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 1. Hutchison Whampoa 2. Petronas 3. Singtel Ltd 4. Samsung Electronics 5. CITIC Group 6. Cemex S.A. 7. LG Electronics 8. China Ocean Shipping 9. Petrleos De Venezuela 10. Jardine Matheson Country HK, China Malaysia SGP S Korea China Mexico S Korea China Veneza HK, China Industry Diversified Oil expl/ref/dist Telecommunications Electronics Diversified Cement Electronics Shipping Oil expl/ref/dist Diversified Foreign Assets 67.6 22.6 18.6 14.6 14.5 13.3 10.4 9.0 8.9 7.1 Total Assets 84.2 62.9 21.6 66.7 84.7 17.2 28.9 15.0 55.4 10.6

Source: UNCTAD, 2006

The Evolution of Cemex

1985
Sales (US$ billions) EBITDA Mexico Total Assets Market Capitalization Installed Capacity (m tons) Employees Countries 0.276 0.084 100% 0.791 0.103 10.7 6,358 1

2005
15.5 3.6 33% 26.5 19.0 97 52,741 50

CAGR
22% 21% 19% 30% 12% 11%

The Global Cement Majors

Capacity CAGR 85-05E Holcim Lafarge Cemex Heidelberg Italcementi 6% 8% 12% 8% 6% CAGR 95-05E 14% 14% 21% 15% 13% EBITDA Margin 05E 25% 21% 23% 18% 24% ROCE 04 8.8% 8.9% 12.5% 3.0% 9.3%

Frequency Distribution of International Cement Firms Market Entries

Why this trend?

80 70
F r e q u e n c y

60 50 40 30 20 10 0
19601965 19651970 19701975 19751980 19801985 19851990 19901995 19952000

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
Differences in cost across countries Potential for economies of scale/scope Potential for learning Transportation costs Similarity of customer needs & tastes Existence of global customers Similarity of distribution channels Transferability of marketing know-how

Cost Drivers

Forces favoring global integration/ local responsiveness

Government Drivers
Existence of trade barriers Similarity of technical standards Similarity of regulations Differences in taxes

Globalization of competitors Industry concentration Differences in industry concentration across countries Feasibility of protecting intangibles

Competitive Drivers
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 71% 70% 68% 59% 59%

Entertainment Carbonated Soft Drinks Light Bulbs Computer Software Computer Hardware

Aerospace/ Defense
Automobiles Semiconductors Cement
Source: Ghemawat and Ghadar, 2006, p. 600

55%
53% 40% 19%

Global Potential of the Cement Industry

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.

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?

Holder bank Lafarge Cemex Heidel berger Italce menti Blue Circle

EBITDA margin
EBITDA/ ton sold

23.4%
23.9

23.2%
38.0

37.1%
45.8

18.7%
26.0

24.5%
22.2

19.0%
n.a.

Source: Case, Exhibit 4

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 USA Spain Caribbean Latin America Administrative Geographic Economic

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), 2nd 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

Cemexs Operating Margins, 2006

45% 40% 35% 30% 25% 20% 15% 10% 5% 0% -5%
0.6% 5.1% 2.5% 31.8% 26.1% 20.8% 27.1% 41.2% 33.7%

Mexico US Spain UK Rest of Europe S.Am/C.Am/Carib Egypt Rest of Af & ME Philippines Rest of Asia

-3.6%

Source: Annual Report, 2006

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

Is there another game being played?

Holderbank EBITDA margin EBITDA/ ton sold (US$) Sales/ country (US$m) Average price/ ton sold (US$) 23.4% 23.9 143.7 102.1 Cemex 37.1% 45.8 321.9 123.5

Average cost/ ton sold (US$)

78.2

77.7

Source: Case, Exhibit 4

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.