CEMEX: Sunnier Days in Mexico?

[DRAFT]
By Dr. David Webb

The February Investor Day was an important date in the 2014 calendar, particularly for Juan Romero 1.
Romero had recently taken over as President of CEMEX’s Mexican business following an internal
restructuring. The day offered a chance to emphasise the strength of this important part of the group.

CEMEX had expanded dramatically in the 1990s and 2000s from its original home in Hidalgo and
Monterrey in Northern Mexico to become a global giant with direct operations in over 50 countries.
However, the Mexican business still contributed over 20% of the group’s overall sales and almost 40%
of operating EBITDA.2

With the Group pushing to regain its investment grade credit rating after the ill-timed Rinker
acquisition in 2007 and the global financial crisis, his presentation was an important opportunity to
convince analysts and shareholders of the firm’s prospects in its home market. The previous year,
2013, had seen a large fall in sales and in headcount, as CEMEX Mexico looked to “right size” its
operations and focus on value over volume.

Romero had joined CEMEX in 1989 following his graduation in law, economics and business. After
senior roles in Mexico, he had run both CEMEX’s South American and European regions. He was seen
as a possible future CEMEX Group CEO3 when Lorenzo Zambrano, who had led CEMEX for decades,
finally retired.

Looking across the Mexican business, Romero believed there were positive signs for investors. Despite
a recent slow down in housing construction, national investment in highways and other infrastructure
projects were expected to increase significantly over the coming years. Private and commercial
construction was also expected to rise.4

In line with the Group’s priorities, CEMEX Mexico’s strategic focus was on better serving customers –
offering solutions where possible rather than just product. In country strategic themes put emphasis
on “value before volume”, sales force effectiveness and on improving its distribution network.

Cement and Concrete Production

1 CEMEX Day Presentation February 13 2014

2 CEMEX 2013 Annual Report

3 Reuters May 13 2014 “CEMEX leadership unclear after sudden death of CEO”

4 CEMEX Day Presentation February 13 2014

Cement is mainly a mixture of limestone and clay that when mixed with fine sand and water forms a
mortar that has been used in construction for centuries. When mixed with sand and gravel you get
concrete, which is used extensively in road building and other large construction projects.

About 1.6 tons of raw materials are needed to produce 1 ton of cement and its manufacture requires
heavy machinery and a large amount of heat. Super heated crushed limestone is loaded into a rotating
kiln and heated to 1450°C to produce clinker. This is then finely milled into cement powder.

Given the bulk of cement and its raw materials, transportation is costly and hence cement plants are
located near quarries or major ports to minimise costs. It also means that the logistics of distribution
are important. The industry is highly capital intensive given the cost of machinery and distribution
facilities.

Combining 10-15% cement with quantities of gravel, sand and water produces concrete and this sets in
to a rock-like mass after about 45 minutes. Consequently it is either mixed at the construction site or
delivered in rotating drum trucks (“ready mix”). Logistics and timing are therefore critical. The
production and distribution of concrete is an industry in itself, with “ready mix” firms a significant
customer of cement producers. Many major cement manufacturers have forward integrated into
concrete production and following its acquisition of the UK’s RMC, CEMEX has become the global
leader in ready mix.

Cement is delivered in bulk to ready mix companies, fabricators and major construction sites. Smaller
constructors and ‘self-constructors’ buy cement in bags via building materials wholesalers and retail
stores.

The Mexican Cement Market

Mexico consumes over 36 million tonnes of cement every year with CEMEX holding an estimated 50%
market share. Holcim Apasco and Cruz Azul account for another 25% combined. In Mexico there are 32
production facilities with an estimated capacity of 60 million tonnes. Unlike many other countries, the
cement retail market comprises a large share of the market. In the USA less than 25% of sales come
from retail, but in Mexico over 50% is sold in bags via hardware and construction materials stores. 5
Hence retail distribution is a major strategic issue. At the same time an increase in large construction
projects have meant a recent increase in the share of bulk sales.

