CEMEX: Globalization “The CEMEX Way” Donald R.

Lessard and Cate Reavis When one

wants to globalize a company, especially when it is from a developing country like Mexico, you
really need to apply more advanced management techniques to do things better. We have seen
many cement companies that use their capital to acquire other companies but without making the
effort to have a common culture or common processes, they get stagnant. 1 —Lorenzo
Zambrano, Chairman and CEO CEMEX On June 7, 2007 Mexico-based CEMEX won a
majority stake in Australia’s Rinker Group. The $15.3 billion takeover, which came on top of the
major acquisition in 2005 of the RMC Corporation – then the world’s largest ready-mix concrete
company and the single largest purchaser of cement – made CEMEX one of the world’s largest
supplier of building materials. This growth also rewarded CEMEX’s shareholders handsomely
through 2007, though its share price had fallen precipitously in 2008 in response to the global
downturn and credit crisis coupled with the substantial financial leverage that had accompanied
the Rinker acquisition. CEMEX’s success over the 15 years from its first international
acquisition in 1992 to the Rinker acquisition in 2007 was not only noteworthy for a company
based in an emerging economy, but also in an industry where the emergence of a multinational
from an emerging economy (EMNE) as a global leader could not be explained by cost arbitrage;
given cement’s low value to weight ratio little product moves across national boundaries. Much
of CEMEX’s success could be attributed to how it looked at acquisitions, and the post-merger
integration (PMI) process that ensued, as an opportunity to drive change, and as a result,
continuously evolve as a corporation. Since it began globalizing its operations in the early 1990s,
the 1 John Barham, “An Intercontinental Mix;” Latin Finance, April 1, 2002. CEMEX:
GLOBALIZATION “THE CEMEX WAY” Donald R. Lessard and Cate Reavis March 5, 2009 2
company had been praised for its ability to successfully integrate its acquisitions by, at one and
the same time, introducing best practices that had been standardized throughout the corporation
and making a concerted effort to learn best practices from the acquired company and implement
them where appropriate. Known internally as the CEMEX Way, CEMEX standardized business
processes, technology, and organizational structure across all countries while simultaneously
granting countries certain operational flexibility, enabling them to react more nimbly to local
operating environments. In addition, CEMEX was known as an innovator, particularly in
operations and marketing, and the CEMEX Way encouraged innovation, particularly if it could
be applied throughout the firm. For CEMEX, the resulting innovation and integration process
was an ongoing effort as it recognized the value of “continuous improvement.” The development
of CEMEX’s growing international footprint and the associated learning process could be
divided into four stages: Laying the Groundwork for Internationalization, Stepping Out, Growing
Up, and Stepping Up. (See Table 1.) This case details how CEMEX has exploited its core
competencies, initially generated at home, and enhanced these with learnings from new
countries, to begin the cycle again. Table 1 CEMEX Internationalization Timeline Year Stage
Key Events Key Steps in Internationalization Process (italics indicate acquisition) Laying the
Groundwork 1982 Mexican crash 1985 Zambrano named CEO 1989 Consolidates Mexican
market position with acquisition of Tolteca 1989 Anti-dumping penalties imposed on exports to
U.S. Stepping Out 1992 Spain 1994 Venezuela, Panama 1995 Mexican recession Dominican
Republic Growing Up 1996 Colombia 1996 Death of CFO PMI applied to Mexico 1997- 1999
Philippines, Indonesia, Egypt, Chile, Costa Rica 1999 NYSE Listing Stepping Up 2000
Southdown US 2005 RMC (UK- based global ready-mix) 2007 Rinker (Australian/US based
global concrete, aggregates) CEMEX: GLOBALIZATION “THE CEMEX WAY” Donald R.
