Session 2-3

Dynamics of International Business:

Risks, Regional Factors & Policies

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 Dynamics of International Business

Economic
Power

Dynamics

Global & Relative

Regional Risks Policies

©2021 P Rameshan IIM-K PGP-24 IB-E 2021-22 S2-3:

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 International Risk Manifestation

China: Origin
& Target

Covid-19 Risk

India/Vietnam:
World: Victim
Opportunity

©2020-2021 P Rameshan IIM-K PGP-24 IB-E 2021-22 S2-3:

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 International Business Risks

IB Risks

Political Risk Forex Risk Strategic Risk

Country Risk Geopolitical Judgmental Execution

Performance Funding

Macroeconomic Cultural Law & Order

Policy Interest Rate Cyclicality Infrastructure

©2018-2021 P Rameshan
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 Business Shock & Risk Type
After 1977 general election led to a new government, IBM & Coke exited
Policy
India due to their unwillingness to adjust to a policy requirement

In 1990s, Ford did not find the 300 million middle class in India to buy
Judgmental
its products as against its expectations

During 1990s, Kellogg did not find Indian urban consumers to buy its
Execution
breakfast cereal products

17 years ago, KFC did not find its operations in India a welcome act as
Political
resistance against it caused disruptions

16 years ago, Metro did not find its entry into India immediately
Infrastructure
rewarding as several constraints hampered its operations

Years ago, Kimberly Clark did not find its sanitary napkins appreciated
Judgmental
by Indian consumers as price was not the only factor as the firm thought

Years ago, Enron had to close its power plant in Maharashtra as the
Political
terms of the original contract were deemed questionable

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 Business Risk Management
Scenario planning; Relationship management; Partnership strategy;
Policy
Scaling down; Exit

Scenario planning; Alliance strategy; Evolutionary approach; Careful/

Geopolitical
limited investment; Exit

Country portfolio management; Industry portfolio management;

Growth
Scenario planning; Consolidation strategy; New market segments

Socio-cultural Focused analysis; Positioning strategy; Product adaptation; Relationship

management

Forex
Scenario planning; Hedging; Inflow-outflow balancing; Transfer Pricing
Market diversification; Source rotation; Centralized depository; Netting

Forex risk management; Market portfolio management; Industry

Financial
portfolio management; Product portfolio management; Efficiency

Careful analysis; Careful planning; Careful choice of strategies;

Strategy
Persistence; Careful execution; Evolutionary approach; Flexibility

Analysis-based action; Right product portfolio; Right product design;

Execution
Right positioning; Customer focus; Relationship management
6
 Most-Spoken Languages’ Share in World Output
Output Share(%)
Language People Speaking (%) GDP 2004 GDP 2008

Mandarin 15 5 12.5*

Hindi 6 3 2.3

Spanish 6 6 6.5

English 6 42 29.3

Arabic 3 3 2.5

German & French 3 18 10.1

Japanese 2 12 7

6000 others 59 11 29.7

* Chinese

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 Evaluation Frameworks for Industrial Growth Variations
Flying Geese Paradigm
Value
Low Value Added/ High Value Added
Low Technology/Consumer Goods High Technology/Capital Goods
Production Production

Exports Exports
Imports Imports
Reimports Reimports

0 Time

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 Diamond of National Competitiveness

Firm Strategy/
structure/rivalry

Resource/Factor Demand
Endowments Conditions

Related/Supporting
Industries

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 The Diamond & Indian Automobile Industry
Firm Strategy/ structure/rivalry:
Ancillarization, distribution &
service network, product
selection, promotion, financing

Resource/Factor Endowments: Demand Conditions:

Skilled workforce, raw Middle class, growing incomes
materials

Related/Supporting Industries:
Well-developed component
industry; rubber & glass

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 The Diamond & Indian IT Industry Paradox
Firm Strategy/ structure/rivalry:
Low-end services,
internationalization

Resource/Factor Endowments: Demand Conditions:

Skilled workforce, Nearly non-existent
entrepreneurship

Related/Supporting Industries:
Nearly non-existent

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 Case 1
Globalization of Cemex

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 Discussion Question

Was Cemex’s globalization process affected by the global

business environment?

If yes, how?

If no, why?

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 Environment Factors of Cemex
Policy Anti-dumping trade sanctions in USA

Economic Local resources & cost of cement;

Mexican Peso crisis

Market Distance limit due to Transport cost;

slower demand growth with higher income

Infrastructure Transportation facilities & transport cost

Social Home construction less cyclical

Cultural Influence of Mexico & Spanish

Competition Industry leaders & acquisition efforts

Political Politics of developing country origin

Political consequences of selected markets

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 Discussion Question

Can Cemex manage its international business risks to

sustain its global expansion??

If yes, how?

If no, why?

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 Business Risks of Cemex & Remedies
Macro Risks Industry Risks Internal Risks

Environmental policy Rival consolidation Mexican concentration

Import hurdles Hostile takeover Unrelated diversification

Forex crisis Over-capacity rivalry Cost escalation

GDP slowdown Business cycle Failure of acquisitions

Cultural risk Management Risk

Strategic Risk

a
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 Business Risks of Cemex & Remedies
Business cycles Market diversification, Planning

Mexican concentration Seeking new markets

Rival consolidation ? M&A?

