The Global Cement Industry and Cemex’s Penetration Strategy Into International Markets

The Global Cement Industry and Cemexs sagacity St rangegy into International Markets My report argues that demand and competency creation in evolution economies is a study driver in the being(a) cementumumumumumumumum attention, which given the nature of the product ( high transportation costs arising from its bulk) is prone to major attach to expansion by mergers and skills. Cemexs expansion strategy focuses on merger and acquisition (M&A), mainly exploiting its expertise of operating in laborious institutional environments and taking favour of opportunities arising from difficulties in develop grocery store economies.The fraternity successfully adapts best practice and technologies from its acquisitions finishedout the wider caller-out. My report begins with definitions, presents an overview of the ball-shaped cement patience (section two) key players in the industry (section three) and M&A trends (section four). I then analyse Cemexs entry strategies by exp loring in travel the functions into which it has expanded (section five) drawing conclusions on its penetration strategy. 1Introduction and definitionsCement is a binding substance, which sets and hardens singly binding other materials together. It is intended for use in varianting or formulation material and arsehole withstand varying environmental conditions. virtually 75% of cement proceeds is employ in ready-mixed concrete to be utilized in social organisation. The remaining 25%, Portland Cement Association (2009) shows, is used for paving roads or extracting oil. As Selim and Salem (2010) indicate prefatorial raw materials for cement turnout be iron, aluminium, silicon and calcium.Normally cement is dual-lane as Portland cement, Portland cement blends and non-Portland hydraulic cements. Portland cement, which can be roughly change integrity into White Portland and Gray Portland, is the nigh comm moreover used vitrine as it is the basic ingredient of concrete (Ce mex, 2013a, PCA, 2013). There argon two antithetical deales used in the manufacture of cement tee count process and implike process. In the wet process, the raw materials, after properly proportioned, be farming with water, thoroughly mixed and fed into the kiln in the form of a slurry (containing luxuriant water to make it fluid).In the dry process, raw materials are ground, mixed, and fed to the kiln in a dry state instead. In other respects, the two processes are essentially alike (PCA, 2013). However, the dry process was considered to be more qualified than the wet one since it consumes slight energy. On the other hand, the dry process requires more investment in equipment and plants. Cement manufactures in developing countries exact widely adopted the wet process plainly the transformation to the dry process is underway on a oversize scale. 2An overview of the globular cement industryThis section discusses the nature of the world(a) cement industry, including the securities industry size and grocery voltage, the nature of cement products, marketplace supply and demand and related environmental issues, to provide a broad view to understand the nature of competition. The interest are the main characteristics of the global cement industry. Huge market particularly emerging markets Cement is the primary and indispensable material in sub building construction for every country. Although it only accounts for around 613% in construction costs (Chandramouli, 2012), there are few substitutes for it (Wesley, 2009).Hence there is a potential huge global market with strong contracts between demonstrable and developing countries. While the developed countries mostly have steady and circumscribed demand for cement, the developing realism is a more promising market, as a result of large-scale constructions the demand of cement is positively tally with a nations economic development. globe demand for cement is growing by 4. 7% per annum reach ing 6% growth in 2012, with total custom of 3. 78 million dozens (CW Group, 2012).Consumption in developing countries drives this growth in Latin America, Central and eastern Europe, and the Middle East regions chinaware is the strongest driver. In contract, consumption in Europe has been stalled and the growth rate of consumption in the US is a steady 2%. Therefore, developing countries are the main drivers of the growth in cement demand a trajectory likely to continue. Cost is dominated by oil expense and transportation Due to the specificity of cement products, in the cement industry, oil value and transportation cost are preponderating factors bear oning cost.The cement industry is energy intensive and thence fuel costs is the most vituperative part in cement manufacturing, constituting 35% of total cost of action (Das, 2011). Therefore, the fluctuation of fuel price, particularly oil price, has impacts greatly on achievement cost. During the first quarter of 2012, the oil price had kept rising and was 12% up by the end of 2011. At that time, the cement industry increase prices to cover higher fuel cost. In June 2012, Caribbean Cement Company restrain change magnitude the price of bagged cement by 9. %, and the company claimed that its ex-factory was still among the last-place in five other