Lessard and Cate Reavis March 5, 2009 3 Laying the Groundwork for Internationalization In the
25 years leading up to the Rinker deal, CEMEX had evolved from a small, privately-owned,
cement-focused Mexican company of 6,500 employees and $275 million in revenue to a
publiclytraded, global leader of 65,000 employees with a presence in 50 countries and $21.7
billion in annual revenue in 2007. See Exhibit 1 for financials and Exhibit 2 for market share
information. Well before its first significant step toward international expansion in 1992,
CEMEX had developed a set of core competencies that would shape its later trajectory including
strong operational capabilities based on engineering and IT, and a culture of transparency. It also
had mastered the art of acquisition and integration within Mexico, having grown though
acquisitions over the years.2 Between 1987 and 1989 alone, the company spent $1 billion in
order to solidify its position at home. When the current CEO, Lorenzo Zambrano, assumed this
post in 1985, Mexico had already begun the process of opening up its economy, culminating
with its entry into NAFTA. The 1982 crash undercut the state-led nationally-focused model that
had been predominant in Mexico over the years, and Mexico began the process of entering
GATT, the precursor of the WTO. Recognizing that these events would significantly change the
Mexican cement industry from a national to a global game, Zambrano began preparing the firm
for a global fight. The first step would involve divestitures from non-related businesses and the
disposal of non-core assets. CEMEX also began “exploring” opportunities in foreign markets
through exports, which required a fairly aggressive program of building or buying terminal
facilities in other markets. Finally, the company began laying the groundwork for global
expansion by investing in a satellite communication system, CEMEXNET, in order to avoid
Mexico’s erratic, insufficient and expensive phone service, and allow all of CEMEX’s 11 cement
factories in Mexico to communicate in a more coordinated and fluid way.3 Along with the
communication system, an Executive Information System was implemented in 1990. All
managers were required to input manufacturing data—including production, sales and
administration, inventory and delivery— that could be viewed by other managers. The system
enabled CEO Zambrano to conduct “virtual inspections” of CEMEX’s operations including the
operating performance of individual factories from his laptop computer. Stepping Out In 1989,
CEMEX completed a major step in consolidating its position in the Mexican cement market by
acquiring Mexican cement producer Tolteca, making CEMEX the second largest Mexican
cement producer and putting it on the Top 10 list of world cement producers. At the time of the
acquisition, 2 CEMEX was formed in 1931 from a merger between Cementos Hidalgo and
Cementos Portland Monterrey. Later acquisitions and domestic expansion activity included:
1966, acquisition of Cementos Maya's plants in Merida and Yucatan (South East Mexico) and
construction of new plants in Torreon, Coahuila and Ciudad Valles, San Luis Potosi (Central
Eastern); 1970, acquisition of a plant in Central Mexico; 1976, acquisition of Cementos
Guadalajara's three plants (Central Western); 1987, acquisition of Cementos Anahuac; 1989,
acquisition of Cementos Tolteca (Distrito Federal). 3 Hau Lee and David Hoyt, “CEMEX:
Transforming a Basic Industry,” Stanford Graduate School of Business Case No. GS-33.
CEMEX: GLOBALIZATION “THE CEMEX WAY” Donald R. Lessard and Cate Reavis March
5, 2009 4 CEMEX was facing mounting competition in Mexico. Just three months before the
deal with Tolteca was finalized, Swiss-based Holderbank (Holcim), which held 49% of Mexico’s
third largest cement producer Apasco (19% market share), announced its intention to increase its
cement capacity by 2 million tons.4 This, along with easing foreign investment regulations that
would allow Holderbank to acquire a majority stake in Apasco, threatened CEMEX’s position in
Mexico.5 At the time, CEMEX accounted for only 33% of the Mexican market while 91% of its
sales were domestic. In addition to these mounting threats in its home market, CEMEX was
confronted with trade sanctions in the United States, its largest market outside of Mexico.
Exports to the U.S. market began in the early 1970s, but by the late 1980s, as the U.S. economy
and construction industry were experiencing a downturn, the U.S. International Trade
Commission slapped CEMEX with a 58% countervailing duty on exports from Mexico to the
United States, later reduced to 31%.6 In 1992, CEMEX acquired a majority stake in two Spanish
cement companies, Valenciana and Sanson, for $1.8 billion, giving it a majority market share
(28%) in one of Europe’s largest cement markets.7 The primary motivation for entering Spain
was a strategic response to Holcim’s growing market share in Mexico. As Hector Medina,
CEMEX Executive VP of Planning and Finance, explained, “Major European competitors had a
very strong position in Spain and the market had become important for them.” 8 A further
important reason for the acquisition was that Spain during this time was an investmentgrade
country, having just entered the European Monetary Union, while domestic interest rates in
Mexico were hovering at 40%, and Mexican issuers faced a country risk premium of at least 6%
for offshore dollar financing.9 Operating in Spain enabled CEMEX to tap this lower cost of
capital not only to finance the acquisition of Valenciana and Sanson, but also to fund its growth
elsewhere at affordable rates. (See Exhibit 3 for CEMEX organizational structure.) While this
benefit could have been obtained in any EU country, Spain offered considerable opportunities for
growth and was relatively affordable. In addition, the linguistic and cultural ties between the two
countries made it a sensible strategic move. In order to pay off the debt taken on to fund the
acquisition, CEMEX set ambitious targets for cost recovery. However, it soon discovered that by
introducing its current Mexican-based best practice to the Spanish operation, it was able to
reduce costs and increase plant efficiency to a much greater 4 “Holderbank of Switzerland
Announces Major Investment Plans,” Neue Zuercher Zeitung October 13, 1989. 5 John Barham,
“An Intercontinental Mix,” Latin Finance, April 1, 2002. 6 Pankaj Ghemawat and Jamie L.
Matthews, “The Globalization of CEMEX,” Harvard Business School Case No. 701-017. 7
Pankaj Ghemawat and Jamie L. Matthews, “The Globalization of CEMEX,” Harvard Business
School Case No. 701-017. 8 Joel Podolny and John Roberts, “CEMEX, S.A. de C.V.: Global
Competition in a Local Business,” Stanford University Graduate School of Business, Case No.