Hostile takeover Expanding size, Sustaining margin

Environmental policy changes Adaptation

Cost escalation Cost management, New locations

Import hurdles Production investment

Over capacity & rivalry Pricing, Collusion, Other strategies

Forex crisis Spain as location of control

Cultural risk Adaptation

Strategic Risk Orthodoxy; Review

Management Risk Proactive approach 17

 Provoking Question

Can Cemex survive the emerging global business scenario?

If yes, how?

If no, why?

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 Cemex Challenges 2000

Sustaining competitive advantage

Working across language barriers & cultural differences

International consolidation

Hostile acquisition by other competitors

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Cemex’s Approach

Expansion process

Opportunity identification criteria

Likely Spanish diaspora factor in entry

Acquisition criteria

Due diligence principles, steps & actions

Post-merger integration principles, steps & actions

Actions related to capital structure & interest cost

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 Cemex Market Selection Criteria

Large population

Lower current consumption

Scope for leadership or at least 25% market share

65% weight for quantitative factors of analysis

35% weight for qualitative factors of analysis (e.g., political risk)

Acquisitions where both company & market restructuring possible

Markets belonging to a regional grouping (e.g., Latin American)

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 Cemex’s Strategy

Expectation of higher P-E ratio from emerging markets

Testing market ideas & innovations first in Mexico

Relatively more effective organizational structure

Monthly meetings

CEO’s personal involvement in operations

Substantial investments in IT logistics

Use of IT for training & manpower development

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 Provoking Question (2020)

Should Cemex continue its global expansion?

If yes, how?

If no, why?

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 Provoking Question

Should Cemex curtail its international expansion? (2019)

If yes, why/how?

If no, why?

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 Solution Question (2021)

Is Cemex’s global environment too hostile for

further expansion?*

If yes, how?

If no, why?

*i.e., is it so hostile that it should not continue global expansion any further?

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 Cemex’s Globalization Future
Strategic Challenges

Consequences

Ideal Actions

Cemex’s Actions

Action Suitability

Past Results

Result Desirability

Cemex’s Competence

Further Expansion

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 Market Top-6 Share Demand Size EBITDA/Value

Japan None of Top 6 has share >70 mil ton 6%

India None of Top 6 has share >80 mil ton 12%

Portugal None of Top 6 has share 10 mil ton 9%

Turkey Heidelberger present >36 mil ton 20%

Brazil Holderbank & Lafarge present >40 mil ton 15%

USA All Top 6 present; Holderbank & >107 mil ton 7%

Heidelberger leading

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 Scenario for Cemex

Holderbank Lafarge

Cemex

Heidelberger Italcementi Blue Circle

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 Performance Data
Holderbank Lafarge Cemex Heidelberger Italcementi Blue Circle

EBITDA 1785 2446 1791 1195 838 684 $mil

Mark.Value 11122 12132 7203 4209 2488 4707

EBITDA/MV 16 20.2 24.9 28.4 33.7 14.5 %

Net Debt 4767 5422 4794 2957 1731 538

ND/EBITDA 2.7 2.2 2.7 2.5 2.1 0.8 %

Value 17015 19157 12500 7373 5050 5593 Debt+Equity

Tonnage 101 85 65 53 54 44 mil Controlled capacity

Value/ton 168.5 225.4 192.3 139.1 93.5 127.1

EBITDA/V 0.105
0.1 0.125
0.1 0.143
0.2 0.162
0.4 0.166
0.7 0.122
0.3 %

Sales 7618 10552 4828 6404 3414 3604

MV/V 0.65 0.63 0.57 0.57 0.49 0.84 Cemex cheaper to buy
Issue more Italcementi cheapest
(Realized Value/Underlying
Value)
equity/debt

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 Global Cement Industry (2016 US$395 bn.)

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 Cemex Entry/Strategic Actions
Acquisition in USA in 2000 making it the largest in USA

Enters Thailand through acquisition (2001)

Acquisition in UK (US$5.8 billion) in 2005 making it global largest in

ready-mix; expands in Europe

Acquisition in Australia in 2006 (US$14.5 billion)

US Wikileaks mention it as Mexican monopolist (87.6% market share);

US anti-trust suit against it after Australian acquisition

Venezuelan nationalization of cement industry in 2008 (lost 50% market

share)

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 Cemex Entry/Strategic Actions

2008-09 debt problems due to Mexican peso crisis; quit Australia selling to
Holderbank (Holcim) for US$1.75 billion

Entered Brazil, Malyasia, Nigeria, UAE, Poland, Turkey, Canada, Israel,

Switzerland etc (total 50 countries)

Cemex negotiated in India with Murli Cements in 2011; no India, no China

Holderbank (now Holcim) took over ACC and Ambuja Cements

Lafarge had a strong presence in India, but later quit the operations

In 2011, there was a talk of even Birla acquiring Cemex

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 IIM-K PGP-24 IB-E 2021-22 S2-3:
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 Global Cement Industry

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 Recent Developments

Holderbank (Holcim since 2001)-Lafarge merger in 2014

(total revenue 2014 $33.2 bn., 2015 $23.8 bn., 2017 $26.6 bn.)

Main competitors in 2015: HeidelbergCement (2015 €13.5

bn.), Italcementi (2010 €4.8 bn.), Votorantim (2013 $11.2
bn.), CRH (2015 €23.6 bn. from diversified businesses)

Cemex 2014 revenue: US$15.7 bn. (now second largest)

2015: US$13.5 bn., 2017: US$13.7 bn.

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