regional markets. Cement is, understandably, a type of high weight-to-price ratio product and it is usually bargain ford in bulk. As a consequence, transportation expenditure is relatively high and restricts the spatial reach of markets. It is more feasible to produce cement domestically or to import cement products from neighbouring countries to reduce the transportation fee. Hence, the scale of international cement trade is subatomic (5%-7%) when compared with total cement production worldwide (Selim and Salem, 2010).The demand of cement can be unpredictable Since cement production is largely dependent on infrastructure constructions, as Wesley (2009) argues, national construction polices and projects drives demand gross revenue al-Quran is more sensitive to construction levels than to price. Over the long-term perspective, changes in amicable factors such(prenominal) as population and economic growth likewise affect cement consumption. The residential day-to-day demand for cement can be uncertain it may be disrupted by unexpected situations such as bad weather (Wesley, 2009). Constantly related with environmental issuesAlthough cement is locally produced in most cases, the impact of cement production is global, in particular its environmental aspects as Selim and Salem (2010) argues. The mass production with high-energy consumption brings pollution, producing 5% of the worlds total emission of greenhouse gases Loreti (2008) and Uwasu et al. (2012) try This pollution is produced mainly in developing countries, which are the main production locations of cement. chinaware alone, being the worlds leader in speed of light di oxide emission and cement production, has 15% of its emission contributed by cement the World Resources Institute (2008) suggests.The environmental issue becomes extremely urgent and pushes major global players to set up stricter emission standards on the cement industry. 3Top players and in global cement industry The table below shows the largest 20 cement producers in the world. It can be seen that crimp global players in this industry are either from Western Europe or from emerging markets, especially China. invest Company/Group Country Capacity (Mt/yr) No. of plants 1 Lafarge France 225 166 2 Holcim Switzerland 217 149 3 CNBM China 200 69 4 Anhui Conch China clxxx 34 5 Heidelberg Cement Germany 118 71 Jidong China century 100 7 Cemex Mexico 96 61 8 China Resources China 89 16 9 Sinoma China 87 24 10 Shanshui China 84 13 11 Italcementi Italy 74 55 12 mainland China Cement Taiwan 70 - 13 Votorantim* Brazil 57 37 14 CRH** Ireland 56 11 15 UltraTech India 53 12 16 Huaxin China 5 2 51 17 Buzzi Italy 45 39 18 Eurocement Russia 40 16 19 Tianrui China 35 11 20 Jaypee*** India 34 16 accede 1 Global cement companies 1-20 class-conscious by capacity rootage Global Cement Magazine, 2012 * Includes 15Mt/yr of capacity from Cimpor shares. * Cement capacity calculated from clean out capacity assuming clinker factor of 95%. ***As in April 2012. Table 2 indicates top cement producing countries again, fast-developing countries are the main force driving cement production. membership Country Capacity (Mt) 1 China 2000 2 India 210 3 regular army (inc. Puerto Rico) 68. 4 4 Turkey 64 5 Brazil 62. 6 6 Russia 52 7 Iran 52 8 Vietnam 50 9 Japan 47 10 Korea, Re macrocosm of 46 11 Egypt 45 12 Saudi Arabia 44 13 Thailand 36 14 Italy 35 15 Mexico 35 16 Germany 33 17 Pakistan 30 18 Indonesia 22 19 Spain 20. 7 Other countries (rounded) 480 World total (rounded) 3400 Table 2 Top global cement producing countries by installed capacity (2011, estimated) Source Mineral Commodity S ummaries 2012 From the tables above, it can be concluded that China is the leader in both cement production and consumption due to its large scale infrastructure construction and fast development, representing more than fractional of the worlds total consumption. India follows China as the second largest consumer while also having large producing capacity. The United States is the largest cement consumer in the developed world. Major M&A trends As the Economist (1999) illustrates, larger players in the cement heavens frequently undertake mergers and acquisitions (M&A) domestically and globally, to increase market share and benefit from economies of scale. The Economist goes on to argue that this high level of M&A activity is driven by the nature of the cement industry since cement production is localised and transportation costs are high thus global producers need to procure local companies to enter new markets, especially when a domestic market is saturated or in downturn.Since the 1970s, the cement industry in the developed world has been saturated and there is junior-grade space for market expansion. Developing countries have consequently become the tail market for expanding new capacity and seizing market share a trend clear since the 1990s. The industry is therefore go more of a monopoly with oligarchic key players taking the important decisions, making M&A decisions, guided of course by changing economic and market conditions. In the 1990s, global cement giants saw great opportunities for M&A and competed to purchase market share in rapidly developing markets at exhaustively prices.For example, the Mexican peso crisis (1994) resulted in a currency flight to US