S-IB-17. 9 L. Hossie, "Remaking Mexico," The Globe and Mail, February 7, 1990. CEMEX:
GLOBALIZATION “THE CEMEX WAY” Donald R. Lessard and Cate Reavis March 5, 2009 5
extent, with annual savings/benefits of $120 million10 and an increase in operating margins from
7% to 24%.11 Thus, while the primary motive for the Spanish acquisition was to respond to a
competitive European entry in its home market, a major source of value resulting from the
acquisition was the improvement in operating results due to the transfer of best practice from a
supposedly less advanced country to a supposedly more advanced one. Further, although it had
acquired and integrated many firms within Mexico, this acquisition, because of its size and the
fact that it was in a foreign country, forced CEMEX to formalize and codify its Post Merger
Integration (PMI) process. CEMEX also enhanced its capabilities through direct learning from
Spain. The company discovered, for example, that the two Spanish companies were unusually
efficient due to the use of petroleum coke as a main fuel source. Within two years, the vast
majority of CEMEX plants began using petroleum coke as a part of the company’s energy-
efficiency program. 12 Accelerating Internationalization and Consolidating the CEMEX Way
CEMEX’s move into Spain was followed soon after with acquisitions in Venezuela, Colombia,
and the Caribbean in the mid-1990s, and the Philippines, and Indonesia in the late 1990s. These
acquisitions, by and large, could be seen as exploiting CEMEX’s core capabilities, which now
combined learnings from the company’s operations in Mexico and Spain. The PMI process also
underwent a significant change during this period. Attempts to impose the same management
processes and systems used in Mexico on the newly acquired Colombian firm resulted in an
exodus of local talent. As a result of the difficult integration process that ensued, CEMEX
learned that alongside transferring best practices that had been standardized throughout the
company, it needed to make a concerted effort to learn best practices from acquired companies,
implementing them when appropriate. This process became known as the CEMEX Way. The
CEMEX Way, also known as internal benchmarking, was the core set of best business practices
with which CEMEX conducted business throughout all of its locations. More a corporate
philosophy than a tangible process, the CEMEX Way was driven by five guidelines: • Efficiently
manage the global knowledge base; • Identify and disseminate best practices; • Standardize
business processes; • Implement key information and Internet-based technologies; 10 J. Duncan,
"CEMEX Wrings Savings from Spanish Purchases," Reuters, March 19, 1993. 11 Joel Podolny
and John Roberts, “CEMEX, S.A. de C.V.: Global Competition in a Local Business,” Stanford
University Graduate School of Business, Case No. S-IB-17. 12 Francisco Chavez, “CEMEX
Takes the High Road,” NYSE Magazine, October/November 2006. CEMEX:
GLOBALIZATION “THE CEMEX WAY” Donald R. Lessard and Cate Reavis March 5, 2009 6
• Foster innovation. As part of the integration phase of the PMI, the CEMEX Way process
involved the dispatch of a number of multinational standardization teams made up of experts in
specific functional areas (Planning Finance, IT, HR), in addition to a group leader, and IT and
HR support. Each team was overseen by a CEMEX executive at the VP level.13 The CEMEX
Way was arguably what made CEMEX’s PMI process so unique. While typically 20% of an
acquired company’s practices were retained, instead of eliminating the 80% in one swift motion
CEMEX Way teams cataloged and stored those practices in a centralized database. Those
processes were then benchmarked against internal and external practices. Processes that were
deemed “superior” (typically two to three per standardization group or 15-30 new practices per
acquisition) became enterprise standards and, therefore, a part of the CEMEX Way. As one
industry observer noted, CEMEX’s strategy sent an important message of, “We are overriding
your business processes to get you quickly on board, but within the year we are likely to take
some part of your process, adapt it to the CEMEX system and roll it out across operations in
[multiple] countries.”14 By some estimates, 70% of CEMEX’s practices had been adopted from
previous acquisitions.15 Furthermore, in just 8 years, CEMEX was able to bring down the
duration of the PMI process from 25 months for the Spanish acquisitions to less than five months
for Texas-based Southdown. Figure 1 Duration of Post-Merger Integration Process Source:
CEMEX. 13 Joel Whitaker and Rob Catalano, “Growth Across Borders,” Corporate Strategy
Board, October 2001. 14 Marc Austin, “Global Integration the CEMEX Way,” Corporate
Dealmaker, February 2004. 15 Joel Whitaker and Rob Catalano, “Growth Across Borders,”
Corporate Strategy Board, October 2001. 0 5 10 15 20 25 30 1992 1994 2000 2002 Months
Spain 11.5MT Southdown 11.0MT Venezuela 4.3MT Puerto Rico 1.1MT CEMEX:
GLOBALIZATION “THE CEMEX WAY” Donald R. Lessard and Cate Reavis March 5, 2009 7
A key feature of the PMI process was the strong reliance that CEMEX placed on middle-level
managers to both diffuse the company’s standard practices and to identify existing capabilities in
the acquired firms that might contribute to the improvement of CEMEX’s current capability
platform. PMI teams were formed ad-hoc for each acquisition. Functional experts in each area
(finance, production, logistics, etc) were selected from CEMEX operations around the world.