The industry consolidated massively over the 1990s and 2000s with dedicated cement companies
acquiring and building regional capacity. With transportation costs high firms would seek to dominate
regions and to vertically integrate (e.g. into raw material extraction, ready mix concrete and retail).
With over-capacity and the entry of global giants, Lafarge and Holcim, competition is intense. Holcim’s
Apasco was number two in the market behind CEMEX, and Lafarge was looking to grow by forming a

5 Oxford Business Group (2015) The Report: Mexico 2015

joint venture with Elementia, a Mexican company. Lafarge had placed its Cementos Fortaleza
subsidiary into this venture.6

CEMEX in Mexico

CEMEX owns 15 cement plants with a total potential capacity of 29.3 million tons per year. They are
spread across Mexico, although 2 are temporarily closed given market conditions. 7 It also owns 49
quarries, and 85 distribution centres (including 7 marine terminals). The distribution centres are
supplied through the firm’s own fleet of trucks and railcars - in addition trucks. In addition rail facilities
are also leased. They own 286 concrete ready mix plants (although 77 are idle) located in 80 cities, as
well as 2,320 ready mix concrete delivery trucks. 8 In cement and concrete the firm claims to “cover
the territory like no one else”.9

In 2013 cement represented 52% of CEMEX’s net sales in Mexico, ready mix concrete 24% and
aggregates 5%. Exports of cement and clinker were to the USA, the Caribbean and South America. 10

Capital expenditure in 2013 for Mexico was US$86m down from US$98m in 2012. It was expected to
be around US$80m in 2014. 11

The company’s employee head count was 12,200, falling from 14,600 in 2011 as the firm globally made
cost savings.12 CEMEX as a group have a strong emphasis on staff training, as well as health and safety
in what can be a dangerous industry – there were 10 fatalities in CEMEX’s Mexican operations in 2013.
CEMEX attracts high calibre staff – as a global leader the company was an attractive employer in
Mexico and claimed to have the best people in the industry.

Logistics and Technology

The Mexican geography and economy had always presented challenges to consolidation in the cement
industry. Infrastructure compounded the challenge of transporting cement, raw materials and,
especially in chaotic cities, ready mix concrete before it set. As a result a cement producer would tend
to dominate its local market and expansion was typically via acquisition to gain another company’s
market, as well its plants. Integration of geographically dispersed production facilities and a

6 Reuters January 8 2013 France’s Lafarge in Mexican cement venture with Elementia

7 CEMEX 2013 20F Report

8 ibid

9 CEMEX Day Presentation February 13, 2014

10 CEMEX 2013 20F Report

11 CEMEX 2014 20F Report

12 CEMEX Day Presentation February 13, 2014

fragmented distribution system was faces the added issue of an unreliable telecommunications
infrastructure.

CEMEX had, over the last 25 years, significantly invested in technology and logistics to overcome these
challenges and realise operational improvements. As CEO from 1985 Zambrano had championed the
use of information technology and operational data across the business. With the Mexican phone
system unreliable and insufficient to network the company’s operations, CEMEX invested in its own
satellite communications system called CEMEXNET. 13 This, combined with a suite of bespoke
production, and decision-making IT applications had allowed the firm to drive best practice and
standards throughout production and effectively manage order fulfilment. The transparency of all
operations allowed the optimisation of production across CEMEX’s plants and flexibility in responding
to fluctuations in demand and unexpected issues. The investments transformed the company’s
approach to logistics and its supply chain and it believed that, as a result, it was well ahead of its
international and especially local rivals.

“One CEMEX” Culture

The increasing ability to operate as “One CEMEX” in Mexico together with the availability of
operational and commercial data had a profound impact on CEMEX’s culture. Moving from the
hierarchical family approach typically seen in many traditional Mexican firms 14, the company shifted to
a more innovative and data driven culture where formal reporting lines were often bypassed. With an
increasing competitive threat of new entrants and the risk of antitrust action on account of its market
share, CEMEX’s mind set had in recent years shifted further and put greater focus on meeting
customer needs – emphasising product innovation and deepening relationships with distributors and
end users.15

CEMEX Day Key Messages

In the CEMEX Investor Day presentation Romero was not only looking to update shareholders on the
outlook for 2014. He also wanted to emphasis how the firm was well positioned to benefit from the
expected increase in infrastructure spending while still serving its traditional and profitable heartland
of small construction projects. As well as highlighting CEMEX’s coverage across Mexico and its
distribution strengths, he would pick up the key themes of customer solutions and Construrama – its
network of independent building products retailers.

