Cemex SA de CV
Cemex SA de CV
Avenida Constitucion 444 Poniente
P.O. Box 392
64000 Monterrey, Nuevo Leon
International Telefax: 52 (8) 345-20-25
Sales: $3.3 Billion (1996)
Stock Exchanges: Mexico City
SICs: 3241 Cement-Hydraulic; 5032 Brick, Stone & Related Materials
Cemex SA de CV is the largest cement producer in the Northern Hemisphere, and ranks third in the industry globally. Within Mexico, the company holds the distinction of being the fifth largest publicly held, non-state-operated company in terms of market capitalization. Operating in 22 countries, Cemex is made up of several subsidiary companies located in Mexico, the United States, Spain, Venezuela, Panama, and the Caribbean. Its primary markets are in countries with a great need for infrastructure and a growing demand for housing. In addition to cement, the company produces and distributes ready-mix concrete and aggregates. One’ of Cemex’s goals is to participate in construction at all levels, from the largest projects to the most humble dwelling. The company was listed on the Mexican bolsa (stock exchange) in 1976.
1906-85: Third Generation Zambrano Begins Leadership Role
Operating successfully in its traditional capacity within Mexico for 80 years, Cemex saw its future as a cement supplier and distributor dim in the 1980s when the governments’ relaxation of protectionist policies posed a considerable challenge to Cemex’s market position. Fortunately for the company, the savvy, Stanford University-educated M.B.A., Lorenzo Zambrano—whose grandfather reorganized the company in 1920 (and whose family owns about 30 percent of Cemex)—was named chief executive in 1985. He had spent his teenage years at the Missouri Military Academy in Mexico, Missouri, and later earned an industrial engineering degree from the Institute Tecnológico in Monterrey, Mexico’s version of MIJ, according to Forbes writer Claire Poole. He returned to Monterrey after earning his M.B.A., and took a job with Cemex, where his uncle sat on the board, and proceeded to climb the corporate ladder for 18 years before becoming Cemex’s CEO. Undaunted by the changing market climate, Zambrano began the implementation of an ambitious expansion plan, giving the company a near-monopoly in Mexico, where cement is the primary building material, beginning with the purchases of several smaller Mexican cement companies, including the purchase of Empresas Tolteca, his biggest domestic competitor. Cemex also diversified into other Mexican industries, such as tourism and hotels, but decided by the late 1980s to divest its non-cement holdings and concentrate on geographic diversification.
Gaining almost 5 percent of the U.S. cement market, Zambrano spent heavily to acquire marketing facilities all over the southwestern U.S. Awakening to the Cemex threat, U.S. producers, including eight cement companies and two labor unions, filed an antidumping suit against Cemex, claiming “they had unfairly deflated cement prices and hurt the American companies’ expansion plans in the Southwest and Florida,” according to Poole. Zambrano was hit with a 58 percent countervailing duty when the International Trade Commission ruled that the U.S. producers had been hurt by the prices Cemex and other Mexican producers were charging—despite the fact that cement in Arizona and California was selling for the same price that Cemex charged. Zambrano reduced exports to the U.S. by 30 percent because the 58 percent import duty substantially affected Cemex profits. Zambrano held on to his U.S. market share in areas where the company could remain competitive due to higher prices. A GATT (General Agreement on Trade and Tariffs) later ruled that the antidumping duties levied by the U.S. Department of Commerce on imports of cement from Mexico were unfounded. Cemex owns Sunbelt Enterprises, a subsidiary made up of Sunbelt Corporation, the firm controlling Cemex’s holdings in the U.S. The company bought the Western U.S. affiliates of Blue Circle Industries and two Houston companies, Houston Shell & Concrete and Gulf Coast Cement. Due to the close proximity and language/cultural similarities, Cemex continued to develop ties within the mini-trade zone between northern Mexico and southern Texas, California, Arizona, New Mexico, Kentucky, Florida, and even as far north as Minnesota.