These managers were then relieved from their day-to-day responsibilities and sent, for periods
varying from a few weeks to several months, to the country/ies where the newly acquired
company operated. Because these managers were the ones who did at home what they were
teaching newly acquired firm’s managers, they were the best teachers as well as the most likely
CEMEX employees to identify which of the standard practices of the acquired firm might make
a positive contribution if adapted and integrated into the CEMEX Way. On the other hand,
because they were seen as the best and the brightest within CEMEX, these managers had the
legitimacy to propose and advocate for changes in the firm’s operation standards in a way that no
other manager could. Hence, PMI team members were low enough in the organization that they
were in a unique position to identify and evaluate different ways of doing things. At the same
time, however, these managers were high enough in the organization that they could effectively
‘sell’ the value of changing a particular practice to corporate level managers. Drawing key
people from multiple countries to form these teams represented a significant challenge for what
CEMEX referred to as ‘legacy operations.’ Since these positions were not covered with new
hires and lowering performance was not in the realm of possibilities, ongoing operations had to
find ways to do the same work with less people and uncover the capabilities of those that
remained. A significant step in consolidating the CEMEX Way and making “One CEMEX” a
global reality occurred as the result of the tragic death in 1996 of CEMEX’s CFO Gustavo
Caballero. Hector Medina, who at the time was the general manager of Mexican operations, took
over the CFO role, and Francisco Garza, who had been general manager of Venezuela, was
named to head Mexican operations. When Garza took charge of the Mexican operations, he
decided to “PMI Mexico,” to apply the PMI process to Mexico as if it had just been acquired.
Roughly 40 people broken down into 10 functional teams spent between two and three months
dedicated to improving the Mexican operation. Savings of $85 million were identified.16 More
importantly, it clearly established the principle of learning and continuous improvement through
the punctuated PMI process and the continuous CEMEX Way. Improvements resulting from the
CEMEX Way were not limited to operational processes. During the 1990s, CEMEX also
developed a branded cement strategy in Mexico that addressed the specific needs of customers
for bag cement. While bulk cement accounted for roughly 80% of CEMEX’s 16 Joel Podolny
and John Roberts, “CEMEX, S.A. de C.V.: Global Competition in a Local Business,” Stanford
University Graduate School of Business, Case No. S-IB-17. CEMEX: GLOBALIZATION “THE
CEMEX WAY” Donald R. Lessard and Cate Reavis March 5, 2009 8 cement sales in developed
countries, bagged cement represented the same percentage in developing countries like Mexico,
reflecting the fact that many households built their own houses.17 These customers were willing
to pay a premium for known quality and convenient distribution, and CEMEX steadily
introduced value-added features for these customers. Finally, with a growing number of plants
and markets on the Caribbean rim, CEMEX began to actively exploit the capacity for cement
trading to smooth/pool demand, economizing on capacity and raising average utilization rates in
an industry notorious for large swings in output in line with macroeconomic fluctuations. 18
Stepping Up Toward the end of the 1990s, CEMEX found that there were few acquisition targets
that met its criteria of market growth/attractiveness and “closeness” to CEMEX in terms of
institutional stability and culture at a reasonable price, and began to consider diversification into
other activities, among other things. However, in order to “shake up” its strategic thinking, it
made a series of changes in the way it explored potential acquisitions, including asking the
Boston Consulting Group, its long-time strategic advisor, to assign a new set of partners. One
important resulting change was to redefine large markets, such as the United States, into regions.
