UltraTech highlights UltraTech's
strengthsandareasofimprovement.Thereafter,afinancialcomparisonofUltraTechwithitsmaincompetitorACC
provides an insight into its cost structure. Through in depth analysis, this article seeks to provide specific
recommendationsonwhatUltraTechmustdoinordertoachievemarketleadership.

Cement demand in India has increased due to the increasing expenditure by the Indian government in infrastructure. As a
result, the participation of larger companies in the sector has also increased. There are a total of 125 large cement plants
and more than 300 small cement plants operating in the country presently. The cement industry is a homogenous
industry with similar nature of raw materials, rising power costs, similar manufacturing and processing units. The nature
of the product makes it difficult for any player to differentiate in order to corner a large share of the market. This leads to
low margins and makes the industry unattractive.
On 17 June 2003, the Aditya Birla Group (ABG) acquired management control of L&T Cement and renamed it
UltraTech. The acquisition brought in new competitive dynamics. The company has since grown rapidly. It is currently
the second largest cement producer and is third in terms of profitability.

TheCementIndustry1
The cement industry is an interesting one to analyze as on one hand the similarity of raw materials and processing units
makes differentiation difficult, while on the other hand large companies are acquiring smaller ones, changing industry
dynamics.
Competitors: The Indian cement industry has a large number of fragmented firms. There is also a dearth of new players
as incumbents have already procured key raw material sources, like limestone reserves on long-term leases. Further, large
firms are continuously consolidating by acquiring smaller ones that find it difficult to attain minimum efficient scale of
production.
Product: Cement is a bulk commodity and a low value product. It is sold in 50 kg packs as OPC grade 33, 43, and 53. It
is used in all construction activities as a primary constituent of concrete. Due to similar raw material inputs and
production processes, there is no significant differentiation in the cement produced across firms.
Environmental Issues: Greenhouse gas emissions from cement manufacturing pose a serious environmental threat.
Currently, the cement industry generates 5% of India's total carbon-dioxide emissions.2 With stringent emission norms,
the production process needs to be made environmentally sustainable. The cost of implementing new production
processes that help reduce emissions can be offset by trading certified emission reductions (CERs). CERs are a
component of national and international emissions trading schemes, implemented through Clean Development
Mechanism (CDM) projects, in an attempt to mitigate global warming.3 Credits obtained through implementation of such
projects can be traded in international markets.
Having studied the cement industry and identified the main issues facing the firms, we engage in an in depth analysis of
the firm's resources to identify the sources of sustainable competitive advantage

UltraTech'sSourcesofCompetitiveAdvantage4,5
The key players in the cement market are Holcim Group, Lafarge Group, ACC and J K Cement. ABG that possessed the
Grasim cement unit acquired management control of L&T cement in the year 2003. The acquisition of L&T Cement
(later named as UltraTech) turned the group into one of the largest players in the market.
Value chain analysis helps in identifying sources of competitive advantage in a systematic manner, and thus we use this
framework. The cement industry value chain comprises (1) sourcing of raw materials and fuel from quarries and mines (2)
the manufacturing process, and (3) distribution of the product to the markets.
The sources of competitive advantage identified for UltraTech are:
Sourcing of Raw Materials: UltraTech's greatest strength is its raw material
sourcing. Limestone quarries are usually leased from the government on a long-term
basis (usually at least 25-30 years). UltraTech's capabilities in identifying, and leasing,
higher quality raw material quarries results in significant cost savings for them. This
source of long-term competitive advantage is due to their people skills which aid in
identifying the sources and their terms of leasing which lock in these resources for
the long term. Clearly, this resource is valuable and rare.

UltraTech'scapabilitiesin
identifying,andleasing,
higherqualityrawmaterial
quarriesresultsinsignificant
costsavingsforthem.

Fuel used in Manufacturing Process: The manufacturing process offers no distinct competitive advantage to
UltraTech or its largest competitor ACC, though ACC enjoys lower fuel cost. However, this is not sustainable, and since
UltraTech has already started switching to coal, ACC's advantage is likely to be neutralized in the near future.
Financial and Human resource advantage: UltraTech, being a part of the Aditya Birla Group, has access to the deep

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pockets of its promoters, as well as human capital of the highest quality. While financial resources may be rare and
inimitable, non-substitutability is debatable. Evidence suggests that in the long term others like the Holcim group can
match the financial resources of ABG.6 Higher quality of human capital might be more valuable in the long run, and
given their astute knowledge of the Indian market, ABG might be able to leverage this resource better than their foreign
counterparts.
A final point to note is that UltraTech has higher operating leverage than ACC. This by itself is neither a source of
competitive advantage nor a disadvantage. In the long run, the gains during the 'up' years will be smoothened by the
'down' years of the cement cycle.

UltraTechV/sACCAFinancialAnalysis7,8
The objective of this financial analysis is to identify specific advantages enjoyed by UltraTech vis-a-vis its major
competitor ACC, their relative magnitude and sustainability.
The last few years of this decade have been good for cement companies as prices have remained high, and hence profits
have been good.9 In the same period, UltraTech and ACC have shown the same trends of increasing sales growth and
capacity utilization although UltraTech has done marginally better, and succeeded in closing the gap with its rival.
Inapostmatureindustrysuch
ascements,firstmovers'
advantageintermsof
differentiatedproductsis
easilynegatedthereby
necessitatingtheneedfor
Ultratechtoestablishitselfas
acostleader.