Pouring Pesos into Mexican Infrastructure: Early 1990s
The economic situation was becoming more lucrative at home, where Mexico’s president, Carlos Salinas de Gortari, a Harvard-educated political economist, initiated public works programs for infrastructure modernization, increasing the demand for cement, as well as increasing the government-set price for cement. The government gradually allowed cement prices to rise from $46 per ton to $72 per ton. The production costs of about $30 per ton at Cemex’s Mexican plants were the lowest in North America. By 1990, the company reached sales of approximately $1.2 billion, and accounted for 66 percent of Mexico’s cement market, gaining the attention of investors who also appreciated Cemex’s operating margins: 27 percent vs. 9 percent for U.S. rival Lafarge. Ten years after Mexico’s debt crisis, the ratio of government debt to annual gross domestic product was down to about 40 percent, vs. 60 percent in the U.S. Zambrano was an outspoken proponent of the North American Free Trade Agreement (NAFTA), although he admitted that the opening of the Mexican economy would be damaging to many of their industries not well-prepared in the areas of managerial expertise, technology, and marketing. Cemex invested heavily in robots and computers, giving them a far-reaching efficiency edge. Their main competitor in Mexico was Aspasco, left with a 20 percent market share—a company controlled by Holderbank of Switzerland.
In 1992 Zambrano negotiated a bridge loan from Citicorp, among others, for the acquisition of majority holdings in two Spanish cement companies, spending $1.84 billion, causing Cemex stock to plummet due to investors’ fears that the company was expanding too rapidly. The move into Europe pitted Cemex against world leaders such as Switzerland’s Holderbank and France’s Lafarge Coppee. Zambrano told Joseph L. McCarthy in Chief Executive, ”Every time we acquire a company, we are told that we paid too much, that we are buying at the wrong time, and that we are crazy. Our critics know a lot about Mexico, but not enough about the cement industry.” Cemex had paid less than half of what Cemex’s competitors Lafarge and Ciment Francais (now part of Italcementi) paid for smaller Spanish cement companies in 1989. Critics worried that Cemex was taking on too much debt, and questioned whether or not the company had sufficient international management expertise. Cemex repaid a large portion of the loan by reselling nonstrate-gic assets in the Spanish cement companies. Justifying his ambitious expenditures, Zambrano explained to McCarthy that, ’ ’We had to become one of the biggest global companies. If we didn’t, someone undoubtedly would have acquired us.” The two Spanish companies were combined into Valenciana de Cementos, becoming Spain’s largest cement producer. In 1994 Valenciana’s net profit jumped to $95.5 million, up from $37.7 million in 1993. Cemex operated 10 plants, four grinding units, and 23 distribution terminals in Spain, both maritime and land-based. The Economist reported that Cemex almost doubled the operating margin of its Spanish plants by firing a third of its workers there, adding that the purchase enabled Cemex to bypass anti-dumping duties imposed by the Bush administration to protect American cement producers, whose costs averaged a third more than Cemex’s. Despite NAFTA, the Clinton administration maintained the duties (until a later ruling), which Cemex compensated for by exporting from duty-exempt Spain.
The company bought a cement plant located in New Braunfels, Texas, from Lafarge Corporation, which included four cement terminals and 52 percent of Parker Lafarge Inc., which is an aggregate plant producing an annual capacity of 820,000 metric tons. During this period Cemex had 18 cement production plants and 36 distribution terminals strategically located in Mexico and the U.S. The company’s first quarter 1994 American sales increased by 45 percent over the previous comparable quarter.
Cemex’s strategy for success can be explained by seven guidelines: professional and modern management to reorganize acquired companies and the ability to adapt to changes in circumstances; concentration on traditional business lines (cement, concrete and concrete block); and a solid and well-capitalized financial structure. In addition, the company’s principal markets are located in countries with a strong need for infrastructure and a growing demand for housing. Finally, Cemex has an efficient and low-cost structure of operations, a balance in its sources of income through geographically diversified operations, and leadership in growth markets.
