CEMEX Case Study

Written Report
Tyler Brezik, Kouame Dadie, Paulette Jones, Annie Kongxaysy, Margaret
Wolfe

Summary
CEMEX is a global building materials company serving over 50 countries while also
maintaining trade relationships in over 100 nations. Before engaging in FDI for the first time,
they looked at opportunity factors such as high population growth and a relatively low level of
current consumption (6). They also examined the potential for restructuring the target company,
which meant increasing its efficiency and optimizing capacity utilization (6). CEO Lorenzo
Zambrano insisted that the use of IT would increase productivity levels and customer service.
This led to the creation of satellite systems to link their plants, transforming the way CEMEX
operated (6). Zambrano noticed in the 1980s that there was risk related to being highly
dependent on the Mexican construction market. He concluded that geographic diversification
was the key to a successful business. However, CEMEX had to secure its position in Mexico to
ensure that they had the financial resources to start a strategy of growth through acquisition (6).
In 1989 CEMEX became the 10th largest cement company in the world. Three years later
they acquired Spains two largest cement firms, leading the firm into the European market (4).
Growth in Southeast Asia was also a key element in CEMEXs foreign direct investment. In
1998, CEMEX bought 14% stake in Semen Gresik, which was said to be Indonesias largest and
most efficient cement company. The Indonesian market had long-run potential, despite of
continued public opposition and weakened institutions (6). The next major foreign investment that
CEMEX made was the purchase of RMC. According to Zambrano, RMC's strong positions in
cement willenhance our leading position in the global building materials market (2).
CEMEXs global integration has made it one of the worlds largest cement producers and
building materials suppliers. Based on their values of collaboration, integrity, and leadership,
they are en route to future foreign investments (4).