Once this was done, the United States, which CEMEX planners had viewed as a slow growing
market with little fit with CEMEX, was transformed into a set of regions, some with growth and
other characteristics more aligned with the rapidly growing markets CEMEX was used to. This
set the foundation for the acquisition of Texas-based Southdown, making CEMEX North
America’s largest cement producer. Another change was to shift the way performance was
measured, from an emphasis on margins, which had made cement appear much more attractive
than concrete or aggregates, to return on investment, which in many cases reversed the apparent
attractiveness of different businesses. With this reframing, other targets were identified, most
importantly RMC, a UK-based, ready-mix concrete global leader. On March 1, 2005, CEMEX
finalized its $5.8 billion acquisition of U.K.-based RMC. This acquisition, which surprised many
in the industry who assumed that RMC would be acquired by a European firm, was CEMEX’s
first acquisition of a diversified multinational. To prevail, CEMEX had to pay a 39%
premium,19 and the financial markets did not respond favorably. CEMEX's share price dropped
10% hours after the announcement, and Moody’s indicated 17 Hau Lee and David Hoyt,
“CEMEX: Transforming a Basic Industry,” Stanford Graduate School of Business Case No. GS-
33. 18 For a description of how CEMEX was able to turn an environmental disadvantage – the
macroeconomic volatility that has characterized the Mexican economy and many of the
emerging markets in which it has invented – into a source of competitive advantage see Lessard
and Lucea (2007). 19 Roy A. Grancher, “U.S. Cement: Development of an Integrated Business,”
Cement Americas, September 1, 2005. CEMEX: GLOBALIZATION “THE CEMEX WAY”
Donald R. Lessard and Cate Reavis March 5, 2009 9 that it was putting CEMEX on credit watch
for a possible downgrade, voicing concern that the size of the RMC acquisition would distract
management from its goal of cutting the company’s debt.20 The acquisition of RMC
significantly changed CEMEX’s business landscape. The deal gave the company a much wider
geographic presence in developed and developing countries alike, most notably France,
Germany, and a number of Eastern European countries. Analysts predicted that as a percent of
product revenue, cement would fall from 72% to 54% and aggregates and ready-mix concrete
would nearly double from 23% to 42%.21 Meanwhile, revenue from CEMEX’s Mexican
operations would fall from 36% prior to the deal to just 17%. Financially, RMC was suffering.
The company recorded a net income loss of over $200 million in 2003, and was trading at six
times EBITDA, compared to industry average of 8.5 to 9 times.22 RMC profit margin of 3.6%
was far below the ready-mix concrete average 6% to 8%. Culturally, RMC was the polar
opposite of CEMEX. RMC was a highly decentralized company with significant differences
across countries in business model, organizational structure, operating processes, and corporate
culture. CEMEX, in contrast, brought the CEMEX Way and a single operating/engineering
culture that connected more readily at the plant and operation level than RMC. And yet, despite
all of RMC’s challenges, CEMEX was able to work its PMI “magic” in a very short period of
time. Within one year, CEMEX had delivered more than the $200 million in the synergy savings
it promised the market and it expected to produce more than $380 million of savings in 2007.23
CEMEX had clearly joined the big leagues, yet the imprint of its early years remained very
strong. In 2007, CEMEX took another major step, acquiring control of the Rinker Corporation.
Rinker did not suffer the same lack of learning processes and cultural integration as RMC and
thus at least some analysts questioned whether CEMEX would be able to work the same magic
once again. 20 Michael Thomas Derham, “The CEMEX Surprise,” LatinFinance, November 1,
2004. 21 Imran Akram, Paul Roger and Daniel McGoey, Global Cement Update: Mexican
Wave, Deutsche Bank, November 26, 2004. 22 Michael Thomas Derham, “The CEMEX
Surprise,” LatinFinance, November 1, 2004. 23 Steven Prokopy, “Merging the CEMEX Way,”
Concrete Products, May 1, 2006. CEMEX: GLOBALIZATION “THE CEMEX WAY” Donald
R. Lessard and Cate Reavis March 5, 2009 10 Exhibit 1a CEMEX Country Sales, EBITDA and
Assets, 2006 Sales Operating Income EBITDA Assets Mexico 3,635 1,235 1,391 5,800 United
States 4,170 919 1,207 7,118 Spain 1,841 471 555 3,089 United Kingdom 2,010 (7) 149 6,249
Rest of Europe 3,644 176 390 6,692 South/Central America & Caribbean 1,586 341 472 3,267
Africa/Middle East 705 136 167 1,251 Asia 346 58 75 861 Other 311 (384) (270) (4,355) Total
18,249 2,945 4,138 29,972 Exhibit 1b CEMEX Select Financials, 1999-2004 (in US$ millions,
except percentages) 1999 2000 2001 2002 2003 2004 2005 2006 Net Sales 4,828 5,621 6,923
6,543 7,143 8,149 15,321 18,249 Operating Income 1,436 1,654 1,653 1,310 1,455 1,851 2,487
2,945 Operating Margin 29.7% 29.4% 23.9% 20.0% 20.3% 22.7% 16.2% 16.1% EBITA 1,791
2,030 2,256 1,917 2,108 2,538 3,557 4,138 EBITA Margin 37.1% 36.1% 32.6% 29.3% 29.4%
31.1% 23.20% 22.7% Net Income 973 999 1,178 520 629 1,307 2,167 2,488 Net Income %
20.2% 17.8% 17.0% 7.9% 8.8% 16.0% 14.1% 13.6% Debt Ratio 45.7% 51.5% 49.8% 56.4%
57.8% 52.7% 61.3% 50.6% Free Cash Flow 860 886 1,145 948 1,143 1,478 2,198 2,689 Source:
CEMEX. CEMEX: GLOBALIZATION “THE CEMEX WAY” Donald R. Lessard and Cate
Reavis March 5, 2009 11 Exhibit 2 CEMEX Cement Market Shares vs. Competitors Country