Mexico’s economy began to decline and private investors were discouraged by the uprising in the south and the murder of the ruling party’s candidate. Cemex’s foreign operations gave the company a hedge against the weakening peso, down 7 percent against the dollar in the first half of 1994. The recession had the affect of paralyzing mortgage loans in Mexico, which in turn affected the housing sector and the demand for cement. Still, net sales dropped only 2.27 percent, offset somewhat by a decline in the costs of sales and operating expenses derived from lower fuel and electric energy prices (a major expenditure in the cement industry), a decrease in personnel, and a 23 percent increase in worker productivity. To strengthen Cemex’s presence in Latin America, Zambrano bought 60 percent of Vencemos, Venezuela’s largest cement company, for $550 million, partly in preparation for export to places such as northern Brazil, Panama, and the Caribbean. In the Caribbean, Cemex completed negotiations for the acquisition of 50 percent of Scancem Industries, Ltd., a company which operated in five countries in the area. The transaction enabled the company to market half a million metric tons of cement to the region, accounting for approximately 50 percent of the imported cement consumption there. At a Panamanian government-held auction, Cemex was awarded Cementos Bayano of Panama, for a price of $60 million, furthering the consolidation of its Caribbean market. Cemex was pursuing its ambitious plan to provide raw materials for the large infrastructure projects developing in Spain, Asia, Africa, Europe, and other Latin markets. Within seven years the company had tripled its global production capacity.
Emerging Markets Throughout the 1990s
Chief financial officer Gustavo Caballero Guerrero told Victoria Griffith of CFO Year that “the company’s main commitment is in emerging markets, and future purchases are likely to take place either in Asia or Latin America. Emerging markets have a number of advantages. First, they will grow much faster than the First World in the long run, and strong economic growth is essential in the cement market. Second, emerging markets view cement not as a commodity, like the First World, but as a brand-name product. It’s much easier to differentiate ourselves in emerging markets from our competitors.” Cemex established a sales office in Hong Kong, hoping to enter economies of scale necessary to beat its competitors, while also diversifying its sources of borrowing. Caballero explained that their financing of eurobonds, convertible bonds, and other sources of credit made raising money easier for Cemex than for other Mexican groups, but that financing is still expensive compared with international competitors. He admitted to one disadvantage of operating in Asia having to do with cultural and language differences, unlike their commonalities with Spain, the Latin countries, and the border with the U.S., but acknowledged that Asia usually moves in different cycles from Latin America, which could be a significant overall market-equalizing factor. Cemex crossed a major milestone in 1995 when non-Mexican operations accounted for 51 percent of the company’s $3 billion in annual sales, balancing declining cash flow from Mexican operations. In that year the company exported 2 million tons of cement products to Taiwan, Thailand, and Indonesia.
Into the 21st Century as Industry World Leader
Company officials credit Cemex’s competitive abilities to its on-line information system. A network of satellite dishes, leased lines, and microwave communications link all of the company’s offices in Mexico and abroad. A Cemex competitor noted that their network is phenomenal, giving the company flexibility, for example, of where to bring in their product. Caballero told Jim Freer in Latin Finance that “Carrying our laptops is like carrying our telephones around. We do about 90 percent of our communications through e-mail,” making global interactions instantly possible, and even acting to reduce the hierarchy, for example, because anyone can shoot off an e-mail to anyone else in the company. Cemex sets the curve for Latin technology users, and attributes its successful global expansion efforts to its hands-on approach. Cemex was the only Mexican company named in Computersworld’ s 1995 “Global 100” listing of the world’s most outstanding users of information technology. A company official stated that he was surprised that Cemex’s competitors have next to no computers. Cemex began by using technology to reduce costs and improve efficiencies, but improved on that functional view, and transformed the way they delivered to the market. Their system keeps a constant log of the chemical composition of the cement it produces, of the reasons for kiln problems and shutdowns, and of the delivery routes of the company’s trucks. Cemex’s information technology department is maintained by a staff of 25, who work with Cemtec, an engineering technology division to provide and develop information access. Gelacio Iniguez Jauregui, the company’s director of information technology told Freer that Cemex will continue to build on its record of developing information technology, “not just for the sake of having information, but for using it, sharing it, and providing access to it.”