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Answers to Case Questions

Question 1: What is the value that Cemex brings to a host economy? Can you see any potential
drawbacks of inward investment by Cemex in an economy?
According to the Organization for Economic Cooperation and Development (9), firms
transfer of technology to a host nation is the greatest source of positive externalities regarding
direct foreign investment. One of CEMEXs most notable assets is its superior use information
technology and the innovative way they produce and distribute their ready-made cement with
little waste. The company transfers this information technology to firms via a process they call
Post-Merger Integration and the CEMEX Way (10). This process has been refined with every
merger and acquisition that CEMEX undertakes and it is a large factor in their success. The
CEMEX Way combines the best practices already in place with those of the acquired firm.
Another benefit foreign nations experience when CEMEX invests in their firms is an
increase in employment. The OECD has found that foreign employers create jobs at a quicker
rate than their domestic counterparts. CEMEX would certainly need to hire distributors to get
their product to clients quickly, and according to the Management Focus article in the text,
CEMEX treats their distributors quite well. This includes offering stock options and deep
discounts on trucks and supplies. These added benefits allow their distributors to have greater
spending power, which would have a favorable impact on the host economy. In addition, foreign
investors like CEMEX also tend to pay their employees more than the national average (12). This,
again, would increase their employees buying power and improve the economy. Furthermore, a
large corporation like CEMEX has access to resources that the smaller firms in the developing
economies that CEMEX targets would not have access to, such as capital to expand or improve
the efficiency of existing facilities. Had they not acquired some of these struggling companies,
some may have had to shut down operations, leading to the loss of jobs for all involved.
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There are a few drawbacks to FDI that a host country may experience. As mentioned
above, because foreign multinational firms tend to have greater capital and resources than their
domestic competitors, they are able to offer higher wages to the work force. As a result, there is
a possibility that domestic firms will have less leverage in attracting high-quality employees.
Without knowledgeable, talented workers, it is unlikely that domestic firms would be able foster
the innovations necessary to keep pace with the larger foreign investors such as CEMEX. If
domestic companies have neither competitive wages nor sources of innovation, it would be hard
to compete in their market and they could be driven out of business (3). According to the text, this
is more of a concern for developing economies, which CEMEX tends to prefer. Also, the
increase of efficiency that CEMEX is known for may lead to layoffs as positions are no longer
necessary for operations.
In addition to the threat of losing market share to large corporations like CEMEX, host
nations must deal with the eventual capital outflow that will occur when CEMEX sends its
earning back to its home country. This outflow on balance of payments accounts is considered a
negative by the host countries; however, this can be overcome by restricting CEMEX from
sending more than a specified amount back home.
Question 2: Why does Cemex enter new markets through FDI instead of exporting or licensing?
Cemex has a strong preference for acquisitions over greenfield ventures as an entry mode. Why?
The nature of CEMEXs main product doesnt lend itself to either exporting or licensing.
The quick-drying, ready-made cement would hardly last in transport from the manufactures in
Mexico to locations like Indonesia or Great Britain. One of the main reasons CEMEX developed
its innovative manufacturing and distributing process was due to the high level of waste it
experienced in trying to transport their fast-drying product. Additionally, because of CEMEXs
low value-to-weight ratio, exporting is not a financially-sound practice.
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It is clear from the case study that CEMEX has developed one of the most efficient and
advanced methods for making and distributing in its industry. This includes GPS, satellites and
specialized computer hardware. These advanced systems would be hard to license out to foreign
nations who may not have access to such technology.
CEMEX would also benefit from any market share the acquired company has already
attained. Gaining market share can be extremely costly, so the access to established customers,
distributors and other relationships would be very beneficial. With greenfield investments,
CEMEX would have to start from scratch to acquire both customers and employees, a process
that is less efficient and more risky than that of an acquisition or merger. A report by the United
Nations confirms that there are relatively lower short-term risks involved in acquisitions (13).
Question 3: Why do you think Cemex decided to exit Indonesia after failing to gain majority
control of Semen Gresik? Why is majority control so important to Cemex instead of working
within the boundaries of a joint venture?
CEMEX likely decided to withdraw from Indonesia when it became clear that the
Indonesia government would not honor the agreement with CEMEX. CEMEX entered the
Indonesian market after acquiring 25% of the cement company Semen Gresik with the
understanding that CEMEX could eventually purchase a majority stake in the firm. While the
Indonesian president was in favor of the deal, local administrators were not and were able to
block the sale to CEMEX. The conflict between the pro-FDI national government and the
nationalist, anti-FDI local governments was a likely drawback to investing in Indonesia.
CEMEXs preference for majority control, as opposed to the like minority control
involved in joint ventures, is due in part to its highly developed technologies and strategies in
production, distribution, and marketing. When CEMEX owned only 25% of Semen Gresik, it
was unable to enact is certain efficiency efforts due to resistance from other owners (7). This is
one of the main disadvantages to joint ventures; investing firms having different methods and
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views on strategy. CEMEX may also be wary of giving other firms access to their methods and
various technologies. Those, in addition to their excellent customer service, are what set them
apart, and they may not want their Indonesian counterparts to copy their technological assets,
which may lead to a decline in competitive advantage.
Question 4: Choose either China or India: will Cemexs preference for acquisitions, and
resistance to joint ventures, be realizable given the structure of the industry and the regulatory
environment?
China is one of the leading producers and consumers of cement, so it makes sense that
CEMEX would want to enter such a potentially lucrative market. China, however, does have
some barriers in place against foreign direct investment. Before enter the Chinese market,
foreign investors must go through a lengthy licensing process. According to the American
Chamber of Commerce in the Peoples Republic of China, (1) more than half of the foreign
respondents to their Business Climate Survey felt that obtaining licensure was a longer, more
difficult process than for their domestic counterparts. China also limits foreign ownership in their
country. Oftentimes, US companies must operate in conjunction with a Chinese partner,
according to AmCham China. Another barrier is a physical one a lack of infrastructure that
makes distribution of products difficult. While CEMEX has superior distribution processes, even
they cant overcome a lack of roads, especially in regards to their quick-drying cement.
With Chinas unwillingness to allow foreign firms to have wholly-owned ventures, it is
unlikely that CEMEX would be able to enter that market in their usual manner (i.e. acquisitions).
Instead, joint ventures would be a more likely prospect. CEMEX is, in fact, currently in the
Chinese market with six concrete plants in northern China (11). They were able to enter the market
after acquiring Australias Rinker Group, which had several plants already in operation.
CEMEXs CEO has said that CEMEX is looking to expand their operations with joint ventures
with Chinese partners.
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CEMEX Update
Over the last years, CEMEX has specifically focused on strengthening its capital
structure and regaining its financial flexibility by reducing its US$14 billion debt. As noted, the
company has not made any acquisition since the Rinker Groups acquisition.
In 2012, the company refinanced approximately US$6.7 billion of debt under the
Financing Agreement (August 14, 2009) into a new Facilities Agreement with a final maturity in
2017 and US$500 million of new senior secured notes due 2018. In addition, the multinational
corporate has improved its cash flow generation, and extended its maturities through different
strategic initiatives. The company issued US$940 million in new senior secured notes maturing
in 2019 in exchange for approximately US$452 million in perpetual debentures and US$619
million in 2014 Eurobonds. They also issued US$1.5 billion of new senior secured notes due
2022. Moreover, CEMEX has continued the sale process of its assets in order to reduce its debt
and streamline operations. The company managed to raise US$227 million in asset sales during
2012. Besides, CEMEX continued to optimize its maintenance and strategic capital expenditures
which maximized a free cash flow of about US$609 million. The company increased the average
life of the debt to 5.0 years, from 3.8 years at the beginning of 2012, with no significant change
in yearly interest expense. CEMEX successfully maintained more than adequate liquidity to
support its operations and continued to comply with its financial obligations.
On July 30 2012 CEMEX signed a 10-year strategic agreement with IBM to deliver
world class business process and information techniques services. This agreement will not only
save the company US $1billion during the 10-year period, but also it will improve the quality of
the services provided. The business agility and scalability and the internal efficiencies will be
maximized in order to better serve its customers.

