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%

10.7

97

12%

6,358

52,741

11%

50

Installed Capacity (m tons)

Employees
Countries

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
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

Differences in cost across countries

Potential for economies of scale/scope
Potential for learning
Transportation costs

Cost
Drivers

Similarity of customer needs & tastes

Existence of global customers
Similarity of distribution channels
Transferability of marketing know-how

Forces favoring
global integration/
local responsiveness

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

Government
Drivers

Existence of trade barriers

Similarity of technical standards
Similarity of regulations
Differences in taxes

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

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

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

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
EBITDA margin
EBITDA/ ton sold

Source: Case, Exhibit 4

Lafarge

Cemex

Heidel
berger

Italce
menti

Blue
Circle

23.4%

23.2%

37.1%

18.7%

24.5%

19.0%

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), 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

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

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?

Holderban
k

Cemex

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

78.2

77.7

EBITDA margin

Average cost/ ton sold (US$)

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.