Market Share Rank Main Competitors Western Europe Spain 22% 1 Cementos Portland (16%),
Holcim (12%), Lafarge (9%), Cimpor (8%), Financiera y Minera (6%), Masaveu (6%) North
America United States 15% 1 Holcim (14%), Lafarge (13%), Buzzi (10%), HeidelbergCement
(8%), Ash Grove (7%), Italcementi (5%) Latin America Colombia 35% 2 Argos (52%), Holcim
(35%) Costa Rica 50% 1= Holcim (50%) Dominican Republic 52% 2 Cibao (38%), Holcim
(13%) Jamaica 100% 1 Mexico 53% 1 Holcim (23%), Cruz Azul (15.5%), Monteczuma (6.2%),
Grupo Cemento Chihuahua (2.4%), Lafarge (0.4%) Nicaragua 56% 1 Holcim (44%) Panama
52% 1 Holcim (48%) Trinidad 100% 1 Venezuela 45% 1 CEMEX (45%), Holcim (26%),
Lafarge (23%), Catatumbo (3%), Andino (3%) Africa Egypt 15% 2 Holcim (20%), CEMEX
(15%), Suez (14%), Tourah (10%), National (10%), Cimpor (8%), Beni Suef (8%) Asia
Philippines 21% 3 Lafarge (28%), Holcim (28%) Source: Mike Betts and Robert Crimes,
“Construction and Building Materials Sector,” JP Morgan European Equity Research, August 16,
2004; CEMEX. CEMEX: GLOBALIZATION “THE CEMEX WAY” Donald R. Lessard and
Cate Reavis March 5, 2009 12 Exhibit 2 CEMEX Organizational Structure Source: CEMEX.
CEMEX: GLOBALIZATION “THE CEMEX WAY” Donald R. Lessard and Cate Reavis March
5, 2009. 13 Appendix Heavy Building Materials Industry Overview The global heavy building
materials industry was a $63 billion (EBITDA) business of which cement accounted for $27
billion, aggregates $17 billion, ready-mix concrete $9 billion, concrete products $7 billion, and
distribution $3 billion.24 Aggregates and cement were upstream products with high barriers to
entry with initial investments ranging from $50 million for aggregates and $175 million for
cement, long payback periods, and little product differentiation. Concrete and asphalt were
downstream products with few barriers to entry, short payback periods and the ability to
differentiate. Of the four building materials products, cement was the most profitable with 20%
to 25% return on sales while ready-mix concrete was the least profitable with just 6% to 8%
return on sales. (See Exhibit 1 for industry characteristics.) At their inception in the early to mid-
1800s, the concrete and cement industries were fragmented. Local producers served communities
in geographic proximity. The high cost of transportation prevented long distance competition. As
the quality of roads and railway transportation improved, industry consolidation, largely on a
national level, began to take place. For more than a century, there was little industry innovation
and companies competed solely on price. 25 In the 1970s, cement companies began to expand
their operations both regionally and internationally enabling them to create more efficient
operations and protect themselves financially from national and regional economic shocks. 26
However, cement’s low value-to-weight ratio made long distance transport by land exceedingly
expensive, so it remained a highly localized industry. By one estimate, 90% of U.S. production
was sold within 300 miles of the producing plant.27 Producers China was the largest cement
producer in the world, with over 40% of global production followed by India with 6% and the
United States with just under 5%.28 (See Exhibit 2.) China and India consumed the majority of
the cement they produced, exporting less than 1%, while the United States was the world’s
largest importer accounting for 25% of global imports (Exhibit 3). In general, the 24 Imran
Akram, Paul Roger, Daniel McGoey, Global Cement Update: Mexican Wave, Deutsche Bank,
November 26, 2004. 25 Arnoldo C. Hax and Rafel Lucea, CEMEX: A leading company; A study
through the Delta Model, MIT Sloan School of Management Working Paper. 26 Ibid. 27 Joel
Podolny and John Roberts, “CEMEX, S.A. de C.V.: Global Competition in a Local Business,”
Stanford University Graduate School of Business, Case No. S-IB-17. 28 U.S. Geological Survey,
Mineral Commodity Summaries, January 2005. CEMEX: GLOBALIZATION “THE CEMEX
WAY” Donald R. Lessard and Cate Reavis March 5, 2009 14 cement industry was not an export-
driven business. Exported cement accounted for a mere 6% of total global consumption.29 By
2004 the cement industry had consolidated to the point where the six largest cement companies
accounted for 42% of the world’s cement capacity outside of China, up from 9% in 1988.30 (See
Table A). The top players’ earnings straddled both developed and developing markets. While the
majority of CEMEX’s and Holcim’s earnings came from developing markets (73% and 69%,
respectively), earnings for Lafarge and Heidelberg came largely from developed markets (62%
and 69%). (See Exhibit 4.) Table A Six Largest Cement Companies by Capacity Company
Country Capacity 2003 (million tons) Lafarge France 108.0 Holcim Switzerland 94.3 CEMEX
Mexico 64.7 HeidelbergCement Germany 51.1 Italcementi Italy 45.6 Taiheiyo Japan 37.9
Source: Mike Betts and Robert Crimes, “Construction and Building Materials Sector,” JP
Morgan European Equity Research, August 16, 2004. There were, however, a number of “second
tier” players who were beginning to invest outside of their home markets and stirring up the
industry’s competitive dynamics including Italy’s Italcementi and France-based Cimentis
Francais. As Exhibit 5 shows, national players dominated cement markets in Eastern Europe,
Asia and the Middle East. Consumers Asia accounted for 56% of cement consumption followed
by Western Europe with 12% and North America with 6.4%. Since 2002, year-over-year growth
rates of cement consumption had slowed most notably in Asia and Eastern Europe (Exhibit 6).