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Take-Away Value
While studying CEMEX, many things can be learned about company expansion, market
monopoly and legal barriers to doing business. As mentioned before, CEMEX was a small
Mexican cement operation that transformed itself into the third largest cement company in the
world. This occurred in the time span of about one decade which leaves something to be learned
about growing any business internationally. The main way that CEMEX grew to be so large is
through carefully planned foreign investments.
The most important step when deciding whether or not a company should make a foreign
investment is the first one: which is the best country to invest in? Before finding a specific
investment, it is best to know where that investment should be made. CEMEX did this by
figuring out which countries would be most interested in their product, and they decided that
developing countries were more in need than were already developed countries that probably had
multiple sources of cement. After they became successful within developing countries, they then
decided to go for more and began trying to establish themselves in developing countries around
2000.
Another thing to be learned from CEMEX is that sometimes you must take a step back to
move forward again. They found this out the hard way after the devaluation of the Mexican peso
in 2008. This caused much trouble for CEMEX and after taking a look at their holdings, they
decided to sell all Australian operations in order to continue paying off debt to the U.S. for their
largest acquisition (that being the Rinker group) in the previous year. This also cured problems
caused by the "monopoly" held by the Mexican company as they sold the Australian operations
to their largest competitor.

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Resources Used
1. American Chamber of Commerce in the People's Republic of China. (2011, April 29). Market
Access: Barriers to Market Entry. Retrieved from www.amchamchina.org:
http://www.amchamchina.org/article/7938
2. Associated Press. (2004, September 28). Cemex to Acquire Concrete Maker RMC. Retrieved
from http://articles.latimes.com/2004/sep/28/business/fi-cemex28
3. Byungchae Jin, F. G. (2013, July 1). Columbia FDI Perspectives. Retrieved from
http://www.vcc.columbia.edu/content/do-host-countries-really-benefit-inward-foreigndirect-investment
4. CEMEX. (2013). Retrieved from http://www.cemex.com/AboutUs.aspx
5. Garcia, J. G. (2011, July 15). Management Innovative eXchange. Retrieved from
www.managementexchange.com: http://www.managementexchange.com/story/shiftchanges-way-cemex-works
6. Ghemawat, Pankaj. (2004, November 29). The Globalization of CEMEX. Retrived from
http://www.amitkarna.info/wp-content/uploads/2013/06/c2_Cemex.pdf
7. Guerin, B. (2006, June 2). Indonesian cement deal cracks open. Retrieved from atimes.com:
http://atimes.com/atimes/Southeast_Asia/HF02Ae01.html
8. Organisation for Ecomonic Co-operation and Development. (2002). Foreign Direct
Investment for Development. Retrieved from OECD.org:
http://www.oecd.org/daf/inv/investmentfordevelopment/1959815.pdf
9. Prakash Loungani, A. R. (2001, June). Finance and Development. Retrieved from
International Monetary Fund:
http://www.imf.org/external/pubs/ft/fandd/2001/06/loungani.htm
10. Reavis, D. R. (2009, March 5). CEMEX: Globalization The CEMEX Way. Retrieved from
mitsloan.mit.edu:
https://mitsloan.mit.edu/LearningEdge/CaseDocs/09%20039%20CEMEX
%20%20Lessard.pdf
11. Reuters. (2011, February 2011). Investors approve Cemex's $2 bln share issue. Retrieved
from www.reuters.com: http://www.reuters.com/article/2011/02/24/cemexidUSN2427760520110224
12. The Economist. (2000, January 6). Foreign friends. Retrieved from
http://www.economist.com/node/327981
13. United Nations. (2007). Transnational Corporations. Retrieved from unctad.org:
http://unctad.org/en/docs/iteiit20071_en.pdf#page=33
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