Commercial Solutions and Cross-Selling

CEMEX’s developments in information technology and logistics had transformed its distribution
capabilities and its ability to add value for its clients. Deliveries could be accurately scheduled to fit the

13 Hoyt, D (2005) CEMEX: Transforming a Basic Industry Company, Stanford Graduate School of Business (Ref
GS-33)

14 Bardsley, D. (2019) Down Mexico Way: Economics, Politics and Family Business, Camden FB, 18 th February

15 Hoyt, D (2005) CEMEX: Transforming a Basic Industry Company, Stanford Graduate School of Business (Ref
GS-33)
needs of large construction projects and intermediary production (e.g. ready mix companies). The
enhanced nationwide logistics network also allowed CEMEX to supply related building products
sourced from third parties (e.g. Steel rebar) and so become a “one stop shop” for constructors.

Given its size and construction material know-how it had increasingly looked to provide design,
coordination and technical support to infrastructure and other large construction projects (e.g. timed
delivery of concrete and on-site plants). It also offered legal and financial support. 16

With government infrastructure spending in transport expected to rise in the coming years, Romero
was keen to stress that CEMEX would guarantee its performance on such projects. He also saw
significant cross sales potential across CEMEX’s products. Cross sales of cement were expected to grow
three fold as sales of concrete for converting asphalt highways doubled. 17

Construrama and Support to “Self Build” Projects

The high level of bagged cement sales for individuals engaged in self-build projects or small builders,
meant construction material retailers were a significant distribution channel for CEMEX. While CEMEX
owned some outlets and chains most retailers were small with little name recognition and often
inefficient. Home Depot, a US company, was the largest chain. Having entered the market in 2001 it
now had 100 stores in 60 cities.

Given this distribution channel’s importance, CEMEX had developed a network for independent
retailers called Construrama. With the firm’s larger retailers being invited to join this national chain, by
2014 the network comprised 782 independent companies operating 1110 stores across Mexico. 18

The Construrama network provided a national brand with countrywide and regional advertising and
standardisation in store design, logos and point of sale technology. CEMEX provided assistance and
training across many business practices including staff training, marketing, inventory control and
customer DIY guides. Brand awareness of Construrama was more than 90% across Mexico –
substantially higher than other construction materials chains. 19

Typically members increased the range of products stocked (perhaps moving from 50 to 500 products),
increased customer’s diversity and gained growth. While members were required to stock CEMEX’s
cement, they could offer products from other suppliers. Although many took advantage of CEMEX’s
effective logistics system to access products beyond of cement. These improvements were good for
CEMEX too – in some Construrama stores sales of CEMEX branded cement more than tripled 20

16 CEMEX Day Presentation February 13, 2014

17 ibid

18 CEMEX 2014 20F Report

19 Hoyt, D (2005) CEMEX: Transforming a Basic Industry Company, Stanford Graduate School of Business (Ref
GS-33)
 In the CEMEX Investor Day presentation, Romero would be detailing developments in the Construrama
offering – “Construrama 2.0” as the set of initiatives was called. Four areas were being highlighted 21:

1. “Construganas”. A loyalty program designed to attract more customers and increase the range
of their purchases.

2. Customer financing. CEMEX had opened up its suite of financing options to all Construrama
customers including credit cards via partnerships and Patrimonio Hoy, a membership micro-
financing scheme for low-income customers that also provides construction assistance.

3. Increasing the range of products carried in the stores including Construrama “own-brand” and
CEMEX supplied items.

4. Continued increases in professionalism and quality standards in the stores – targeting gaps
with training and support.

In light of market developments and the actions CEMEX was taking, Romero believed the Mexican
business was on track to meet its targets. The business, in his view, covered the country like no one
else, had the best products and solutions, a superior distribution network and the best people in the
industry. However, with international and domestic competition growing and an uncertain economic
recovery, only time would tell whether CEMEX Mexico could maintain its advantages over others.

20ibid

21 CEMEX Day Presentation February 13, 2014

Appendix: Slides from Juan Romero’s CEMEX Day Presentation