Developing countries accounted for 69% of cement consumption, a percentage that was expected
to increase to 85% by 2020 (Exhibit 7). In growth rate terms, between 2003 and 2020,
developing countries’ cement consumption was predicted to increase 4.4% per year compared
to .8% for developed countries.31 29 Mike Betts and Robert Crimes, “Construction and Building
Materials Sector,” JP Morgan European Equity Research, August 16, 2004. 30 Ibid. 31 Ibid.
CEMEX: GLOBALIZATION “THE CEMEX WAY” Donald R. Lessard and Cate Reavis March
5, 2009 15 Cement consumption was largely driven by local socio-economic conditions. As GDP
per capita increased above $3,000, cement consumption tended to increase substantially in
response to growing need for improved infrastructure and housing. However, once GDP per
capita exceeded $15,000, consumption tended to level off.32 Weather—heavy rainfall was a
deterrent—and population growth rates and density — higher densities usually demanded taller
buildings—were other variables that affected consumption.33 In 2003, China accounted for 44%
of global cement consumption and industry observers expected the country’s share to increase to
53% by 2020.34 The way in which cement was consumed differed among developing and
developed countries. Developing markets tended to be dominated by individual homebuilders
who purchased bag cement instead of bulk. CEMEX believed that as much as 80% of cement
sales in developed countries were bulk cement compared to the same percentage of bagged
cement in developing countries.35 Thus in these markets companies like CEMEX had to brand
their product through packaging and getting the company name out in front of their customer
base.36 In contrast, cement consumers in developed countries tended to be large construction
companies that bought in bulk and required timeliness to their cement deliveries. State of the art
logistics and technology platforms were paramount to compete. Additionally, cement companies
had to be prepared to meet local preferences. Consumers in Egypt preferred darker cement
believing it was of higher quality whereas Mexicans preferred light colored cement. 32 Mike
Betts and Robert Crimes, “Construction and Building Materials Sector,” JP Morgan European
Equity Research, August 16, 2004. 33 “The Globalization of CEMEX,” Harvard Business
School Case No. 701-017 prepared by Professor Pankaj Ghemawat and Research Associate
Jamie L. Matthews. 34 Mike Betts and Robert Crimes, “Construction and Building Materials
Sector,” JP Morgan European Equity Research, August 16, 2004. 35 “CEMEX: Transforming a
Basic Industry,” Stanford Graduate School of Business Case No. GS-33, prepared by David Hoyt
under the supervision of Professor Hau Lee. 36 “CEMEX: Global Growth Through Superior
Information Capabilities,” IMD Case No. 134 prepared by Rebecca Chung and Katarina Paddack
under the supervision of Professor Donald A. Marchand. CEMEX: GLOBALIZATION “THE
CEMEX WAY” Donald R. Lessard and Cate Reavis March 5, 2009. 16 Exhibit 1 Heavy
Building Materials Industry Characteristics Aggregates Cement Ready-Mix Concrete Asphalt
Initial investment $50 million $175 million <$10 million >$10 million Entry barriers High High
Low Low Payback period Long Long Short Short Options for vertical integration Downstream
into ready-mix concrete products, decorative aggregates, asphalt Mainly downstream into
readymix Either downstream into blocks, ties or pavers, or upstream into cement Upstream into
aggregates, or downstream into road contracting Return on sales (%) 10-20 15-25 6-8 10-15
Investment to sales (%) <100 >200 80 40 Return on investment (%) 8-10 8-10 8-10 8-10 Product
differentiation Impossible Nearly impossible Can differnentiate from small players on some top-
quality products and can innovate (e.g., high-performance concreate) National players all have
versions of low-noise, smooth surface asphalt Market flexibility in adjusting to over/under
capacity Strong flexibility on exisiting quarries (operations can be stopped and restarted in a few
months) but difficult to open new ones) Can take decades as even 20- year old plants can still
produce cash Normally adjusts in two to four years One to three years Source: Imran Akram,
Paul Roger, Daniel McGoey, Global Cement Update: Mexican Wave, Deutsche Bank,
November 26, 2004. CEMEX: GLOBALIZATION “THE CEMEX WAY” Donald R. Lessard
and Cate Reavis March 5, 2009 17 Exhibit 2 Global Cement Production, 2005 Source: U.S.