One of Zambrano’s proudest achievements, according to Daniel Dombey, writing for Industry Week, is Cemex’ s Tepeaca complex—probably the most modern cement plant in the Americas, located two hours outside of Mexico City. Situated among green fields, the unassuming-looking plant filters out pollutants via bags of glass fiber that “filter out smoke before it reaches the open air; pollutants are gathered at 60 points throughout the complex,” according to Dombey. Its emissions are far below legal requirements, attributable to a system financed by 10 percent of the total cost of the plant. With more capacity than any other kiln on the continent, Tepeaca supplies one-fifth of the Mexican market and is the lowest-cost cement producer in the world.
It is estimated that Mexico’s cement industry will grow between 6 to 8 percent in 1997, due in part to an increasing population and a profitable countrywide economic expansion. Having survived the worst recession in memory, Zambrano, while entrenched in Mexico, does not wish to place too much emphasis on operations there—it was foreign revenues that kept Cemex’s top line growing during 1995-96, when Mexico’s gross domestic product tumbled by more than 6 percent. Cemex’s debt is at an enormous $4.8 billion, making it Latin America’s biggest corporate debtor, restricting the company’s cash flow and causing Zambrano to put a hold on major expansion moves. He is particularly interested, according to Dombey, in markets such as Indonesia and Malaysia. The company authorized a 1997 plan to buy back as much as $200 million worth of stock in an effort to convince investors that the company’s operations generate enough cash to pay debt, fund its expansion program, and set a buyback program. Cemex shares are traded in Mexico City and over the counter in New York as American depository receipts (ADRs). In February 1997, stock prices declined to $3.33, down from $9.40 at the end of the previous November. With the peso’s devaluation and doubts about Cemex’s ability to meets its debt, investors grew concerned. Roberto Carillo, who tracks Cemex for Baring Securities, Inc. of Mexico City, expressed confidence in Cemex’s abilities to manage its rising hard-currency revenues from abroad as a cushion. He told Geri Smith and Stanley Reed of Business Week that “These guys know what they’re doing— they know how to finance things.”
Cementos Mty, AS de CV; Tolmex AS de CV; Grupo Empresarial Maya SA de CV; Sunbelt Enterprises, Inc.
Brown, Elicia, “Tolmex: Repaying Mexico’s Roads,” Financial World, July 23, 1991, pp. 18-21.
”The Children with the Magic Powder,” The Economist, May 21, 1994, pp. 76-79.
Dombey, Daniel, “Well-Built Success,” Industry Week, May 5, 1997, pp. 32-39.
Ellis, Junius, “Five Stocks to Buy on the World’s Hottest Market,” Money, September 1992, pp. 153-56.
Freer, Jim, “Check the Voltage, Please,” Latin Finance, March 1996, p. 62.
Griffith, Victoria, “Not a Mexican Company,” Latin Finance, September, 1995, pp. 24-26.
Hernandez, Janine, “Cementos Mexicanos,” Latin Finance, July-August 1994, pp. 46-48.
Holland, Kelly, “Citicorp Leads 1.2 Billion Bridge Loan for Cemex,” American Banker, August 14, 1992, pp. 1-2.
Luxner, Larry, “Taking the Plunge,” Pit & Quarry, February 1996, pp. 26-29.
McCarthy, Joseph L., “Lorenzo Zambrano (CEO of Cementos Mexicanos),” Chief Executive, September 1993, p. 27.
Pearson, John, and Smith, Geri, “Cemex: Solid as Mexico Sinks,” February 27, 1995, pp. 58-62.
Poole, Claire, “Cement Wars,” Forbes, October 1, 1990, pp. 99-102.
Weeks, Scott, “Solid Sale: Cemex Converts in a Difficult Market,” Latin Finance, November 1994, p. 68.