The cement industry is a "post-mature" industry - an old industry where change is slow
and marginal, first movers' advantage in terms of differentiated products is minimal
and any advantage is likely to be fleeting and parity would be restored soon enough. In
such an industry, the only way for UltraTech to be the number one is to be a cost
leader. Thus, it is imperative to analyze the cost advantages, which ACC and UltraTech
have relative to the each other.

A detailed analysis of the cost structure (Exhibit 1) reveals stark differences between
ACC and UltraTech in raw material and power costs. A comparison of raw material
costs showed that UltraTech had a huge advantage (nearly double) over ACC due to
greater access to better quality quarries. For the same quantity of cement produced, UltraTech spent less on mining, and
got better quality limestone, than ACC.
A comparison of power costs revealed a different picture with ACC enjoying a cost advantage over UltraTech. This is
due to the higher cost of Naphtha and Fuel Oil based Power Plants used by UltraTech (in addition to coal fired plants)
while ACC used only coal based plants. UltraTech wanted to spread the risks of prices and availability of fuel, but the
strategy backfired as coal remained a much cheaper alternative (detailed cost breakups shown in Exhibit 1).

Exhibit1ComparisonofcostsbetweenACCandUltraTech

UltraTechLookingAhead
We look at the trends emerging in this sector and analyze how UltraTech can leverage these to its advantage in the light
of its competitive advantages.
Cost leadership: Striving to become a cost leader by means of setting up captive power plants, and/or up-gradation of
technology to enhance productivity, is increasingly becoming critical for large cement players in this sector.
Rising Exports: Due to the increasing construction activity in the Middle-East, exports will constitute a major sales
driver. Hence, the coming years would see companies scrambling for bases on the Western coast to minimize their export
transportation costs.
Retail Stores: A unique concept, which Ultra Tech is experimenting with in recent times, and one that is important for
the future, is to continue setting up retail stores. Other companies like Asian paints, and most recently Tata Steel have
tried a similar concept.
Relationship Management: UltraTech should focus on managing its relationships with importers, exporters,
distributors, warehouse providers, wholesalers, retailers and dealers for their long-term profitability.
Synergies with Grasim: The two companies under the ABG banner can exploit operational synergies in raw materials
procurement, manufacturing, common branding, dealer networking, logistics, and exchange of key personnel.
Ready Mix Concrete: Finally, one of the recent trends in this sector is the focus on ready-mix concrete. Therefore, an
early technology and capacity building in this area would determine the strategic moves of cement companies in the
future.

Conclusion
This article has succinctly analyzed the present state of affairs at UltraTech cement and thus identified its strengths and
problem areas through a variety of tools. While its raw material sourcing, financial and human resource pools are sources
of competitive advantage, UltraTech has to improve in terms of fuel costs in order to beat ACC to the top position in the
low margin industry. This can also be achieved by leveraging futuristic trends like branded retailing, exports and new
products like ready concrete mix.

Authors
Arjun R Kannan (PGP 2007-09) holds a B. Tech. in Chemical Engineering from Indian Institute of Technology (IIT)
Madras. He can be reached at arjunk07@iimb.ernet.in
Debabrata Ghosh (FPM 2007) holds a B. Tech. in Mechanical Engineering from Vellore Institute of Technology and
has previously worked at TCS, Bangalore. He can be reached at debabratag07@iimb.ernet.in
Manaw Mohan (PGP 2007-09) holds a B. Tech. in Chemical Engineering from Indian Institute of Technology (IIT)
Chennai and has previously worked at ITC Ltd. He can be reached at manawm07@iimb.ernet.in
Priyank Dutt Dwivedi
priyankd06@iimb.ernet.in

(PGP

2006)

B.

Tech.

He

can

be

reached

at

priyankd06@iimb.ernet.in

Rahul Raj Jain (PGP 2007-09) holds a B. Tech. in Civil Engineering from Indian Institute of Technology (IIT) Kanpur.
He can be reached at rahulj07@iimb.ernet.in
This article is drafted from the student project done under the guidance of Prof.Rejie George Palathitta ,Assistant
Professor in the Corporate Strategy & Policy Area at IIM Bangalore.
Keywords
Strategy, Cement, India, UltraTech, ACC, Aditya Birla Group, ABG
References
1.
2.
3.
4.
5.
6.
7.
8.
9.

Report by ICRA Ltd, Publications titled "The Indian Cement Industry", Published March 2008
http://indiatoday.digitaltoday.in/content_mail.php?option=com_content&name=print&id=1814
http://www.cogeneration.net/certified_emission_reduction.htm
Company analysis report by Research arm of ENAM Securities Pvt. Ltd. Company : Grasim, Published in March
2008
Company analysis report by Research arm of SSKI India Research, Published 5th April, 2007
Economic Times, 3rd Feb 2008, "Holcim to invest Rs 10,000 cr in five years in cement sector",
http://tinyurl.com/ydtx33l, Last accessed on March 10th, 2008
Business Standard, 8th February 2006, "Cement industry in India is on strong foundation"
http://www.ibef.org/artdisplay.aspx?cat_id=528&art_id=9722 Last accessed on April 25th, 2008
Abhinaba Das, Economic Times, July 2005, "Cement demand in south up 22% in Q1",
http://findarticles.com/p/articles/mi_hb5936/is_200507/ai_n23943409 Last accessed on June 25th, 2008
Economic Times, 16th March 2008, "Cement prices to remain firm in medium-term: CMIE"
http://economictimes.indiatimes.com/News_by_Industry/Cement_prices_to_remain_firm_in_mediumterm
_CMIE /articleshow/2870707.cms, Last accessed on April 15th, 2008
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