Geological Survey, Mineral Commodity Summaries, January 2005. 0 5 10 15 20 25 30 35 40 45
% of Market China India United States Japan South Korea Russia Spain Brazil Italy Egypt
Mexico Thailand Turkey Indonesia Iran Germany Saudi Arabia France Others Global Cement
Production CEMEX: GLOBALIZATION “THE CEMEX WAY” Donald R. Lessard and Cate
Reavis March 5, 2009 18 Exhibit 3 World’s Leading Cement Exporters and Importers (by
percentage) (2004) Leading Exporting Nations Leading Importing Nations Ranking Country
2001 2002 2003 Ranking Country 2001 2002 1 Thailand 16.6 16.6 12.1 1 United States 25.9
24.2 2 Turkey 8.6 10.4 10.2 2 Spain 6 7.5 3 Indonesia 9.5 9 7.3 3 Bangladesh 6 6.4 4 Japan 7.6
8.3 9.6 4 Nigeria 6 5.4 5 India 5.2 6.3 5 Hong Kong 3.9 3.9 6 China 6.1 6 6 Vietnam 1.6 3.1 7
Greece 5.9 5.6 7 Netherlands 3.4 3 8 Saudi Arabia 4.7 5.6 8 France 2.1 2.6 9 Canada 5.4 5.5 9
United Kingdom 1.5 2.5 10 Venezuela 2.8 4.1 10 Taiwan 2.3 2.3 11 Taiwan 3.4 3.9 5 11 Kuwait
2.3 1.9 12 Germany 3.9 3.9 12 Ghana 1.7 1.9 13 South Korea 4.6 3.4 3.2 14 Malaysia 2 3 15
Italy 2.6 2.4 16 Egypt 0.1 2.2 6.2 17 Spain 1.4 1.5 18 Iran 2.8 1.4 Source: Mike Betts and Robert
Crimes, “Construction and Building Materials Sector,” JP Morgan European Equity Research,
August 16, 2004. CEMEX: GLOBALIZATION “THE CEMEX WAY” Donald R. Lessard and
Cate Reavis March 5, 2009 19 Exhibit 4 Geographical Breakdown of Top Cement Company
Earnings (% of EBITA) (2004) CEMEX Heidelberg Holcim Lafarge Italcementi Cimentis
Francais Total Average Developed markets 27 69 39 62 90 82 53 Western Europe 13 44 18 48
78 69 36 North America 14 25 19 14 12 14 16 Australasia 2 0 Developing markets 73 31 61 38
10 18 47 Eastern Europe 17 10 6 2 3 6 Latin America 64 31 9 0 0 23 Asia 2 11 9 9 3 4 7 Middle
East 1 3 1 Africa 6 4 10 11 5 10 9 Source: Mike Betts and Robert Crimes, “Construction and
Building Materials Sector,” JP Morgan European Equity Research, August 16, 2004. CEMEX:
GLOBALIZATION “THE CEMEX WAY” Donald R. Lessard and Cate Reavis March 5, 2009
20 Exhibit 5 Multinational Cement Companies’ Market Shares by Region, 2004 Source: Mike
Betts and Robert Crimes, “Construction and Building Materials Sector,” JP Morgan European
Equity Research, August 16, 2004. 0 10 20 30 40 50 60 70 80 90 100 North America Latin
America Africa Europe Western Australasia Europe Eastern Asia Middle East Region %
National player Mutlinational cement companies CEMEX: GLOBALIZATION “THE CEMEX
WAY” Donald R. Lessard and Cate Reavis March 5, 2009. 21 Exhibit 6a Cement Demand by
Region (million tons), 2000-2005E 2002 2003 2004E 2005E 2006E Asia 990.6 1,048.8 1,114.6
1,184.3 1,259.0 Western Europe 224.9 229.2 232.6 236.2 238.9 North America 116.7 121.2
125.9 128.3 129.6 Latin America 93.2 90.0 94.5 99.4 103.7 Eastern Europe 75.6 83.1 87.3 91.7
96.5 Africa 56.7 58.1 59.7 61.9 64.0 Japan 64.6 60.1 56.5 54.8 54.8 Middle East 9.8 9.6 10.0
10.5 10.9 Australasia 8.6 9.1 9.3 9.5 9.6 TOTAL 1,803.3 1,878.6 1,967.7 2,062.6 2,162.0
Source: Mike Betts and Robert Crimes, “Construction and Building Materials Sector,” JP
Morgan European

What makes growing internationally attractive to CEMEX rather than keeping its business within
Mexico?

Why doesnt cemex keep operating in Mexico?

What core strengths does CEMEX bring to a new acquisition?

How do you evaluate the CEMEX Way? What keeps other firms from doing the same thing?