Globalization of CEMEX - Summary

Submitted By: Section B _ Group 4

[Aishwarya (266), Ayush(259), Charanjeet(260), Eshan(265), Maitri(396), Surya teja(382)]

Facts:

 Cementos Hindalgo, formed in 1906, was merged with Cmentos Portland Monterrey in 1931 to form
Cementos Mexicos (CEMEX)
 CEMEX initially diversified horizontally into mining, petrochemicals, tourism along with cement
 Later, all the non-core businesses were divested and focus shifted to geographical diversification
 It followed the strategy of acquisitions for its growth - acquiring companies in target countries for
geographical diversification and growth
 1987, CEMEX became Mexico’s largest cement producer after acquiring competitors
 Expanded into multiple countries and this gave CEMEX the diversification of currency risk that
came with Peso crisis in 1994/95

Acquisitions
 Mexico - CEMEX acquired companies in Mexico to boost growth and capture a large market share.
In 1987, CEMEX became the largest cement producer in Mexico
 The United States - Imposition of Trade sanctions put FDI as a better internationalization strategy
instead of pure trade
 Spain - Entry into Spain was to counteract the huge dependence on the Mexican market. This also
allowed CEMEX to codify their Acquisition strategy
 Latin America - Focus was to build a surplus production base to export to various countries

Future Prospects
 CEMEX becomes the 3rd largest cement producer in the world in 2000.
 Announced $1.175 billion for acquisitions
 Targeted China - but market was too fragmented
 Targeted India - too fragmented market
 Targeted Brazil - valuation per capacity is lower than the acquisition cost
 Portugal - to strengthen Brazil and Mediterranean markets

Acquisition Process
 Identification - GDP growth, Population, Population growth, market fragmentation, other qualitative
factors became primary factors in identifying target companies
 Due Diligence - Built processes looking at each component, HR especially, quite meticulously.
 Post-Merger Integration (PMI) - PMI team focused on 3 level integration: Improving acquired
plant, sharing management principles, and acquaintance with cultural beliefs

Management
 Internationalization helped CEMEX take on currency risks (Peso Crisis)
 Focus on emerging markets helped in the demand side of the equation
 Increased customer segments - reducing cyclicality of the cement industry
 Digital Business Design - Increase customer service and subsequently, brand loyalty

Arguments for ‘Yes’

Financial risks

 Interest rate risk : Low interest rate risk as financing costs were lower and recent PE investment in
the firm
  Currency risk : Risks are hedged through derivatives and 50% of revenue come from peso markets.
 Capital risk : Cemex has maintained the % of debt lower than the industry level to maintain
solvency.
 Liquidity risk : The firm is having positive and increasing Net Working Capital in past years

Socio-economic risks

 Managed social and cultural challenges : Cemex has performed wonderfully in maintaining the
diverse set of employees with its effective leadership strategies.
 Post-Merger Integration : PMI mechanism of Cemex has worked well in the past 20 years due to
its flexible style and robust strategies.
 Ring of Grey gold : Gaining the first mover advantage by moving into high growth emerging
economies like - India, Brazil, Philippines.

Market risks

 High competition : Cemex is 3 largest firm, but the company is facing high competition from other
rd

players. But competition will be reduced by moving into uncharted territories ( Emerging markets).
 Market slowdown : Cemex has hedged this risk by moving into economies at different level of
business cycles. It has presence in both developed and developing markets across the globe.

Operational & organizational risks

 Digital infrastructure : Cemex has one of the best IT infra, which helped in making major
distribution decision. It ensured efficient transportation system and delivery mechanism.
 Leadership and organization structure: The organizational structure included heads at various
levels and frequent meetings enabled effective and informed decision making.

Arguments for ‘No’

Country risk

 Regulatory risk: Operations in multiple countries leaves Cemex vulnerable to the changes in their
laws, which may adversely impact its operations. Eg. Changes in duties by USA.
 Cyclical risk: Construction activity decreases during winters and this directly reduces demand for
Cemex’s products.
 Cultural risk: Plans of internationalization in countries with vast cultural differences like Asia and
Middle East, poses threats to integration.
 Technological risks: With increase in dependency on technology, lack of infrastructure in some
countries can hinder operations.