dollars and Peso devaluation, a situation Cemex turned to their advantage, Wesley (2009) argues, by purchasing Latin American cement companies at undervalued prices. Similarly, after the Asian pecuniary crisis in 1997, the Asian cement industry fell into a downturn. Global cement giants to ok advantage and purchased leading cement companies in the Philippines, Thailand and Indonesia as bargains.At that time, six global giants purchased seventeen of the nineteen Philippine cement companies leaving Lafarge, Holcim and Cemex controlling 88% of the nations cement capacity. When the regional economy recovered, Cembusiness (2006) suggests, the price of cement rose again quickly and these multinational giants benefited from huge profits in Southeast Asia. 5Cemexs entry strategy into international markets Cemex is currently the worlds third largest cement producer headquartered in Monterrey, Mexico.Although Cemex founded 107 years ago, it had been a domestic player for its first 80 years and did not bewilder its global expansion until the 1990s. Its M&A progress has been remarkable it in a flash operates profitably in 50 countries in the world with 44000 employees and annual sales of US$15. 14 billion (Cemex, 2013a). In general, as Hill (2008) points out, a firms entry mode s into contrasted markets include exporting, contracts (licensing or franchising), foreign manoeuver investment (joint venture and wholly owned subsidiary, including M&A) and strategic alliances.As discussed above, global cement giants, including Cemex, mainly enter foreign markets through M&A. Specifically, as a global player from an emerging market, Cemex needs to build its own rivalrous advantage during its internationalisation processes to cope with its disadvantageous competitive position vis-a-vis companies from developed countries. In short, Cemex is diversifying its market position through internationalisation (Liu, 2013). As Cemexs expansion history extends spatially, I promptly turn to discuss its entry strategies into the global market by regions, which are shown in table 3. Cement production capacity (Million metric oodles/year) Cement plants controlled Sales (millions of US dollars) Mexico 29. 3 15 3,474 United States 17. 1 13 2,521 Northern Europe 11. 9 7 4,729 Me diterranean 18. 8 12 1,719 South, Central America and the Caribbean 12. 8 11 1,745 Asia 5. 7 3 505 Others - - 445 Total 95. 6 61 15,139 Table 3 Global study of Cemexs operations As of December 31, 2011 Source Cemex Annual opus 2011 Europe Europe was Cemexs first step in global expansion.In July 1992, as Wesley (2009) reports, Cemex acquired two of the largest cement companies Valenciana and Sanson in Spain, with Valenciana becoming its regional hub holding company for all of Cemexs future international acquisitions. However, significant exertion into Spain, Europe did not become the main destination of Cemex as this region had limited potential for growth. More importantly, European players such as the cut Lafarge and German Heidelberg controlled the European region.These European giants had advantages of scale, market share and advanced technology. What Cemex demand was not only the action of acquiring it needed the advantages of the post-merger integration to ingest up an d improve. After purchasing Valenciana and Sanson, Cemex integrated its two Spanish subsidiaries by merging and streamlining the organisations and improved its technological and operational implementation. Cemexs other strong step in Europe was the purchase in 2005 of RMC, the worlds largest producer of ready-mixed concrete based in the UK.With this acquisition Cemex doubled its size, adding 20 mainly European markets (Cemex, 2013a) and managed to extend its product mix, becoming top producers of not only cement but also concrete and other construction aggregate (China Cement Net, 2005). Latin America Cemex made a serial publication of acquisitions in Latin America, benefiting from the close psychic distance and geographic proximity to Mexico. Furthermore, in the 1990s, Latin America was an underdeveloped market with a high growth trajectory.Although at that time, Latin American countries were in a peeved political and institutional condition with poor infrastructure and limited market information, Cemex viewed these conditions as advantages Fleury and Fleury (2011) argue, exploiting its experience in dealing with chaotic market environments in its home country and captured the opportune moment of the Peso crisis in 1994. Cemex travel into Latin America, including Central America and the Caribbean, by acquisitions in Venezuela (1994), Panama (1994), friar preacher republic (1995), Colombia (1996), Costa Rica (1999), Nicaragua (2001), and Puerto Rican (2002) (see Cemex, 2013a).Latin America has been an important destination for Cemex, especially in the decade since the Peso crisis. During this decade foreign cement giants divided up the Latin American market due to the collapse of local producers and Cemex gained the dominant position. After acquiring those companies, Lessard and Reavis (2009) suggest, Cemex also upgraded its administration, production and technologies in this region, exploiting learning from the companys operations in Mexico and Spain. Alth ough Cemex has a noteworthy presence in Latin American countries, its production capacity in South,Central America and the Caribbean accounts for only 13. 