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 Romero1. 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

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.

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

10
CEMEX 2013 20F Report
11
CEMEX 2014 20F Report
12
CEMEX Day Presentation February 13, 2014
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
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 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.

15
Hoyt, D (2005) CEMEX: Transforming a Basic Industry Company, Stanford Graduate School of Business
(Ref GS-33)
16
CEMEX Day Presentation February 13, 2014
17
ibid
18
CEMEX 2014 20F Report
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

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 highlighted21:

 “Construganas”. A loyalty program designed to attract more customers and increase

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

19
Hoyt, D (2005) CEMEX: Transforming a Basic Industry Company, Stanford Graduate School of Business
(Ref GS-33)
20
ibid
21
CEMEX Day Presentation February 13, 2014
Appendix: Slides from Juan Romero’s CEMEX Day Presentation