Global market risk

 Forex volatility: A supply chain spread across nations, impacts the cost structure and hence
profitability due to volatility in exchange markets.
 Risk premium: Due to different risk profiles across nations, the cost of expansion varies a lot
depending upon the level of development and market volatility of these countries.

 Energy price volatility: The changes in oil prices, makes international logistics expensive to
manage for Cemex.

Competitor risk

 Increased efficiency: Consolidation of big players like Heidelberg and Lafarge, would result in a
large scale of production with reduced costs.
   Market dominance: With greater market share competitors would have greater power and this may
pose a serious disadvantage to Cemex.
 Diversification benefits: Merger of entities spread across different geographies would cause the
joint entity to be less vulnerable to changes in individual operations.

Operational risk

 Distorted efficiency: With operations being undertaken across countries, standardization remains a
constant challenge, and may require frequent changes like that of Cemex’s US operations.
 No standard safety standards: Differences in safety requirements across markets, leaves Cemex at
an increased risk of litigation due to differences in operations.

Let us go through some of the specific risks that CEMEX has faced in the past and the ways they have been
controlled by them that have been talked about in the case.
 Macroeconomic Instability: To deal with risk it they had planned on keeping the capital utilization
high and to use the surplus for exports as they were lying close to the sea coast and hence they would
not be effected much by the market instability.
 Major dependence on Mexican Market for revenue : This has created an over dependence as a
quite a good sizeable market lies in Mexico. To deal with this they have diversified geographically
and into emerging economies.
 Currency Risk( i.e. Peso Crisis): These risks majorly emerged in Spain and Mexico. To manage
this issue, they have rationalised the operations so that Spain would become the centre for all the
operation regarding Mexico. There were major acquisitions in Spain to reduce the Mexican
dependency.
 Mexican Crisis: During this time the company started off with branding and doing promotions
which was then rolled out to various other countries They therefore have neutralised by expanding
into new market segments which were relatively stable during the crisis period due to their informal
nature.
 Import Hurdles: They countered this risk by limiting their exports to te US as the prices were high
so as to reduce the dependency on the market. They have also started on setting up an ecosystem by
heavily investing in South American nations and they have acquired the respective firms for
increasing their reach.
 Cultural Risks : To mitigate this risk they have concentrated on a more careful market selections so
that they could deal with more of Spanish speaking countries initially and later on they had Post
Merger Integration Process which also had soft mergers. They also had various cultural awareness
sessions and team building workshops to overcome the cultural risks.
When in 2000 during the end of the case there have been some anxieties. Let us see the risks that were
implied during this period and their possible solutions.
 Cultural Risks: These risks were more manifested in the recent times while they have been
diversifying into the non-Spanish areas. CEMEX have been flexible and adaptive to the cultural
issues and hence there are good chance of the company overcoming these risks.
 Competition Risk (Rival Consolidation): To overcome this risk CEMEX can also try to play an
active part and try acquiring other companies through mergers and acquisitions. They can actively
proceed towards further diversification in the emerging economies and also by establishing an IT
advantage.
 Faster Diversification: This could be a risk as the debt equity ratio dilution can become an issue.
They can get listed in the Stock exchange but that could cause the stock dilution risk
 Hostile takeover risk: They should maintain their market by buying back their share and reducing
the debt and can also stabilize their share price.
Conclusion : Since its origin in 1906, Cemex has expanded its business internationally in Spain, Latin
America and Asian countries. Through successful merger and acquisition it  became the top cement industry
in Mexico and 3rd largest in the world by 2000. The way it tackled and capitalised financial risk and social
cultural risk in Spain and other countries and its robust It infrastructure strengthened the fact that they
should enter into the diversified market of China and India. But on the other hand there are several
operational issues and high cyclicity in these markets questions their decision. They need to be cautious
about macroeconomic and country risk, where already majority of market is dominated by local as well as
global leaders.