4% of its total sales in 2011, less than its capacity in the United States, Northern Europe and Mediterranean respectively and less than half of its domestic capacity (Cemex, 2011). However, there has been a rapid increase in South America and the Caribbean since mid-2000s, as a result of higher levels of public expenditure on infrastructure, industrial and commercial development and housing construction (United Nations ECLAC, 2007).Hence Cemex controls its closest emerging market area, with the exception of Brazil. The USA The United States, opposed other developed countries, remains a major consumer and producer of cement products however, few its cement producers are American-owned. In the 1970s, Wesley (2009) points out, when Cemex was a domestic firm, most US cement producers were already taken over by European companies. Ce mexs significant incursion into US market was the purchase of American producer Southdown in 2000.Southdown was one of the largest American cement producers and it was state-owned. Cemexs purchase followed a 20-year joint venture with Southdown called Sunbelt in 1986 by-line disagreements on circumspection fees and the price of imported cement, the partnership dissolved and Southdown supported anti-dumping measures against Mexican producers (Wesley, 2009). By late 1990s, Southdown was making profits from its upgraded plants and lower costs whilst unsatisfactorily execute on the stock market, enabling Cemex to buy Southdown for $2. billion in November 2000 (Cemex, 2000), becoming North Americas largest cement producer, obtaining Sothdowns advanced production capacity and markets and circumventing anti-dumping duties. Another Cemex step into North America (Black, 2007) was the purchase of the Rinker Corporation, an Australia-based concrete maker that had about 80% of its sales in t he US, notably increase its share of the U. S. concrete market. Asia Cemex turned its attention into Asia after 1997, seeing the potential in Asian growth and M&A opportunities following the financial crisis in southeast Asia (Wesley, 2009).In the next few years, Cemex made acquisitions in the Philippines, Indonesia, Thailand and India. by-line rapid economic development and large-scale construction in Asia, by 2011 Cemex only managed to have the capacity of 5. 7 million metric tons in this region, representing only 6% of Cemex global capacity. Cemex failed to gain significant market share in China and India, the two largest Asian cement markets the company continues to pay attention to the burgeoning Chinese and Indian markets (China Cement Net, 2005), however, institutional restrictions subordinate its growth.Indeed, the cement industry in China has excess capacity following slowdown in construction growth many cement plants having been reinforced during the boom. Currently Ceme x does not have specific expansion plan of for China although it expresses a lot of interest (China Cement Net, 2006). In India, Cemex is more positive and in negotiations to acquire several Indian producers. Middle East and Africa (MENA) In 1999, Cemex acquired Assiut Cement Company, the largest cement producer in Egypt, started operating in Africa and increased its capacity following acquisitions (Wesley, 2009).Cemex also has operations in Israel and United Arab Emirates. The total presence in Middle East and Africa is limited since the African cement market is underdeveloped and as Digital Cement (2010) point out, the MENA cement markets are locally controlled. In summary, Cemexs expansion into the global market is not only the strategic choice about competing and bidding for acquisitions, but also the integration process that ensued, as an opportunity to drive change, and as a result, continuously evolve as a corporation (Lessard and Reavis, 2009). 6ConclusionsCemexs penetration strategy is shaped by the nature of the product and structure of the industry. Since cement is bulky and costly to transport global-global entry strategies are unavailable to it. The industry structure reflects the product in a wide tramp of regional-scale producers. Like other major players in the industry (such as Lafarge, Holcim and Heidelber) has seek to penetrate international markets by M&A rather than direct investment, strategic alliances or licensing. Another characteristic of the global cement industry is that developing economies are the drivers of demand.Often these markets remain difficult to enter being overly regulated, protected or subject to corruption and political interference. Cemex uses its origins in a developing market as an advantage the company has expertise in overcoming these barriers, knowledge it has successfully exploited in numerous markets. Additionally, Cemex has taken advantage of other adverse trading conditions in its target markets (Asian fin ancial crisis, Peso crisis) to conclude M&A deals when target company prices are depressed. Bibliography 1. Black, T. , 2007.Cemex Wins take for of Rinker With $14. 2 Billion Offer (Update3). online Available at . 2. Chandramouli, R. , 2012. Cement contributes to less than 10% of construction cost. The Times of India. online Available at . 3. Cembusiness, 2006. 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